What is a Buying Club bond?
Buying club bonds are a subset of the broader financial guarantee bond category that must be filed with the state government agency responsible for regulating buying club activity in the club’s jurisdiction.
Buying club bonds must be issued by insurance carriers admitted in the state where the government agency requiring the bond resides. The insurance carrier issuing any surety bond, such as a buying club bond, will also be referred to as the “surety company” or the “bond company”. Buying club bonds refer to the club as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is a Buying Club bond required?
Buying clubs are required to purchase financial guarantee bonds by state statutes to protect a government agency by transferring to a surety bond company the cost of ensuring the club members are compensated for damages resulting from the buying club breaking license law. The surety company provides the government a guarantee (the surety bond) that the buying club members will receive payment for financial damages due to a violation of the statutes and regulations referenced in the bond form up to a limit specified in the bond (“penal sum” or “bond amount”). Ultimately, buying clubs are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face civil action.
Buying club bond violations triggering a bond payout may include a buying club failing to provide the discounted products or services as advertised to its members.
How much does a Buying Club bond cost?
Buying club bonds generally cost between 1% and 7.5% of the bond limit.
Example: $10,000 Buying Club Bond Cost
| Credit Score | Premium Rate | Bond Cost |
|---|---|---|
| 680 or above | 1.0% | $100 |
| 650-679 | 2.0% | $200 |
| 625-649 | 2.5% | $250 |
| 600-624 | 3.0% | $300 |
| 550-599 | 5.0% | $500 |
| 500-549 | 7.5% | $750 |
The actual cost of a specific buying club bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the club’s license history, experience and creditworthiness.
Is a Credit Check Required for Buying Club Bonds?
Credit checks are required for most buying club bonds.
How does the wording in the bond form impact the cost of a buying club bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and buying club (principal). While many bond forms use similar language, each bond form can be customized by the government agency requiring the specific bond and may contain provisions that increase potential costs for the surety company, which will ultimately be passed on to the buying club via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a buying club bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
Aggregate Limits
Bond forms always specify the penal sum defined as the maximum amount of financial damages any single party can recover from the bond related to a single claim occurrence. Most bond forms also contain a clause which limits the amount of financial damages from all parties and all claims to a specific amount (“aggregate limit”), usually the same amount as the penal sum. For example, a $15,000 buying club bond with an aggregate limit of $15,000 will pay out no more than $15,000, regardless of the number of damaged parties or claim occurrences. Buying club bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Cancellation Provisions
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the buying club and government agency requiring the bond with the cancellation taking effect within a set period of time, usually 30 days (“Cancellation Period”). Cancellation provisions allow the surety company to cancel the bond for any reason, but most often due to the club failing to pay premiums due, claim payouts, or material changes in the club owner’s credit score. Buying club bonds with no cancellation provision or cancellation periods greater than 30 days will be more expensive than a bond with similar coverage containing a standard cancellation provision.
Forfeiture Clause
Surety bond claims are paid by surety companies to damaged parties to reimburse that party for the financial loss incurred up to the bond penalty amount. Certain bonds contain a clause which requires the surety company to pay the full bond penalty to the damaged party, regardless of the actual damages incurred (“Forfeiture Clause”). Buying club bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.
Where can I find more information on a specific Buying Club bond?
To find information on specific buying club bonds, select the state and use our search function to find any requirement across the country.