What is a Pawnbroker Bond?
Pawnbroker license 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 pawnbroking activity in the pawnshops’ jurisdiction as a condition of licensure for most pawnbrokers, secondhand dealers, and precious metals dealers. Some states handle pawnbroker licensing directly, while the majority allow local municipalities to regulate and license pawnbrokers.
Pawnbroker 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 pawnbroker license bond, will also be referred to as the “surety company” or the “bond company”. Pawnbroker license bonds refer to the pawnbroker as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is a Pawnbroker Bond required?
Pawnbrokers 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 pawnbroker breaking pawnbroking law. The surety company provides the government a guarantee (the surety bond) that the customers, vendors, and employees of a licensed pawnbroker will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the pawnbroker 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, pawnbrokers 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.
Pawnbroker license bond violations triggering a bond payout may include a pawnbroker failing to redeem a pledged item left in the possession of the pawnbroker during the duration of the pawn contract or charging service fees higher than allowed by law.
How much does a Pawnbroker Bond cost?
Pawnbroker bonds generally cost 1% of the bond limit with a minimum premium of $100.00.
Example: $10,000 Pawnbroker Bond Cost
| Credit Score | Premium Rate | Bond Cost |
|---|---|---|
| Not Required | 1% | $100 |
Is a Credit Check Required for Pawnbroker Bonds?
Credit checks are not required for most pawnbroker license bonds.
How does the wording in the bond form impact the cost of a Pawnbroker Bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and pawnbroker (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 pawnbroker via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a pawnbroker 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 pawnbroker 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. Pawnbroker 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 pawnbroker 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 broker failing to pay premiums due, claim payouts, or material changes in the broker’s credit score. Pawnbroker 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”). Pawnbroker bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.