A commercial bond is a very general type of surety bond. A commercial bond, such as a contractor license bond, is most often required by government agencies; federal, state or local. These bonds are typically required to be in force in order for a business or individual to obtain or maintain various licenses and/or permits.
Commercial bonds are usually annual bonds; i.e., the initial term of the bond is one year and the bond will have to be renewed every successive year. In some cases the governing agency requiring the bond will specify bond expiration dates or may require the bond to be aligned with the calendar year. Some bonds are required for multi-year increments as well, e.g., sales tax bond with a two year term.
Generally, commercial bonds serve the purpose of protecting a portion of the general public that interacts with the principal being licensed. In most cases a claim may be made on these bonds by anyone who has suffered a loss due to violations of applicable rules, regulations and/or laws by the bonded principal. When a valid claim is made on these bonds, the surety will make payment to settle the claim. Those payments may go toward settling the damage caused by the principal or toward covering fees to the governing agency for the principal's violation. A surety will attempt to recoup its losses from the principal who is ultimately financially liable. A surety may also cancel a bond when claim activity arises, unless specifically prohibited from doing so. Since these bonds are usually required in order for the license or permit to remain active, it is in the principal's best interest to resolve issues that could result in a claim on their bond before a claim is made.
Commercial bond penalty amounts vary greatly depending on the agency requiring the bond and the reason for the bond. Some commercial bonds have set penalty amounts. In some cases there are scaled penalty amounts based on different criteria. Some commercial bond penalties are based on calculations such as a penalty calculated using a percentage of a business's prior year sales or expected first year sales. There are various other factors used by some government agencies to determine the required bond amount such as:
There are far more factors that could be considered when determining the bond penalty amounts. Most governing agencies requiring a bond will either indicate the bond penalty amount or provide a way to calculate it.