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A beginner’s guide to surety bonds in the energy sector

September 10, 2012

When it comes time to pay your utility bill each month, you — a homeowner or renter — most likely think nothing of writing a check to your utility company or paying the bill online. In most cases, utility companies trust that their residential clients will pay for the energy they consume every month without fail. Many utility companies also provide energy for large businesses, such as manufacturing plants, restaurants and campgrounds. When it comes to these businesses that use a great deal of energy each month, how do utility companies ensure that they will receive payment on time and in full? By requiring a utility surety bond.

To understand utility bonds, one must first understand what a surety bond is and how it functions. A surety bond is a legal contract that financially binds three entities together. The principal purchases the surety bond, the obligee requires the bond and the surety provides the bond. With traditional surety bonds, the obligee is usually a local or state government agency that requires the bond in order to protect itself in the event of wrongdoing committed by the principal. With utility bonds, on the other hand, the obligee is the utility company that requires its clients to post a bond. Why? To protect the utility company if the client fails to pay his utility bill.

Unlike traditional surety bonds that are required by law, utility bonds are required at the discretion of utility companies. If your utility company determines that you — a business owner — must post a utility bond for your business, you will need to purchase the bond in an amount set by the utility company before energy will begin flowing. From then on, the utility company can make a claim on your utility bond if you fail to pay your utility bill. If this happens, the case will be investigated, and — if proven accurate — the surety that backed the bond will pay your utility bill on your behalf. Once this occurs, you must reimburse the surety company.

Overall, claims made against surety bonds are rare. Why? Because repaying a surety company in the event of a claim against a utility bond is expensive and therefore can be detrimental to the well-being of the business in question. Additionally, surety providers take great care when reviewing applicants. If an applicant has a history of financial instability that indicates they won’t pay their utility bills appropriately, the surety might charge a higher bond fee or refuse to issue the bond altogether. Fortunately, the majority of bonded individuals and businesses adhere to the terms of their bonds.

The way surety bonds affect the energy and utilities sector is a valuable concept to understand not only for energy-conscious individuals but also business owners. It’s also important to understand that in the confusing world of insurance and business legislation, there’s a financial tool that promotes the success and well-being of not only utility companies but also the energy sector as a whole.

Sara Aisenberg is the executive writer for the Surety Bonds Insider, a publication that tracks developments within the surety industry. As part of the publication’s educational outreach program, Sara provides information to leading industry professionals to help them better understand surety bond intricacies. Follow Sara on Twitter @SaraAisenberg.

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