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The Purpose and Benefit of License Bonds

    By J. Mark Strange, Surety Advisors, LLC, Bonding Agents

    License Bonds guarantee that a person or organization will perform according to the laws and statutes of a particular business or industry. Often when laws are enacted to regulate an industry or group of businesses a licensing procedure and surety bond requirement will be included in these laws.

    Most businesses today must receive permission from some government or regulatory agency to begin or continue in operation. The business submits an application and the regulatory authority grants a license permit on the condition the business will provide a license or permit bond guaranteeing that the laws, ordinances and regulations applicable to that business will be obeyed.

    The primary purpose of the bond is to prequalify license applicants who in the bonding company’s view should have the business experience to comply with the statutory obligations for a license and honor its financial obligations to the licensee’s customers and comply with the applicable business laws.

    The surety provides the Federal, State, County or City regulatory authority (whichever is requiring the bond) with a way to prequalify applicants and provide reimbursement for losses up to the amount of the bond if a licensee files bankruptcy or otherwise defrauds the public. Some of these bonds may be used instead of the business purchasing proper commercial insurance policies however bonds are a poor substitute for good insurance coverage.

    License and permit bonds are divided into four types:

    • Bonds that guarantee fines or expenses for noncompliance
    • Bonds required for granting special privileges to businesses
    • Bonds protecting the public against loss of money entrusted to a licensee
    • Bonds guaranteeing the payment of taxes

    For example most States have enacted laws regulating mortgage brokers and included a Mortgage Brokers Bond as a license requirement. Each State’s bond requirement differs but the main reason for the requirement is that each applicant for a mortgage broker license bond must demonstrate to the regulatory authority that it has sufficient financial resources and reserves to conduct business and protect their customers escrow funds or fees. The regulatory authority relies on the surety’s investigation and due diligence as a substitute for its own analysis and looks to the bond for recovery of any loss.

    The surety bond provides a strong incentive for licensees to comply with the terms of their license because if there is a claim and the surety pays, the licensee must indemnify or pay back the bonding company.

    Some common types of License bonds:

    Who writes these bonds? There are over 400 surety companies in the U.S. and Canada. Some specialize in certain types of bonds but most can write the estimated 10,000 or more different bonds required or used by governments and businesses.

    How do you get a license bond? License bonds are written through insurance agencies specializing in surety bonds. Surety Advisors, LLC,, is a bonding agency in Houston, Texas whose specialty includes license, court, probate, fidelity and contract bonding. Their website contains all of the information needed to apply and pay for these bonds.

Surety Advisors, LLC - All Articles
Surety Advisors, LLC - All Articles

IMPORTANT NOTE: While we specialize in Surety Bonds, this Website provides only a simplified description of bonds and is not a statement of contract. Wording may not apply in all states. For complete details of bonds and conditions, be sure to read the bond, including all endorsements, or riders, if applicable. Bonds CANNOT be bound, amended, or altered by leaving a message on, or relying upon, information in this Website or through E-Mail.
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