Brief Guide to Ocean Transportation Intermediary (OTI) Bonds
Anyone who wants to become an Ocean Transportation Intermediary (OTI) must obtain a license by the Federal Maritime Commission (FMC) as mandated by the Shipping Act of 1984. An OTI is considered either an Ocean Freight Forwarder (OFF) or a Non-Vessel-Operating Common Carrier (NVOCC). A very important part of the licensing requirement is the Ocean Transportation Intermediary Bond (OTI bond). Here’s a brief guide about OTI Bonds along with information about how to obtain them.
Definition of OTI Bonds
OTI bonds fall under the category of commercial or licensing surety bonds. For those of you who are new to the term, surety bonds represent a party between three sides: a principal, an obligee and a surety. The principal is the side which needs to post the bond, the obligee is the one who requires the bond, while the surety is something of a middleman between the two — it is a surety bond company, which practically endorses the principal by underwriting the bond.
When it comes to OTI bonds the principal is either the OFF or the NVOCC, while the obligee is the FMC. OTI bonds are required as a way to make sure that OTIs follow all the rules and regulations governing their trade. The bonds also act as a protection to shippers and carriers who have contractual agreement with OTIs.
In case a breach in the agreement occurs, the surety must compensate the obligee of the bond in a timely manner. This doesn’t mean, however, that the principal is free from responsibility. Once the dispute is settled, the surety has the legal right to recover the losses incurred.
How to Satisfy FMC’s Bonding Requirements
Technically, you can obtain an OTI license by submitting proof of financial responsibility in the form of a guarantee or insurance to FMC. But as the Commission points out on its website, “to date all such proof has been in the form of surety bonds.”
The amount of the required financial responsibility for freight forwarders is $50,000 and another $10,000 “for each unincorporated branch office in the United States performing ocean freight forwarder services.” All US-based non-vessel-operating common carriers and licensed non-vessel-operating common carriers from outside the US need a bond in the amount of $75,000 plus an additional $10,000 “for each unincorporated branch office in the United States performing NVOCC services.”
There are two types of OTI bond. One of them is an OTI bond, suitable for individual OTIs. It is submitted using the FMC-48 form. The other one is a group OTI, which you can obtain by grouping with other OTIs. In that case you need to submit the FMC-69 form.
How Much Do OTI Bonds Cost?
Even though the required proof of financial responsibility seems rather high, this is not the total amount you have to have in cash in order to get the bond. Rather, OTI bonds are paid in annual premiums, calculated individually for each applicant, i.e. you pay only a percentage of the total bond amount.
While, there are many factors that come into play when calculating your premium, the most important one is your personal credit score. Sureties perceive your credit score as a measure of the likelihood of you triggering a claim. Since they are financially responsible for your actions, they want to make sure they are dealing with somebody trustworthy. It’s important to know that by default, sureties are risk averse and always assume a zero percent loss ratio.
If you have a clean credit history and a good credit score of about 700 and above, you will pay an estimated 1 to 4 percent of the total amount of the OTI bond. People with a bad credit score and a history of tax liens, civil judgments or bankruptcies are considered high-risk applicants and are usually asked to pay annual premiums between 5 and 15 percent. Sometimes, though not often, the premium can go as high as 20 percent. If you work on improving your credit score, the premium will be lower next time you apply for it. Sureties are known to never issue bonds for the following two types of credit issues: open bankruptcies and late child support payments.
Why Choose Lance Surety Bonds for Your OTI Bond?
Now that you know how your bond price is calculated, here’s another thing to consider if you want to maximize your chances of getting a good premium offer.
While surety bonds are underwritten by a surety bond companie, they are brokered by surety bond agencies. It’s important to work with an agency that has a good reputation and a rich network of partners, such as Lance Surety Bonds. Why? The more partners an agency has, the more likely they are to find the best match for your specific case. Not every surety will be willing to issue a bond to every OTI, so we also maximize your chance of getting bonded if you have bad credit.
Lance Surety Bonds offers a fast and efficient service. Once you apply, you get a free quote in a matter of minutes. Once we sign the bond, we guarantee it will be accepted by your obligee or you get your money back.
If for some reason your OTI bond is cancelled by your surety, it’s important to know that your license is valid for one more month. After this, it is considered revoked and you will not be allowed to run your business unless you renew your license.