Indeed, the majority of our customers have asked us, “Is the premium refundable on a surety bond?” However, the eligibility of refund will depend on many factors with the surety company. In general, the surety company will have to consider: For more information on refund eligibility and terms, visit Alpha Surety Bonds to learn more about how they handle such cases.
Is their rate filing allowing the return premium?
– Is the bond cancellable?
What part of the bond term is considered “earned” as opposed to “unearned”?
Why Would Your Customer Want to Refund Their Surety Bond?
If your customer is soliciting a refund for any premium paid on a surety bond, it is most probably for one of the following reasons:
Purchased the surety bond only to find out later that the bond is not required
– Bought a surety bond, only to be denied a business license or permit
– Purchased a surety bond, and then decided against obtaining the business license or permit or went out of business
– Had the wrong surety bond
– Paid for a multi-year term, and well before the expiration of the term the bond is no longer needed
Whatever the case may be, your customer is expecting some form of refund if their bond needs to be cancelled before the term ends. Navigating through minutiae of a surety company’s policy on returning premiums can be quite difficult but we have broken down the basics for you in the following sections.
Is Refund of Premiums on Surety Bonds Done?
Surety companies consider premiums as compensations for assuming the risk as named in the bond agreement. As long as the bond is cancellable and there is means through which the surety can discharge their liability under the bond, then the surety should refund any premium paid but unearned.
Thus, if, for example, the bond is cancelled mid-term, the surety company will apportion the premium payable on the one that has been earned on the bond. Generally, the surety companies compute their earned premium on a daily basis. For example, suppose a bond is issued for a 1-year term starting on January 1, 2021. On January 31, 2021, the surety company will have earned 31 days of the bond premium. Furthermore, most surety bonds usually have a cancellation provision applicable for the period of time between 30 and 60 days and this extension also expands the surety company’s liability. Thus, for our example above, a bond with a 30-day cancellation period would have accumulated the premium earned after 31 days plus an additional 30 days for the cancellation period: 61 days for premium earned.
If a surety company pays out a bond claim, the indemnity agreement in the bond holds the principle legally obligated to reimburse the surety company for all claims handling costs. Most carriers will hold the return premium as collateral on canceled bonds due to claims being filed against it.
Most carriers will grant a pro-rated refund, but it is essential to note that there are a few that maintain a minimum earned premium (varying between $100-$100). The minimum earned is primarily for recovery of costs incurred by the surety company in the issuance of the surety bond. Thus, if the premium of your customer’s bond is less than $100, this means that even if it is cancelled mid-term, there may be little or no return premium.
Are There Any Situations When Premium Would Not be Refunded?
Surety companies will generally refund all unearned premiums; however, two conditions will render a bond ineligible for a refund:
If the bond has no provision for mid-term cancellation, it has no unearned premium because it cannot be cancelled mid-term.
2. A surety company has language in its rate filing which excludes refunds on certain types and situations of bonds.
