What is a Well Driller Bond?
Well driller 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 natural resources in the well contractor’s jurisdiction as a condition of licensure for most water, oil and gas well drillers and pump installers. Many states handle well driller licensing directly, while others allow local municipalities to regulate and license well drillers.
Well driller 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 well driller bond, will also be referred to as the “surety company” or the “bond company”.
Why is a Well Driller Bond required?
Well drillers 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 well driller breaking oil, water, or gas well drilling license law. The surety company provides the government a guarantee (the surety bond) that the customers of a licensed well driller will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the well driller 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, well contractors 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. Well driller bonds refer to the contractor as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Well driller bond violations triggering a bond payout may include a drilling company allowing an unlicensed driller to operate under the company’s license, performing substandard work, or committing fraud, misrepresentation, or dishonest acts within the scope of the well contractor’s work.
How much does a Well Driller Bond cost?
Well driller bonds generally cost between 2% and 8% of the bond limit.
Example: $10,000 Well Driller Bond Cost
|Credit Score||Premium Rate||Bond Cost|
|650 or above||2.0%||$200|
The actual cost of a specific well driller bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the well contractor’s license history, experience and creditworthiness. Well driller 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 Well Driller Bonds?
Credit checks are required for most well driller license bonds required by state agencies.Well driller 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 Well Driller Bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and well driller (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 well contractor via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a well driller 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 well driller 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. Well driller 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 well contractor 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 well driller failing to pay premiums due, claim payouts, or material changes in the well contractor’s credit score. Well driller 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”). Well driller bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.