Approximately one-third of the states in the U.S. have deregulated their energy markets, which means individuals can encourage clients to switch energy providers by finding competitive rates through brokerage. Professions that depend upon brokering of any kind are prone to unethical business practices, so government agencies that regulate brokers look for ways to protect consumers. One way they do so is by requiring surety bonds.
As such, states that permit the brokerage of energy typically require brokers to purchase surety bonds as part of the licensing process. Don’t worry if you’re wondering “What are surety bonds?” As a surety expert, I can tell you you’re not alone. The professionals required to purchase surety bonds oftentimes don’t understand how they work, either.
In a previous article for The Daily Energy Report, I explained why utility companies require some clients to purchase surety bonds before their power can be turned on. In this situation, surety bonds function as financial guarantees that can be used to compensate utility companies when customers fail to pay for energy consumed. Energy broker bonds aren’t financial guarantee bonds, however; they’re compliance bonds. This means rather than guaranteeing payments, these bonds require that principals comply with certain terms. When it comes to energy broker bonds, these terms are typically licensing requirements used to regulate energy brokers.
The exact terms an energy broker agrees to comply with when purchasing a bond depends on the form’s legal language. States typically draft unique bond forms, so energy brokers should fully understand the contractual obligations they’re agreeing to before purchasing a bond. Energy brokers who want to work across multiple states will have to be legally licensed and bonded in each state, which means they’ll have to apply and pay for multiple licenses and surety bonds.
Three parties are involved in every real estate broker bond contract regardless of the state requiring it or the language used on the form.
- Principal: the individual who purchases the bond to become an energy broker
- Obligee: the government agency that requires the bond to ensure a broker’s credibility
- Surety: the insurance underwriter that issues the bond
If an energy broker breaks the bond’s terms by failing to comply with industry regulations, harmed consumers and/or the government can make a claim on the bond to recover financial losses or owed fines.
Finally, it should be noted that the costs associated with getting bonded can catch aspiring real estate brokers off guard. Premiums are based on two primary factors:
- how much coverage the state requires
- the individual’s personal application, including financial credentials
Rates for this type of surety bond typically fall between 1 and 5% for applicants with good credit. For $10,000 of coverage, this translates to a $100 to $500 premium. For applicants with credit issues, rates typically fall between 10 and 20%, which translates to a $1,000 to $2,000 premium for $10,000 of coverage. Keep in mind that those intending to broker energy in multiple states will have to purchase a separate bond for every state that requires one, so the costs can add up quickly.
For more information about getting licensed as an energy broker, check out this video.
Danielle Rodabaugh is the director of educational outreach at SuretyBonds.com, a nationwide surety bond agency that helps energy brokers fulfill their bonding requirements. Danielle writes to help leading industry professionals better understand surety bond intricacies, including those related to the energy market. You can keep up with Danielle on Google+.