This guest post was provided by Danielle Rodabaugh, chief editor of the Surety Bond Insider.
In most cases, surety bond insurance is used to protect consumers from companies that could harm them by committing fraud or failing to follow industry regulations. In some situations, however, bonds can be used to protect a business itself. Such is the case with utility bonds used within the energy and utility sector.
Utility surety bonds are used to guarantee that clients pay all utility bills in full and on time. As such, utility companies typically require surety bonds of clients who consume thousands of dollars of energy each month. Examples of utility customers that might be asked to provide a utility bond include manufacturing plants, restaurants, bars and campgrounds. The utility company requiring the bond will probably ask the client to provide it before power will be turned on.
Surety bonds are legally binding contracts, so they can be confusing to understand. Each surety bond that’s issued brings three separate entities together. The obligee is the utility company seeking to avoid financial loss. The principal is the client that purchases a surety bond to guarantee future payment. The surety is the insurance company that backs the bond’s guarantee.
If a client fails to pay a utility bill, the utility company can make a legal claim on the bond to ensure it’s paid for all services. If the claim is valid, the insurance company that issued the bond will have to repay the utility company up to the bond’s full amount. However, it’s important to note that surety bonds function as lines of credit rather than traditional insurance policies. That is to say, if a claim is made on a bond, the insurance company will not simply assume the loss. If this were the case, clients could go without paying their bills because they wouldn’t face any sort of accountability. When it comes to surety bonds contracts, an indemnification clause explains that the insurance company will require the principal to reimburse it in full for any claims paid out.
Fortunately, because most energy consumers pay their utility bills appropriately, the need for claims against these bonds is rare. Furthermore, underwriters carefully review every applicant before issuing a utility bond. If a client’s application suggests financial instability, the surety can simply choose not to issue the bond. If unable to procure the required bond, the client won’t be able to work with the utility company. This process limits the number of risky clients utility companies work with.
In the end, purchasing a surety bond can, unfortunately, be a hassle for the clients required to provide them. However, the legal protection surety bonds provide utility companies with is invaluable because they could lose a great deal of money otherwise.
Danielle Rodabaugh is the chief editor of the Surety Bond Insider, a publication that tracks developments within the surety industry. As a part of the publication’s educational outreach program, Danielle provides information to help attorneys and their clients to help them better understand intricacies related to bonding, especially those in the energy and utility sector. You can keep up with Danielle on Google+.