Different types of Surety Bonds in California
California is the largest state by population. It has a vibrant and thriving automotive, construction/contracting, alcoholic & spirit, and mortgage industries. Given the importance of these industries and their potential risks, the government of California requires surety bonds for the key participants of these industries, such as motor vehicle dealers, contractors, and mortgage brokers. In this article, we will go in depth about what is a surety bond, the purpose of a surety bond, the most popular types of California surety bonds and how to get a surety bond in California
To start, it’s important to establish the basis for what a surety bond is and how it works.
A surety bond is a three party contract issued by a surety company (the surety) that provides a financial guarantee to an interested party (the obligee) that specifies that a named person or business (the principal) will comply with terms and conditions established by the bond. The obligee is typically a government institution. If the obligee or the general public believes that the principal has violated certain laws and regulations enforced by the bond, then they can file a surety bond claim against the principal’s bond for recourse. Even though the surety company will first pay the claims to the obligee, ultimately, the principal is the party responsible for paying back the money that the surety pays the obligee.
The purpose of a surety bond is to protect the general public from financial losses resulting from fraudulent behavior of individuals or businesses. It achieves its purposes through the following two ways:
1. Preemptively prevent unqualified applicants from becoming licensed and bonded
Surety companies use applicant credit score, financial history, and years of experience to determine both the price of the bond and if the applicant can even obtain a surety bond. If the applicant has a very bad credit score, has gone through bankruptcies and has committed financial crimes, that individual won’t qualify for a bond. The surety company will not approve this individual for a surety bond. Not having this applicant bonded will prevent him or her from getting a required professional license. This ultimately protects the public against potential risk.
2. Provide a financial protection to the public if fraudulent behavior has been committed by the bonded individual
If the bonded individual commits any fraudulent behavior, a claim can be filed against the bond and if the claim is proven to be valid, the claim will be paid to repair the damage caused to the claimant, which is typically the general public or the government
There are three main types of surety bonds in California: commercial bonds (i.e., license/permit bonds), contract bonds (i.e., performance or service bond), and court bonds.
Commercial bonds are used to protect businesses and consumers from financial losses due to a business or individual’s failure to fulfill its obligations to their customers or to the government. The several types of commercial bonds are:
A license and permit bond is required as a condition to grant a license to engage in a specific profession i.e., general contracting, motor vehicle dealership. The purpose of a license & permit bond is to provide a financial guarantee that the licensed professional will comply with rules and regulations of the specific industry defined by the government regulating body. A good example of license & permit bond is the $50,000 California Motor Vehicle Dealer Surety Bond and $25,000 California Contractor License Surety Bond
A fidelity bond offers financial protection to the company or the company’s clients due to fraudulent behavior of the company’s employees, such as theft. Fidelity Bond can be different from other types of surety bonds since there are only two parties to a fidelity bond and fidelity bond is typically to protect the principal. Two good examples of fidelity bonds are Business Services Bonds, also known as Janitorial Service Bond in some circles and Employee Dishonesty Bonds
A public official bond is used to protect against the conduct by the named public official that constitutes a breach of the public official’s duties of office. These bonds are required for public officials in order to ensure that they fulfill their obligations honestly and responsibly.
A California Motor Vehicle Dealer Bond is a type of license and permit bond required by the California Department of Motor Vehicles (the obligee) for all California motor vehicle dealers (the principal). The auto dealer bond provides financial protection to car buyers, car loan companies and the general public by guaranteeing that the auto dealers will operate their business in compliance with the California Vehicle Industry Registration Procedures Manual. The bond amount is $10,000 for wholesale dealers and $50,000 for retail dealers.
A California Contractor License Bond is a type of license and permit bond that is required by the California Contractor State License Board for licensed contractors. The contractor bond is designed to provide financial protection to home owners by guaranteeing that contractors will conduct business in compliance with state contractor laws and regulations. In California, all licensed contractors who have a single job exceeding $500 value are required to have a contractor license bond in the amount of $25,000.
A type of license and permit bond that is required by the California Secretary of State under California Government Code sections 8212-8213 for any individuals who want to work as public notaries. The notary bond is designed to protect financial guarantee that the notaries will conduct business according to the laws regulating the notary practice.
A California tax preparer bond is a type of license & permit bond required by the California Tax Education Council for all individuals or companies that operate as a registered tax preparer. The bond provides financial protection to taxpayers by guaranteeing that tax preparers will fulfill their duties in compliance with the provisions found in Division 8, Chapter 14 of the Business and Professions Code. The bond amount is $5,000.
Also known as residential mortgage lender or servicer bond, is a type of license & permit surety bond that is required by the California Department of Business Oversight for individuals or companies that operate as mortgage brokers in California. The bond provides financial protection to prospective home buyers by guaranteeing that mortgage brokers will abide by the provisions of the California Residential Mortgage Lending Act and other rules by the Commissioner of Business Oversight. In California, mortgage brokers are required to have a mortgage broker bond in the amount of either $50,000 or $100,000.
