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Bond Insurance in Texas

Bond insurance in Texas is a type of insurance where an insurer or surety assures payment if the obligor does not meet the conditions under a contract. Like all insurance, it is a risk mitigation tool. The conditions could be the timely payment of the principal and interest on a security or covering the liability of a professional for incomplete work.

There are three parties to a bond insurance contract:

  • Principal (obligor),

  • Obligee (who is being protected), and

  • Insurer/surety.

There are various types of bond insurance policies. They all serve the same purpose of protecting the relevant third party, e.g., security for the obligee or customer of a professional. They provide a measure of protection and guarantee. It also gives the insured financial backing when the obligor fails to meet the requirements of the bond, making them more reliable and trustworthy.

Depending on the industry, bond insurance may be a legal requirement for a business to operate in that industry. Other times, a business may voluntarily obtain a bond.

Some do not consider bond insurance a type of insurance because it lacks certain characteristics of a typical insurance policy. For example, unlike a conventional insurance policy between two parties (the consumer and the insurance company), bond insurance involves three parties. Also, bond insurance guarantees the commitment of the principal rather than risk or loss coverage. As a result, instead of the insurance company being responsible for the claims, the principal still covers the losses from the failure to meet the terms of the agreement. Lastly, bond insurance is more of a form of credit.

However, because it has some basic features of an insurance policy, bond insurance is considered a type of insurance in most settings. For example, like other types of insurance, the principal pays premiums to the insurer based on the consideration that if the terms of the agreement are not met, they will be at risk or suffer loss. Thus, the premium is paid to insure a possible risk or loss. It serves as protection, which is the basic aim of insurance.

Overall, if a business intends to get bond insurance in Texas, it should contact a licensed insurance agent to understand it and know how to get it. The insurance agent will provide the necessary guidance, which will include:

  • Evaluation and qualification: They will advise on the necessary financial documents to prove creditworthiness and the financial capacity required to meet the insurer or surety’s bond coverage criteria. Based on the circumstances presented to them, they will also provide information as to whether the project will require bond financing.

  • Underwriting: Like most insurance policies, underwriting is part of the process of getting bond insurance. An insurance agent can provide guidance during the underwriting process. This process evaluates the business’ risk and may provide a written agreement requiring indemnity in the case of a loss and other required responsibilities.

  • Bond issuance: The business will be given a bond to sign and deliver to the other party (obligee).

What are Surety Bonds in Insurance?

Bond insurance, also called “financial guaranty insurance,” is a type of insurance in which an insurer guarantees payment where an obligor cannot meet the terms of an agreement. It could be regarding repayment of a loan or indemnification of a customer for the incomplete work of a professional. Generally, there are three parties involved in a bond insurance contract. These are the principal/obligor, obligee, and insurer/surety.

The issuer or owner of the bond (obligor) pays the insurance company or surety a premium. This premium can be paid in full or in installments. The bond insurance premium charged is a reflection of the issuer’s assessed risk of failure or default. It can also be a result of an issuer saving money on interest by using bond insurance or the improved security value realized by an owner who buys bond insurance.

Bond insurance can be described as a way of credit enhancement. Bond issuers who purchase this form of insurance may earn a higher credit rating; as a result, making their bonds more attractive to potential investors.

Bond insurers are required by law to be “monoline.” This means that they only engage in that line of insurance. They do not write other types of insurance, like life, health, or property and casualty insurance.

What is the Purpose of Bond Insurance?

Bond insurance provides financial protection to the obligor and obligee by guaranteeing payment in the event of a default from the obligor. It makes the obligor trustworthy because there is an assurance that the contract will not be frustrated. It also enhances the credit of the obligor. In some cases, a bond insurance agreement is entered into to comply with legal or regulatory requirements in Texas.

What is Bond Insurance for?

Bond insurance is a means to mitigate risk. It is to assure the commitment of the principal/obligor that there will be no default on payment to the obligee.

What are the Types of Bond Insurance?

