What is a Timber Buyer Bond?
Timber buyer bonds are a subset of the broader license & permit bond category that must be filed with the government agency (city, county, or state) responsible for regulating natural resources in the buyer’s jurisdiction as a condition of licensure and permit issuance for most timber buyers, sellers, and/or harvesters. Many states handle timbering licensing and permit issuance directly, while others allow local municipalities to regulate and license timber transactions.
Timber buyer 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 timber buyer bond, will also be referred to as the “surety company” or the “bond company”.
Why is a Timber Buyer Bond required?
Loggers are required to purchase license or permit 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 logger breaking timber buyer license and permit laws. The surety company provides the government a guarantee (the surety bond) that the customers, vendors, suppliers and employees of a licensed timber buyer will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the loggers license or permit 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, timber buyers, sellers and harvesters 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 or revocation of permits. Timber buyer bonds refer to the buyer, seller or harvester as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Timber buyer license and permit bond violations triggering a bond payout may include a timber agent buying, selling, or harvesting timber which was not lawfully purchased, failing to pay for timber per a purchase agreement, or transporting timber without proper permits or proof of ownership.
How much does a Timber Buyer Bond cost?
Timber buyer license & permit bonds generally cost between 1% and 5% of the bond limit.
Example: $10,000 Timber Buyer Bond Cost
|Credit Score||Premium Rate||Bond Cost|
|650 or above||1.0%||$100|
The actual cost of a specific timber buyer license or permit bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the buyer’s license history, experience and creditworthiness. TImber buyer bonds required by a local government (city or county) tend to have the lowest cost, while state requirements have potentially higher costs and/or more strict underwriting requirements.
Is a Credit Check Required for Timber Buyer Bonds?
Credit checks are required for most timber buyer license or permit bonds required by state agencies.Timber buyer bonds required by cities, townships or counties with bond amounts under $25,000 generally do not require a credit check to purchase the bond. 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 Timber Buyer Bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and timber buyer (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 buyer via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a timber buyer 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 timber buyer 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. Timbering 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 timber agent 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 timber buyer failing to pay premiums due, claim payouts, or material changes in the timber agent’s credit score. Timber buyer 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”). Timber buyer bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.