What is a License Plate Manufacturer Bond?
License Plate Manufacturer bonds are a subset of the broader miscellaneous bond category that must be filed with the state government agency responsible for regulating license plate manufacturing in the manufacturer’s jurisdiction as a condition to enter into an agreement with the state to manufacture license plates. The manufacturer is required to agree to terms with the state and to file a bond ensuring fulfillment of term agreements. The Commonwealth of Massachusetts is the only state currently with a bond requirement for license plate manufacturers.
License plate manufacturer bonds must be issued by insurance carriers admitted in the Commonwealth of Massachusetts. The insurance carrier issuing any surety bond, such as a license plate manufacturer bond, will also be referred to as the “surety company” or the “bond company”. License plate manufacturer bonds refer to the manufacturer as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is a License Plate Manufacturer Bond required?
License Plate Manufacturers are required to purchase 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 a manufacturer violating the terms of the license plate manufacturing agreement. The surety company provides the government a guarantee (the surety bond) that the government agency will receive payment for financial damages due to a violation of the agreement up to a limit specified in the bond (“penal sum” or “bond amount”). Ultimately, license plate manufacturers are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond.
License plate manufacturer bond violations triggering a bond payout may include a manufacturer violating the terms of their manufacturing agreement.
How much does a License Plate Manufacturer Bond cost?
License plate manufacturer bonds generally cost between 1.5% and 10% of the bond limit.
Example: $10,000 License Plate Manufacturer Bond Cost
|Credit Score||Premium Rate||Bond Cost|
|650 or above||1.5%||$150|
|499 or below||10.0%||$1,000|
The actual cost of a specific license plate manufacturer bond can vary widely depending on the terms of the manufacturing agreement, the language in the bond form and the manufacturer’s experience and creditworthiness.
Is a Credit Check Required for License Plate Manufacturer Bonds?
Credit checks are required for license plate manufacturer bonds.
How does the wording in the bond form impact the cost of a License Plate Manufacturer Bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and license plate manufacturer (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 license plate manufacturer via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a license plate manufacturer license bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
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 license plate manufacturer 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. License plate manufacturer bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the license plate manufacturer 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 manufacturer failing to pay premiums due, claim payouts, or material changes in the manufacturer’s credit score. License plate manufacturer 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.
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”). License plate manufacturer bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.