What a licence bond does
A licence bond is payable to the licensing body, the obligee. It guarantees the business will comply with the statute and regulations attached to its licence. If the business breaks the rules and someone suffers a loss, a claim can be made against the bond, usually through the regulator.
For the regulator, the bond is a pool of money for consumers that does not depend on the business staying solvent. For your client, it is a cost of being licensed, and a cheaper one than tying up cash.
Examples from Canadian regulators
Thousands of licence and permit bond types exist. These are examples, each confirmed against the regulator's own source:
| Jurisdiction | Licence | Security rule |
|---|---|---|
| Ontario | Bailiffs and assistant bailiffs (Bailiffs Act) | Must be bonded before acting. $5,000 for a corporation, owner or partner; $1,000 for other bailiffs and assistant bailiffs. A bond from an insurer licensed to write surety is one accepted form. |
| Alberta | Auction sales, collection agencies, debt repayment agencies, direct selling, employment agencies, fund-raising, high-cost credit, home inspection, electricity and natural gas marketing, payday loans, prepaid contracting, retail home sales, time share | Service Alberta lists these as licences that may require security, with a consumer claim process run by the Director of Fair Trading. |
| British Columbia | Debt collection agencies (Debt Collection and Repayment Regulation) | Licensees must provide security. Consumer Protection BC has suspended licences for failing to do so. |
| Federal | Customs brokers and other CBSA programs | See customs and excise bonds. |
| Provincial tax | Fuel, gasoline and tobacco tax registrants | See customs and excise bonds. |
Construction-related permits have their own pages: developer bonds for municipal subdivision and site work, and Tarion bonds for new home builders in Ontario.
Read the regulator's form first
Most regulators publish their own bond form, and the surety has to issue on it. The form sets the amount, who can claim, how long claims can be made after the bond ends, and how much notice the surety must give to cancel. Two bonds for the same licence in different provinces can carry different risk.
Send the form with the request. If the regulator has only sent a letter, send that. We read the wording before we quote.
How claims work
Claims usually run through the regulator, not straight to the surety. Alberta's process is a good example. A consumer applies to the Director of Fair Trading with a statutory declaration, or with an unsatisfied court judgment. The Director decides claims under $10,000, and disputed claims above that go to binding arbitration. If claims exceed the security, the Director pays them out pro rata, and no one recovers more than the posted amount.
Whatever the surety pays, it recovers from the licensee. That is why underwriters care about complaint history as much as the balance sheet.
What the underwriter looks at
- The licence type. A bond that guarantees consumer deposits or trust funds carries more risk than one that guarantees paperwork.
- The business. Years in operation, financial statements and the owners behind it.
- Credit. The owners' personal credit carries weight on smaller companies.
- Complaint and claim history. Regulator findings, suspensions and past bond claims.
- The form. Claim windows, cancellation notice and any unusual conditions.
Renewals and cancellations
Most licence bonds run on the licence term and renew with it. Put the bond renewal on the same calendar as the licence. If the bond lapses, the licence can be suspended, and the regulator will not wait for paperwork to catch up.
A surety can cancel by giving the notice the form requires. The client then has to replace the bond before the cancellation takes effect, or lose the licence.