There are several types of bond insurance. Some common ones include:

  • Surety bond: This is an agreement between a minimum of three parties that protects against risks and losses that arise from default in contractual obligations. For example, a contractor can have a surety bond between them, their customer, and the surety. Thus, if the contractor fails to perform in line with the contract, the customer will be entitled to a fee from the surety.

  • Conduct bond: This is a type of bond that guarantees that the principal will follow the laws and regulations that affect businesses that operate in that industry. For example, in Texas, the Texas Alcoholic Beverage Commission requires bar and lounge owners that do not have a food and beverage license to have a conduct bond. If they violate any code or rule, the bond amount will be lost to the state.

  • License and permit bond: These are bonds required by government agencies as part of the process for a business to be licensed. It can be at the federal, state, or municipal level. Depending on the type of business, license, or permit, the bond may be valid for one to five years, and it is usually renewable. Essentially, the bond ensures that the business will follow all regulations and laws, protecting both the business and its clients. Examples of license and permit bonds include professional licensure bonds, mortgage broker or lender bonds, notary bonds, private investigator bonds, auto dealer bonds, auctioneer bonds, collection agency bonds, and travel agency bonds.

  • Contract bond: A contract bond acts as an assurance for the executing contractual conditions. Its objective is to ensure the standard performance agreed on by the contractor and the customer. The parties to a contract bond can indicate the projected completion date, materials to be used, and a range of other factors to fulfill the customer’s needs. It is usually issued by an insurance company and is usually obtained per project by contractors as part of the conditions for securing a job. It protects the customers against incomplete projects, for example, when the contractor declares bankruptcy before the job is completed. Bid bonds, performance bonds, and payment bonds are common examples of contract bonds.

  • Fidelity bond: Fidelity bonds protect policyholders from fraudulent conduct. A business owner may get a fidelity bond to protect their business against probable fraudulent activities performed by your staff. This can include theft or property damage. Examples of fidelity bonds are employee theft/dishonesty bonds, janitorial service bonds, Employee Retirement Income Security Act (ERISA) bonds, and probate or Executor bonds.

Do you Need Bond Insurance in Texas?

Obtaining bond insurance may be mandatory for a business to conduct operations in an industry in Texas. For example, construction businesses must have bond coverage, general liability insurance, and workers’ compensation before they are licensed. Where this is the case, the bond insurance must comply with the standards required by the regulatory agency.

If getting bond insurance is not mandatory, the business will have to determine if they need to get bond insurance.

Generally, bond insurance helps businesses by:

  • Protecting a business company from financial losses, including bankruptcy, and preventing them from being subjects of expensive lawsuits.

  • Assuring their clients that they run a legitimate business.

  • Complying with the requirements of the law or clients.

Why Do you Need Bond Insurance?

A business may need bond insurance because it is required by law or a client under a contract. It is a requirement by the government or by a client before hiring a company. Bond insurance is common because they incentivize trustworthiness by holding the obligor company financially liable for default.

Some businesses need bond insurance before getting a professional or business license. Two common examples in Texas are insurance agents and construction contractors. Some others may need bond insurance before they can operate particular utilities.

The primary purpose of bond insurance is to limit the risk of the principal falling short of the contractual obligations and having to pay any owed debt in the process.

When bond insurance is mandatory, a business should get the required bond coverage as soon as possible to avoid delays in getting licensed. Where it is not mandatory, they can get it as they see fit. For example, fidelity bonds are usually voluntary and are used to protect the business and its customers from losses caused by employee misconduct.

How Much Bond Insurance Do you Need?

When obtaining bond insurance is a legal or regulatory requirement, the amount of bond coverage should comply strictly with the prescribed requirement. Otherwise, the amount of bond coverage a business varies considering:

  • The profession,

  • The type of bond,

  • The level of coverage required,

  • Deductibles, and

  • Where the business is operating.

Some bonds require premium payments. There are some, like fidelity and contract bonds, where the business pays a percentage of the coverage amount they choose, usually about 0.5-1%. For example, a $75,000 bond coverage will have a starting price of about $750. Surety bonds are often calculated as a percentage of the required coverage, though at a higher rate of about 15%, with the percentage paid as a yearly premium. In the case of licensing bonds, credit score is usually considered.

