What is an Insurance Broker Bond / Insurance Adjuster Bond?
Insurance Broker and Insurance Adjuster bonds are a subset of the broader license bond category that must be filed with the government agency responsible for regulating insurance agents in the adjuster or broker’s jurisdiction as a condition of licensure. Insurance agents may be required to purchase bonds in their capacity as agents/brokers, insurance adjusters, surplus lines brokers, or managing general agents.
Insurance adjuster and broker 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 an Insurance adjuster or broker bond, will also be referred to as the “surety company” or the “bond company”. Insurance broker bonds refer to the insurance agent as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is an Insurance Adjuster/Broker bond required?
Insurance agents are required to purchase license bonds by state statutes to protect a government agency by transferring to a surety bond company the cost of ensuring the public is compensated for damages resulting from an insurance broker or adjuster breaking insurance license law. The surety company provides the government a guarantee (the surety bond) that the insureds serviced by a licensed insurance broker, adjuster, agent, or counselor will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the specific insurance license up to a limit specified in the bond (“penal sum” or “bond amount”). The bond company also directly receives claims from the public and determines the validity of claims. Ultimately, Insurance agents and adjusters are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face indefinite license suspension.
Insurance adjuster or broker bond violations triggering a bond payout may include an insurance broker failing to obtain the appropriate license, placing coverage with an insolvent insurer, or having insufficient funds in their premium trust account.
How much does an Insurance Adjuster/Broker bond cost?
Insurance Adjuster and Broker bonds generally cost between .5% - 1% of the bond limit.
Example: $10,000 Insurance Adjuster/Broker Bond Cost
| Bond Amount | Premium Rate | Bond Cost |
|---|---|---|
| $10,000 | 1.0% | $100 |
Is a Credit Check Required for Insurance Adjuster/Broker Bonds?
Credit checks are not required for most insurance adjuster or broker bonds required by state agencies. Surplus lines broker bonds and managing general agency bonds typically require credit checks and additional underwriting. Ultimately, the surety insurance company determines how it will underwrite and price a surety bond.
How does the wording in the bond form impact the cost of an Insurance Adjuster/Broker bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and insurance professional (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 insurance broker or adjuster via higher bond premiums, stricter underwriting or collateral. The primary text to consider in an insurance agentbond 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 insurance broker 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. Bonds for insurance professionals 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 insurance broker, adjuster, agent or counselor 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 insurance agent failing to pay premiums due or claim payouts. Insurance broker or adjuster 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”). Insurance adjuster or broker bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.