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Secrets of Bonding # 142: Make Bid Bonds Great Again!

Steve Golia1 Comment

You used to love them.  They were so easy.  Now they are in dollar amounts and percentages, sometimes with a limited maximum value.  They can be electronic or digital.  Sometimes a letter is required instead.  Sometimes nothing is required instead! There may be a single or annual charge for it or maybe it is free! It’s outta control…

So here is your chance to catch up with everybody’s favorite: The fun and fascinating world of Bid Bonds.

The Basics
These instruments accompany a contractor’s proposal during the acquisition process for a new project.  This is routine on public work, such as federal state and local municipal contracts.  The procedure may also be used on private projects at the contract owner’s discretion.

The bond guarantees that, if awarded, the bidder will sign the contract, furnish the required Performance and Payment Bond, and commence with the work – or – pay the difference between their bid and the next higher bidder (subject to the maximum dollar value of the bid bond.)

Cost
Usually free although the surety is entitled to charge for them.  Typical charges could be an annual bid bond service fee or a per bond charge.

Underwriting
The decision to issue the bid bond is based on the underwriter’s willingness to provide the related P&P bond, because that is the real money transaction. The decision is NOT based on the dollar value of the bid bond.  Rely on the fact that the underwriter will not provide the bid bond if they do not feel they can support the final bond.

Bid Spreads
If the bidder is more than 10% below the next bidder without a plausible explanation (we have a special machine,  already have materials, are already working next door, we’re super fabulous, etc.) the surety could decline the final bond, resulting in a bid bond claim.

Alternative Forms of Security
In addition to a bid bond, proposals may also be secured using a cashier’s check or irrevocable letter of credit, depending on what the project owner (Obligee) is willing to accept.

Percentages
The Invitation or Bid Solicitation describes the proposal requirements.  It will state if a bid bond is required and the amount.

The bond value is often expressed as a percentage. Example “20% of the attached proposal amount.”  This is convenient because the underwriter doesn’t want to know the actual bid amount (to preserve the bid confidentiality).  It is the best way to express the exactly correct amount when typing the bond in advance.

Capped
Because the percentage bond actually has an unknown dollar value at the moment it is executed, language is sometimes added establishing the most it can be worth (to prevent a wildly high amount the underwriter didn’t expect).  Example, “10% of the attached bid, not to exceed $100,000.”

Fixed Penalty
“Bond Penalty” is the term used to express the bond dollar value.  A fixed penalty bond has a stipulated amount, regardless of the bid.  Example, “Maximum bid bond amount required: $20,000.”

Surety Letter
Some owners choose to require a letter from the bonding company, but no bond. Federal projects are handled this way at times.  The letter talks about how much they love the client and the contracts they are willing to bond.

Consent of Surety
This letter is the surety’s written promise to issue the P&P bond if the contract is awarded.

Electronic
A scanned copy (pdf) of the executed bond may be acceptable for an online bid.

Digital
Some state departments of transportation use this.  The surety registers with the obligee in advance and the bid bond is “filed” online using a unique identification number.

No Free Lunch
If you default (cause a bond claim), the surety will come after the contractor, it’s owners and spouses for recovery.  Remember: Bonds are not insurance.

Funky Land
Now some of the weird stuff:

  • You may encounter a bid bond requirement, but no final bond (P&P bond) to follow
  • Can also have the opposite: No bid security required but a final bond is needed
  • No! You are not required to use the same surety for the bid and final bonds – although the bid bond provider fully expects to write the final bond and may hunt you down and kill you. (Just kidding!!!)
  • Yes! If you obtain a bid bond under the promise to provide collateral, you are allowed to get the final bond from a different surety that is not demanding collateral. (But you face the hunt and kill thing again)
  • When you acquire a project using a Consent provided by ABC Surety (their promise to provide the bond upon award of the contract), you are not prohibited from taking the final bond from XYZ Surety. However, good protocol dictates that you remain loyal to those who enabled you to acquire the job (meaning ABC).

Make Bid Bonds Great Again
So there you have it.  These instruments are fussy and sometimes complicated.  It is imperative that they be executed correctly and filed on time or it can cause the bid to be thrown out (loss of contract.)  This always makes people very crabby (Read as: LAWSUIT).

The key is to review the written bonding requirements as described in the bid advertisement. Use any mandatory bond forms that are stipulated and double check the correct execution and typing of the document including name spelling, job description, project identification details and the correct bid bond amount.

