Auction bonds are classified as license and permit bonds because purchasing one is a prerequisite for obtaining or renewing an auctioneer license. Failure to maintain an active bond in force at all times can result in suspension or revocation of an auctioneer’s license. The required bond amount (the bond’s “penal sum”), varies by state.
Auction Bonds for Licensed Sellers
Auctioneers and dealers need an auction bond when sale rules require financial assurance for bidders or consignors. Surety Bonds Agent works nationwide with clear guidance and fast quote support. Request an auction bond quote today.
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What Are Auction Bonds?
Most states require auctioneers to be licensed to conduct auctions or to run an auction company, and purchasing an auctioneer surety bond is typically a requirement for licensure. The auction business presents opportunities for unscrupulous auctioneers to do some real financial damage through unlawful and unethical practices such as mispresenting the authenticity or condition of auction items or misappropriating payments from customers.
An auction bond is a licensed auctioneer’s guarantee to do business in compliance with all applicable state laws. Any violation that causes a financial loss to a customer gives the injured party the right to file a claim for damages against the auctioneer’s surety bond—claims that the auctioneer is legally obligated to pay. In addition to providing a source of funds for paying claims, an auction bond protects the state against any liability for damages caused by a state-licensed auctioneer.
Who Needs Them?
How Do They Work?
An auction bond is a legally binding contract among three parties: an “obligee,” a “principal,” and a “surety.”
- The “obligee” requiring the bond is the state entity that licenses auctioneers. In many states, the Secretary of State or an Auctioneers Commission is the obligee,
- The “principal” is the auctioneer required to purchase the bond, and
- The “surety” is the company guaranteeing the payment of claims.
When a claim is filed by an injured party, the surety will investigate and make sure that it is valid before approving it for payment. In some cases, the surety may try to negotiate a settlement, but if the claim must be paid, it’s the principal’s legal responsibility to pay it.
However, it’s the surety that guarantees payment, so if the principal doesn’t pay a claim right away, the surety will pay it initially on behalf of the principal. That doesn’t relieve the principal of the obligation to pay, but that will be repayment of the debt now owed to the surety rather than direct payment to the claimant.
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What Do They Cost?
The annual premium the principal will pay for an auction bond is a small percentage of the bond’s penal sum. While the obligee has established the penal sum for auction bonds issued in the state, the surety determines what the premium rate will be.
Because of the risk associated with paying claims on behalf of the principal and waiting to be repaid, the main underwriting consideration is the principal’s creditworthiness, as measured by their personal credit score.
A high credit score is indicative of low risk to the surety, so the premium rate will be low, potentially as low as one percent. Someone with lesser credit will be assigned a higher premium rate to offset the risk to the surety.
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