What is a License and Permit Surety Bond?

License and permit bonds are a type of surety bond that must be filed with the government agency (city, county, state or federal) responsible for regulating the business activity in the business’ jurisdiction as a condition of licensure for a business (“license bond” or “compliance bond”) or as a condition for issuance of a work permit (“permit bond”). License and permit bonds, also referred to as “L&P bonds”, are one of the most common types of surety bonds. 

License and permit bonds must be issued by insurance carriers admitted in the state where the government agency requiring the bond resides. The insurance carrier issuing any surety bond, such as a  license and permit bond, will also be referred to as the “surety company” or the “bond company”.

Why is a license bond required?

License bonds protect a government agency by transferring to a surety bond company the cost of ensuring the public is compensated for damages resulting from a business breaking license law. The surety company provides the government a guarantee (the surety bond) that the customers, vendors and employees of a licensed business will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the license up to a limit specified in the bond (“penal sum” or “bond amount”). The bond company also directly receives claims from the public and determines the validity of claims. Ultimately,  licensed business owners are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face indefinite license suspension.License bonds refer to the licensed business as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.

License bonds apply to hundreds of occupational licenses. Common examples of license violations triggering a bond payout include a contractor failing to pay employees or abandoning an uncompleted job or a car dealer bouncing a check at auction or failing to deliver proper title to a purchaser.

Why is a permit bond required?

Permit bonds protect the government agency issuing a permit by transferring the risk to a surety company that the permitted person or business, usually a contractor, creates damages related to the permitted activity. The surety company will pay the government agency to rectify damages resulting from the permitted activity up to a limit specified in the bond (“penal sum” or “bond amount”). Ultimately, the permitted person or business is responsible for their actions under the permit and required by law to reimburse the surety company for any payments made under the bond. Permit bonds refer to the permitted person or business as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.

For example, various transportations agencies require trucking companies to secure a permit before shipping large loads to protect public highways by requiring the trucking company to return the road to workable condition when damages result from their shipping activities. If the trucking company fails to repair the road to the specifications in the permit, the surety company will pay for the repairs and seek reimbursement from the trucking company. Failure to reimburse the surety company will disqualify the trucking company from gaining future permits.   

How much does a license and permit bond cost?

License and permit bonds typically cost between 1% and 10% of the bond amount.

Example: $10,000 License and Permit Bond Cost

Credit Score Premium Rate Bond Cost
680 or above 1.0% $100
650 - 679 1.5% $150
625-649 2.0% $200
600-624 3.0% $300
550-599 5.0% $500
500-549 7.0% $700
499 or below 10.0% $1,000

The actual cost of a specific license or permit bond can vary widely depending on the risk associated with the government agency, the occupation or permit type and the business owner’s license history, experience and creditworthiness. Surety bonds required by a local government (city or county) tend to have the lowest cost, while state or federal requirements have potentially higher costs and/or more strict underwriting requirements.

Is a Credit Check Required for License and Permit Bonds?

Depending on the relative risk of the bond and the underwriting practices of the surety, the bond company may require a personal credit check of the owner of the business applying for a license or permit bond to determine the premium rate and eligibility for the applicant. For many license and permit bonds required by cities, townships or counties with bond amounts under $25,000, a credit check is not required to purchase the bond. Also, certain low-risk state required bonds may be available without a credit check. Ultimately, the surety insurance company determines how it will underwrite and price a surety bond.

How does the wording in the bond form impact the cost of a license bond?

The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and licensed business (principal). While many bond forms use similar language, each bond form can be customized by the government agency requiring the specific bond and may contain provisions that increase potential costs for the surety company, which will  ultimately be passed on to the principal via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a license bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.

Aggregate Limits
Bond forms always specify the penal sum defined as the maximum amount of financial damages any single party can recover from the bond related to a single claim occurrence. Most bond forms also contain a clause which limits the amount of financial damages from all parties and all claims to a specific amount (“aggregate limit”), usually the same amount as the penal sum. For example, a $15,000 license bond with an aggregate limit of $15,000 will pay out no more than $15,000, regardless of the number of damaged parties or claim occurrences. License or permit bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.

Cancellation Provisions
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the licensed business and government agency requiring the bond with the cancellation taking effect within a set period of time, usually 30 days (“Cancellation Period”). Cancellation provisions allow the surety company to cancel the bond for any reason, but most often due to the principal failing to pay premiums due, claim payouts, or material changes in the business owner’s credit score. License bonds with no cancellation provision or cancellation periods greater than 30 days will be more expensive than a bond with similar coverage containing a standard cancellation provision.

Forfeiture Clause
Surety bond claims are paid by surety companies to damaged parties to reimburse that party for the financial loss incurred up to the bond penalty amount. Certain bonds contain a clause which requires the surety company to pay the full bond penalty to the damaged party, regardless of the actual damages incurred (“Forfeiture Clause”). License bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.  

Types of License and Permit Bonds

Suretypedia groups License and Permit Bonds into 63 unique categories, primarily by industry and sub-industry. Below is a link to more information on each bond category: