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What Are License and Permit Bonds?
A license bond is a type of surety bond that is required by government agencies or industry regulatory bodies as a condition of obtaining a professional or business license. The bond serves as a guarantee to consumers or clients that the business will operate in compliance with all applicable laws and regulations.
A permit bond is a type of surety bond that is required by government agencies as a condition of obtaining a permit for a specific activity or project. The bond serves as a guarantee that the activity or project will be completed in compliance with all applicable laws and regulations.
Both types of bonds are designed to protect the public from financial loss due to the actions of the licensed or permitted party. The bond is typically issued by a surety company and backed by the financial strength of the company. Examples of license and permit bonds include notary bonds, contractor license bonds, and tax preparer bonds.
Different categories of surety bonds include contract bonds and court bonds.
How do License and Permit Bonds Work?
A license or permit bond works by providing a guarantee to the government agency or regulatory body that issues the license or permit that the business or individual will operate in compliance with all applicable laws and regulations. The bond is a financial guarantee that, in the event that the business or individual fails to comply with the regulations, the bond will provide compensation to any affected parties.
When a business or individual applies for a license or permit, they are typically required to purchase a bond from a surety company. The bond is essentially a contract between the surety company, the business or individual, and the government agency or regulatory body that issues the license or permit.
The surety company will typically require the business or individual to pay a premium for the bond, which is a one-time or annual fee. The premium is based on a number of factors, including the type of business or activity, the amount of the bond, and the creditworthiness of the business or individual.
In the event that a claim is made against the bond, the surety company will investigate the claim to determine if it is valid. If the claim is found to be valid, the surety company will pay the claim, up to the full amount of the bond. The business or individual will then be responsible for reimbursing the surety company for any claims paid out.
It is important to note that a license or permit bond is not the same as insurance. A bond is a guarantee that the business or individual will comply with the regulations, while insurance is a contract that provides financial protection against specific risks or losses.
Types Of License and Permit Bonds
A notary bond is a type of surety bond is required of any practicing notary public, which serves as a guarantee to the state that the notary will perform their duties in accordance with the state laws and regulations.
Contractor license bonds allow contractors to work professionally, guaranteeing their employer or the state that the contractor will work the contractual standards
Tax preparer surety bonds are required by state government as a condition of obtaining a tax preparer license, which serves as a guarantee to the state that the tax preparer will comply with the laws and regulations and fulfill any tax-related obligations.
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Three Parties to License and Permit Bonds
License and permit bonds are types of surety bonds between three parties, the obligee, the principal and the surety.
1. The Principal
The principal is the person or company who is required to purchase the bond and is obligated to fulfill the terms of the contract. The principal is the party who is bonded and must meet the obligations stated in the bond. They are the one who is responsible for the performance of the bond
2. The Obligee
The obligee is the party that requires the bond, usually a government agency, a public body or a private project owner. It is the obligee who sets the requirements for the bond and is protected by the bond in case of any default by the principal. They are the beneficiary of the bond.
3. The Surety
The surety is the company that issues the bond, guaranteeing that the principal will fulfill the contract in accordance with the terms and conditions set by the obligee. The surety is a third-party who ensures the obligee that the principal will fulfill the bond. In case of the principal’s default, the surety will be responsible for taking action to fulfill the contract or compensate the obligee for any losses.
License and Permit Bond Benefits
License and permit bonds have several benefits, including:
Protection for consumers and clients: The bond serves as a guarantee to consumers and clients that the business or individual will operate in compliance with all applicable laws and regulations, which provides them with a level of protection against financial loss.
Compliance with laws and regulations: The bond helps ensure that businesses and individuals comply with the laws and regulations that govern their industry or activity, which helps protect the public and promote fair competition.
Financial security: The bond provides a financial guarantee that, in the event that the business or individual fails to comply with the regulations, the bond will provide compensation to any affected parties.
Professionalism: Having a bond can be seen as a sign of professionalism, which can help attract customers and build trust with clients.
Access to business opportunities: Many government agencies and regulatory bodies require a bond as a condition of obtaining a license or permit. This means that businesses and individuals must have a bond in order to take advantage of certain business opportunities.
Cost-effective: Bonding can be a more cost-effective way for businesses and individuals to manage their risk, as opposed to self-insuring or paying for insurance coverage.
Protects public’s interest: Many bonds are required by government agencies as a condition of obtaining a license or permit, this helps to ensure that the business or individual will operate in compliance with all applicable laws and regulations, which protects the public’s interest.
It is possible for a Surety Bond Company to “cap” a bid bond. This means they will have a maximum bid amount on the bid bond and therefore a maximum bond penalty.
