Who sets the requirement
The agency that issues the license sets the bond amount and usually supplies the bond form. Requirements differ widely from one state, county or city to another, even for the same type of business.
Common examples
- Contractor and trade licenses
- Auto dealers
- Mortgage brokers and lenders
- Collection agencies
- Notaries public
- Sales tax and fuel tax permits
- Right-of-way and sidewalk permits
Renewal
Most license bonds run for a term that matches the license and renew each term. Some stay in force until cancelled. Keep the bond continuous, because a lapse can suspend the license.
The three parties to a license bond
Every surety bond has three parties. The principal is the business or person who needs the license. The obligee is the agency that requires the bond, such as a state licensing board, a city or a tax department. The surety is the company that issues the bond and promises to pay valid claims up to the bond amount.
If a claim is paid, the surety normally expects the principal to repay it under the indemnity agreement signed at application. That is the main difference from insurance: the bond protects the public, not the business that buys it.
What you need before applying
- The exact bond form or wording from the licensing agency
- The required bond amount and the bond term
- The legal name and address of the business as it appears on the license application
- Owner details, since many license bonds are underwritten mainly on personal credit
- Any license number already issued, for renewals and replacements
How price is set
The premium is a percentage of the bond amount, set by the surety based on the type of bond and the applicant's credit and experience. Low-risk license bonds may be issued with a short application, while bonds that guarantee tax payments or handling of customer funds can require financial statements. Rates differ by surety and state, so no single rate applies to everyone.
Riders, cancellations and lapses
If your business name, address or required amount changes, the surety issues a rider rather than a new bond. A surety can usually cancel a bond by giving the notice period stated in the bond form or set by the agency. Watch renewal dates closely, because many agencies suspend a license as soon as the bond is no longer on file.
Frequently asked questions
Can I use one bond for two licenses?
Usually not. Each obligee normally requires its own bond.
Who files the bond with the agency?
It depends on the agency. Some accept electronic filing from the surety, others want the signed original from the principal. The instructions on the bond form say which.