Utility Bond

Utility Bond 

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A utility bond is a type of financial guarantee that ensures a business (sometimes an individual) pays their utility bills. Utility bonds protect utility companies against defaulted or late payments, as they can file a claim against the bond to collect outstanding payments. Purchasing a bond generally costs 1% to 5% of the bond amount, but the requirement may be waived if you have a timely payment history.

In this utility bond guide, you will learn:

    • Definition and Example

      • How It Works

        • Cost

          • Utility Bond vs. Utility Deposit

            • Requirements

              • Where to Buy and How to Apply

                • FAQs

                Utility Bond Definition and Example

                Sometimes called a utility deposit bond, a utility bond serves as a financial guarantee to utility companies that individuals and companies pay their utility bills in full and on time. Utility bonds are enforced to protect utility companies against businesses and individuals that use their services without paying. If a party defaults on their payments, the utility company can get reimbursed by filing a claim.

                When obtaining a utility bond, keep in mind that three parties are involved in this contract:

                  • Principal: The company or individual that must obtain the bond as a condition of using the utilities (you).

                    • Obligee: The utility company that requires the principal to obtain the bond.

                      • Surety: The company that sells the bond to you and provides a financial guarantee to the utility company if you default on your utility bill.

                      Utility bond example

                      Jonathan opens a laundromat and is required to post a utility surety bond before he can use the utilities. Jonathan obtains the bond and makes payments timely for the first year. However, Jonathan fails to pay the utility bill for two consecutive months. His outstanding balance is $4,000. The utility company files a claim against the bond and gets reimbursed for the full $4,000.

                      How Does a Utility Bond Work?

                      In 2020, the commercial sector consumed 157 billion kWh — electric utility companies are the unsung heroes that provide all that power, helping businesses deliver their products and services. However, companies sometimes fail to pay their utility bills. That means utility companies sometimes work without being compensated for their services. 

                      Utility bonds protect utility companies against missing or late payments. If a company defaults on payments, then a utility company can file a claim against the bond to get reimbursed. (It goes without saying that a history of non-payment will likely mean no more utilities for your business).

                      Utility bonds are often required for businesses that use tons of energy, such as restaurants, factories, and manufacturing companies. Our earlier example used a laundromat because this business type consumes electricity, gas, and water, often resulting in higher utility bills compared to other industries. While not as often, individuals may need to post a utility bond if they have a history of missing payments.

                      Like any other type of surety bond, a utility bond has the following characteristics:

                        • Bonding amount: The highest amount the utility company can be reimbursed for when filing a claim.

                          • Premium: The cost of purchasing the utility bond — typically a percentage of the bond amount.

                            • Term: How long the bond lasts.

                            What happens when a claim is filed?

                            The claims process for a utility bond is straightforward. If the utility company can prove that you have not paid your utility bill, then the claim will be approved and the utility company will be reimbursed. Keep in mind that you are still financially liable — you must reimburse the surety for whatever amount they paid to fulfill the claim.

                            Utility Bond Cost

                            Premiums are typically calculated as 1% to 5% of the required bond amount (low credit applicants may face higher percentages). Your utility provider will determine the minimum amount. Take a $10,000 utility bond requirement, for example. Based on a 1% to 5% premium, you could be paying anywhere from $100 to $500 out of pocket.

                            Utility Bond vs. Utility Deposit

                            The alternative to obtaining a utility bond is to pay a traditional deposit. Similar to a utility bond, a utility deposit insures the utility company against losses from unpaid or underpaid bills. However, the upfront cost is typically higher. 

                            Take our earlier example with a $10,000 minimum requirement. Paying a 5% premium ($500) to obtain a $10,000 bond is more affordable than needing the full $10,000 and putting it in a deposit account.

                            Utility Bond Requirements

                            The utility company will determine which companies (or individuals) require a utility bond and the minimum bond amount. Utility companies typically enforce the bonding requirement for new business customers that operate in high-utility-cost industries. The business owner will need to supply proof of bonding before the utility company turns on the power. 

                            Good news: the utility bond requirement may not be required forever. The utility company may waive the bond requirement if you demonstrate a timely payment history — usually two years minimum. Once you’re able to get the bond requirement waived, you could reinvest the money otherwise spent on bond premiums back into your business.

                            Where to Buy a Utility Bond

                            Insurance companies or specialized surety bond companies are your typical go-to sources for purchasing a utility bond. The purchase process is often quick and completely online. After finding a surety, you just need to take the following steps:

                            1. Submit an online bond application that includes your personal and business information (e.g., business name, industry, address).

                            2. Receive a premium quote based on your qualifications.

                            3. Purchase and receive your bond (or shop around and compare rates before buying).

                            4. File your utility bond with the utility company. Keep in mind that some utility companies may have specific forms you must use.

                            Applying for a utility bond 

                            Obtaining a utility bond is easy when applying with Worldwide Insurance, Inc. Just fill out our initial application form and get an instant quote in minutes. With rates starting as low as 1%, we issue all types of surety bonds in all 50 states. No credit check required and no obligation.

                            Utility Bond FAQs

                            What is a utility bond?

                            A utility bond is a financial guarantee that utility companies require to ensure that utility bills are paid on time and in full. If a company or individual fails to pay their utility bill, the utility company can file a claim against the bond to get reimbursed for the outstanding amount.

                            What is a utility bond used for?

                            Utility bonds are used by utility companies to protect against missing or late payments. Instead of getting stuck with a bill that will never get paid, the utility company can file a claim against the utility bond to receive the amount due.

                            How much does a utility bond cost?

                            A utility bond typically costs 1% to 5% of the minimum bond amount set by the utility company. A $10,000 utility bond, for example, can cost between $100 to $500. However, keep in mind that newer businesses and low-credit applicants may face higher premiums.

                            How long does a utility bond last?

                            Utility bond terms often last one year and you’d need to pay another premium to renew your bond. Fortunately, some utility bonds may waive their bond requirements for companies that demonstrate a timely payment history.

                            Can I get a bond with bad credit?

                            Yes, bad credit applicants can still get bonded but may face higher premiums. Worldwide Insurance, Inc. works with thousands of business owners — even those with low credit — to help them meet their bonding requirements.

                            What type of surety bond do I need?

                            Visit our list of bonds by state to get a closer idea of your bonding requirements. To learn more about surety bonds in general, check out our free surety bond guide.

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