What Is a Warehouse Bond?

A warehouse bond is a type of surety bond through which warehouse operators are protected against financial losses stemming from lawsuits. Laws in many areas mean that all warehouse operators are required to be bonded while in other places only government-operated warehouses are covered by bonds. Prior to purchasing a bond, warehouse operators typically have to be licensed and in many instances, people who apply for licenses and bonds are subject to criminal background checks.

Typically, a warehouse bond remains in place for a year and the bond term is usually renewable on an annual basis. Warehouse bond purchasers have to make an annual lump sum premium payment to the bond issuer. The purchase premium is normally calculated as a percentage of the financial coverage provided by the issuer. Bonds are generally expensive when compared with insurance contracts because in many instances bond issuers are required to sell bonds to all licensed warehouse operators while insurance companies have the ability to approve or deny insurance applications on a case-by-case basis.

In most instances, warehouses hold goods that belong to parties that do not have an ownership stake in the building. Under laws in many nations, warehouse owners are liable if goods become lost or damaged while in storage. Property owners have the right to sue warehouse operators and although a court can instruct a party to pay damages, a court cannot help a plaintiff collect funds if the warehouse operator lacks the cash to settle the claim. Consequently, governments in many areas require warehouse operators to purchase surety bonds so that the obligation to settle financial disputes falls to the bond issuer rather than the warehouse owner.

Like insurance contracts, warehouse bonds provide property owners with a limited amount of coverage. The property owner is responsible for settling claims that exceed the maximum amount of coverage that the bondholder provides. Bond protection limits are normally adjusted over the course of time to reflect the impact of inflation. In theory, a bond coverage limit should be equal to the value of the property that is typically housed within a particular property. As a back up to a warehouse bond, some property owners also buy liability insurance policies that work in a similar manner to surety bonds but are typically less expensive.

Some warehouse bonds also protect property owners against lawsuits related to injuries. If a warehouse employee or another party is injured while inside a warehouse, laws in many areas enable that individual to sue the owner for damages. Many bonds provide a certain amount of coverage for claims related to property damage and a separate limit for claims related to injuries.