Month: September 2015

Secrets of Bonding #106: Better Than a Paid Bond Claim

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Secrets of Bonding is brought to you by Bonding Pros

Need a bond?  Talk to the Pros!  856-304-7348  www.BondingPros.com

Brokers protected.  Contractors welcomed.

Performance and Payment Bonds are required on contracts so a claim can be filed if there are problems.  There could be unpaid bills from suppliers of labor or material.  Workmanship and / or materials could be faulty. The contract terms may have been violated.  There are many things that can go wrong, and the P&P bond is the safety net.money5

Making a bond claim can be technical and time consuming, but the fact remains – the surety industry pays out millions every year.  So bond claims do get paid.

Surety bonds are designed to be cheap protection for taxpayers and other project owners. The system works, which is why bonds are required on nearly all public works projects.

There is another benefit that project owners receive.  It exists on all bonded contracts even if no claim is filed.  In fact, a “no claim” project is the best example of this important effect. 

This effect begins even before the bond is issued.  What is it?  Let’s call it the “F-Factor.”

The F-Factor is the result of the structure under which P&P bonds are provided.  We called them cheap protection – they are, in relation to the exposure the surety assumes. How do bonding companies make money if they are paid little in relation to the risk they face? The answer is that they are very cautious when evaluating the contractors that apply for bonds.  Every aspect of their capabilities is considered so the surety can avoid a loss. This is the all important F-Factor:

The Filter

The surety only supports contractors that present no likelihood of claim or loss on the bonded projects.  It’s the only way a bonding company can remain profitable and survive. This filter effect means the project owner can be confident that the contractor passed the surety’s evaluation.  The bonding company’s very existence depends on filtering out the weak applicants that may falter.  A true saying among bond underwriters is that “No premium is worth a claim.”

detectiveBond underwriters are trained to evaluate all the relevant factors. They look at the company history, its financial records, banking, and credit status. Resumes are reviewed and personal bank accounts are verified.  The company, its owners and spouses are all required to promise reimbursement if they cause a bond loss (surety bonds are not insurance policies). The underwriting process is strenuous and comprehensive.

When a bonded contractor is required on a project, the owner is getting a company that has passed the test.  They have been processed by a group of analysts trained in the art of evaluating all these elements. Underwriters are expected to produce a 0% loss ratio, meaning no bond claims or losses.  Their career depends on it.  You can assume that no project owner has the ability to perform this thorough analysis the way a trained underwriter does.

So this is the F-Factor, the Filter Effect.  The screening out of less capable contractors is an automatic benefit that occurs on every bond.  In the vast majority of cases, the bonded contractor performs as expected and no claim results.  However, when the unexpected occurs and the bond kicks in, a paid claim may save the day for owners, subs and suppliers. 

Every bond is beneficial, even if no claim is made, especially if no claim is made.  The filter, the pre-qualification of contractors, is an important benefit that every project owner enjoys when a bond is required.

About Us: Bonding Pros is a surety specialist that has focused exclusively on bonds for contractors since 1972.  We’re getting pretty good at it!

We work with insurance agents as their “virtual bond department” and also directly with contractor clients. If you need a bond, we have the markets and expertise to get things done – even when others have failed.  

Talk to the Pros: 856-304-7348

Not available in all states.

Secrets of Bonding #105: Choose Your Partner!

Brought to you by…

Secrets of Bonding is brought to you by Bonding Pros

Need a bond?  Talk to the Pros!  856-304-7348  www.BondingPros.com

Brokers protected.  Contractors welcomed.

When the music starts you take your partner by the hand and head for the dance floor!  Click now for mood music, “The Virginia Reel, 1953”

When it comes to Surety Bonds, how do you know which partner to choose? Which bonding company fits the project at hand?  Here are some tips: Square D 3

Federal Projects

These contracts require a bonding company pre-approved by the Treasury Department to issue bonds with the federal government as obligee. Federal projects include all contracts with a branch of the federal government such as the Army Corps of Engineers, Office of General Services, Dept. of Veteran Affairs, and the Federal Aviation Administration.  This a big area of activity with 38,786 contracts listed online as of this writing.

The bonding company must be listed / approved, and for a sufficient amount (equal to or more than the contract in question). Circular 570 is issued annually by the Treasury Department aka the “T-List.”  Click for the T-list

The rules pertaining to federal contracts are found in the Federal Acquisition Regulation (called “the FAR”). Click for the FAR

Fine points regarding federal contracting: HUD is not a direct federal agency, and makes their own rules.

Square D 1Any other project owner may CHOOSE to require the T-list as a means of screening the bonding companies. You need to review the project’s written bonding requirements to determine this.  It could say that “a T-listed surety must be used.” It could also require that the T-list amount be equal to or greater than the contract in question.

State and Municipal Contracts

The most common requirement is for the surety to be licensed in the state where the work is being performed.  Many sureties do not find it worthwhile to maintain licensing in all 51 states. *  To check for a specific state, you can go the local insurance department, the surety may list this info in their web site, and it also appears in the T-list details (if the surety is on the list).

Private Contracts

This category includes all non-public commercial contracts, such as a general contractor building an office for a private company. It also includes all the subcontractors such as electricians, plumbers, roofers, etc.  All subcontracts are private even if they are performed on a federal or state projects (because they are not “prime,” not contracted directly with the public entity.)

In this group you may find that a T-list requirement is indicated, or the project owner may choose to be more open.  They can make or waive such requirements at their sole discretion.

Contract specifications may also stipulate a certain A.M. Best rating.  Simply look up the surety to determine if they have a rating, and if it meets the requirement. Click for A.M. Best 

Conclusion

No two bonding companies have exactly the same credentials.  The common areas to consider are:

  • T-listedSquare d 2
  • T-list amount
  • State licensing
  • A.M. Best rating (size and financial strength)
  • Underwriting appetite
  • Excluded classes
  • Excluded geographic areas (Canada?  Mexico? Overseas?)
  • Excluded jurisdictions (New York City?)

Picking the right partner is step one.  If they will not be accepted as surety on the project, move on! 

Hmmm… how about that wallflower over in the corner?

* 50! Just wanted to see if you are paying attention.  (:^D)

About Us: Bonding Pros is a surety specialist that has focused exclusively on bonds for contractors since 1972.  We’re getting pretty good at it!

We work with insurance agents as their “virtual bond department” and also directly with contractor clients. If you need a bond, we have the markets and expertise to get things done – even when others have failed.  

Talk to the Pros: 856-304-7348