Shipping is a serious, global business. An ocean transportation intermediary (OTI) bond is a type of surety bond that applies to marine vessels participating in commerce between the United States and foreign countries.
It’s legally required that these vessels have an OTI bond if they want to transport goods from the United States to any foreign countries. It’s also necessary to have an OTI bond to secure the OTI license these businesses need to conduct their business legally. Foreign vessels don’t have to have a license, but they still need to post an OTI bond.
Let’s take a closer look at how OTI bonds work and who needs them.
As briefly noted above, OTI bonds are required in order for the marine vessels participating in foreing commerce to trade and be licensed. Essentially, an OTI bond is required by the Federal Maritime Commission (FMC). The FMC requires an OTI bond from all ocean freight forwarders (OFFs) and non-vessel-operating common carriers (NVOCCs) who want to become licensed as an OTI or who want to operate in the United States.
How Do OTI Bonds Work?
OTI bonds work similarly to any other type of surety bond. There are three parties involved in the issuing of an OTI surety bond.
If a claim is filed against the OTI bond, the surety has to pay out the claim up the bonding amount. The surety will investigate the claim to make sure it’s legitimate before they pay out a claim. The principal isn’t free and clear here as they’ll have to pay the surety back for the claim amount.
Essentially, OTI bonds protect other businesses against licensed and bonded OFFs and NVOCCs who commit fraud or break rules set by the FMC and regulations like the Shipping Act of 1984. Any businesses that work with another business that has an OTI bond can rest easy knowing that if they aren’t being treated honestly and in accordance with regulations, they can receive financial compensation.
It’s pretty clear cut which types of businesses need OTI bonds to operate, as it’s a requirement for certain business licenses. OTI bonds exist to protect shippers and carriers that partner with OTIs to ensure the OTI is adhering to FMC regulations and that they’ll act honestly.
All OFFs and NVOCCs are required to hold OTI bonds. Another reason that OFFs and NVOCCs need an OTI license is because having one is required in order to become licensed. If their OTI bond is canceled for any reason, they’ll have their license revoked.
OTIs may be legally required for certain businesses to operate, but this surety bond can be quite beneficial to the businesses that hold one. When an OFF or NVOCC has an OTI bond and license, this gives their business credibility and makes them a more appealing business partner.
What type of license a business requires affects how much their bonding amount needs to be and what type of bond or riders they may need. Let’s take a closer look at a few different scenarios that can require differing OTI bonding amounts.
OTI bonds can vary in cost as the bonding amount affects how much you’ll spend. Usually, surety bonds cost a certain percentage of the bonding amount and OTI bonds can range in price from $50,000 to $150,000.
To determine what percentage a business will pay, the owner’s personal credit score will be taken into account, as will other factors such as how old the business is and what the current financial state of the business is. The higher someone’s personal credit score is, the less they’ll pay. If someone has a high credit score, they can expect to pay between 1% and 5% of the bonding amount. Lower credit scores usually qualify for rates between 5% and 10%.