There are many types of bonds and many situations where they may be required. Hence, it is advisable to get the professional help of a licensed insurance agent in Texas to evaluate your particular situation and determine the type of bond insurance needed.

How Much Does a Surety Bond Cost in Texas?

The cost of surety bonds varies in Texas based on the bond amount and your rate. They typically range from 1 to 15% of the total bond amount required in Texas. For instance, if you want a $20,000 bond, your costs could range from $200 to $3,000.

Is Bond Insurance Required by Law in Texas?

In Texas, bond insurance may be a requirement to run a business or participate in particular activities. Bond insurance is mandatory for title insurance agents, building contractors, escrow officers, and other professionals to carry out business in Texas. For example, the Texas Department of Insurance (TDI) requires an insurance broker bond of $25,000 before an insurance broker can get licensed. Thus, all persons and entities that intend to operate as insurance brokers must obtain an insurance broker’s bond.

Other municipalities and departments in Texas require bond coverage as a prerequisite to obtaining a license for persons who want to engage in an activity or service. Some include:

Usually, when bond coverage is a regulatory requirement, it guarantees and protects customers from fraud and misuse the principal might engage in, like unethical activities or failure to deliver the right services.

How Does Bond Insurance Work?

To understand how bond insurance works, you must first grasp the roles of the parties to a bond insurance agreement. A bond insurance policy has three parties:

  1. Principal/Obligor: This is the person or business purchasing the bond to guarantee the payment in the event of default of contract performance. They may either get the bond to fulfill a requirement or for personal reasons. Overall, it is to protect their integrity and help gain the trust of others, including their customers or financers.

  2. Obligee: This is the corporation or client who requires the obligor to perform an obligation or undertaking under a contract. They require bond insurance as protection from any fraudulent or other work-related problems caused by the principal. They will be paid for failure to meet the conditions of the agreement.

  3. Insurer/surety: This is the insurance company or financial institution that sells the bond to the principal. When the principal fails to meet the terms and conditions of the contract with the obligee, the surety will pay to settle the claim. The surety will get repayment from the principal to cover the charges.

A bond insurance policy operates to protect the performance of a contract. The principal has an obligation towards the obligee, and if the principal fails to perform the surety guarantees payments.

The principal will sign an indemnity agreement with the insurer stating that the principal will repay the insurer if the insurer makes a payment on the principal’s behalf because of a default in the original contract.

What Does Bond Insurance Cover?

This depends on the type of bond insurance. There are many types of bonds, including surety bonds, license & permit bonds, contract bonds, bid bonds, and environmental bonds. Each type of bond insurance covers different industries and aspects of a business. Thus, a business may need to know the right policy for them.

Performance bonds ensure that a business does the work that a client contracts. Contract Bonds are common in the construction industry, and they usually stipulate the expected completion time, project materials, and various other deliverables. Contract bonds also protect clients from incomplete projects, covering them where a business goes bankrupt before completing a project. Fidelity Bonds ensure loyalty and reliability by protecting a business against employee theft, embezzlement, or other dishonest employee actions. Surety bonds protect the obligee financially and the integrity of the obligor. They protect the obligee who set the bond requirements and file for damages when they are not met.

To know more about what each type of bond insurance requires, you can speak to a licensed insurance agent in Texas.

What is Bond Insurance Good for?

Bond insurance is good for protecting an obligee where an obligor fails to meet the terms of an agreement. It also makes the obligor trustworthy and reliable in their industry.

Reach out to an insurance agent in Texas to know more about bond insurance in the state.

Who is Covered by Bond Insurance?

Bond insurance protects both the principal/obligor and the obligee. The obligee may be a consumer or the entity that provided the principal with the security. Obligee is frequently a state government agency.

What is not Covered by Bond Insurance?

An insurance bond is not meant to pay for claims like a typical insurance policy. It is intended to give a financial guarantee that the person or company acquiring the bond (the principal) would reimburse the obligee if the principal defaults, fails to fulfill its obligations, or makes a claim.

