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What Are Auto Insurance Bonds?
Many people are surprised to learn that in some states there is an alternative to obtaining conventional auto insurance. In some cases, it’s possible to satisfy the state’s insurance requirement by purchasing an auto insurance bond as proof of the financial resources to self-insure.
Who Needs Them?
In states that allow self-insurance, auto insurance bonds can be an attractive option for businesses that maintain a fleet of vehicles, like auto dealers and rental agencies. Long-term, purchasing the necessary auto insurance bond can be a cost-effective alternative to paying insurance premiums on the individual vehicles.
While some states allow individual vehicle owners to obtain a surety bond rather than an insurance policy as proof of financial responsibility, fleet owners are the primary purchasers of these kinds of bonds.
How Do They Work?
While traditional insurance transfers the risk of financial loss to an insurance company, people who purchase car insurance bonds retain that risk. The bond, however, does not transfer any risk to the surety company. As the principal, you are ultimately responsible for any payment on a valid claim.
Let’s assume that the owner of a fleet of 20 vehicles purchases an auto insurance bond, which makes that fleet owner the principal in the surety bond agreement. In the event of an accident resulting in a valid claim against the bond, the surety company will pay the claim.
However, the principal is still liable for the claim amount, because the risk was not transferred to the surety company. Surety bond contracts include an indemnity clause that leaves the principal responsible for reimbursing the surety company for the financial loss.
The surety company typically allows the principal to repay the claim amount over time. This is one of the key advantages of this type of bond to the principal. The bond premium costs less than the principal owner would pay for traditional insurance for his entire fleet, and if there is a valid claim against the bond, the principal has some time in which to make good on the obligation to repay the surety company.
How Much Do They Cost?
The state establishes the required bond amount, and there is wide variation from one state to another. In all states, the principal pays only a small percentage of that required bond amount as an annual premium. The surety company determines the premium for any given bond based on such factors as the applicant’s personal credit score as well as their personal and business financial strength. The better the applicant’s credit and finances, the lower the premium.
There’s a lot to consider if you’re thinking about obtaining an auto insurance bond. Our experienced surety professionals are ready to help you.