A utility bond is a way for utility companies to protect themselves against loss due to late or missed payments from a client—typically large commercial clients. Learn more about this type of bond below, or contact our experienced surety agents for assistance with any questions you may have.
What Are Utility Bonds?
Do you have any idea of the size of the average monthly electric or gas bill for a good-sized factory or a large department store? How about the average water bill for a car wash or a company that fills swimming pools? Utility companies have reason to be concerned as to whether or not a new business customer, especially one with high utility use, will be able to pay its bills on time.
A utility bond is an alternative to requiring such customers to put down a large cash deposit before service will be initiated. It protects the utility company against financial loss in the event that the customer pays its utility bill very late or fails to pay at all.
Who Needs Them?
Utility bonds are most often required of new electric, natural gas, or water customers with anticipated high demand and/or a history of late payment or nonpayment with other utility companies. Each utility company applies its own rules in determining when a bond is needed.
How Do They Work?
As with any surety bond, there are three parties involved in a utility bond contract. These include:
- The obligee – The utility company that requires and is protected by the bond.
- The principal – The customer that is required to purchase the bond.
- The surety – The company that underwrites and issues the bond.
In purchasing the bond, the customer is guaranteeing to pay its utility bills in accordance with the terms of the bond. In requiring the bond, the obligee gains the right to file a claim against it in the event of the principal’s nonpayment. And in issuing the bond, the surety guarantees to pay the obligee’s claim if it is found to be valid. The surety also gains the right to collect that claim amount from the principal, who is legally obligated to reimburse the surety.
What Do They Cost?
The utility company determines the required bond amount based on the principal’s anticipated utility use. This may be determined by examining the principal’s previous billing from a previous utility company in another location. Or, it may be calculated based on the average utility use of another company of comparable size in the same industry.
However, the principal will pay only a relatively small percentage of that bond amount. That percentage, known as the premium rate, is established by the surety based on the applicant’s credit score, financial stability, and other relevant factors.
An applicant with good credit typically pays an annual premium that’s in the range of 1-2% of the required bond amount. Applicants with credit challenges may pay between 3-5%.
Request A Quote
If you’ve been informed that you’ll need to obtain a utility bond to get the lights turned on, reach out to us today. Surety Bond Professionals has over 30 years of experience serving clients nationwide. Our expert bonding agents are ready to assist with all of your needs.