Alabama Utility Deposit Bonds
What Is the Purpose of Utility Deposit Bonds in Alabama?
Over 20 different utility companies in Alabama will allow commercial or industrial customers, known as General Power Customers or GSAs, to utilize a surety bond in lieu of providing a security deposit. The Utility Deposit Bond can be purchased for a small premium amount as opposed to supplying the deposit amount in full to the utility company. The surety company guarantees payment to the utility company if the principal (customer) fails to make timely payment which would be covered by the security deposit (which was replaced by the bond).
Which Utilities Will Allow Use of a Utility Deposit Bond?
General Power Customers purchasing electricity, gas, water or sewer utilities from the following list can make use of the surety bond requirement option. Being that the bond is replacing the security deposit amount the penal sum (bonding limit) of the bond is equal to that amount.
What Do Surety Underwriters Need to Know About Utility Deposit Bonds in Alabama?
A claim against a utility deposit bond is the result from the failure of a commercial or industrial utility customer who purchased a surety bond to avoid the security deposit not paying the bills in a timely manner. The customers are incentivized to pay the bills or else they will not receive their utility service, thus ending their service and most likely their business.
The shutting down of the utility service is not going to be the precipitating factor in the closing of the business, but that claim on the bond will most likely not be indemnified, thus making this bond a risky proposition for surety companies. Small commercial businesses fail quite often and security deposits are the utilities counter to protect themselves from providing services unpaid for.
There are many utility companies allowing the bond as an option to avoid paying security deposits in Alabama and none were using the bond as a result of missing prior payments. While not expressed by utilities terms of service or in our communication with them, it is entirely plausible that the principal (customer) may be forced to get a surety bond for a poor history of payment.
The utility company is not screening applicants, so the surety company must utilize underwriting commensurate with the bond’s penal sum. A credit check will suffice for small penal sums, but as the amount gets larger surety companies should perform a review of financial statements and the businesses plan.
According to industry experts, utility deposit bonds are a fairly risky venture and in Alabama, even more so. Claims will happen and surety companies must take appropriate caution when approved eligibility and setting rate.
What Do Surety Claims Handlers Need to Know About Utility Deposit Bonds in Alabama?
Claims will be filed against the bond by the utility company following missed payment(s) by their bonded customer. None of the utilities have any language on the bond form that would allow them to make claims on more than the bond limit set. However, many utilities do contain statutes in their agreements stating the customer is responsible for collection fees, cut off fees, attorney fees and court costs. Those costs could be added onto a late payment amount, but not to exceed the limit of the bond.
Several utility companies use the same language on their bond form regarding how long the surety company must pay the claim. The following utilities state the surety company must make payment 10 days from notice of claim. The utility company can send a notice of claim as soon as 15 days from the date of the bill sent to their customer.
- Alabama Power Company - Birmingham Division
- Alabama Power Company - Eastern Division
- City of Bessemer
- City of Foley dba Riviera Utilities
- Franklin Electric Cooperative
- Sand Mountain Electric Cooperative
- Spire, Inc.
- The Water Works and Sewer Board of the City of Birmingham
Are There Other Alternatives to the Security Deposit with a Utility in Alabama?
The bond is by far the most preferred alternative to putting up cash, approved personal check, cashier’s check, or money order for a deposit with a utility company. A letter of credit may be utilized from a bank. However, that will come with fees and is difficult to be approved for, making it an inferior substitute to the surety bond.
Security deposits held by utility companies will accrue interest which is payable back to the customer when services are stopped. But don’t expect a large sum as it most likely will be enough for a nice lunch as opposed to a form of retirement savings.
How Much Does the Alabama Utility Deposit Bond Cost?
Utility Deposit Bond Costs are dependent on the penal sum of the bond (which is based on the security deposit amount) and typically the personal credit of the applicant. The price of the bond will range from 1-15% of the penal sum.
Are Alabama Utility Deposit Bonds Renewable?
For commercial and industrial the utility deposit bond must be renewed as the bond needs to be on file until service is cancelled. Once the original term of the bond expires, the surety company will need to collect an additional premium to extend bond coverage for an additional or else will need to cancel the bond.
How is the Utility Deposit Bond Filed and How Are They Cancelled?
The Utility Deposit bonds are filed directly to the utility company. The bond form will require signatures from the customer and the surety company and may require a surety company seal.
The bond can be cancelled by the surety company per request to the utility company. If the customer wants to continue their utility service, they will need to either make a deposit or purchase another surety bond. Each bond has a cancellation period, in which the bond remains active, thus giving the customer opportunity to secure a deposit or bond.