Also known as BMC-84 bond, this is a type of license and permit bond that is required by the Federal Motor Carrier Safety Administration (FMCSA) for individuals or companies that operate as freight brokers or freight forwarders. This is a federal bond required for all states but it is still very popular in California. The bond provides financial protection to shippers and carriers by guaranteeing that the broker will operate in compliance with federal regulations established by FMCSA (the obligee). The bond amount required is $75,000.
Also known as title bond, this is a type of license and permit bond required by the California DMV for individuals or companies who would like to obtain a bonded title. According to the California Vehicle Code Sections 4157 and 4307, a defective title bond is required for owners who would like to obtain a title if they can’t provide sufficient proof of ownership. The bond amount required is equal to the fair market value of the vehicle evaluated by a licensed motor vehicle dealer or the average valuation from a trusted industry source, such as Kelley Blue Book.
This is a type of license and permit bond required by the California Department of Insurance for individuals who would like to become a licensed insurance broker. According to the California Insurance Code sections 1662-1665, insurance brokers in the state of California need an insurance broker bond before getting their insurance license. The bond provides a financial guarantee that the broker will comply with California insurance regulations.
Contract bond is typically required in the construction industry to guarantee that a contractor will comply with the contract they signed with the construction site owner. This is typically related to large construction projects, i.e., shopping malls, apartment buildings, etc. This bond protects construction project owners by ensuring that the contractors will finish the project on time and in compliance with the terms in the contract. If the contractor fails to complete the project according to the contract terms and schedule, then the project owner can make a claim against the bond and get financial compensation.
There are three types of contract bonds in California:
Bid bonds are required for contractors before they can submit a bid for a project. This bond provides protection for construction project developers receiving the bids that the contractors submitting bid proposals have the financial and construction expertise to complete the job. If a bid is selected and the contractor whose bid is selected declines or retracts the bid, then the construction project developer can make a claim against the bond. The claim payment is typically the difference between the retracted bid and the next highest bid.
Performance bond guarantees that contractors complete construction projects according to the terms of the contract they signed with the project developer. Based on the Miller Act, a performance bond is required for all federally funded projects worth $100,000 or more. If the contractor fails to finish the project according to the terms, the project owners can make a claim against the bond. If the claim is proved valid, the project owners will be paid a financial compensation that can be used to hire another contractor to complete the project or repair issues caused by the previous contractor.
Payment bonds are also typically required for contractors who are given public works projects. This bond ensures that the subcontractors, suppliers, and workers are properly compensated if the contractors go bankrupt or intentionally not pay the parties in the construction project
Court bonds refer to all surety bonds needed for an individual when going through a court of law. This is an umbrella term that can be divided into two categories of bonds:
Ordered by the judge in civil cases where monetary damages are involved. They protect either party against potential financial losses from the court ruling. Examples of judicial bonds include appeal bond, bail bond, plaintiff’s attachment bonds.
Also known as a fiduciary bond. This type of bond is required for individuals appointed by the court to manage other people’s assets or care for others. It acts as a financial guarantee that the bonded individual will comply with the fiduciary obligations that are associated with the making of financial decisions that affect an estate or individual. Examples of probate bonds include custodian bonds, executor bond, fiduciary bond, and guardianship bond.
The process for acquiring a surety bond in California is similar to that of most other states.
1. Submit Information Online.
You are required to submit information required by the specific bond, such as legal name, legal business address, license number
2. Surety Company will look for the best quotes
After receiving the applicant’s information, the surety agency will find the most affordable quotes among their insurance partners. The surety company will email, text and call you about the most affordable quote for you
3. The applicant can purchase the bond
If the principal is happy with the price and terms of the bond, they can make a purchase.
4. The applicant will print and sign the bond
After the purchase, the sealed bond will be issued by the surety company and sent to the principal to print and sign.
5. Submit the bond to the obligee
Once the sealed bond has been signed, the principal can submit the bond to the obligee and proceed with their normal business procedures.
While there are many similarities between the surety bond policies in California and other states, there are also important differences to consider. One important difference is that California, being the largest state with a lot of regulations, has many surety bonds that can only be found in this state. For example, California Contractor License Bond is the only state-required contractor license bond for all licensed contractors in the state. While other states have specific municipalities that require a contractor license bond for a specific class of contractors, California has a license bond requirement for basically all contractors operating in the state. Take another example, California tax preparer bond is also a uniquely Californian bond because only one other state, Nevada, requires a surety bond for tax professionals working on tax returns for consumers. Given the large number of California licensed professionals and the large number of bonds, the state is a very important market for surety bonds.
