Month: June 2015

Secret # 95: PLASTER – Not The Solution To Bond Problems

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Brokers protected.  Contractors welcomed.

apply-plasterIn construction there are physical problems you can solve by plastering over them.  In the world of surety bonds, managing, massaging, covering over, (plastering) is sometimes undertaken to deal with negative facts or situations that are hindering the issuance of surety bonds.

Bond underwriters all know the great earnestness with which bid and performance bonds are requested.

“We need a bid bond because we need the project to get the revenues to meet our obligations and have a successful year!”

The pressure’s on! Sometimes that high level of motivation leads people to take extreme measures… Where do you draw the line?

Let’s talk about some real life examples and you decide (our opinion to follow):

  1. Joe, the founder / owner of ABC Company has an unavoidable problem with bad results.  It could be the bankruptcy of their largest client, forcing ABC into bankruptcy.  It could be an accident resulting in a lawsuit and devastating judgement against the company.  As a result, a new company is formed with Joe’s child as owner and President.  Joe is not an officer and officially functions as a consultant to the company, even though he really runs the show.  Is this legitimate?
  2. Smith Co. cannot get the bonding capacity they need because of poorly or improperly prepared financial statements from their accountant.  They decide, as of the next fiscal year, to engage a Certified Public Accountant experienced with construction clients. Is this appropriate?
  3. For Ajax Inc. the first half of the year did not meet expectations, but the year in total should be OK. When the bonding company asks for their 6 month financial results, the company makes up an excuse saying they have a software problem and cannot produce the statement. The plan is to stonewall the underwriter and only provide the fiscal year-end. Does this really hurt anyone since the 6 month statement is relatively less important?

Before deciding on these specific circumstances, let’s look at the big picture. What is the nature of the relationship between the contractor and surety?

The surety is paid to take a risk on behalf of the contractor, they become their guarantor.  It is a true partnership in the sense that they succeed or fail together. Everyone loses if the contractor defaults on a project.

The surety bases their underwriting decisions on info as provided by the applicant, and depends on them to be “forthcoming.” To put it bluntly, intentionally misrepresenting or concealing relevant facts may be considered fraudulent.  Then there is the gray area.

In our three examples, did you find #1 objectionable? This situation does occur, and we appreciate the motivation. The underwriter might choose to accept it on the condition that the consultant gives personal indemnity, even though he is not a stockholder.

#2? This seems like an appropriately timed, logical response to the problem. A-OK!

#3? The sin being committed is the violation of trust with the surety.  If there is a real partnership, they will proceed based on full disclosure, knowing all the good and bad. Even if the info being withheld is irrelevant, it is inappropriate for one party to intentionally conceal it for their perceived benefit.

Bonding Pros: This article talks about the importance of relationships in the world of bonding.  It is one of our unique strengths.  It comes for doing nothing but surety bonds, every day, for years!

We have the strong relationships that enable your deals to get done.  Call us when you need a bid, performance, site or subdivision bond.  We have the markets and the relationships that matter on tough cases.  856-304-7348

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Secret #94: Reading the Tea Leaves

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Secrets of Bonding is brought to you by Bonding Pros

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Brokers protected.  Contractors welcomed.

The gypsy gazes intently at the tea leaves. For those who understand their meaning, the future is revealed!

tea_leavesWhat if you could predict the future in your Surety Bond activities? In this article we will explain how you can!

When a contractor or agent contacts us for bid and performance bonds, one of the first areas we review are the written bonding requirements. They tell us which bonding companies can be used for the opportunity, the ones that will fit. By reviewing the written requirements we can predict if our surety is headed for approval or rejection.

These tea leaves are important! When a bond is approved by a surety, and the surety is rejected by the obligee, the producer is faced with lost commissions, lost time, embarrassment, a disappointed client, and maybe a lawsuit!

So what should you look for?

Bonding is usually found near the insurance specifications. Here are some of the common requirements and what you need to know about them:

Circular 570
This document is published by the Federal Treasury Department, and is often referred to as the “T-list” (T=Treasury). The current edition is easy to look up on the internet.

The T-list names the bonding companies approved by the Treasury Department to issue bonds on federal projects, and the maximum amount permitted for each bond. For federal projects, you must use a surety T-listed for an adequate amount. Most of the major bonding companies are T-listed.

In addition to the T-list being a mandatory requirement on federal projects, other obligees may choose to require a T-listed surety. They want to take advantage of the screening process performed by the treasury department analysts.

Two things to keep in mind:

  • If a T-listed surety fails to perform, the treasury department will not care or be responsible.
  • There are perfectly good sureties that may not have applied for T-list approval. So not being on the list simply means… they’re not on the list. It is not necessarily an indication of weakness or defect.

One final point, a requirement that the surety must be “certified by the federal government” does not literally mean the issuance of a certificate. It simply means “T-listed.” The government refers to sureties on the treasury list as Certified Companies.

A Rated
This, of course, refers to an A.M. Best rating. It may say A or B is required along with a minimum strength indication.  This is a frequently used criteria, despite the fact that insurers have gone under while enjoying a favorable Best rating. 

Tip: If your surety does not meet the stated requirement, the credentials of their Best rated reinsurer can be brought to the forefront by issuing a cut-through rider. This makes the reinsurer responsible as a primary carrier. A fee may be charged, and not all reinsurers are willing accept the exposure. But sometimes it can be the solution.

“Authorized to do business in… “
This is also a common requirement. It means licensed by the local state insurance department. It is worth knowing about, because such licensing may not be in place.

When there are no written bonding requirements..
Yippeee!??   Maybe not.

Be cautious if there is nothing saying a bond is mandatory. Some obligees want the assurance of knowing the principal is bondable, but are not willing to actually pay for a bond. You don’t need any more practice, right?

Corporate Surety or Individual suretytea-cup
Not all sureties are corporations. Some public bodies accept either type of surety. There are others that only accept a corporate surety. A private obligee may have the latitude to accept both. Read those tea leaves!

Conclusion: These factors enable you to predict the future. If you develop an account using an insurer or surety that does not meet the requirements, you are doomed to a rejection and the ensuing pain.

Understanding the written requirements can assure that you deliver an appropriate product. It’s not magic. It’s just good business!

NOTE: This article is intended for entertainment purposes ONLY.  We are not attorneys and are not offering legal advice. “Fugetaboutit!”

Bid, Performance, Site, Subdivision Bonds: Call us!  856-304-7348