What is a Prescription Drug Wholesaler Bond?
Prescription drug wholesaler bonds are a subset of the broader license bond category that must be filed with the state government agency responsible for regulating prescription medication in the wholesaler’s jurisdiction as a condition of licensure for most prescription drug wholesalers, pharmacies, or wholesale drug distributors.
Pharmaceutical drug wholesaler 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 prescription drug wholesaler bond, will also be referred to as the “surety company” or the “bond company”. Prescription drug wholesaler bonds refer to the wholesaler as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is a Prescription Drug Wholesaler Bond required?
Pharmaceutical wholesalers 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 wholesaler breaking state pharmaceutical licensing regulations. The surety company provides the government a guarantee (the surety bond) that the customers, vendors, suppliers and employees of a licensed prescription drug wholesaler will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the prescription drug wholesale 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, wholesalers 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.
Prescription drug wholesaler bond violations triggering a bond payout may include a wholesaler failing to maintain adequate records for drugs stored on the premises, operating without proper licensing, or selling pharmaceutical drugs to individuals without a valid prescription.
How much does a Prescription Drug Wholesaler Bond cost?
Prescription drug wholesaler bonds generally cost between 1% and 5% of the bond limit.
Example: $10,000 Prescription Drug Wholesaler Bond Cost
| Credit Score | Premium Rate | Bond Cost |
|---|---|---|
| 650 or above | 1.0% | $100 |
| 625-649 | 2.0% | $200 |
| 600-624 | 2.66% | $266 |
| 575-599 | 3.0% | $300 |
| 550-574 | 4.0% | $400 |
| 549 or below | 5.0% | $500 |
The actual cost of a specific prescription drug wholesaler bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the wholesaler’s license history, experience and creditworthiness.
Is a Credit Check Required for Prescription Drug Wholesaler Bonds?
Credit checks are required for prescription drug wholesaler 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 Prescription Drug Wholesaler Bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and pharmaceutical wholesaler (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 wholesaler via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a prescription drug wholesaler 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 prescription drug wholesaler 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. Prescription wholesaler 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 wholesaler 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 pharmaceutical wholesaler failing to pay premiums due, claim payouts, or material changes in the wholesaler’s credit score. Prescription drug wholesaler 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”). Prescription drug wholesaler bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.