payment bond

Flat Tires and Surety Bonds

“It’s only flat on the bottom!”  When you heard that, did it make you feel any better?  No… a flat tire is a real PIA. Nothin’ good about it!

What about “Flat line?”  Heaven forbid!  That’s real bad.

When I was a kid we had an expression, a “Flat leaver.”  That was a person who left you flat. Don’t like that either.

You can probably think of other examples: Flat footed, flat broke, flat on your back…

BUT! When it comes to surety bonds, flat can be good. Look at how major sureties typically make their decisions.  There is the field person in the branch, plus a supervisor, and a bond manager.  Then there is a home office underwriter, maybe two.  Together this “committee” makes major decisions.  Problem is, they don’t actually work as a committee, they process the decision sequentially.  Each person looks at it, then sends it on to the next.  That’s a great system, unless you need an answer in this lifetime!

This is an example of a decision making structure that is not flat.  It is multi-layer, multi-person, each with an “in” box and other priorities.  Getting a decision will take a couple of weeks.

When it comes to surety bonds, you want flat.  You want a structure where decisions are made promptly and efficiently.  Then everyone wins.  You get the answer you need, when you need it.  Isn’t this how the system is supposed to work?

KIS Surety / Great Midwest Insurance Company (GMIC) is your large capacity, most flat market.  We process decisions fast.  All new submissions receive a same day response.  Productive, creative, expert underwriting that has produced superb results for years.

Do yourself a favor.  Take a step up to surety bonds the way they should be. KIS Surety Bonds, LLC is the exclusive underwriting department for Great Midwest Insurance Company an “A – 8” carrier licensed in all states plus D.C.  We have in-house authority for Bid and Performance Bonds up to $10 million each.

Contact us for creative solutions and a same day response: 856-304-7348

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Secrets of Bonding #148: The Greatest Impediment to Bonding

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Surety bonds are hard to get. Contractors and their insurance agents know that underwriters are conservative. They ask lots of questions. Then they ask more questions. Then they say they can’t help you. It’s a fun-filled process.

Some contractors can’t get bonded because they have a poor credit history. Others have weak or insufficient financial statements. There are plenty of reasons for an unhappy ending, but what is the single biggest reason – and what can you do about it?

Crappy credit: This is a very common problem. The company may be struggling to get enough work, resulting in a weak credit report. So they decide to move into public work for additional revenues – but the bad credit report makes this impossible. Sometimes the report can be improved by correcting errors and updating the info. This is not the greatest impediment contractors and their agents face.

Weak or insufficient financial statement: There are innumerable potential problems. No financial statement, only an internal statement, only a compilation, an interim FS, a net loss, no working capital – the pitfalls are endless! It’s not the biggest impediment though.

Unsavory circumstances: Excessive bid spreads, inadequate prior experience, bad bond forms, harsh contract terms, too much other work. They are all bad, but they are not the king.

The Greatest Impediment

Picture how the process starts. When the contractor decides to go after bonding, a list of information is requested. The underwriter wants business and personal financial statements. A current work in process schedule is needed. Prior tax returns, resumes of key people and a bank reference letter are desired.

The contractor wants to pursue this, but MAN, that’s a lot of stuff!

He has not needed to make company financial statements, so how to come up with them now?

The company owner never needed to make a resume, always been self-employed. How do I write that up?

The WIP schedule: I don’t have that info available. I know where I am on all my jobs. Why would I take the time to fill out a bunch of forms anyway?

I can get the bank reference letter completed and make copies of prior tax returns (they want the WHOLE THING?!) But if I do that, who’s gonna do the estimating so we don’t run out of work? And I have to visit the projects or everything will grind to a halt. The workers want to milk every job like it’s their last. They’ll suck the profits out of everything if I give them the chance.

Conclusion 

The greatest impediment is the applicant themselves! In my 40+ years of surety bond underwriting, I have concluded that MOST contractors deserve to be bonded, but many fail to acquire surety support. It is because they stop trying, or never really start.

People must make choices. They have to put bread on the table. If they can succeed by doing what they know, why try some experiment that may fail? Sometimes it’s just easier to keep doing the same thing – even if you are discontent.

Our observation is that bonding takes perseverance and patience. It is a journey, a path with unexpected twists. There can be obstacles, but we have solutions! If contractors or agents expect it to be fast and easy… they may be disappointed.

Applicants for bonding must plan to devote some time and energy to achieve a goal they know is worthy. It says a lot to have a surety backing you. They are vouching for your ability, and putting up their own money to prove it. It’s a big deal and not always easy, but always worth it in the end.

Insurance Agents and Contractors: Love the “Secrets” articles? You’ll really love it when we solve your tough bonding problem! We have the markets and the know-how to succeed even when others have failed.  Call us with your next surety bond need.  We guarantee a same day response.  856-304-7348

Not available in all states.

Secrets of Bonding #135: Surety Bond Challenge Question!

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What kind of surety bond can be written with another bond as it’s subject?

Our articles have covered some of the oddities of the surety world: Seemingly crazy bond forms and rating procedures.  Out of all of them, one is the strangest. An agent colleague called us on one this week, so let’s talk about this ugly baby.

Characteristics:

  • Inexpensive, but hard to get.  Often collateral for more than the bond amount plus full indemnity is required.
  • The bond penalty (dollar amount) may not be fixed.
  • Banks and insurance companies can be both the applicant and beneficiary of such bonds.
  • This bond “renews” for free – for years.
  • It is a surety bond that can have another bond as it’s subject.

Sounds pretty weird? Raise your hand if you know.

It is a Lost Instrument Bond.

So what do these do? No, you don’t get one when you can’t find your tuba.tuba

These bonds are required when an instrument such as a cashier’s check or stock certificate has been lost, and a replacement is desired.  The bond protects the interests of the issuer, and is subject to claim if both the original and the duplicate are cashed.  The bond applicant would be responsible for the financial loss – thus the common need for collateral.

The subject of the surety bond can be a government issued investment bond.  So this is the one surety bond that covers another bond!

Bonding companies are not fond of these because they make a one-time annual premium charge, but the bond must remain in effect for a statutory term, typically years (ugh!)

drummerUnderwriters may refuse to provide a bond immediately after the instrument is lost.  The concern is that the original may be found and the bond returned for a refund.  The surety may require a cooling off period to see if the original is located (90 days?)

Instruments with a changing dollar value, such as shares of stock, are covered with an Open Penalty bond.  This means the dollar value will automatically increase to cover the current value of the instrument, in the event of a claim. This is one more reason to make underwriters reluctant – and require more than 100% of the initial value in collateral.

Lost Instrument Bonds: The ugly babies of the surety world.  So now you know.  They aren’t ugly, they’re just “different!”

(BTW, the author thinks ALL babies are beautiful!)

Secrets of Bonding #122: Don’t Sign That Lien Release!

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WAIVER OF LIEN BY CONTRACTOR, SUBCONTRACTOR(S) AND SUPPLIER

We, the undersigned, acknowledge receipt of the amounts stated below as full payment for all labor, professional services, materials, or equipment furnished for use on or about the property of…”

In construction, lien releases are common. Project owners expect their general contractor to execute them. GCs demand them from their subcontractors and suppliers. They are part of the routine. If you want to get paid, you sign it. But when should you not sign it? Let’s look at what a lien release does, and when you should be cautious about executing.

The Purpose of Lien Releases
Typically, a lien release is required in connection with a monetary payment. It comes up in any of these situations:

  • Monthly payment made from project owner to the general contractor
  • Monthly payment from GC to a sub or suppliers
  • Final contract payments to any of these

The lien release enables the accounting to transition from one billing cycle to the next. It is a form of receipt that protects the Payor by acknowleging that the Payee has received funds – they relinquish the right to claim they were not paid.

danger-aheadNormally, when contractors and suppliers are unpaid, they can file a lien (a security interest) against the title of the physical property. With such a lien in place, the property cannot be sold.  The lien release / waiver gives up the right to file such a lien and possibly other legal remedies as well.

Lien releases come in two basic flavors, and it is very important to recognize the difference between them.

The Good One: Conditional

“THIS DOCUMENT WAIVES THE CLAIMANT’S LIEN, STOP PAYMENT NOTICE, AND PAYMENT BOND RIGHTS EFFECTIVE ON RECEIPT OF PAYMENT. A PERSON SHOULD NOT RELY ON THIS DOCUMENT UNLESS SATISFIED THAT THE CLAIMANT HAS RECEIVED PAYMENT.”

A release / waiver is Conditional if it waives rights once a condition (usually the receipt of payment) occurs. An example of conditional language is:

“Upon the receipt of $____, Subcontractor hereby waives and releases its lien and bond rights for labor and materials through _________ (date).”

Unless the waiver states otherwise, the conditional waiver is not effective until the condition, such as payment, occurs.

Also note, this wording includes a condition regarding time which protects the claimant’s lien rights arising in the next billing period.

The Bad One: Unconditionalcaution-proceed-carefully-md

“THIS DOCUMENT WAIVES AND RELEASES LIEN, STOP PAYMENT NOTICE, AND PAYMENT BOND RIGHTS UNCONDITIONALLY AND STATES THAT YOU HAVE BEEN PAID FOR GIVING UP THOSE RIGHTS. THIS DOCUMENT IS ENFORCEABLE AGAINST YOU IF YOU SIGN IT, EVEN IF YOU HAVE NOT BEEN PAID. IF YOU HAVE NOT BEEN PAID, USE A CONDITIONAL WAIVER AND RELEASE FORM.”

Actually it is only bad if the claimant has not yet been paid. Then it would be inadvisable to provide an unconditional release. The claimant will have no recourse if they do not receive their payment, and they will also relinquish their ability to claim against the Payment Bond.

Conclusion
The Conditional Lien Release includes conditions and wording that protects the claimant’s interests.

The Unconditional Release can be detrimental if executed unintentionally or under inappropriate circumstances.

Insurance Agents and Contractors: when tough bonding situations arise, we have the markets and the know-how to succeed even when others have failed.

Give us a call today!  856-304-7348

Not available in all states including Idaho.

Secrets of Bonding #121: Are Court Bonds Like Fruit?

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produce_manMostly we issue contract surety bonds (Performance & Payment) for contractors and our insurance agent / colleagues.  However, we are also an important provider of Court and Probate bonds.  We issued a number of interesting court bonds recently so here is some info on this subject.

What Are Court Bonds Are Why Are They Needed?

Generally, court bonds serve three purposes.

  1. They provide required protection for the other party in the litigation (opposite the bond applicant)
  2. They guarantee the payment of related court costs
  3. The court likes them

An Injunction Bond is a good example.  In these legal actions one party wants to limit or prevent the actions of another.  An insurance agency may request an injunction to prevent a former salesman from soliciting their clients.  The court requires the plaintiff (insurance agency) to provide a bond for the protection of the defendant (salesman) in the event it is found that (s)he has been wrongfully restrained.

A Replevin Bond is similar.  These are required when the plaintiff (a bank) wants to seize an asset (your private jet) for failure to pay your finance charges.  The bond will protect you if it is later found they wrongfully seized “Wings Over Yonkers.”  See how these work?  In different situations the bonds provide the same type of function.  The name of the bond identifies the underlying legal action.

Why Do Courts Like Them?

You may think “what’s not to like?!” That’s true. But the court may require a surety bond for a practical reason.  If the litigation involves a financial matter, they could require that an escrow deposit be placed with the court for the benefit of the other party. They would hold this money until the case is decided.

This works, but is not convenient.  Where will the funds be held?  Who is responsible for their safekeeping?  Will there be periodic accounting if the case runs for years?  Who pays the expenses associated with this?  What if the money is misplaced or stolen? 

Compare this to a surety bond: Get the bond, throw in the file. Done!

cherriesEven though the court may have the option to take cash in lieu of bond, they may demand the issuance of a surety bond simply for its convenience.

Other Court Bonds

When a money judgment is rendered, the defendant may want the matter heard by the Appellant Court. Let’s say Maynard sued Dobie for money and wins a $10,000 judgment.  Maynard figures “Ok here comes 10 big ones!”  However, Dobie wants to dispute the decision so now Maynard has to wait.

In order to bring the Appeal, Dobie must obtain an Appeal Bond which protects the interests of the court and guarantees prompt payment if Dobie loses again.  To get this bond, he’ll have to give his personal financial statement, his indemnity, and put up maybe $11,000 for the surety to hold.  Oh, and pay the bond premium!  Why is all this necessary?

Bond underwriters know that most defendants lose at the Appellate level.  They also know that the court will simply claim on the bond to pay off the judgement.  This means that underwriters expect full penalty claims on defendant’s appeal bonds – which is why they normally require full collateral for the judgment amount plus interest and expenses.nanners

Conclusion

Hopefully it is apparent that there is a thread of similarity between these different types of court bonds.  This can make it easier to understand them when a client comes a-knockin’.

Oh, so why are court bonds like fruit?  Because they have appeal!

Insurance Agents and Contractors: when tough bonding situations arise, we have the markets and the know-how to succeed even when others have failed.

Give us a call today!  856-304-7348

Not available in all states including Idaho.

Secrets Of Bonding #114: Offer a Concrete Solution?

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This Concrete Subcontractor has a big problem.  How would you solve it?

The Facts

  • The bond applicant, we will call ‘Subby,’ is a highly experienced subcontractor who performed concrete work on a school job.
  • Subby was not required to give a Performance & Payment Bond to the GC.
  • The GC, “Gigunda Const.,” has given a P&P bond to the school district.
  • The GC claims that the concrete Subby installed has failed a critical strength test. As a result, Gigunda is demanding a 2 year maintenance bond to cover potential defects.
  • Subby has disputed this charge and feels they are in compliance with the contract.
  • Since the requested maintenance bond will run to the GC and not the school district, it appears the issue must arise from within the subcontract terms (not directly with the school district).
  • Subby has an ongoing relationship with a major bonding company: “Wonderful Surety.”
  • Wonderful Surety has refused to provide the maintenance bond.
  • Subby’s agent called us for help. Is it possible some of our sureties may support it?