Now that you know, you can start to love bid bonds again!

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.

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Secrets of Bonding #136: The Case of the Vanishing Bid Bond

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For mood music, click here.

Here are the facts:

DR-11
Perry Mason is an American legal drama series broadcast from September 21, 1957, to May 22, 1966.
  • Late Friday evening we got a call from an existing client “Presidential Construction, Inc.” They want to go after a public contract next week and a bid bond will be needed. The proposals go in next Thursday, in four business days.
  • The new project is particularly large and we set a strategy for success. Due to the job size, updated financial statements are needed. They rely on their CPA firm for such info.
  • On Monday, Presidential intends to call their accountant and try to rush the financials. They will also gather prices from subcontractors and material suppliers to formulate their bid estimate.
  • Due to the short timetable, there is no guarantee that they can produce the financial info, gain approval of the bond, and have it issued prior to the bid date.
  • On Tuesday the municipality, the entity offering the work, released an addendum stating that “No bid bond shall be required.” (Strange because such public work is normally always bonded.)
  • Presidential was relieved and still intends to bid the project. No more rush on the financial info! They will “worry about the final bond later.”

Our client thinks this a lucky break. Is it? Let’s review the implications when a bid bond requirement… vanishes.

Presidential was concerned that they may incur the expense of preparing their proposal and then not be able to bid in the absence of a bid bond. Now they are willing to proceed without first establishing their surety support. The new risk is that they could face embarrassment and loss of the contract if they cannot produce a Performance & Payment bond when required. (This job is large and beyond their normal bonding capacity.)

Keep in mind, the bid bond is the predecessor of the P&P bond and establishes the surety’s willingness to support the new contract.

Secondly, as a bonded contractor, Presidential now loses a competitive advantage over unbonded firms. With the bond waived, more bidders can come in, potentially driving down the profitability of the contract or likelihood of winning an award. Assuming there will still be a P&P bond required, waiving the bid bond really doesn’t help anyone.

What’s the best move for our client? We recommended continuing to pursue the surety support with the knowledge that no bid bond is stipulated. This is exactly how we handle private contracts when there is no bid security, but a final bond is required to cover the project. Using this approach, the surety can give their pre-approval so the contractor knows they can qualify for the final bond.

Conclusion:

So where did the vanishing bid bond go? Turned out the next addendum postponed the entire project. No revised bid date has been announced.

The good news: We approved Presidential so they are ready to go when this job is again offered for bid. Case closed!

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety 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.

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Secrets of Bonding #132: Inside the Underwriters Skull

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We’re going on a journey.  We will crawl inside the surety bond underwriter’s skull and see what’s in there: Maybe not much.

To succeed in acquiring bonds, it is helpful to understand the process and motivation of the decision makers.  Here we go.

Agency vs. Bonding Company

When new clients call us to get their bond account resolved, we always ask “Do you currently have a bonding company?”  The answer is often something like “Yes! The Acme Insurance Agency.”

So the first thing to understand is the difference between the agent (or agency) and the bonding company (aka the surety, the carrier, the company). Typically, the agent (and agency) is your local retail salesperson.  Their job is to find new prospective clients, develop their info, analyze and submit it to the underwriters for review, and provide ongoing customer service. They normally are paid by commission and do not hold any of the risk on the bonds.

The Surety (bonding company, the carrier) holds the risk.  They collect the bond premium.  Their employee, the underwriter, is the decision maker who determines if the bond will be approved, and on what terms. 

Now that we have identified who the decision-maker is, let’s talk about process and motivation.

The Process – Underwriting Authorityskull

In order to assure a consistent and controlled decision-making process, bonding companies issue Letters of Authority to each underwriter.  These instructions cover two areas. 

  • #1 prohibited transactions. Don’t do any of this stuff.  It may include types of bonds and different scenarios that are unsupported by reinsurance, or are incompatible with the company’s risk appetite.
  • #2 transaction size. This covers the dollar value of transactions.  It may say “You can issue the following type of bond, up to this maximum amount $_______.”

Motivation

Underwriters are paid a salary and in many cases, a production bonus.  The bonus is based on the volume of profitable business they produce.  They are expected to operate faithfully within the company’s underwriting guidelines.  Annual production goals are set with a reward if they are exceeded.

If you have a feel for it now, let’s put on our underwriter hats and look at some situations.  As an underwriter, will you move these to the top of the stack?

