Purchasing a lottery bond is a mandatory step in becoming licensed as a lottery agent. The surety bond agreement is a legally binding contract among three parties with distinctly different roles and responsiiblities:
- The state agency with jurisdiction over a state’s lottery and mandating the purchase of a lottery bond is referred to as the “obligee.”
- The lottery retailer required to purchase the bond is known as the bond’s “principal.”
- The surety company underwriting and issuing the bond is called the “surety.”
If the principal commits an infraction of the rules set forth in the surety bond agreement—for example, failing to remit lottery sales proceeds to the state—the obligee can file a claim against the bond. If the surety finds that the claim is valid but is unable to negotiate an amicable settlement, the surety typically pays the claim on behalf of the principal, who is then legally obligated to reimburse the surety.
This process is made possible by the fact that in issuing a lottery surety bond, the surety estabishes a line of credit for the principal in the required amount of the lottery bond. This line of credit will provide the funds to pay claims, if necessary. That’s why the main factor the surety considers in setting the surety bond premium rate is the principal’s personal credit score. A principal with a high credit score has a track record of paying creditors on time, which minimizes the risk the surety assumes in issuing a surety bond to that individual.