License and Permit Bond
A license and permit bond is a specific type of surety bond which is often called either a license bond or a permit bond, but regardless of the nomenclature, it is required by government agencies as a necessity before doing business in many different industries. The general rule of thumb regarding which businesses require a license and permit bond is that when a service is being offered to the public by a supposedly qualified contractor or business person, the license bond will be required as a means of protection for consumers availing themselves of the service.
This means that the protection afforded by these bonds are not for the purchaser of the bond or the person operating the business, but is instead meant to protect consumers who do business with that contractor. The intent of the license bond is to ensure that any business owner in one of the required fields of commerce will conduct their business in compliance with all local, state, and federal regulations governing the business.
Each bond is thus specific to a single industry only since there will be a set of regulations that pertain to that given industry, and which are detailed in the language of the bond. In actual practice, these bonds protect consumers against fraud, incompetence, poor workmanship, and non-compliance with other governmental regulations. Before a business can legally go into operation, it will need to have one of these bonds as a guarantee to consumers of professional conduct. Any business which is required to have one of these bonds, but does not purchase it before going into operation, would face the possibility of having financial penalties imposed, being arrested for violating the law, and possibly facing a prison term.
What is the cost of a license/permit bond?
The cost of these bonds is sometimes misunderstood by business owners, at least before they apply for one and learn more about it. The dollar amount of the bond itself does not represent the cost that must be paid by a business owner to acquire it, and the total bond amount will vary from industry to industry, depending on the degree of liability involved in the business. There are a couple of other factors that affect the total bond amount as well, namely the size of a business operation, and the state of application.
The cost to a business owner will also be dependent on several factors, the first of which is the business owner’s credit score. This is a major factor because there is a degree of risk assumed by the surety company that issues the bond if the purchaser has a claim leveled against that bond. Whenever a claim is made against a bond in this way, the surety company would be obligated to pay the amount of a validated claim.
Having paid the claim amount, the surety company would then seek to be reimbursed by the business owner who purchased the claim, since it would be that business owner who failed to live up to the terms of the bond, and caused a claim to be filed. If the business owner does not reimburse the surety company for the amount of the claim and chooses to default on the amount, the surety company would then take a loss for that defaulted amount.
This is the risk factor associated with a surety company issuing a license and permit bond to a business owner or contractor. The greater the risk of default on the part of the owner, the higher will be the cost of a bond to that individual. When a biz owner shows a poor credit history, that increases the risk of default, and potential liability is assumed by the surety company.
All that being said, the actual cost to a business owner of a license and permit bond will always be only a small percentage of the total bond amount. For instance, if a business is required to purchase a $50,000 bond form, the cost of purchasing the bond might only be one percent of that total, or $500. In the case of a business owner with poor credit history, that percentage amount is very likely to be higher, because the risk is higher.
What are the types of license and permit bonds?
There are many different types of these bonds available for purchase since each type can only cover a specific industry. In some cases, the nature of the industry itself requires that the purchaser be licensed to operate in all 50 states, whereas other types of businesses are more local, and therefore require only a local or state permit.
Wherever the possibility exists of a consumer being defrauded by a business owner, it is likely that a license and permit bond is required by the government as a necessity before doing business. The types of surety bonds listed below are representative of the many types available, which are required by law, but this is by no means an all-inclusive list.
If you are thinking of starting up your own business, and are uncertain about whether or not you would need to acquire a bond, consult with local authorities to be sure. The penalties for not acquiring a permit bond before going into business can be severe, so you should be certain before beginning operations.
- Airline reporting bond – this type of bond is a federal requirement for travel agents that must cover all 50 states since the airline industry itself functions in all 50 states. This bond serves as a guarantee against fraud by travel agents, who accept payments from customers for flight costs but may fail to forward that money to the appropriate airline. When this happens, a customer or tourist would then have the right to file a claim against the airline reporting commission bond for the amount of the airline flight ticket. With this kind of bond in place, you can have a reasonable certainty as a tourist or vacationer, that the money you pay to a travel agent is being passed on to the airline to cover the cost of your flight.
- Auto dealer bond – consumers are protected by this type of bond against wrongful actions on the part of auto dealers or any of the employees at a dealership. Since the auto industry is a huge one in this country, there is a powerful need for protecting consumers against potential fraud associated with the purchase of automobiles. Before any potential business owner can even acquire a motor vehicle dealer license, it will be necessary for them to purchase an auto dealer bond. This is intended to guarantee that the dealership and all its employees will comply with government regulations associated with the auto sales industry. The actual consumer protections offered by this kind of bond are different in every state, except in Vermont and Ohio, which are the only two states which do not require auto dealer bonds.
- Contractor license bond – professionals in the construction industry in almost every state must purchase a contractor license bond before they would be legally permitted to conduct business and offer their services to consumers. By purchasing a contractor license bond, a business professional agrees to perform all work in compliance with existing regulations and laws that protect government agencies and other consumers against any kind of financial loss. Government agencies are frequent users of contract contractor services, and therefore require specific protections to ensure that public funding is well-managed.
- Insurance broker – This type guarantees that insurance professionals are operating within the laws and regulations specified by the states where they do business. Before an insurance broker can obtain a license to do business in most states, they must have purchased an insurance broker bond and must be able to prove that on-demand. Consumers purchasing various types of insurance are thus safeguarded against fraud or malpractice on the part of the broker.
- Medicaid provider – This kind of license bond intends to ensure that companies are held accountable for the appropriate and accurate billing of Medicaid services. Since Medicaid has such widespread usage in this country, it is essential that accurate billing is observed, and that all those who bill Medicaid for services are doing so in good faith, and not attempting to defraud the government. This kind of bond is required by the Center for Medicare and Medicaid Services (CMS), particularly about vendors who supply prosthetics, orthotics, and other kinds of medical equipment, as well as the billing services, previously mentioned.
- Notary bond – The license bond which a notary public must purchase constitutes a legally binding contract which is a guarantee to public users that the notary will perform professional tasks according to legal requirements of the state, as well as in compliance with the appropriate code of ethics. If a notary fails to live up to these standards and requirements, anyone who is harmed by this failure, including an individual or governmental agency, would have the right to make a claim against the notary bond and be compensated for any damage done.
- Pharmacy bond – As you might expect, a pharmacy bond provides a guarantee that the business operating in the pharmaceutical industry will not mismanage shipments or sales of license and permit bond insurance. Many states in this country require that businesses purchase a pharmacy bond before they can be granted a license to operate within the state. If a particular pharmacy is found guilty of some type of wrongdoing in this regard, fines can be levied by the appropriate governmental agency, and those fines can be paid by claiming the pharmacy bond.
How do I purchase a license and permit bond?
All business owners and contractors seeking to acquire their necessary license bond should consider contacting NFP, the nation’s largest and most reliable surety company in this country. Authorized to issue all bond types in each of the 50 states, we can provide the best rates for your bond, as well as the fastest issuance, to get your business off and running.