Alabama Premium Finance Company Bond

What Is the Purpose of the Alabama Premium Finance Company Bond?

In Alabama, companies that offer insurance premium financing services to the public are required by the Alabama Department of Insurance (ALDOI) to obtain a license and post a surety bond in the amount of $35,000 to legally do business in the State. The Alabama Premium Finance Company Bond is used by the ALDOI to hold premium finance companies accountable to the Code of Alabama Section 27-40, enforce the laws governing business conduct, and provide a financial guarantee to the public that they will be compensated if damaged by a fraudulent premium finance company.

Which Businesses Need the Alabama Premium Finance Company Bond?

Pursuant to the Code of Alabama Section 27-40-1, the Premium Finance Company Bond is required for any company entering into insurance premium financing agreements, but with a notable list of exemptions:

  1. Any insurance company licensed to do business in the State
  2. Any banking institution regulated by the State, savings and loan association, credit union authorized to do business in this state, or any national banking institution or federal savings and loan association located within this state
  3. Premium agreements in connection with installment sales of motor vehicles, boats, or mobile homes
  4. Any insurance agent or agency licensed in Alabama that charges a collection fee on unpaid balances for insurance premiums under Section 27-12-17 or under the Alabama Consumer Credit Act.

What Do Surety Underwriters Need to Know About the Alabama Premium Finance Company Bond?

The ALDOI takes an active role in ensuring that the Alabama public is protected from unlawful or fraudulent insurance agreements and practices. As such, the Commissioner of the ALDOI reserves the right to suspend or revoke a Premium Finance Company License, levy fines from $200 up to $5,000, and reimburse damaged consumers out of the surety bond amount. Examples of violations of the regulations may include charging service charges in excess of the limits set by the ALDOI, or engaging in payment contracts with consumers without sufficiently documenting the payment terms.

The obligee and parties familiar with the bond concur that the risk of loss is very low in Alabama (<1%), and only slightly higher nationally (<5%). This is likely the result of a thorough licensing process, coupled with the considerable penalties at the ALDOI Commissioner’s discretion.

Surety underwriters are essentially assessing the principal’s likelihood of complying with the rules and regulations of the ALDOI, which can be accomplished through a personal credit check.

What Do Surety Claims Handlers Need to Know About the Alabama Premium Finance Company Bond?

Although the Code of Alabama Section 27-40 is fairly general in describing actions that would constitute a violation of the Premium Finance Company License, it does provide a high degree of autonomy to the Commissioner of the ALDOI for remediating such violations. Actions that demonstrate that a Premium Finance Company is not trustworthy or competent to perform their duties may have their license suspended or revoked. If those same actions resulted in financial damage to a consumer, and the Commissioner investigates and judges that compensation is warranted, there is likely to be a claim against the bond. 

Surety claim handlers should note that when the Commissioner of the ALDOI receives a complaint against a premium finance company, an investigation and hearing is conducted to allow the subject company due process. This presents the surety company and principal an opportunity to defend themselves from a bond claim, and potentially minimize the impact on the principal’s business.

Can a Premium Finance Company in Alabama Avoid the Bond Requirement? 

No, the surety bond is a requirement of the licensing process for premium finance companies through the ALDOI.

How Much Does the Alabama Premium Finance Company Bond Cost?

Surety carriers generally price the Premium Finance Company Bond at approximately 2% to 10% of the $35,000 bond limit, or $700 to $3,500.

How Is the Alabama Premium Finance Company Bond Filed?

The original bond with signature and seal must be sent for filing with the Alabama Department of Insurance.

All bond documentation must be shipped to the following location:

State of Alabama Department of Insurance
201 Monroe Street, Suite 502
Montgomery, AL 36104

Can the Alabama Premium Finance Company Bond Be Cancelled?

Yes, the Premium Finance Company Bond can be cancelled by sending written notice to the AL DOI. Liability for the surety carrier is released 30 days after notifying the obligee.

Are Alabama Premium Finance Company Bonds Renewable?

The bond is continuous until cancelled, but must be renewed with the surety carrier to ensure that a valid bond is active at the time of the license renewal on October 1st annually.