Secrets of Bonding # 59: Bonding Specifications, Boilerplate That Bites

Does anybody really read this stuff? YEP, WE DO!

Just like on insurance, there are written specifications (specs) for bonds, and if you don’t know what they are in each case, you could be setting yourself up for a disaster. Go to http://www.SecretsofBonding.com and re-read # 30, the Greatest Danger. There can be serious consequences if a bid bond is rejected and a contract is lost.

So how do agents protect themselves from such an outcome? Step one is to obtain the written bonding requirements in every case. You may find they are open or they may be very narrow and specific.

Here is an example of one spec we recently handled: “The surety company shall hold a current certificate of authority as acceptable surety on federal bonds in accordance with the United States Department of Treasury Circular 570, Current Revisions.” (Read Secret # 23 about the T-list). To determine if you are in compliance with such a requirement, find the name of the surety exactly as it appears on the bond, and look it up here: http://www.fms.treas.gov/c570/c570_a-z.html
If the requirement goes on to say the Circular 570 dollar amount must be sufficient, compare the “Underwriting Limitation” amount to the dollar value of the bond. It must be is equal to or larger than the penal sum of the bond.

“No modification or waiver of any of the terms of the contract to be performed will in any manner discharge any surety liability thereunder.” This is commonly accepted language meaning the bond follows the contract even if the amount or terms are subsequently changed.

Normally the specs require a Performance and Payment Bond equal to 100% of the contract amount. Occasionally you may see a request 110% bonds. This is troublesome for the surety and they will resist issuing on this basis.

The boilerplate may require a bonding capacity letter issued by an acceptable surety in lieu of a bid bond.

Also note, bid bond percentages vary. Federal is normally 20% of the bid amount. Others are often 10%, but some are 5%.

The bid could also require a surety consent letter, promising to issue the P&P bond if awarded the work.

Federal Projects
On all federal projects where the contractor has a direct (prime) contract with a federal agency, the surety must be on the T-List and for a sufficient amount. Other owners sometimes choose to use this as part their own requirements.

On a prime federal contract you are also required to use the government bid bond form (Standard Form 24) and performance (25) / payment (25A) bond forms. Get them here: http://www.gsa.gov/portal/forms/type/SF

A.M. Best Ratings
It is not unusual for the specifications to require a minimum A.M. Best rating.  To confirm that the surety has a sufficient Best rating, look up the exact surety name in the A.M Best site: http://www3.ambest.com/ratings/default.asp

State Licensing
Another common requirement is that the surety must be “authorized to do business in the state of…” This means the surety must hold a state insurance department issued license (an admitted carrier). To check this, go to the insurance department for the state where the work is located. In our home state of New Jersey, we go here: http://www.state.nj.us/dobi/data/inscomp.htm

Bond Forms and Documents
You may run into mandatory bond forms. These are more common on private contracts than on public work. However, mandatory means just that. So it is important to 1. know if mandatory forms are stipulated and 2. confirm that the forms are acceptable to the surety and contractor. Sometimes on private work, they are strongly slanted against them.

Summary
Referring again to Secret #30, there is a significant risk for bond issuers, especially on bid bonds. Important: Agents should not rely on the bond request form prepared by the contractor. We often find this information incomplete and/or incorrect. To be sure you are issuing a valid bid bond that the obligee will accept, you must directly review the written bonding requirements

All the fine points we discussed can lead to a bond rejection. So get the boilerplate and take a bite out of it, before it bites you!

Watch for our next Secret: Capacity – 10 Magic Wands You Can Wave


 More Bond Commissions for You

Missing out on bond production opportunities?  We have the markets and the expertise to get the deals done.  You have the clients who need bonds.  What a great team!

Call us when your next bond opportunity pops up.  We’ll serve as your agency bond department and take care of it, then pay you a commission.  Perfect!

Call Steve Golia 856-304-7348

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