Secrets of Bonding

If you have been reading our surety articles (well over 100 have been published), you may know SOMETHING about surety bonds by now.  So let’s see if you know more than the basics!

(Answers and your Award appear at bottom.)

Begin!

1. When calculating Working Capital “as allowed,” what portion of an HVAC contractor’s Inventory is included when analyzing an audited Balance Sheet?
   1. 50%
   2. 75%
   3. 100%
2. Why do underwriters prefer to NOT issue Performance and Maintenance bonds simultaneously?
   1. The bond premiums cannot be accurately calculated
   2. It is not yet known if the project will be built correctly
   3. Performance Bonds may automatically cover one year of defective materials and workmanship
3. Which accounting method is not acceptable to sureties and why?
   1. Completed Contract, because it excludes open projects
   2. Percentage of Completion, because unearned profits are excluded
   3. Cash, because Accounts Payable, Receivable and other items are excluded
4. Which if the following assets is treated as Long Term by accountants and Current by surety analysts?
   1. Cash Value of Life Insurance
   2. Face Value of Term Insurance
   3. Pending liability claims
5. What is the % of bid spread? 1^st $125,000  2^nd $ 168,000
   1. 34%
   2. 26%
   3. 34%
6. The purpose of a Dual Obligee Rider is:
   1. Prevents claimants from Dueling over the proceeds of the bond
   2. Protects the surety from paying the bond amount more than once
   3. Assures that all “interested parties” can make a claim
7. A “Capped Bid Bond”…
   1. Has a definite expiration date
   2. Has a maximum aggregate
   3. Has a maximum penal sum
8. Which of these financial statement assets would be disallowed by surety underwriters in their analysis?
   1. Stockholder Loan Receivable
   2. Stockholder Loan Payable
   3. Stockholder Deferred Bonus
9. What is the Debt to Equity Ratio and how will the surety respond? Total Liabilities and Stockholders Equity: $1,450,000 Stockholders Equity: $250,000
   1. $1,200,000 “Too low!”
   2. .17:1 “Let’s write bonds!”
   3. 4.8:1 “Sorry, we’ll pass.”
10. When is the surety exonerated on a Labor and Materialmen’s Payment Bond?
    1. Upon fulfillment of the contract provisions and expiration of the applicable lien period
    2. One year after completion of the work
    3. When the original bond document is returned to the surety

Answers:

1. C, because with an Audit, the CPA has confirmed the asset
2. B, they may want to avoid continuing their obligation if the project encountered difficulty during construction
3. C
4. A
5. A: 168,000 – 125,000=43,000. 43,000/168,000=25.6 or 26%. The low bid is 26% below the second bid.
6. B
7. C
8. A
9. C (Trick question: You must first calculate “Total Liabilities” which is 1,450,000-250,000=1,200,000.)  Then 1,200,000/250,000=4.8 or 4.8:1
10. A

Awards

All correct:

7-9 correct:

Less than 7 correct:  

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.