The Important Role of Surety Bonds in Professional Licensing
Obtaining a professional license is a requirement for many occupations. As of 2018, 43 million Americans held professional licenses, and that number is steadily increasing. Whether you’re a contractor, auto dealer, or mortgage broker, a professional license demonstrates that you’re qualified and comply with industry standards and regulations.
To get licensed, you often need to complete certain coursework, accrue a specific amount of supervised experience, and pass an examination. Some professions also have an additional requirement: purchasing a professional licensing surety bond.
Below, we’ll explain how surety bonds work and explore their role in professional licensing. We’ll also discuss which professions require surety bonds, the factors that influence surety bond costs, and the steps you must take to obtain and renew your surety bond to maintain an active license.
What Are Professional Licensing Surety Bonds and How Do They Work?
A License and Permit (L&P) bond is a type of surety bond that government agencies or regulatory bodies require to ensure that licensed professionals comply with local laws, regulations, and licensing requirements. Like all surety bonds, L&P bonds involve the following three parties:
- Principal – The individual or business that needs the bond to obtain their professional license.
- Obligee – The government agency or regulatory body requiring the bond.
- Surety – The company issuing the bond.
Surety bonds create a financial incentive for professionals to prioritize their legal and regulatory compliance. If a professional falls short of these obligations, their surety company may compensate affected parties up to the bond's limit and seek reimbursement from the professional for any claims paid out.
If a professional faces multiple claims against their surety bond, their licensing authority may take note of their pattern of non-compliance. This could trigger a review of their licensing status, potentially resulting in disciplinary action or the revocation of their license.
The Purpose of Surety Bonds in Professional Licensing
The primary purpose of professional license surety bonds is to protect the public from financial harm resulting from professional negligence, fraud, or malpractice.
For example, consider a contractor who uses faulty materials to cut costs during a public construction project. Their subpar work leads to structural issues or safety hazards. Rather than absorbing the associated costs, the project owner can seek financial compensation from the contractor’s surety. If the contractor continues this behavior, they may risk losing their license.
As you can see, surety bonds’ incentive structure can uphold industry standards, promote ethical practices, and strengthen public trust within various professions.
Learn More: Step-by-Step Guide to Obtaining a Contractor License with Surety Bonds
What Types of Professions Require Surety Bonds?
Professions that pose a risk of financial harm to consumers or the public often require surety bonds as a part of their licensing process. Some of these professions include:
- Contractors – Contractors who work on public construction projects may need to obtain a surety bond to provide financial protection for project owners and public stakeholders.
- Auto dealers – Auto dealers may need to obtain a surety bond to ensure that they comply with state laws regarding vehicle sales, odometer readings, and advertising practices.
- Pawnbrokers and auctioneers – Pawnbrokers and auctioneers often require surety bonds to guarantee accurate item valuation, fair business practices, and the protection of customer property.
- Notaries – Notaries may need surety bonds to assure their clients that they’ll adhere to state laws, verify signers’ identities, and ensure document accuracy.
- Insurance brokers – Bonded insurance brokers have a strong incentive to act ethically, serving their clients and insurance companies with integrity and avoiding any fraud or malpractice.
- Mortgage brokers – Mortgage brokers may need surety bonds to prove that they’ll follow all federal and state regulations regarding lending practices, loan origination, and consumer protection.
- Freight brokers – Freight brokers are often required to carry a surety bond to guarantee that they’ll pay their carriers on time and manage their logistics properly.
How Much Do Professional Licensing Bonds Cost?
Obtaining a professional license is rarely free. You often need to pay application fees, examination fees, background check fees, and insurance premiums. If your professional license requires a surety bond, you’ll also need to pay your bond’s annual premium.
Surety bond premium costs can vary from $100 to $1,000 or more per year, depending on the required bond amount, your profession, and your creditworthiness:
- Required bond amount – Bond amount requirements are typically determined by licensing boards or regulatory bodies. They can range from a few thousand dollars to six figures. Fortunately, you only need to pay a small percentage of that amount–typically 1% to 3%, depending on your creditworthiness.
- Profession – Some professions are riskier than others. High-risk professions often require larger bond amounts. For example, while notaries may only need to purchase bonds for a few thousand dollars, hazardous waste management companies may need to purchase bonds exceeding $500,000.
- Creditworthiness – Surety companies consider your creditworthiness when calculating your bond premium rate. A high credit score shows that you repay your debts on time, suggesting that you’ll likely do the same with any bond claim payouts. Thus, having a high credit score can help you qualify for a lower premium.
Along with strengthening your credit score, you can secure better bond rates by shopping around and comparing your options with various surety companies. An experienced surety bond agency, like BOSS Bonds, can handle this process on your behalf. Surety agencies work with multiple providers, enabling them to find the one that can offer you the most competitive rates and favorable terms.
Learn More: 9 Questions Contractors Should Ask Their Surety Bond Agency
How to Obtain a Professional Licensing Surety Bond
Purchasing a surety bond is a simple process. You just need to follow these three steps:
- Apply online – You can apply for your bond online with your chosen surety provider. You’ll need to provide details about your business, financial history, and licensing requirements. You may also need to undergo a soft credit check to assess your creditworthiness.
- Pay for your bond – After completing your application, you’ll need to pay your bond’s annual premium. Depending on the surety company, you may receive your bond immediately upon payment.
- File your bond – Once approved, you can print your bond certificate and submit it to the appropriate licensing authority. Electronic copies are not always accepted, so you may be required to file the original bond document with your licensing authority.
While this three-step process is simple, it helps to have a surety specialist walk you through it. At BOSS Bonds, we can guide you through the application process every step of the way and ensure you select the right bond for your licensing needs.
How to Renew a Professional Licensing Surety Bond
Most professional licensing bonds need to be renewed on an annual basis. Fortunately, this process is equally straightforward. Just make sure you start it 30 to 60 days before your current bond is set to expire. You can find your bond’s expiration date on its certificate or within your bond agreement.
When you’re ready to start the renewal process, you can do so by:
- Contacting your surety company and updating them on your finances and credit.
- Paying the renewal premium, which may differ from the amount of your original bond.
- Filing your new bond’s certificate with the appropriate licensing authority.
To streamline this process going forward, ask your surety company if they can set up automatic renewals. If not, make sure to keep track of your bonds’ renewal dates and set reminders so you don’t let them expire. Operating with an expired bond can lead to fines, penalties, or the suspension of your license.
Get Your Next Professional Licensing Bond with BOSS Bonds
As you can see, surety bonds play an essential role in professional licensing. If your profession requires a licensing surety bond, you may be looking to purchase or renew one before the new year.
At BOSS Bonds, we can help you get bonded quickly and easily. We offer over 3,000 different types of surety bonds, from contractor license bonds to motor vehicle dealer bonds. No matter what type of bond you need, you can expect to receive hands-on service and favorable rates.
Ready to get started? Find your professional licensing bond with BOSS Bonds today.
Sources:
U.S. Bureau of Labor Statistics. Professional certifications and occupational licenses: evidence from the Current Population Survey.
https://www.bls.gov/opub/mlr/2019/article/professional-certifications-and-occupational-licenses.htm
