What is a Premium Finance Company Bond?
Premium finance company bonds are a subset of the broader license bond category that must be filed with the state government agency (city, county, or state) responsible for regulating insurance and financial activity in the finance company’s jurisdiction as a condition of licensure for most premium finance companies.
Premium finance company 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 premium finance company bond, will also be referred to as the “surety company” or the “bond company”. Premium finance bonds refer to the license holder as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is a Premium Finance Company Bond required?
Premium finance companies 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 finance company breaking financial regulations within their industry. The surety company provides the government a guarantee (the surety bond) that the customers of a licensed premium finance company will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the finance company 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, finance companies are responsible for their actions and required by law to reimburse the surety for any payments made under the bond or face indefinite license suspension.
Premium finance company bond violations triggering a bond payout may include a license holder financing products not regulated under provisions of state insurance codes, accelerating payments due from the customer or insured in absence of default, and committing fraudulent or dishonest acts while conducting business activities.
How much does a Premium Finance Company Bond cost?
Premium finance company bonds generally cost between 2% and 8% of the bond limit.
Example: $10,000 Premium Finance Company Bond Cost
|Credit Score||Premium Rate||Bond Cost|
|680 or above||2.0%||$200|
The actual cost of a specific premium finance company bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the company’s license history, experience and creditworthiness.
Is a Credit Check Required for Premium Finance Company Bonds?
Credit checks are required for premium finance company 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 a Premium Finance Company Bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and finance company (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 holder via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a premium finance company 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 premium finance 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. Premium finance company 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 holder 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 premium finance company failing to pay premiums due, claim payouts, or material changes in the business owner’s credit score. Premium finance company 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”). Premium finance company bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.