A license bond is a type of surety bond. In fact, license bonds represent a big chunk of different surety bonds, with diverse objectives and conditions. Surety bonds are specialized bonds. They act as any other type of bond, but they have the objective of establishing an enforceable contract and a financial guarantee where it is stated that the purchaser of the bond will act within the regulations and laws ruling the industry. In some industries, state government agencies might require a special bond prior to issuing a license or a permit. These special bonds are called license bonds or permit bonds. There are many examples of industries that require bonding prior to issuing any professional license. New auctioneers will have to buy a license bond if they want to obtain a license to operate an auction house; telemarketing companies or businesses require a bond before they can start any business by phone.
Because license bonds are surety bonds, they are contracts where three parties are involved, each one of them with their own responsibilities.
The Principal is the individual or company that needs to purchase the bond in order to obtain a license or a permit. When the principal obtains the bond, he is agreeing to act within the limits of the laws that regulate that specific industry. It is a financial guarantee that every regulation will be followed with the only objective of bringing honest and quality service to the client.
The Obligee is the party that will require the bond to be purchased before issuing any permit or license. State government entities are usually the ones to represent the Obligee party in a license bond contract. Many state government agencies require special bonding prior to issuing a license. Used car dealers, travel agencies, mortgage brokers and collection agencies are just some of the industries that require a license bond prior to issuing or renewing a professional license.
The third and final party is known as the Surety. This is the party that will sell, underwrite and issue a bond. Since sureties need to have a strong financial support, insurance companies are usually the ones to play this part. As the issuers of the bond, sureties have certain specific responsibilities with both the obligee and the principal. If the principal deliberately or accidentally acts outside the established limits of the law or regulations that control the industry, the obligee can make a claim against the bond. Whenever a claim is made, the surety will have the obligation to study the situation in order to determine if the claim is valid. In an event of a valid claim, the surety will pay the obligee for any amount required to cover the damages and harms made when the principal failed to act within the law. The surety will then turn to the principal and ask for a reimbursement of the paid amount plus any legal fees incurred during the claim’s investigation.
It is very clear that license bonds and insurance are two different things, and they should not be confused. In an insurance deal, there are only two parties: the insurance company and the insured individual or company. The insured party never pays reimbursement whenever the insurance company has to make a payment in his name. In a license bond, there are three parties, and the principal always has to make a reimbursement whenever the surety pays in his name. This is mainly because a license bond is a guarantee aimed for the customer, not the principal.
A license bond comes as a prerequisite of many licenses businesses. It is an efficient way for a principal to guarantee that they will work following any regulations involved in the industry. It also works for the obligee, protecting it from any financial loss if the principal fails to follow the established guidelines and laws. With a license bond, government institutions have better regulation over the industry and the services it provides; it is a way to ensure quality service, honest transactions and good business relationships between the principal and the client.