In other words, an insurance bond is intended to demonstrate or support the financial stability of the business that purchases the bond. It confirms that the principal will be able to repay the bond company if a claim is paid out.

What is an Example of Bond Insurance?

One of the most popular types of bond insurance in Texas is the license and permit bond. States and municipalities usually require this type of bond coverage as a prerequisite for acquiring a license to operate. It provides substantial aid to the general public in instances where they may require the services of a professional.

Fidelity bond is another common type of bond. A company that wants to protect itself from employee theft, embezzlement, or fraud can get this type of bond so that it can be compensated if any of those things happen as a consequence of employee acts.

What is the Difference Between Bond Insurance, Professional Liability Insurance, and Workers’ Compensation Insurance?

Bond insurance is usually confused with professional liability insurance and workers’ compensation insurance. Professional liability insurance protects an insured company from damages, while bond insurance protects an obligee in the event of contractual default. Workers’ compensation insurance covers a company’s employees when they are injured on the job.

Is a Surety Bond the Same as Insurance?

Not exactly. They have differences and similarities. One major difference is that surety bond involves three parties — principal, obligor, and surety. Insurance involves two parties — the insured and the insurer. The role of surety is to guarantee commitment of the principal to the obligor (not to replace it), while an insurer in an insurance contract covers for losses that arise from possible risks.

However, they are similar in the sense that the principal and insured pay premiums to the surety and insurer respectively. Also, they provide financial protection from risks and losses.

Surety Bond Insurance
This is a type of indemnity or guarantee tool. It is an agreement between three parties — principal (obligor), obligee, and surety. If the principal does not meet an obligation owed to the obligee, the surety will guarantee payment. This is a type of risk mitigation tool. It is a contract between two parties — insured and insurer (an insurance company). The insured is compensated in the event of a covered loss.
It protects the obligee. It protects the insured against risks or losses.
Premiums are paid for the guarantee of the principal’s performance of his obligation. Premiums are paid to cover the possible losses.
Losses are not really expected. Losses are expected and rates are fixed to cover losses depending on different factors.
When payment is made by the surety, the principal still pays the surety back. When a claim is made, the insurer pays the insured. No form of repayment is made to the insurer.

What Happens if you Don’t Use Bond Insurance?

If there is no default in the contract by the obligor, the obligor should be able to get the premiums paid to the insurer for the bond coverage. They can file a claim following the terms of the insurance policy.

How to Get Surety Bonded in Texas?

These are the main steps to take when getting surety bond in Texas:

  • Know the type of surety bond that your business needs

  • Search for surety companies or bond brokers that offer that type of bond and get a surety bond quote for it. The surety will request personal information, business information, and information about your financial history.

  • The surety will carry out an underwriting process (similar to what an insurance company does) to assess your risk level based on factors like your credit score and financial history.

  • The surety will provide you with a premium quote. If you applied to more than one surety, you will get many premium quotes that you can compare. After you get quotes, you can either pay the premium or keep finding more quotes until you get a preferred quote.

Many businesses take the shorter route of engaging the services of a surety bond broker that works with different sureties. It is the easiest way to secure an affordable surety bond.

Who Can Get Bond Insurance?

Bond insurance is available to almost any business or person that requires it. It is usually needed by businesses operating in industries or under contracts that require bond coverage. This is a common requirement of the insurance industry, construction industry, government agencies, janitorial services, and temporary staffing companies. Companies that need extra protection from employee misconduct also get bond insurance.

If you fall into any of the above categories or intend to know more about bond insurance, you can contact a licensed insurance agent in Texas.

Who Qualifies for Bond Insurance?

Any person or business that intends to get bond coverage and is ready to pay the required sum to be protected.

Who Needs Bond Insurance?

A business may need bond insurance depending on regulatory or contractual requirements. A business may be required to get bond coverage by the state, their industry association, or a contract that they signed.

Industries in Texas that commonly require bond insurance include the insurance industry, construction industry, government agencies, janitorial services, and temporary staffing companies. These industries require bond coverage for their participants to protect clients from noncompliance, poor craftsmanship, or work abandonment.

Who Should Get Bond Insurance?

