What is an Invention Developer Bond?
Invention Developer bonds are a subset of the broader license bond category that must be filed with the government agency (city, county, or state) responsible for regulating invention development services in the invention development services company’s jurisdiction as a condition of licensure for invention developers. Invention developers provide services to inventors such as the development, manufacture, promotion or sale of their ideas for a fee. Currently, only California and North Carolina have such a requirement for invention developers and each state handles this bond type directly.
Invention developer 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 invention developer license bond, will also be referred to as the “surety company” or the “bond company”. Invention developer license bonds refer to the invention developer as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is an Invention Developer bond required?
Invention Developers 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 invention developer breaking license law. The surety company provides the government a guarantee (the surety bond) that the customers of a licensed invention developer will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the invention developer 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, invention developers 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.
Invention developer license bond violations triggering a bond payout may include an invention developer failing to provide agreed upon services to an inventor, solicitation of services outside of their licensed state, and fraudulent or dishonest acts.
How much does an invention developer bond cost?
Invention Developer license bonds generally cost between 1% and 10% of the bond limit.
Example: $25,000 Invention Developer Bond Cost
| Credit Score | Premium Rate | Bond Cost |
|---|---|---|
| 800 or above | 1.0% | $250 |
| 650 - 679 | 1.5% | $375 |
| 625 - 649 | 3.0% | $750 |
| 600-624 | 3.75% | $938 |
| 550-599 | 5.0% | $1,250 |
| 500-549 | 7.5% | $1,875 |
| 499 or below | 10.0% | $2,500 |
The actual cost of a specific invention developer bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the invention developer’s license history, experience and creditworthiness.
Is a Credit Check Required for Invention Developer Bonds?
Credit checks are required for invention developer license bonds. 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 invention developer bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and invention developer (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 invention developer via higher bond premiums, stricter underwriting or collateral. The primary text to consider in an invention developer license 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 invention developer 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. Invention developer 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 invention developer 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 developer failing to pay premiums due, claim payouts, or material changes in the developer’s credit score. Invention developer 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”). Invention developer bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.