Surety Bonds and Errors and Omission Insurance: A Notaries Guide to Financial Liability Protection
About the author: Guy has been a commissioned notary for more than 5 years. He also runs one of the most established Facebook groups for Remote Online Notarization with over 7000 members nationwide.
If you’ve already gotten your notary commission or are just looking into the requirements, you’ve probably heard of Surety Bonds and Errors and Omissions (E & O) Insurance. Surety bonds are required by most states to qualify for a notary commission, while E & O insurance is usually optional but what are the other differences?
It can be tempting to say, “Surety bonds and E & O insurance are more or less the same things.”
In a general sense, a very general sense, this is true. Both provide certain parties protection from significant financial loss in the case of a notarization mistake. Who they protect and how they work, though, is very different.
Basically, the purpose of a surety bond is to protect the public, while the purpose of E & O insurance is to protect the notary. There are other key differences in costs, the obligation of the notary, and situations where they are useful.
In the following discussion, we’ll cover:
- What surety bonds and E & O insurance are, and how they work
- The differences in costs and protections for the notary
- Why both are important to protect notaries from liability
Bond…Surety Bond?
Because most states require it for your notary commission, let’s start with the surety bond. A key thing to understand as a notary is that when you purchase a surety bond, you are essentially purchasing a line of credit.
The purpose of this line of credit is to reimburse a client in the event that they suffer a financial loss from a mistake that you made during a notarization.
What’s one non-negotiable fact about a line of credit? If you borrow on that line of credit, you have to pay it back.
How does this work in real-life practice?
Imagine you are sitting in your office and the phone rings. It’s a client for who you performed a notarization a few weeks ago. They claim that there was a mistake made during the notarization, which resulted in them missing a deadline. The client claims this mistake cost them $5000.
After much research and paperwork, you discover that the client is correct. You made a mistake. You don’t have $5000 in the bank to reimburse them, though. After more paperwork (probably much, much more), you refer them to the company that provided you your surety bond, and that company reimburses the client. Now you, the notary, have to reimburse that surety company the $5000 they paid out to the client.
This doesn’t sound like much protection for the notary, does it? This is a situation where E & O insurance could be very, very helpful.
E & O Insurance, It’s got YOUR back!
Let’s take a look at how the same situation might play out if you had the forethought to purchase Errors and Omission (E & O) insurance.
Once the mistake is discovered, depending on your E & O policy, you may be able to file a claim. As long as you are covered for the specifics of the situation, the insurance company will either directly reimburse the client or repay your surety bond.
The key difference is obvious- you, the notary, DO NOT have to pay back that $5000. You are covered.
E & O insurance is known as professional liability insurance, and it works just like any other insurance policy. You select a policy that covers the most likely situations you would encounter, and you pay your premium. Then you are not liable (don’t have to pay) costs incurred in scenarios covered by your E & O policy. Some situations covered by E & O insurance include:
- Financial damage from and error or omission during the notarization
- Unintentionally violating the law during a notarization
- Being named in a lawsuit
- Fraudulent notarization (someone forges your seal or signature)
Key Differences
There are several other key differences between surety bonds and E & O insurance.
- Cost: Surety bonds are relatively cheap, often gotten for under $100. E & O insurance cost is based on your policy. More coverage is often more expensive.
- Contracted Parties: E & O insurance is a contract between the notary and the insurance company. This contract lays out what payments will be reimbursed between the notary and the insurance company based on the policy. A surety bond is actually a contract between three parties, the notary, the bond company, and the customer. This contract ensures that the notary will reimburse the third party through the bond company.
- Payment: Surety bonds payout to the customer and are repaid by the notary. E & O insurance pays out to the notary based on the policy.
- Protection: A surety bond protects the client, while E & O insurance protects the notary from financial losses.
- Legal Requirements: Most states require that you purchase a surety bond to protect the public. E & O Insurance is voluntary.
Protect Yourself
It’s understandable after paying for state fees, required notary education, supplies, and your surety bond that purchasing E & O Insurance could seem a bridge too far.
After all, what’s the worst that could happen?
Unfortunately, even mistakes made in good faith can end up costing a notary significant amounts of money. It’s also worth noting that, depending on the mistake, your surety bond only covers a predetermined amount of money. If a claim is filed against you that is greater than your bond coverage, you are still liable for that full amount.
While it might be tempting to put off the purchase of E & O insurance, it’s usually not the best choice. Even a basic policy will cover the most common claim situations. There are many trustworthy organizations such as the National Notary Association and the American Association of Notaries who offer E & O insurance designed specifically to protect notaries. They sell affordable surety bonds as well.
So, if you are a new notary or one who has put off the purchase of E & O insurance, don’t wait any longer. You are already required to protect the public through the purchase of a surety bond. Why not have a policy that protects you as well? Mistakes happen. They shouldn’t have to result in financial ruin.
For more helpful tips on becoming an online notary and other topics, check out our blog at LiveNotary.com!