The three main reasons why you should get bond insurance are if:

  • You are operating in an industry or under a contract where bond insurance is required.

  • You carry out services in another person’s house or business and need extra protection.

  • You obtained security and need protection to ensure timely payment of principal or interest.

The following businesses or industries are likely to get bonded:

  • Accountants

  • Alcohol warehouses, manufacturers, wholesalers, and retailers

  • Attorneys

  • Auto & Mobile Home Dealers

  • Businesses involved in agriculture

  • Collection agencies

  • Construction companies

  • Contractors

  • Cosmetologists

  • Debt consolidators

  • Employment agencies

  • Handlers of food or alcoholic beverages.

  • Home improvement contractors

  • Insurance agents

  • Loan companies

  • Medical professionals

  • Nursing homes

  • Real estate agents

You can speak to a licensed insurance agent in Texas to clarify any questions about bond insurance.

PROs and CONs of Surety Bond Insurance in Texas

Let’s first consider the benefits of bond insurance:

PROs of Bond Insurance

  • Bond insurance ensures that a business will follow through on its contractual obligations. If they fail to do so, the obligee may file a claim against the bond with the surety of recovering their losses. It encourages industry standards by giving customers a dependable way to make a demand against a company that provides subpar services and goods.

  • Although a surety bond protects the customer, obtaining the bond provides a business with strategic advantages. Because a business has bond insurance, it can gain a reputation in its sector or industry and become a dependable and renowned name over time. Every successful business relationship in the client base builds on the previous one, showing the brand as reliable.

  • Potential clients will feel more at ease starting the process of working with the business because they would be reimbursed if there are performance concerns. ​​It provides the clients with a somewhat risk-free opportunity to try the business’ exceptional products and services and attracts them to continue working with the business.

  • Other advantages of bond insurance include:

  • Meeting surety bond requirements helps advance important processes

  • Help keep unscrupulous operators out of sensitive industries

  • Build trust with customers and the public at large.

CONs of Bond Insurance

  • While bond insurance sets industry standards by showing that a business has a certain amount of capital, it can prevent smaller businesses that cannot get the required bond from competing in certain projects. Hence, bond insurance can reduce competition within an industry.

  • One major risk of bond insurance is credit risk. If the issuer should go out of business, there may not be any payment of principal or interest.

  • Bonded businesses must pay for bonds and any valid claims.

  • A lapse in bond coverage can invalidate a license, permit, or contract.

  • Renewing bond policies can add to ongoing costs and hassle.

Is it Worth Getting Bond Insurance?

Basic cost-benefit analysis shows that bond insurance is worth it. By getting the needed bond coverage, a person becomes qualified to launch a business, formalize an important agreement, or gain the trust of a client or customer. These factors have significant and long-term advantages and implications.

Also, prices are low and manageable, especially when working with a reputable insurance firm. Bond insurance policies are not a big deal as long as the bonded party stays away from anything that could lead to the obligee filing for payment upon default.

Furthermore, they help protect the financial interest of the obligee. And failure to get bond coverage, where it is a mandatory requirement, may be detrimental to the business.

Any person or business interested in obtaining bond insurance should speak to a licensed insurance agent in Texas. They can provide all the information necessary to get bond coverage.

What Happens if you Don’t Have Bond Insurance?

If it is mandatory in the industry, then the business will face the consequences prescribed by the regulatory agency. It is usually denial or revocation of license or permit. The agency could also stipulate fines to be paid for default. Furthermore, it could affect the reputation of the business because it will be viewed as an entity that is not reliable.

Why is Bond Insurance Important?

The importance of bond insurance can be summarized in one sentence: to protect the obligee under a contract. The obligor benefits from obtaining the bond since it makes his business appear more reliable and trustworthy because of the financial support if he fails to meet the terms of the contract. So, bond insurance is a business advantage for an obligor and an insurance policy for an obligee.

What Happens When your Bond Insurance Lapses?

Bond insurance policies do not last forever. They operate within a stipulated period and have an expiration date. However, they can be renewed to extend beyond the initial coverage term.

With any further questions about bonds and insurance in Texas, speak with a licensed professional.