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Union Bonds, aka Wage and Welfare Bonds, can be a troublesome area for contractors, agents and bonding companies. But we like to think there is something there to love. We will explain…
For contractors, this is often their first brush with the wonderfully playful world of surety bonds. Maybe the contractor is focused on light commercial work, or is exclusively a subcontractor, so bid and performance bonds have never been needed. The contractor wants to get workers from the union hall so a new contract can begin on time. Suddenly this road block appears: “A $50,000 surety bond is required.” Unfortunately, the contractor learns that financial statements are needed – but they are not immediately available. And there are financial strength requirements, which the contractor may need meet, soooo…!
For bonding companies, you might assume that if they get paid their premium, they should be perfectly happy to issue these. They are not. The union bond is often their first bond request from the new client. In other words, they don’t have a file, don’t know the financial condition of the applicant, are not confident in their ability to operate successfully, and this bond is considered a “financial guarantee” (as opposed to a performance and payment bond). A financial guarantee bond guarantees that the principal (construction company) will pay funds when due at a future date. Get out your crystal ball! If the contractor cannot pay the required union wages and benefits resulting in a bond claim, where will the money come from to reimburse the surety for the loss? Underwriters are quick to admit they think these bonds are the worst part of a contractors account, and they dislike having one as the first bond request from a new client. They prefer to get a couple of P&P bonds under their belt first.
For the bond agent, if they can get the bond approved and issued, what’s not to love? The problem is that for many new applicants with credit issues or poor financial statements, the bonds are only approved with “full collateral.” This means if you want a $50,000 bond, the surety wants to HOLD $50,000 as a security deposit against potential future claims. Plus you pay the bond premium. Plus you sign an indemnity agreement, probably including personal indemnity, plus your spouse. So, faced with these terms, it is not unusual for the contractor to give the $50,000 directly to the union in lieu of the bond. For the agent, this means when the bond is approved, the client no longer wants it. No commission. Ugh!
Here is the flip side. If the bond is painlessly approved, everyone goes home happy. But even with a full collateral requirement, there are reasons to still chose the bond (over security held directly by the union). With a bond in place, any claim by the union must be reviewed and analyzed by the surety’s claims department. The surety is likely to ask the contractor for info and an explanation. Normally money does not go flying out of the bonding company. It is possible the claim may be declined. This investigative process can be protective for the construction company. If a cash deposit is used, the union has immediate access to the contractor’s money. Secondly, the wage and welfare bond can open the door with the surety. Maybe it will lead to a new performance bond facility. That could result in more revenues, more profits, greater success for the contractor. Another benefit is that after a track record is established, the collateral requirement could be waived. Now the contractor has the bond with NO collateral required. It was worth the wait!
So there you have it. Wage and welfare bonds may seem like a PIA, but even if it’s hard to get the bond, it may be worth having in the long run.
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