Cost
Cost of bid bonds depends on the surety bond company and broker. MG Surety Bonds does not charge for bid bonds. We want to build a long-term relationship with our clients and issue bid bonds as part of that service.
How to Get a Bid Bond
In most cases, companies with good credit can get bid bonds up to $500,000 freely with a simple application. Larger bid bonds may require additional information and our staff are happy to help you through the process. You can see the process for obtaining a bid bond in the chart below:
Contractors can also learn more about construction bond underwriting and what it takes to get bid bonds here. As contractors grow, they may need more surety bond capacity to take on additional work and to obtain more bid bonds. You can read more about increasing your surety bond capacity here.
What Happens to the Bond After the Bid?
Should you be the successful bidder, the Obligee will likely require you to enter into a contract. At that point, they may ask you to provide Performance Bonds and Payment Bonds.
Should your bid be unsuccessful, the bid bond will simply expire, and you can shred it and move on to the next job. There is no need to have the bid bond returned.
When Would Someone Make a Claim on a Bid Bond?
Bid bond claims are rare. Normally they occur in one of two circumstances:
• When the Contractor (Principal) decides not to enter into the contract for that price
• When the Bond Company (Surety) decides that they will not support performance and payment bonds for the project.
Both circumstances typically happen when a contractor makes a large mistake. The Obligee could then make a claim on the bid bond. An example is below:
Contractor 1 bids a project with a 5% bid bond. The bid is turned in at $700,000. Contractor 2 is the second lowest bidder at $1,000,000. After reviewing their bid, Contractor 1 realizes they made a mistake and left something out. Contractor 1 tells the Obligee that they will not be entering into the contract. The Obligee can then make a claim on the bid bond for $35,000 ($700,000 x 5%) to compensate them for having to rebid the project or go to the next bidder.
Suppose in the example above that Contractor 1 still wants the project at $700,000 and would like to go ahead. Their surety bond company may decide not to support the project. The Contractor must either find another surety bond company who will support the project or the Obligee can make a bid bond claim. You can read all about bid bond claims here.
Defenses to Bid Bond Claims
A valid defense to a bid bond claim is clerical error or error in transposing the numbers. For example, let’s say a material supplier gave you a bid for $50,000 but in your rush to get your bid together, you wrote it down as $5,000. This could be a valid defense to a bid bond claim.
Best practice is to go the Obligee as soon as you know there is a mistake. Regardless or whether there is a valid bid bond claim or not, most good owners and contractors do not want to start a project with someone who is upside down on the project. They may decided that it is best to move on to the next bidder.
Indemnity
Bid bonds are written on The Principle of Indemnity. That means that if a valid claim does happen, and the surety bond company pay a claim, they will seek reimbursement from the contractor any other indemnitors. The terms are normally spelled out in the General Indemnity Agreement which a contractor will be required to sign with the surety bond company before receiving any bid bonds.
Electronic Bid Bonds
Many Obligees have moved to electronic bidding. This is especially true for Department of Transportation projects. The underwriting for obtaining these electronic bid bonds are still the same. Once the bid bond is approved by the surety bond company, the electronic bond is approved in the bidding system.
What to Look for in a Bid Bond Company
The bid documents will outline the requirements for the surety bond company writing your bid bond. Many will require that your surety bond company be rated “A-“ or better by the rating agency A.M. Best. Contractors should be very suspicious about using a bond with a lesser rating. Most contracts will also require your surety bond company to be listed on the U.S. Department of Treasury’s Circular 570 which you can check here. This is sometimes shorted as a “T-Listing”.
How Much Do License and Permit Bonds Cost?
The cost of a license or permit bond, also known as the bond premium, can vary depending on a number of factors such as the type of bond, the amount of the bond, the creditworthiness of the business or individual, and the state or jurisdiction in which the bond is required (California contractor license bonds will be different from other bond costs, for example).
The bond premium is typically a percentage of the bond amount and can range from 1-15%. For example, if a bond is required for a business with a bond amount of $10,000, the bond premium could be anywhere from $100 to $1,500.
The bond premium can also be affected by the creditworthiness of the business or individual. A business or individual with a good credit score may be able to get a bond at a lower premium than one with a poor credit score.
It’s also important to note that the bond premium is a one-time or annual fee, and it is not refundable.
It is possible for a Surety Bond Company to “cap” a bid bond. This means they will have a maximum bid amount on the bid bond and therefore a maximum bond penalty.
Cost
Cost of bid bonds depends on the surety bond company and broker. MG Surety Bonds does not charge for bid bonds. We want to build a long-term relationship with our clients and issue bid bonds as part of that service.