Situation 1: This new applicant does not normally need performance bonds.  In fact, after three years in business this is their first one.  You are told “this shouldn’t be a problem” because the contract / bond amount is only $15,000.

Situation 2: Maintenance Bond request on a completed contract.  A “no brainer?”   The performance bond was issued by another surety, but the client says they don’t want to use them for the Maintenance Bond because of their slow service.

Situation 3: The government is offering a computer services contract.  The vendor must provide a performance bond.  The contract has two optional one-year extensions at the sole discretion of the government.  The surety must file notice of cancellation 30 days prior to anniversary in order to get off the risk.  Failure to bond the extension (with a new surety) can result in a claim against the expiring bond.

Love any of these?  We don’t either.  Why are they undesirable to the underwriter?

Remember the basics:  Underwriters are looking for profitable transactions they can process efficiently.  Case #1 is simply not rewarding enough.  Too hard to set up a new file just to write one very small bond, and maybe that’s the last one for the next three years.

#2, looks like there is a complicated underwriting situation.  Could be a performance bond claim, or bad financial info that is causing the incumbent surety to back away.  People don’t change bonding companies just for fun.

#3, underwriters cannot proceed if their exposure is undefined. Since the potential bond term is undefined (and beyond the underwriter’s control), it would be impossible to comply with the underwriting authority.

Conclusion

Underwriters do not embrace all transactions equally.  So how do get your bonds approved?

  1. Start with a conversation. This can give you an idea of how to proceed efficiently: “Here’s what I got.  Can you help me?”
  2. Good file accessibility: Make the info easy to process.  Does the underwriter want pdfs emailed for review?  Then don’t send a paper file or one big jpg (a picture file).
  3. Proper forms: Does the underwriter require their own application?  Use it!  Answer ALL the questions.
  4. Be Cooperative: “Are you sure you don’t have that already? We sent it on Monday.” That always amazed me. If the underwriter requests info, don’t ask them to justify that they need it.  Provide it – and more than once if necessary.

Remember, even if the process is difficult, underwriters must approve business to remain viable.  Make your bond easy to process and easy to approve. Make it the file they want to work on next.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety 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.

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Secrets of Bonding #129: What It Takes To Get a $1 Million Bond

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Here is a common fallacy held by observers of the surety bonding industry: whellbarrow money

How much cash do you need to get a $1 million bond?  The answer is NOT $1,000,000. Surprisingly, you only need a fraction of the $1 million, but you do need other elements as well.  Let’s dive in!

Our readers may be familiar with the 3 Cs of Surety Bond Underwriting: Coercion, Corruption, Cowardice.  Actually they are Character, Capacity and Capital. These describe areas of analysis that are important to the bond decision-makers.  Cash falls under the Capital heading.  Other factors are also important.

  • Character includes the applicant’s credit rating and operating history. Bill paying habits are reviewed along with references from suppliers and lenders. Character evaluates if the applicant is likely to honor their obligations under the contract and bond.
  • Capacity cover the skills of key people, company experience overall, plant, equipment and other factors.
  • Capital includes all financial resources, including Cash.

The Magic Number

Stacks of US currency

There is no magic number. When underwriters review the company financial statement they do look at the cash position.  In addition, they evaluate the Working Capital, which is the sum of cash, accounts receivable, inventory, and other items, minus Current Liabilities.  Working Capital consists of elements that will become cash during the current fiscal period (the accounting year).  For example, a dollar of “good” receivables is the same as cash to credit analysts.  So to this extent, less pure cash is needed.

Financing New Projects

One of the reasons contractors need Working Capital (WC) is to finance the start of new projects.  They must mobilize the job site, pay laborers and purchase materials – all out of their pocket initially.  As the project proceeds, it starts to fund itself. 

For the $1 million contract with the $1 million bond, would it take $1 million to finance the start?  No, it would just be a percentage of the $1 million.

The Two-Part Answer

Many bundle of US 100 dollars bank notes

This brings us to the answer. Cash is one component of Working Capital, and underwriters expect WC to equal about 10% of the bonded exposure. This could mean that the $1 million bond requires less than $100,000 cash when combined with other working capital components. However, cash alone doesn’t get bonds approved.

All of the 3 Cs are equally important. Cash is not the sole basis of the decision.  A cash rich company with bad credit or weak prior experience will still be declined.  Cash cannot overcome these deficiencies.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety 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.

