Service Contract Provider Bond - Statewide in Alabama

Brief Summary

Most Alabama service contract providers never need to post a bond, and the ones who do have a choice about how large it is. Code of Ala. 8-32-3 gives providers three ways to prove financial responsibility, and the surety bond is the deposit instrument for the one most independent providers choose. A bond lets you satisfy the Alabama Department of Insurance deposit requirement for an annual premium instead of parking $25,000 or more in cash or securities with the commissioner.

Alabama registers service contract providers through the Alabama Department of Insurance under Code of Ala. 8-32-1 et seq. A provider that backs its own contracts with a reserve account must also deposit financial security with the commissioner worth at least 5 percent of aggregate provider fees on contracts in force, less claims paid, and never less than $25,000. A surety bond is one of the forms of security the statute accepts. Providers that insure every contract under a reimbursement insurance policy, or that hold $100,000,000 in net worth, satisfy the law a different way.

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How to Apply for a Service Contract Provider Bond:

• Decide which of the three financial responsibility options under Code of Ala. 8-32-3(f) your company will use. The bond applies only to the reserve account option.
• Calculate aggregate provider fees for all service contracts sold and in force in Alabama, subtract claims paid, and take 5 percent. The bond amount is that figure or $25,000, whichever is larger.
• Have the legal entity name exactly as it will appear on the ALDOI provider registration.
• Owner or principal name, address and Social Security number for the surety credit review.
• Complete the bond application, review the quoted premium and pay it.
• Execute the Department of Insurance bond and tri-party deposit agreement form with the surety and file it with the registration application and fee.
• Review the in-force book each year at renewal and raise the bond if 5 percent of provider fees less claims paid has grown past the current penal sum.

Detailed Information About the Alabama Service Contract Provider Bond:

Three ways to qualify, and only one of them uses a bond

The single most common mistake on this bond is assuming every service contract provider in Alabama posts it. Code of Ala. 8-32-3(f) lets a registered provider meet its financial responsibility requirement in any one of three ways.

First, the provider can insure all of its service contracts under a reimbursement insurance policy issued by an insurer authorized to transact insurance in Alabama. Most national providers go this route and no bond is involved.

Second, the provider can maintain a funded reserve account, either at a level certified by an actuary based on loss experience or at 30 percent of the aggregate provider fees for all service contracts sold and then in force. A provider using this option must also place financial security on deposit with the commissioner. The deposit must be worth not less than 5 percent of the aggregate provider fees, less claims paid, for all service contracts sold and then in force, and in no case less than $25,000. The statute lists a surety bond issued by an authorized surety, eligible securities, cash, a letter of credit, or another form of security the commissioner prescribes. This is where the service contract provider surety bond fits.

Third, the provider can maintain a net worth or stockholders equity of $100,000,000 and file its most recent Form 10-K or Form 20-F, or audited financial statements, with the commissioner. A parent company guarantee can stand in if the provider itself does not meet the figure.

The amount is a formula, not a flat number

Because the deposit is tied to provider fees on contracts in force, the bond amount is not fixed by statute. It starts at the $25,000 floor and rises as 5 percent of your in-force provider fees, less claims paid, exceeds that floor. A provider whose book grows will need to increase the bond. Provider fee means the total purchase price paid for a service contract, so the calculation uses gross contract sales, not profit. The Department of Insurance posts a bond and tri-party deposit agreement form for this purpose, and the bond must be written on that form rather than a generic one.

Who falls outside the chapter

Code of Ala. 8-32-1(b) excludes warranties, maintenance agreements, utility contracts on transmission devices, service contracts sold in commercial transactions or to persons other than consumers, and contracts sold at the point of sale or within 60 days covering property priced at $250 or less before sales tax. Manufacturers covering their own products and Alabama electric cooperatives are held to only a few sections of the chapter under 8-32-1(c). Mechanical breakdown insurance is insurance, not a service contract, and is regulated separately.

Registration and renewal

Every provider must register with the Insurance Commissioner before selling service contracts in Alabama. Code of Ala. 8-32-3 sets the registration fee at $200 annually, and the Department of Insurance currently lists a $264 registration fee effective June 20, 2021. Registration renews each year and the Department requires renewal payments through its electronic portal. The initial filing packet on the ALDOI service contract page includes the application, the bond and tri-party deposit agreement, the guarantee agreement, the required contract provisions and the provider requirements certification. Confirm the current form versions with the Department before the bond is issued, because the deposit agreement names the commissioner and must match the Department's wording.

Eligibility and Requirements for a Alabama Service Contract Provider Bond:

• A surety company authorized to transact business in Alabama.
• Penal sum of not less than 5 percent of aggregate provider fees less claims paid on contracts in force, and never less than $25,000.
• Commissioner of the Alabama Department of Insurance as obligee, on the Department's bond and tri-party deposit agreement form.
• Entity name on the bond matching the provider registration exactly.
• Current provider registration, which renews annually with the Department of Insurance.
• Owner credit review. At this bond size credit mostly shapes the rate rather than eligibility.

Alabama Service Contract Provider Bond FAQs:

Official and Additional Resources for the Alabama Service Contract Provider Bond: