David Zabel Associate Vice President, Surety Home Office Underwriting IAT Surety, a division of IAT Insurance Group
As materials prices continue to rise and the competitiveness for labor creates an increase in wages, the size of a bid or final contract is naturally going to go up. That increase in contract price is going to require a greater bonding program from the contractor’s surety. First and foremost to increase that capacity, an open line of communication between the contractor’s broker and surety is key. Bonding companies respond the quickest and most favorably when there are no surprises. Predictability helps underwriters plan for their clients’ bond programs and what they will need to have in place to support their contractor clients’ business plans. Undisclosed changes to the financial condition, ownership moves, new scopes of work or branching out to new territories (to name a few) give the bonding company pause when being asked to increase surety support. Second, a well-thought-out business plan and path to execution helps increase a contractor’s surety credit. When bonding companies can buy into their clients’ plans and be a part of the success, they are more comfortable extending surety credit. Finally, it’s been said many times in the underwriting world that retaining or increasing Capital in the company and having an upstanding reputation (Character) in the community will help increase the Capacity a surety will provide.
Joseph Sforzo Chief Operating Officer Surety2000 There are multiple instances where an insurance agent or even a surety has fraudulently issued bonds to a contractor without their knowledge. Unfortunately, these fraudulent bonds do exist, negating the security the bond is designed to provide. Owner obligees, general contractors, subcontractors and suppliers may all face significant financial consequences if a fraudulent bond is uncovered after an issue arises. An ebonding solution can help contractors—and everyone else in the chain—protect themselves against fraud. Ebonding platforms such as Surety2000 can provide a unique bond number and digital staple associated with each bond as well as a power of attorney preventing a fraudulent execution of the bond, verification of the surety's authenticity, verification that the insurance agent has the authority to execute the bond on behalf of the surety company being used to execute the bond secure, digital signatures from all parties and collaborative communication to all parties to the bond upon execution of the document.
Stephen Ruschak Executive Vice President, Surety Arch Insurance
Sureties look at many different financial ratios and benchmarks when considering bonding support for construction firms. Surety underwriters are most concerned about whether the contractor is able to positively cash-flow its projects and ultimately earn an attractive profit margin that can strengthen the balance sheet. In periods of economic downturns like we seem to be heading toward in 2023, the emphasis on working capital, profitably completing projects and strategically acquiring new work will be more pronounced than ever. Working capital, or current assets less current liabilities, are the financial resources available to a contractor to cash-flow its projects and pay its overhead. Current assets include accounts receivables, and so the ability to convert AR into cash is critical. Underwriters are also concerned with underbillings, which are classified as work performed but not yet billed or paid by the owner or general contractor. While firms believe that they will be compensated for work performed under the contract, it is never completely guaranteed until the check clears. Conversely, overbillings or work billed but not yet performed increase a surety's exposure, since contract balances have been reduced without the corresponding scope of work completed. Underwriters want to support contractors that can successfully complete bonded obligations, including timely closing out projects. The longer it takes to close jobs and collect retainage, the more likely there will be profit fade. Bidding on difficult projects and working for tough owners can also hinder the ability to close out jobs. This all negatively affects working capital and net worth, which underwriters compare to the overall bonded work program extended to the contractor. Reductions in those benchmarks can lead to a surety reducing the bond line or even exiting from the account if the deterioration is significant.
Shawn Kelly Director, Surety Claims Nationwide Surety The specific reasons why a contractor may be declared in default of its contractual obligations are as diverse as the type of projects found in the construction industry itself. However, most contractor defaults can generally be classified into one of three main categories: contractor insolvency, non-conforming/defective work and unexcused schedule delays. Each situation will be highly dependent upon the specific facts surrounding each project to which they relate, but most project defaults can be classified into one or more of these three main classifications. When the bond obligee has complied with the conditions of the bond and made demand upon the surety to perform, the surety can generally select from the following five performance options: 1. In an insolvency situation, finance its bond principal through the completion of the project; 2. Re-bid the remaining scope of work on the project and tender a completing contractor to the obligee. The completing contractor provides a new bond to the obligee to cover its completion scope, while the original surety makes a payment to the obligee for the difference between the completion contractor’s bid and the remaining original contract balance; 3. Takeover the contract and complete the remaining scope of work with a new contractor selected by the surety. The surety usually engages a construction consultant to assist with project completion administration in this scenario; 4. Enter into a monetary settlement with the obligee; or 5. Deny liability based on the legitimate legal defenses of the principal and/or surety.
Hank Nozko Jr. President ACSTAR Insurance Company There are lots of reasons why surety applications might be denied. Some may just be the result of an administrative procedure. For example, a surety may require the applicant’s full company name, address and tax ID number and the full name(s), address(es) and Social Security number(s) of the principal(s) in order for the submission to be entered in the surety’s information system. The submission may ultimately be denied simply because of the lack of information. Declinations may also occur because of poor communication. For example, there may have been a payment claim that was resolved without incident or payment, because it was invalid. Answering o to the question “Have you had any claims?” would be insufficient. The better answer is yes, we have had claims, but such claims were not valid and disposed of without any payment or surety intervention. An incomplete fill-in might get misunderstood or misinterpreted as a misrepresentation, resulting in a denial that might have been avoided. Go overboard on disclosure. Lack of complete information could cause faulty assumptions that could lead to disapproval. If you have done a complete and accurate presentation in preparing the surety’s application but difficulties disclosed cause a declination, approval might still be achieved with another surety. An insurance agent that specializes in surety and is knowledgeable about the dissimilarities of the surety markets might help you find a home for your surety needs. Some markets that underwrite more difficult situations may undertake intense examination and verification. If your disclosure list is complete and accurate, that will immensely enhance the possibility of finding a surety partner. Openness can be a path to approval.
Robert Murray Head of Surety for Zurich North America Zurich North America Private owners often wonder about the cost versus the benefits of requiring bonding from contractors. Simply stated, a bond significantly increases the owner’s probability of having a project completed on time and on budget, and the benefits of bonding far outweigh the costs. Recent studies completed by the global consulting firm EY under the guidance of the Surety & Fidelity Association of America indicate that the prequalification efforts of the bonding companies significantly decrease the likelihood of a contractor defaulting on a project. Further, in the unfortunate event of a contractor default, the same study indicates that post-default costs are considerably less as the sureties have the tools and resources necessary to help complete a project in the most cost-effective manner. This reduces the burden for the owner in resolving the completion issues and is especially important as the pain associated with a contract default can be severe if managed unsuccessfully. The current economic environment brings with it uncertainties that we have not seen for some time. Inflation, labor shortages, supply-chain disruption, rising interest rates and the possibility of a recession are issues we have previously seen, but the current combination makes the road ahead especially slippery. Private owners wishing to increase the probability of successful project completion would be wise to include bonding as a part of their risk-mitigation strategy. For reference, the full EY study can be reviewed further on the Surety & Fidelity Association’s website at https://surety.org/suretyprotects/.
Jay Farley Vice President, Claims Manager Merchants Bonding Company
Contractors face a number of considerations when selecting a surety. But perhaps the most overlooked, yet very important, aspect of the surety relationship is claim service. When a contractor purchases a bond, the contractor is buying claim services. Indeed, in a claim situation, it’s the claims department, not the agent or underwriter, which becomes the surety representative to investigate the claim and carry out the surety’s obligation under the bond. And due to the three-party nature of the bond agreement, the claims representative becomes the face of the interaction, providing service to the contractor as well as the obligee. Unfortunately, many contractors only become aware of this reality after the fact, learning it the hard way. Dissatisfaction with claim service, or a perceived “bad” claim experience, can be the reason a contractor leaves a surety. But that situation is avoidable. With claims, as in all aspects of surety, relationships matter. In addition to claims handling, claims departments typically provide support to underwriters and perform various value-add services for agents and contractors. Regular interaction with the claims team allows the contractor to utilize various legal-support services, navigate performance and payment situations and truly maximize the relationship. Contractors should partner with a surety whose claims department shares the contractor’s values. This includes not only a common-sense philosophy with respect to claim handling but also a business-minded and pragmatic approach to all matters. As with any trusted relationship, communication and transparency are key and can serve to establish and strengthen the relationship over time and ultimately serve to minimize the risk of loss.
Steven D. Davis Director/Senior Vice President McGriff Construction Insurance Services Contractors with upcoming insurance renewals should consider four best practices to assure that they are getting optimal results from the underwriting community. First of all, start the renewal process earlier than normal, about 90+ days in advance. Underwriters are getting to look at multiple accounts due to the current market conditions, and the objective is to allow ample time to sort through options, coverage issues and any required actuarial analysis.Secondly, the underwriting submission should be comprehensive and recommend that the AGC risk profiler be completed, which will allow a deep dive into the construction operations as well as risk management and safety/loss control practices. Relationships matter in this business and can make a difference when managed well. Think about delivering your renewal jointly and in-person, with key individuals from the construction company. Lastly, more and more contractors are looking at captive or other risk-financing solutions to better manage their insurance programs. Whether a construction group captive or single-parent facility, contractors do have options to evaluate during the process.
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