3 Ways Using Surety Bonds in Workers’ Comp Will Free Up Your Lines of Credit

Workers’ comp self-insureds can use surety bonds to guarantee they can pay claims within their retention.
By: | August 22, 2021

If a workers’ comp program has recently switched to self-insuring its risks, there may be questions about how to meet its state’s requirement of proving they have adequate resources to cover any claims that may arise.

In addition to a self-insured retention, employers are often required to post equivalent collateral in the form of a letter of credit or a self-insurer’s bond, also known as a surety bond.

That way, the state knows the self-insurer has a back-up to cover its losses in any case where it can’t meet its obligations.

“In order to self insure they have to provide a guarantee to the state, that says that they can actually pay the claims within that retention,” said Maria Duhart, head of commercial bonds at AXA XL. “The bond guarantees that same payment within the self insurance program.”

In these cases, surety bonds can be a great solution for self-insureds to guarantee payments within their retention layers while keeping their credit lines relatively free for other areas of the business.

Here are three benefits to using surety bonds for workers’ comp self-insureds.

1) Surety Bonds Can Free Up Your Line of Credit

One of the major benefits of using surety bonds to guarantee self-insured retentions is that it frees up a business’s line of credit.

Maria Duhart, head of commercial bonds, AXA XL

“Instead of drawing down on their line of credit, they can actually free up that capacity for general corporate purposes,” Duhart said. “It gives the customer more flexibility.”

A workers’ compensation self-insured that uses a $70 million letter of credit could use a combination of surety bonds and letters of credit to cover their retention instead, thereby freeing up letter of credit capacity.

Additionally, replacing letters of credit with surety bonds can lead to cost savings, especially if the bonds are competitively priced.

“We have the ability to be more competitive sometimes than the bank in terms of pricing,” Duhart said.

2) Insurance Companies Have Lower Capital Requirements than Banks

Another benefit to using surety bonds is that they are often easier to obtain than letters of credit since insurance companies have lower capital requirements than banks.

When evaluating whether to issue a surety bond, Duhart said underwriters analyze a company’s assets to make sure they have the financial resources to cover their retentions.

They also analyze the exposures to make sure a self-insured is appropriately pricing its risk and setting aside the proper reserves.

The state where the company is located is also taken into consideration, as some jurisdictions tend to be more litigious than others.

“Insurance companies have lower capital requirements than banks for these products,” Duhart said, “mainly driven by regulatory restrictions, and in general, the bond is rarely drawn on.”

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The terms of a bond are also a bit more flexible than those of a letter of credit. Letters of credit typically need to be renewed annually, and while many bonds operate on similar terms, some can be issued over a longer period of time.

3) A Bond’s Reserves Are There When You Need Them 

Using a surety bond instead of a letter of credit can also ensure that a self-insured has the funds it needs in the event it requires them.

Unlike a letter of credit, bonds require proof of default to be drawn on, which is one of the reasons insurance companies may be able to offer a better price.

This conditionality guarantees that a self-insured has the funds it needs to pay claims in case of default.

“With a letter of credit, the beneficiary can draw down on them unconditionally. Bonds actually restrict the payments to actual cases of default,” Duhart said. &

Courtney DuChene is an associate editor at Risk & Insurance. She can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]