Insurance brokers don’t work for a particular insurance company. Rather, they operate as intermediaries between people seeking insurance and any number of insurance companies. They work on behalf of clients, both individuals and businesses, to find insurance coverage at the best possible price. Insurance brokers often develop long-term relationships with clients, helping them manage risk with appropriate insurance products as their circumstances and insurance needs change over time.
An insurance broker bond is a type of license surety bond that serves as a licensed broker’s guarantee to act in the best interest of their clients, by law. The bond is a pledge to conduct business in a completely lawful and ethical manner.
An insurance broker bond provides financial protection for the state by indemnifying it against liability for damages stemming from a state-licensed broker’s malfeasance or negligence. The bond also provides a way to compensate those who suffer such damages due to the insurance broker’s failure to act in the best interest of clients or otherwise live up to the terms of the surety bond agreement.
Who Needs Them?
The insurance brokerage industry is regulated at the state level, and many states require candidates for licensure to purchase an insurance broker bond. Insurance broker bonds must be continuous, meaning that there must always be an active bond in force to prevent suspension or revocation of the broker’s license.
How Do They Work?
The agreement that is the basis for an insurance broker surety bond forms a legally binding contract between three parties:
- The state licensing authority that requires the bond is known as the “obligee.” The obligee establishes the required bond amount, also called the bond’s “penal sum.” This is the maximum dollar amount that will be paid on a single claim.
- The insurance broker is referred to as the bond’s “principal.” The principal is solely responsible for paying valid claims against the insurance broker bond.
- The bonding company that authorizes the bond is called the “surety.” The surety sets the premium rate for each principal on a case-by-case basis. The surety also investigates claims against the bond, determines whether they are valid, and approves them for payment.
Although the responsibility for paying claims belongs entirely to the principal, in practice, the surety often pays a claim initially. Essentially, the insurance broker bond represents a line of credit in the amount of the bond’s penal sum. When the surety pays a claim on behalf of the principal, it taps that line of credit and creates a debt that the principal is legally obligated to repay.
What Do They Cost?
The annual premium cost of an insurance broker bond is a small percentage of the bond’s penal sum. What that percentage, the premium rate, will be depends on the surety’s assessment of the risk that extending credit to the principal would entail.
The main factor the underwriters will consider is the principal’s personal credit score. A high credit score indicates a low risk that the surety will have trouble getting reimbursed by the principal for claims paid on the principal’s behalf. The low risk earns the principal a low premium rate, perhaps as low as 1%.