How to Get a Bid Bond
In most cases, companies with good credit can get bid bonds up to $500,000 freely with a simple application. Larger bid bonds may require additional information and our staff are happy to help you through the process. You can see the process for obtaining a bid bond in the chart below:
Contractors can also learn more about construction bond underwriting and what it takes to get bid bonds here. As contractors grow, they may need more surety bond capacity to take on additional work and to obtain more bid bonds. You can read more about increasing your surety bond capacity here.
What Happens to the Bond After the Bid?
Should you be the successful bidder, the Obligee will likely require you to enter into a contract. At that point, they may ask you to provide Performance Bonds and Payment Bonds.
Should your bid be unsuccessful, the bid bond will simply expire, and you can shred it and move on to the next job. There is no need to have the bid bond returned.
When Would Someone Make a Claim on a Bid Bond?
Bid bond claims are rare. Normally they occur in one of two circumstances:
• When the Contractor (Principal) decides not to enter into the contract for that price
• When the Bond Company (Surety) decides that they will not support performance and payment bonds for the project.
Both circumstances typically happen when a contractor makes a large mistake. The Obligee could then make a claim on the bid bond. An example is below:
Contractor 1 bids a project with a 5% bid bond. The bid is turned in at $700,000. Contractor 2 is the second lowest bidder at $1,000,000. After reviewing their bid, Contractor 1 realizes they made a mistake and left something out. Contractor 1 tells the Obligee that they will not be entering into the contract. The Obligee can then make a claim on the bid bond for $35,000 ($700,000 x 5%) to compensate them for having to rebid the project or go to the next bidder.
Suppose in the example above that Contractor 1 still wants the project at $700,000 and would like to go ahead. Their surety bond company may decide not to support the project. The Contractor must either find another surety bond company who will support the project or the Obligee can make a bid bond claim. You can read all about bid bond claims here.
Defenses to Bid Bond Claims
A valid defense to a bid bond claim is clerical error or error in transposing the numbers. For example, let’s say a material supplier gave you a bid for $50,000 but in your rush to get your bid together, you wrote it down as $5,000. This could be a valid defense to a bid bond claim.
Best practice is to go the Obligee as soon as you know there is a mistake. Regardless or whether there is a valid bid bond claim or not, most good owners and contractors do not want to start a project with someone who is upside down on the project. They may decided that it is best to move on to the next bidder.
Indemnity
Bid bonds are written on The Principle of Indemnity. That means that if a valid claim does happen, and the surety bond company pay a claim, they will seek reimbursement from the contractor any other indemnitors. The terms are normally spelled out in the General Indemnity Agreement which a contractor will be required to sign with the surety bond company before receiving any bid bonds.
Electronic Bid Bonds
Many Obligees have moved to electronic bidding. This is especially true for Department of Transportation projects. The underwriting for obtaining these electronic bid bonds are still the same. Once the bid bond is approved by the surety bond company, the electronic bond is approved in the bidding system.
What to Look for in a Bid Bond Company
The bid documents will outline the requirements for the surety bond company writing your bid bond. Many will require that your surety bond company be rated “A-“ or better by the rating agency A.M. Best. Contractors should be very suspicious about using a bond with a lesser rating. Most contracts will also require your surety bond company to be listed on the U.S. Department of Treasury’s Circular 570 which you can check here. This is sometimes shorted as a “T-Listing”.
License and Permit Bond FAQs
What types of businesses typically need a license and permit bond?
Businesses that typically need a license and permit bond include contractors, tax preparers, notaries public, and businesses that are regulated by a government agency or industry regulatory body. Examples include construction companies, auto dealers, insurance agents, and liquor stores.
What happens if I don't have a license and permit bond?
If a business or individual does not have the required license or permit bond, they may be unable to obtain a license or permit, which can limit their ability to operate their business or pursue certain opportunities. In addition, they may be subject to fines or penalties for operating without a bond.
Can I get a license and permit bond if I have bad credit?
It is possible to get a license or permit bond if you have bad credit, but it may be more difficult and may require a higher bond premium. Some surety companies specialize in providing bonds to businesses and individuals with poor credit.
Can I cancel my license and permit bond?
You may be able to cancel your license or permit bond, but it will depend on the terms and conditions of the bond and the requirements of the government agency or regulatory body that issued the license or permit. In general, a bond can be cancelled by giving notice to the surety company and the obligee, and by paying any cancellation fees that may be required.
How long does a license and permit bond last?
The duration of a license or permit bond can vary depending on the requirements of the government agency or regulatory body that issued the license or permit. Some bonds may be valid for a specific period of time, such as one year, while others may be valid for the duration of the license or permit. It’s always a good idea to check with the relevant government agency or regulatory body to find out the specific bond duration.
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