- This is a Performance Bond request for a multi-million dollar subcontract
- The applicant / principal is a long established company
- They have successfully completed similar sized projects
- The company has a modest net worth, but is on a profitable trend. Ratios are OK.
- Personal financial statements of the stockholders add more net worth to the picture
- The company is owned by a father and son. Son is the primary stockholder.
- We noted their SS numbers are only a few digits apart
- Father has a substantial net worth. Son has a small net worth as indicated on his personal statement.
- The applicant has started the subcontract
- The GC / obligee has a mandatory bond form – very tough. It effectively makes it a forfeiture bond (obligee completes the job and sends you the bill.)
- Father has a living trust
- Son also indicated he has a trust
A lot of moving parts. What are the issues?
- Low company net worth. Too low for the size bond requested.
- “Close” SS numbers imply these individuals are immigrants (received SS numbers at about the same time). Are they U.S. citizens?
- Started subcontract. Why were they allowed to start without a bond? Degree of completion? Work acceptable? Bills paid? On schedule?
- Do we want to write a forfeiture bond form (financial guarantee?)
- What assets are in the trusts? Can they give indemnity? Will we rely on the indemnity of a trust?
– Think of your possible solutions –
Here is the approach crafted by our underwriters:
- Low company net worth. We do not prefer to require collateral because it may be counter-productive, making it harder for the client to complete the project. Instead, the client agreed to add capital to the company – an investment in their future. The funds could be a subordinated stockholder loan, or a stronger method: Additional Paid-in Capital. The latter is more permanent and therefore desirable. The client agreed to permanent capital that would be verified in writing by their CPA and supported by a current interim balance sheet.
- Close SS numbers. Why would we inquire about anyone with a social security number? It is because the number itself does not prove citizenship – nor does the filing of a US tax return. Non-citizens authorized to work in the U.S. can get a SS#. “Tax residents” are permanent residents and green card holders who are non-citizens required to pay U.S. taxes. All sureties are cautious when taking the personal indemnity of a non-citizen. They may easily flee the country to avoid their obligations. On this account we determined the father and son were immigrants as we suspected, and naturalized U.S. citizens.
- Started subcontract. This would be clarified by obtaining our All’s Right Letter from the obligee, stating the relevant facts on the project (degree of completion, on time, no problems, etc.)
- Bad bond form. We had previous dealings with this major GC and negotiated a bond modification that made the bond operate more normally. They agreed to use the bond mod again.
- Trusts. It turned out there was only one trust. The son was the beneficiary of the fathers trust, no separate trust of his own. A review of the father’s trust showed it was not prohibited from signing the indemnity agreement. However, living trusts are revocable, meaning the terms can be changed and assets moved out – making them unreliable indemnitors. And it contained the single most important asset, the father’s residence. How to overcome this last obstacle? Our solution: We will place a lien on the property giving us access regardless of changes in the trust.
There you have it. Did you come up with solutions to match ours? It was a tough / complicated case, but we worked hard to solve it.We’ll work hard to solve your bond cases too. Bid bonds, performance and payment, and also site and subdivision!
Include us in your bond production efforts. We can make it happen.
Steve Golia is FIA Surety’s Marketing Manager.
The insurance company provides Bid, Performance, Site and Subdivision Bonds with speed and creativity. Contact us today and let’s discuss how we can help. Call 856-304-7348.
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