There are a number of different types of surety bonding instruments.
Auctioneer bonding is a type of surety bond (license and permit bond) which normally pays the state licensing agency if the licensee causes a direct and actual loss to the state or member of the public; in turn, the state licensing agency then pays the claimant.
An auctioneer surety bond is a contract with three (3) parties:
- The obligee – the party who is the recipient of an obligation — typically the state licensing agency (the state)
- The principal – the party who will be performing the contractual obligation — the auctioneer
- The surety – the party who assures the obligee that the principal will perform the task — the bonding company
States which require an auctioneer bond set the specific amount, as well as what actions are covered by the bond, who can file, forms, payout limits, procedure, etc.
While surety bonds seem similar to insurance policies, surety bonds (auctioneer bonds) are also unlike insurance in one key regard.
If the bonding company (surety) pays out to the obligee (state) on behalf of the principal (auctioneer), the surety will then take steps to recover those same amounts from the principal — such as collection efforts, a lawsuit, judgement, garnishments, and the like.
An insurance company, on the other hand, would pay out, but not try to then directly recover their loss from the payee — but might indirectly raise the insured’s premium, and/or cancel the policy.
The purpose of auctioneer bonding is to ensure that the auctioneer follows all laws and rules of that state regarding auctioneering. Then, if an auctioneer doesn’t comply the state can request the surety pays to compensate for (typically) actual or direct losses.
- Let’s say Sarah hires an auctioneer to sell her extensive doll collection. The auction takes place, grossing $50,000. However, Sarah never receives her check for the net proceeds (gross minus expenses.) She calls the auctioneer, but he doesn’t call her back. She writes to the auctioneer but he doesn’t respond …
- In a license state where the auctioneer is bonded, Sarah could contact the state licensing agency about her loss. Given Sarah’s auctioneer charged her 20% commission, she has a loss of $40,000. The state licensing agency would contact the auctioneer and the surety and examine the circumstances to determine if the surety is required to pay this $40,000 to the state, and in turn to Sarah.
- Of course, the surety is not anxious to pay out this $40,000, so they often argue that the state (and thus Sarah) should recover this loss in some other fashion. The surety essentially requires that the claimants mitigate their damages before asking the surety for compensation. If, for example, Sarah sued the auctioneer in court, and received a judgement for $40,000, the surety would argue they owe nothing.
- And as we’ve mentioned, if the surety did payout this $40,000 in Sarah’s case, the surety would then take steps to recover that $40,000 from the principal (auctioneer.) They might sue the auctioneer, place a lien on the auctioneer’s property and/or garnish the auctioneer’s future wages.
In these seventeen states which require auctioneer bonds, the amounts required range from as little as $1,000 to as high as $50,000. The average bond is about $10,000, with the average cost to the auctioneer of no more than $100 for a year’s coverage.
For consumers, such as Sarah, it is important for them to ascertain the approximate amount of money belonging to them that the auctioneer will possibly possess.
If Sarah’s $40,000 claim was in a state where her auctioneer was required to have only $5,000 in bonding, she would have to take other steps to recover the remaining $35,000. Better than that, Sarah could require her auctioneer to secure a higher bond before signing the contract to sell her dolls, or provide some other sort of assurance.
Finally, what about a state “recovery fund” instead of each auctioneer carrying their own bond? While this will be the subject of our next article, it’s fair to say that private bonding may be a better system for auctioneers (and the public) than a state recovery fund.
Auctioneer bonding is designed to protect the public in cases where their auctioneer harms them financially. A bond is a relatively small cost to auctioneers for them to provide financial assurance to their clients.
Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Keller Williams Auctions and Goodwill Columbus Car Auction. His Facebook page is: www.facebook.com/mbauctioneer. He serves as Adjunct Faculty at Columbus State Community College and is Executive Director of The Ohio Auction School.