What are License and Permit Surety Bonds?

License and Permit (L&P) bonds are one of the most common types of commercial surety bonds you’ll encounter. If you're running a business, chances are, you'll need one of these to obtain a license or permit. Regulatory bodies, whether at the local, state, or federal level, require these bonds to ensure businesses comply with the laws and regulations that keep communities safe and fair.

In simple terms, L&P bonds are a promise: they guarantee that a business (the bond principal) will act in accordance with relevant statutes, codes, or ordinances. The terms of these bonds are dictated by laws, which set the bond amount, define the conditions, and specify the obligations of the business. For example, an L&P bond might guarantee that a contractor will follow safety regulations or that a restaurant will pay its taxes and fines promptly.

Examples of License and Permit Bonds

To bring this to life, here are some common examples:

1. Contractor License Bond: Contractors are often required to post a bond before being granted a license. This bond guarantees that the contractor will comply with building codes and complete their work safely.

2. Auto Dealer Bond: Car dealerships are usually required to post a bond to ensure they follow regulations, like not selling stolen vehicles or failing to transfer titles.

3. Insurance Broker Bonds: Insurance brokers may need an insurance broker bond, which guarantees compliance with state regulations and ensures that they conduct business ethically and responsibly.

 

Without these bonds, businesses could take shortcuts that put public safety at risk, and the financial burden of a failure would fall on the community. L&P bonds shift that risk away from taxpayers and ensure businesses are accountable for their actions.

.Types of License and Permit Bonds

L&P bonds fall into four main categories, each serving a different purpose:

1. Regulatory/Compliance Bonds: These bonds ensure that businesses comply with laws and regulations. For example, an electrician may need a compliance bond to guarantee they follow safety codes.

2. Public Safety Bonds: These bonds are designed to protect the community by ensuring that businesses adhere to safety standards, like proper waste disposal or safe construction practices.

3. Public Protection Bonds: These bonds protect consumers directly. For example, an auto dealer bond protects customers from fraudulent practices by guaranteeing that titles are properly transferred.

4. Financial Guarantee Bonds: These bonds guarantee specific financial obligations, such as paying taxes, fees, or penalties owed by the business.

To see what bond types are required in your state or municipality, visit the Merchants Bonding Company Hub™.

Underwriting License and Permit Bonds

Underwriting L&P bonds is all about assessing risk based on the type of bond and what it guarantees. For most compliance bonds under $25,000, the process is simple, and these are typically considered “instant issue” bonds. Essentially, if the risk is low, there's less paperwork involved, making it quick and easy for businesses to get bonded.

For bonds with greater financial risk—such as financial guarantee bonds—underwriting becomes more thorough. This can involve a credit check and review of financial statements to assess the principal’s ability to fulfill the bond’s obligations. For instance, if you’re an auto dealer needing a financial guarantee bond, the underwriter will look at your creditworthiness to determine the bond's approval and the premium rate.

How Do I Get a Surety Bond?

Getting a surety bond through Merchants Bonding Company (Mutual) is straightforward. Surety bonds are issued through insurance agents, so you’ll want to contact your local insurance agent or use our Find an Agent tool. They’ll guide you through the process and let you know what documents you’ll need to provide for underwriting.

What Is a Surety Bond?

A surety bond is essentially a three-party agreement that ensures the fulfillment of a commitment or contract. It involves:

• The Principal: The business or individual required to fulfill an obligation (e.g., a contractor).

• The Obligee: The entity requiring the bond (e.g., a government authority).

• The Surety: The bonding company, like Merchants Bonding Company, that provides the financial guarantee.

Here’s an example: Let’s say a contractor (the principal) is required by the city (the obligee) to post a surety bond before starting a project. If the contractor fails to complete the project according to the contract, the surety steps in to cover the damages. Unlike traditional insurance, if the surety has to pay a claim, the principal must reimburse the surety for the amount paid.

Next Steps

If you’re a business owner looking to get licensed or need more information on what bonds might be required in your industry, reach out to your insurance agent or visit the Merchants Bonding Company Hub™ for more details. Getting the right bonds in place not only helps you meet legal requirements but also builds trust with your customers and community.

All information provided is subject to change.