Real Estate Investment and Mortgage Financing Resources
Surety Bond Bulk Discounts
Every now and then I get a call from a new client asking how much of a discount they will receive for obtaining multiple bonds. I immediately know the conversation will take a bit longer than usual, as I will have to explain what surety bonds are in order for them to understand why they will not obtain a discount for placing multiple bonds.
Surety bonds are not an investment bond, rather they are a three party (principal, obligee, and surety) guarantee. We will use an example (using mortgage brokers) to make it easier to understand. The state (obligee) the mortgage broker is operating in requires that a surety bond be filed to guarantee the mortgage broker?s performance per the states rules and regulations on the industry. The mortgage broker (principal) goes to a bond producer to write a bond backed by a Federally approved bonding company (surety). If the broker triggers a claim the surety will pay the claim to the state department handling the brokers license. The bonding company will then look to the mortgage broker for repayment of the claim and expenses incurred.
As you can see from our example above, a surety bond should be thought of as a type of credit. The principal pays a service charge (premium) to the surety for their financial backing. Traditional surety underwriting will not approve a bond for a client that does not financially qualify for it on paper. Since suretyship is truly another form a credit, risk increases as the principal?s credit gets maxed out. Therefore, a bonding company may increase rates as the principal maxes out their surety credit. New companies or companies with poor business financial statements will have less surety credit available to them.
I do not want to give the wrong impression that bonding companies never give special treatment or lower rates to larger accounts. If a surety feels that a principal is a very low risk, the underwriter may write a bond he/she normally would not (i.e. bond form with risky language) so they can write all of the principal?s bonds. However, this is usually only done for very financially strong principals. Contract bond rates can be reduced for large accounts that bid and are awarded jobs often. The same can not be said for commercial surety.
A good bond producer will have a variety of surety markets to place all of your bonding needs. A diversity of markets allows the producer to place bonds with bonding companies that prefer a specific line of business or even specific bond form.
If you are a principal calling a bond producer, don?t ask how much of a discount there is for multiple bonds. Ask approximately how much surety credit you qualify for, as rates will only increase as you reach your surety credit limitations.
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