Consider the Issues

  1. The work is not covered by a performance bond.
  2. Subby’s current surety has refused to support them.
  3. If Subby ignores the problem, the GC may ultimately have a performance claim ontheir  The GC, and their surety, are responsible for the entire project, including the subcontracted work.
  4. If Subby ignores the problem, the GC may have to fix it – and will back charge them for the costs.
  5. If Subby doesn’t provide the maintenance bond, the GC will withhold the remaining money in their sub contract.
  6. Gigunda’s subcontract may have imposed the GC contract conditions automatically on to the subs (possibly including concrete strength requirements).
  7. It would be normal for the subcontract to state that Subby must protect Gigunda from claims arising from their work.concrete_truck

Possible Solutions

Which One Do You Like Best?

  1. Subby can ask a new surety to provide the maintenance bond.
  2. Subby can rip out the questionable work at their own expense and re-do it to Gigunda’s satisfaction.
  3. Subby can review the subcontract to determine what strength requirements were indicated, and if Subby is actually in violation.
  4. Gigunda can press their surety to issue the maintenance bond. (Although this would be unlikley if Gigunda is the beneficiary.)
  5. Subby could refuse to get the maintenance bond or replace the work (do nothing.)
  6. Subby could ask Gigunda for a contract amendment providing additional money to rip out / replace the questionable work.
  7. Subby could let Gigunda hold money for 2 years in lieu of the bond (the entire bond amount).

So you chose: #_____

 

Conclusion

The step we recommend is #3, “review the subcontract requirements.”

Subby is an experienced concrete company that is convinced their work product is correct. They are not aware of the strength requirements that are the basis of this dispute – but a careful legal review is needed.  

Subby should also ask the GC to cite where these strength requirements appear in the subcontract.

If the work is in violation of the subcontract, Subby will have to choose between paying to replace it now, or face the difficult task of obtaining the maintenance bond. It is possible that no surety will support this without requiring substantial collateral, or maybe even full collateral.  

Pretty tough, but the bond would offer some important advantages even if full collateral is required:

  1. Subby could totally avoid the cost of replacing the work if the concrete performs successfully. Only time will tell, and filing the bond gives them that time.
  2. The bond is better for Subby than letting Gigunda hold funds. If Gigunda concludes the concrete has failed during the 2 years, they will have to go through the surety’s claim department for recovery.  That’s better than just letting the GC use their money if they want. This type of advantage always exists for bond applicants when choosing between a surety bond or putting up cash directly with an obligee / beneficiary.

The experts at Bonding Pros can help Insurance Agents and Contractors when tough bonding situations arise. We have the markets and the know-how to succeed even when others have failed.

Give us a call today!  856-304-7348

Not available in all states including Idaho.

Secrets of Bonding #90: Manage Your Credit Report

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Love it or hate it, you do have a credit report and potential creditors can view it.

Credit scores have always been important in the evaluation of contractors applying for bid and performance bonds. Today they are even more important because a number of bonding programs we offer use the personal credit score as a primary basis for the bond approval.

Let’s dig into this critical underwriting element, learn about the inner workings and how to manage them.

Here are the main components used in evaluating the credit status (listed in order of importance):Credit cards

  1. Payment history
  2. Amounts owed
  3. Types of credit in use
  4. Length of credit history

Dig Deeper

Each credit bureau has reporting relationships with vendors and lenders. They gather payment info from them each month. It is likely that every credit bureau receives information from the issuers of your major retail credit cards (such as department stores and gas cards.) They may not, however, know all of your creditors. Therefore it is possible that credit bureaus may show different data and credit scores.

Regarding amounts owed, the dollar amount may not necessarily lower your score. It is more detrimental if you are using a high percentage of your available credit. This is viewed as a possible indication of financial stress.

The type of credit you use is not a major factor in determining your score. However, you should refrain from opening new credit cards unnecessarily. It may also lower your score if you do not have any credit cards. Managing credit card debt responsibly helps raise your score.

Applications for new credit can lower your score, especially if you do not have a long credit history. It does not lower your score if you order your own report directly from the credit bureau.

Manage Your Credit Report

Step one is to order a free copy of your credit report and check it for erroneous information. Mistyped social security numbers and name spelling errors can result in other people’s bad information appearing in your report. This happens more often than you might think.

If you do find inaccuracies, write to the credit bureau, provide an explanation and evidence (such as proof that a disputed account was settled) and demand a correction.

Other tips:

  • Set up payment reminders
  • Reduce the amount of debt you owe
  • Pay your bills on time
  • Talk to creditors if you are having difficulty making payments

Conclusion

Your credit score matters for bonding and other purposes. It is worth taking the time to manage, and maximize it.

Disclaimer: We are not credit counselors and are not providing financial advice! We are Surety Bond Specialists.

If you need a credit counselor, contact one.  If you need a bond, call us!  856-304-7348