What is a Passenger Broker Bond?
Passenger broker or carrier bonds are a subset of the broader license bond category that must be filed with the state government agency responsible for regulating passenger transportation in the broker’s jurisdiction as a condition of licensure for most passenger carriers or brokers. This bond is typically required for companies that transport groups of passengers and who charge a fee in a prearranged contract.
Passenger carrier license 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 passenger broker license bond, will also be referred to as the “surety company” or the “bond company”. Passenger broker license bonds refer to the passenger carrier as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is a Passenger Broker Bond required?
Passenger brokers are required to purchase license bonds by state and local 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 passenger carrier breaking transportation service regulations. The surety company provides the government a guarantee (the surety bond) that the customers of a licensed passenger broker will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the passenger broker 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, passenger brokers 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.
Passenger broker license bond violations triggering a bond payout may include a passenger broker materially misrepresenting facts used when obtaining their license, fraudulent activity causing loss or damages to the passenger, or by any fraudulent representation while in the scope of business or employment.
How much does a Passenger Broker Bond cost?
Passenger broker license bonds generally cost 1% the bond limit.
Example: $25,000 Passenger Broker Bond Cost
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Is a Credit Check Required for Passenger Broker Bonds?
Credit checks are not required for passenger carrier or broker bonds.
How does the wording in the bond form impact the cost of a Passenger 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 passenger broker (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 broker via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a passenger broker 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 $25,000 passenger carrier bond with an aggregate limit of $25,000 will pay out no more than $25,000, regardless of the number of damaged parties or claim occurrences. Passenger broker 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 passenger broker 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 transportation service failing to pay premiums due, claim payouts, or material changes in the broker’s credit score. Passenger broker 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”). Passenger broker bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.