By Danielle Rodabaugh
The utilities and energy sector is a booming market. Of course there will always be plenty of demand for the services provided by companies in the industry. To ensure the market continues to thrive, though, utility companies must ensure they’re fully paid for the energy they supply. So how do energy providers ensure that they’ll be paid, especially when working with clients who consume enormous amounts of energy?
There’s a special type of insurance called surety bond insurance that most people, including those in the utilities and energy sector, know little about. Most commercial bond types function as license and permit bonds that guarantee professionals work according to industry regulations. Utility bonds, however, function as financial guarantees. Whereas most surety bond types protect government agencies and the general public, the financial guarantees provided by utility bonds protect utility companies.
A simple definition explains that surety bonds bring together three separate entities to ensure a specific task is performed. When it comes to utility bonds, the principal is the client who purchases the bond as a promise that all future utility bills will be paid on time and in full. The bond’s obligee is the utility company that requires the bond as a way to prevent financial loss when clients fail to make appropriate payments. The surety is the insurance company that underwrites the bond and provides a financial guarantee that the client will pay all utility bills.
When a client is expected to consume a significant amount of energy each month, the utility provider might require the company to purchase a bond before turning power on in the building(s). For this reason utility bonds are typically required of large corporations such as manufacturing companies. Deciding which clients need to purchase utility bonds is ultimately up to the discretion of individual utility companies.
If a bonded client does fail to make a payment, then the utility company can make a claim against the bond. If the claim is found to be valid, the surety will use the bond’s funds to reimburse the utility company in an amount not to exceed the bond’s penal sum. Surety bond insurance does not work as does traditional insurance, however, as the insurance company will seek reimbursement from the principal if a claim is paid out to the utility company. This serves to keep large companies from skirting their utility bills under the assumption that their surety will simply pay a claim. All claims paid are expected to be reimbursed, so sureties pursue collection from those who fail to uphold their payment obligations.
Due to the losses they’ve incurred from recent claims, surety providers are currently hesitant to issue many utility bonds. This means that clients can have trouble getting surety bonds as required by their energy providers. Because insurance companies intend to avoid claims, they’re extremely picky when reviewing surety bond applications. If an applicant’s financial credentials suggest the client might default or fail to pay future utility bills, the surety simply won’t issue a bond. When large consumers of energy, such as warehouses or manufacturing plants, are unable to get utility bonds as required, utility companies will not take them on as clients.
Danielle Rodabaugh is the chief editor of the Surety Bonds Insider, a publication that tracks developments within the surety industry. As a part of the publication’s educational outreach program, Danielle provides information to leading industry professionals to help them better understand surety bond intricacies.