Insurance Broker Bond

An insurance broker bond is a three-party agreement that protects the consumer's interest against unethical business practices, purchased by an insurance broker to comply with state licensing requirements. Three parties sign off on a bond: an obligee, an obligor, and a guarantor.

The party at risk is the obligee, normally a state department of insurance or licensing. You or your company is called the principal and obligor. The company from which you are purchasing your insurance broker bond, the surety bond broker, is the guarantor.

Insurance broker surety bonds exist to protect the consumer's interest and the obligee, rather than to protect you or your company like insurance products do. If you, your company, or an employee is found to have manipulated prices, intentionally sold unnecessary or inappropriate products, or committed or contributed to fraud, then the harmed party can be made whole by filing a claim on your bond. Other unethical business practices can result in a claim on your bond, as triggers vary by state.

All but a very few states require an insurance broker surety bond as a condition of doing business in that state as an insurance broker. Most require a bond of $10,000-$20,000, and the requiring agency is some variation of a state insurance or licensing agency. Bear in mind, too, that, like the agencies that require them, these bonds can be referred to by different names in different states. Additionally, different insurance bond types may be required of brokers, depending on the additional types of business in which they are engaged.

Other names for broker bonds and related bonds include: insurance surplus lines broker bond (California), service contract provider bond, insurance producer bond, insurance adjuster bond, insurance agent bond, insurance administrator bond, insurance counselor bond, preferred provider program administrator bond, financial responsibility bond, insurance consultant's license bond, discount medical plans bond, discount healthcare program operator, and employee benefit plan administrator bond.

If you are unsure of what broker surety bonds are called in your state or whether you need one, contact us to find out.

Insurance professionals in most states are required to file proof of an insurance broker surety bond before they can qualify for a business license to broker insurance. This type of license and permit bond protects consumers from unethical or negligent business practices by ensuring insurance professionals operate ethically, following state and local laws and regulations.

Sometimes, more than one is required. Brokers who operate across state lines may need a separate bond for each state in which they plan to do business. Insurance professionals who sell or broker more than one type of product usually need separate bonding for each.

Brokerages with more than one location within the same state may need more than one broker bond. Insurance brokerages may also need separate bonding for each of their employees or have the option for a blanket bond for the entire company.

Bonds exist to protect consumers, and when you purchase a bond, you are agreeing to abide by the conditions of the bond. If you do not, a claim may be brought against your bond.

Bond claims usually begin when a consumer files a complaint with a state Department of Insurance or similar authority. These entities will then bring a claim against your bond on behalf of that consumer and perhaps on behalf of the general public, as well.

If the claim against the bond is proven to be valid, the guarantor (surety) will pay the claimant up to the bond amount. The bond's indemnity agreement stipulates that you must repay the surety, though.

If a customer has an issue with you or your business, it is always best to do all you can to clear up the issue before a claim is made on your bond, even if this means administering a full refund. A refund will be less costly in the long run than a bond claim.

Besides reimbursing the broker, a claim on your bond will affect your eligibility and pricing for future bonds. Since bonds are required for licensing in many states and are only valid for a specified length of time, maintaining your eligibility for bonding and affordable bond rates is crucial to continuing your business.

Insurance broker surety bond cost varies by state, surety, and business and credit profile. Similar to what a business might pay for business insurance, a bond cost is called a premium, but it is not paid monthly. Instead, bond premiums are paid in full at the time the bond is purchased.

Because licensing requirements for insurance brokers are so strict throughout the country, broker bonds are considered low-risk. As a result, insurance broker bonds normally cost around 1% of the bond amount required by the state. Premiums may be higher, between 2 and 8% or more, depending on your or your business's credit profile.