When issuing appeal bonds, surety companies charge what they refer to as a premium, which is expressed as a percentage of the bond amount.
The premium charged for appeal bonds is primarily based on the following factors:
- The financial strength of the applicant when bond is being considered without collateral.
- The size of the bond.
- When collateral is provided, the type of collateral being used to secure the bond.
It is important to note that surety companies charge premiums for appeal bonds annually. The first year’s premium is fully earned once the bond is issued, and any renewal premiums after the first year are prorated if the bond is exonerated midterm.
Appeal Bonds without Collateral
Similar to bank loans, surety companies charge lower premiums for those applicants that are very financially strong and creditworthy relative to the appeal bond amount required. Appeal bonds less than $1 million will generally cost 1-2% of the bond amount per year. Appeal bonds over $1 million are typically 1% or less, and premium rates for very large multimillion dollar appeal bonds can go down as low as 0.3% for certain qualified applicants.
For clients that are not as financially strong relative to the bond amount from the sureties’ perspective, the premium rates may be higher.
Appeal Bonds with Collateral
When collateral is used to secure an appeal bond, the type of collateral along with the bond size will determine the premium rate charged by the surety company.
Below we outline each form of collateral along with the range of corresponding premium rates. While cost is an important factor when collateralizing and appeal bond, there are also considerations such timing to get the collateral in place. Our team of finance experts can help you creative solutions based on your unique circumstances.
Cash is one of the quickest and least expensive forms of collateral that appellants can use. It is wire transferred to the surety company into an account that they hold during the course of the appeal. Some sureties will pay interest on the deposit, and depending on the size of the bond, the interest may even equal to or exceed the bond premium. When using cash, we have several programs that enable clients to earn interest, which can offset or even exceed the premium paid for the bond.
For more information on using cash collateral, visit our article: Using Cash Collateral.
Bank Letters of Credit
A letter of credit is issued by a bank to the surety company and states that the bank will make funds available up to the bond amount to be drawn upon. As a result of it being highly liquid, this type of collateral is viewed similar to cash by surety companies, and as a result, surety companies usually charge lower premium rates. Banks typically charge the client a fee to provide letters of credit, but it is generally less costly for clients than obtaining loans. This option is typically best suited companies and high net worth individuals that have strong existing banking relationships.
For more information on how to secure an appeal bond using a bank letter of credit, read our article: How Letters of Credit Work to Secure Appeal Bonds
Real estate can be a very important option for appellants that have a lot of their equity in real property. Surety companies will consider residential and commercial property. Because of the illiquid nature, sureties charge a much higher premium for appeal bonds, and the process can take anywhere from 30 to 60 day depending on the circumstances.
To learn more about whether real estate is the right option for you, read our article Using Real Estate to Secure Appeal Bonds
Marketable securities are non-retirement brokerage accounts holding stocks and bonds that are pledged to a surety company. Using this approach, clients benefit from not liquidating their investments, which allows them to continue earning returns and avoid any tax consequences from the sale of the assets.
To learn more details about how pledging a marketable securities account works, read our article: Securing an Appeal Bond Using a Stock or Bond Portfolio
When using real estate as collateral, surety companies take on certain risk. The main risk is in properly valuing a property as well as the market risk of the value fluctuating during the course of the appeal. In addition, the illiquid nature means it will take more time and possibly money to potentially recoup a loss they have under a bond. As a result, surety companies generally charge 4% of the bond amount. While it costs more than other forms of collateral, it allows appellants to avoid selling their properties to come up with the cash to secure an appeal bond, and the premium rate is often a lower cost than appellants could obtain a loan for from a bank.
Stock & Bond Portfolio or Account
Marketable securities can consist of a wide range of assets including individual stocks, index funds, and corporate or government bonds. Sureties will only consider high quality investments, and the type of investments is one of main factors that determines the premium rate. Generally speaking, assets such as short term treasury bill/bonds will have a lower premium rate, because they have an extremely low risk of default and they won’t fluctuate in value as much as other investments. Individual stocks or index funds can vary significantly, and therefore, pose more risk to a surety. Thus, the premium rate for marketable securities can range anywhere from 1% to 3%.