Secret # 95: PLASTER – Not The Solution To Bond Problems

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apply-plasterIn construction there are physical problems you can solve by plastering over them.  In the world of surety bonds, managing, massaging, covering over, (plastering) is sometimes undertaken to deal with negative facts or situations that are hindering the issuance of surety bonds.

Bond underwriters all know the great earnestness with which bid and performance bonds are requested.

“We need a bid bond because we need the project to get the revenues to meet our obligations and have a successful year!”

The pressure’s on! Sometimes that high level of motivation leads people to take extreme measures… Where do you draw the line?

Let’s talk about some real life examples and you decide (our opinion to follow):

  1. Joe, the founder / owner of ABC Company has an unavoidable problem with bad results.  It could be the bankruptcy of their largest client, forcing ABC into bankruptcy.  It could be an accident resulting in a lawsuit and devastating judgement against the company.  As a result, a new company is formed with Joe’s adult child as owner and President.  Joe is not an officer and officially functions as a consultant to the company, even though he really runs the show.  Is this legit?
  2. Smith Co. cannot get the bonding capacity they need because of poorly or improperly prepared financial statements from their accountant.  They decide, as of the next fiscal year, to engage a Certified Public Accountant experienced with construction clients. Is this appropriate?
  3. For Ajax Inc. the first half of the year did not meet expectations, but the year in total should be OK. When the bonding company asks for their 6 month financial results, the company makes up an excuse saying they have a software problem and cannot produce the statement. The plan is to stonewall the underwriter and only provide the fiscal year-end. Does this really hurt anyone since the 6 month statement is relatively less important?

Before deciding on these specific circumstances, let’s look at the big picture. What is the nature of the relationship between the contractor and surety?

The surety is paid to take a risk on behalf of the contractor, they become their guarantor.  It is a true partnership in the sense that they succeed or fail together. Everyone loses if the contractor defaults on a project.

The surety bases their underwriting decisions on info as provided by the applicant, and depends on them to be “forthcoming.” To put it bluntly, intentionally misrepresenting or concealing relevant facts may be considered fraudulent.  Then there is the gray area.

In our three examples, did you find #1 objectionable? This situation does occur, and we appreciate the motivation. The underwriter might choose to accept it on the condition that the consultant gives personal indemnity, even though he is not a stockholder.

#2? This seems like an appropriately timed, logical response to the problem. A-OK!

#3? The sin being committed is the violation of trust with the surety.  If there is a real partnership, they will proceed based on full disclosure, knowing all the good and bad. Even if the info being withheld is irrelevant, it is inappropriate for one party to intentionally conceal it for their perceived benefit.

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.

Secrets of Bonding #79: Personal Indemnity, How to Avoid it

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If there is one universal complaint we hear from Performance Bond applicants it is their reluctance to give personal indemnity. And there is even more resistance from their spouses!  Keep in mind, people operate through corporations to protect their assets.  So why defeat the purpose by signing personally?  Why do bonding companies demand this and can it be avoided?

The giving a personal indemnity makes the company owners and spouses personally liable in the event of a bond claim or loss. It means assets such as their home and investments are literally at risk if there is a problem on a bonded contract. People typically view bonds the same as insurance where there is no such personal obligation. Therefore, there’s a natural resistance to this requirement.

Let’s stop for a moment and understand why such indemnity is expected.

A bonding relationship is much like borrowing money from a bank. Unlike insurance, neither bankthe bank nor the bonding company ever expects to have a loss.  When you apply for a bank line the lender may ask for personal signatures of the company owners (co-signers) to support the credit application. This means that if the company fails to pay the debt, the bank seeks recovery from the co-signers. The bank wants the owners to stand behind the company obligation.

The same approach is used in bonding.  Bonding companies want the company owners to share in the risk and understand the importance of preventing bond losses.  Personal indemnity accomplishes this.

Why must spouses sign?

  1. Company stock is normally a jointly owned marital asset.
  2. The success of the bonded contracts benefits both parties even if they are not both active in the company.
  3. Bonding companies want to prevent assets from being moved around to avoid the indemnity obligations.

For these reasons “full personal indemnity” is generally required by all bonding companies. However there are some exceptions. Ways to avoid indemnity:

  • Long surety relationship It is possible that after many years in a profitable relationship, the contractor may convince the surety to drop the indemnity requirement.
  • Company size Firms with a multi-million dollar net worth may be viewed as so credit worthy, the additional support (of personal indemnity) is unnecessary.
  • Public Companies Go public. Publicly owned entities normally only give company indemnity. Obtaining personal indemnity is impractical and normally waived.
  • ESOPS Form an ESOP. Employee owned companies (like public companies) tend to have a large number of stockholders, each with a small percent of ownership. It is unrealistic to expect these owners to be personally liable.
  • Pre-Nup. The existence of a Prenuptial Agreement or Non-transfer of Assets Agreement between married parties/stockholders could justify waiving the spouse.  However, the stockholder would still give indemnity.
  • Sell Your Stock Company owners can sell their stock to the next generation of owners, key employees perhaps. If you (and your spouse) are no longer stockholders, your personal indemnity will not be expected.  An exception could be a case where you remain in a key position and/or you personally are the primary financial strength.
  • Collateral Place assets with the bonding company such as cash or an irrevocable letter of credit to secure their position. If high enough, it could overcome the absence of personal indemnity.

These examples are real life solutions.  However for many contractors they may not be within reach. The simple truth is that in most cases personal indemnity cannot be avoided.

Company owners/spouses rarely like to give it, but virtually all must do so if they wish to have bonded contracts for their privately owned companies.

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.

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Secrets of Bonding #74: Twofers

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A Basic Question

 Talk to the experts, and you may get different answers to this extremely basic question: “What is the maximum potential loss for the surety on a Performance and Payment Bond?”

If you have experience producing surety bonds, you know that a 100% Performance Bond (equal in amount to the contract) is priced based on the contract amount. If the bond rate is 2.5% of the contract amount on a $100,000 project, the Performance Bond cost would be $2,500.

How much would it be for a Performance and Payment Bond? It seems logical that if you add to the exposure, you must charge more – but the cost is the same. Surety rules typically say that the Payment bond is provided at no additional charge. Is this because the surety is being generous, or is the exposure amount not actually increased?!

Surety Practices

We have established that bonding companies do not charge twice as much for a P&P bond.

When it comes to the use of the contractors bonding capacity, they use “1 x” here too.  For the contract in our example, $100,000 of capacity is consumed by the P&P bond, not $200,000.

Combined Bond Forms

Look up New Jersey law “N.J.S.A. 2A:44-147” and you will find it stipulates a combined Performance and Payment Bond form for public work in the Garden State. The penal sum (maximum dollar value of the bond) is stated once in support of a two-headed obligation. This may lead the reader to conclude that the single bond penalty is shared by the surety’s two legal obligations. That would justify not making an additional charge when including a Payment obligation with the Performance Bond.

Bond Specifications

On public work, such a federal, state and municipal contracts, the bonding requirement may indicate “100% Performance Bond and 100% Payment Bond” or “100% Performance and Payment Bond.” In the context of this article, the implications may be obvious, but it appears contract officers use them interchangeably.

Federal contract officers, on other other hand, can be quite specific on this point and expect the surety to assume a 200% exposure for the 1 x bond fee.

Federal bond forms require a separate instrument for Performance and another one for Payment, each with its own penal sum.  The Surety may attach them both as a single document and even give them one bond number.  But the government clearly is buying a guarantee with a combined value of 200%.

Twofers

The reality is that, despite the pricing methods and handling procedures used by sureties, the bonding company IS responsible for 200% if they issue two instruments each stating a 100%  obligation. This is the twofer that sureties willingly offer. You can have Performance only, or get Performance and Payment, twofer the price of one!

The Irony

Surprisingly, obligees may not position themselves to obtain maximum value and protection from the bonds they buy, and sureties may give away coverage rather than charge for it. fia_surety_logo

 

FIA Surety / First Indemnity of America Insurance Company
2740 Rt. 10 West, Suite 205
Morris Plains, NJ 07950
Office: 973-541-3417
Visit us: www.fiagroup.com
We are currently licensed in: NJ, PA, DE, MD, VA, NC, SC, WV, TN, FL, GA, AL, OK, TX

Secrets of Bonding #50: Don’t Cross that Line (of Authority)

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Bonding Lines of Authority are always in play when it comes to surety bonds.  However, they are available (or unavailable) in varying degrees to underwriters, agents, and contractor accounts.  Let’s look at where they come from, how they work, and how to get one – and keep it!

