This article is the eighth installment of our Surety EDU series, which is brought to you by nationwide surety bond agency SuretyBonds.com. Check back next Friday for another in-depth look into how surety bonds work.
If you’re looking for information on how much your specific surety bond will cost, contact a surety expert here to get a free surety bond quote with no obligation.
Before we get started, let’s remember that surety bonds function more like lines of credit than traditional insurance policies. Unlike insurance policies, claims against surety bonds are not expected. And, unlike underwriters who assume losses when claims are paid out on insurance policy claims, underwriters require principals to reimburse them in full when claims are paid out on bonds.
As such, when an underwriter issues a surety bond, the premium charged is based on the line of credit (a.k.a. bond amount) being issued rather than a premium made to offset the claim risk as with insurance policies.
Underwriters calculate many surety bond premiums on a case-by-case basis depending on the bond’s risk and the individual’s application. A few types of surety bonds, such as notary bonds or janitorial bonds, inherently involve virtually no claim risk, so underwriters charge a minimal flat fee to issue them. An applicant’s credit score and other financial credentials don’t affect costs for these bonds.
The majority of surety bond types, however, require a more extensive application process that, at minimum, requires a credit check. An individual’s credit worthiness is an indicator of their previous ability to pay off debts, and a poor credit score suggests that such an individual would have trouble repaying a surety if a claim is paid out. Because surety underwriters issue bonds at a zero loss ratio, they want to make sure any potential claims could be repaid in full.
The general rule for commercial bonds (typically used for compliance/licensing purposes) is that applicants with credit scores at or near 700 will qualify for the standard bonding market, which means they’ll pay premiums calculated at 1-5% of the bond amount. This means applicants with good credit would pay $100-$500 for a standard $10,000 bond or $1,000-$5,000 for a standard $100,000 bond. The higher the credit score, the lower the bond premium.
Applicants with credit scores below 700 will qualify for the nonstandard (or bad credit) bonding market, which means they’ll pay premiums calculated at 10-20% of the bond amount. This means applicants with bad credit would pay $1,000-$2,000 for a standard $10,000 bond or $10,000-$20,000 for a standard $100,000 bond. The lower the credit score, the higher the bond premium.
Riskier bonds, such as those issued for the finance industry, might require a review of other financial credentials such as net worth and/or assets. Bonds issued for contractual purposes might also require a review of previous work history. It should also be noted that some riskier bond types, such as contract or court bonds, require that applicants have a minimum credit score to even qualify. Applicants with low credit scores typically find it difficult to find a surety underwriter willing to issue them such high-risk bonds.
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