Origin of Underwriting Authority

It did not start “a long time ago in a galaxy far, far away….”  In fact, you could argue that it does not even start in the home office of the surety. The ability and the authority to make underwriting decisions on Bid and Performance Bonds is often the result of a negotiation with the surety’s reinsurers who share in the risk / rewards of the underwriting.  The reinsurance treaty provides underwriting guidelines and specific limits of capacity.  Letters of Underwriting Authority are derived from this.

Surety Branch Offices

The highest level of decision-making authority is held in the home office of the surety.  Lesser amounts are then delegated to branch office managers, their respective surety department managers, bond supervisors, and underwriters. The authority we have described thus far consists of general decision making authority; it is not “account specific.”

When individual accounts are approved for ongoing surety support, senior underwriters may choose to delegate a portion of their authority to other underwriters to help process the day-to-day bond requests more efficiently. These are the people you are likely to get on the phone when you call the surety’s office. Call them “line” underwriters for a different reason – they are directly in the line of fire with the surety’s agents and contractors.

This client specific authority has a normal set of underwriting criteria (i.e. no overseas contracts, excessive bid spreads, etc.) plus maximum dollar values for a single bond/contract and for aggregate capacity.  Call us at 856-304-7348 if you don’t have Secrets # 9 & 38 which cover aggregate capacity. There is also an expiration date which is normally a few months after the clients next FYE (*what’s that?) Such lines of authority are referred to as Bond Lines.

Agencies

The surety underwriter may in turn delegate some portion of the bond line to the agent.  This is a major step because it is being transferred to a person who is not a direct employee of the surety – and therefore less responsible to the surety for their actions.  Keep in mind, this decision-making is serious business. The underwriters are literally the custodians and guardians of the surety’s assets.  A Performance or Payment Bond claim can cost millions for the surety.

Agency authority may be issued to a specific person rather than the agency itself.  This assures a level of accountability and facilitates a periodic underwriting audit.

Don’t Cross That Line (of Authority)

Picture the chain of authority from the reinsurers down to the line underwriter and maybe the agent, too.  Each level of authority is granted based on confidence in the honesty, knowledge and dependability of the recipient.  When line underwriters miss-handle a situation, they must answer to the department manager.  That manager also has to answer to a higher up.  Each person’s individual credibility is at stake.

Over the years I have had a number of occasions when violations of authority occurred below me, it’s always an unpleasant situation (understatement!)  These were not bad people; in fact they may have had good intentions. So how do violations of authority occur?

  1. Failure to know or follow the details of the authority.
  2. Riders, documents or bonds not covered by the line are issued.
  3. Failure to note the expiration of the line.
  4. A bond is issued as an interim measure with the intention of bringing in another surety.
  5. “It’s only a bid bond and they probably won’t be low.”

Whatever the reason, underwriting authority is dependent on the trustworthiness and professionalism of the recipient.  When this is shattered, when that line is crossed, senior underwriters will never forget!

If you receive a Letter of Authority, be conscientious and conservative when exercising it.  Print out a copy and refer to the details before acting.  Also consider double checking with the person above you before making a final decision.  Just because you have the authority, it doesn’t mean you must decide on your own.

A line of authority can be a great asset, but you if you cross it, you may lose it!

*FYE = Fiscal Year-End.

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.

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Secrets of Bonding #24: Manage the Bond Manager

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Q. Who is your bonding company?

A. Jimmy at the Smertz Agency

Am I the only one who thinks this is a strange answer? It always amazes me when contractors have no idea who their bonding company is.  It could mean that the agency is doing a fantastic job of managing the account.  But it is more likely that the contractor is doing a bad job of managing the relationship with the surety.

Who’s on first?

The bond agency plays a vital role in guiding the process forward, advising the client and supporting the underwriting process.  But for the most part, the Bond Manager controls the underwriting decisions – even if some measure of discretionary authority has been granted to the agent.

To put it simply, the Bond Manager has life or death control over the bond account. If there is a bond the manager is not interested in supporting, the contractor can kiss those revenues and profits goodbye. 

For major accounts that produce significant annual premiums and require substantial capacity, the surety will probably make themselves known.  They may ask for an annual meeting to discuss fiscal year-end results and plans for the new year.

For smaller accounts, the contractor is just a name in a computer record.  Flat.  No personality or rapport.  So when that stretch or exceptional bonding need comes up, they have nothing extra going for them.  The gate keeper doesn’t know the contractor from Adam, and there will be no special consideration.  How do you prevent this?

Manage the Bond Manager

The first step toward a good rapport is to establish open communications.  The contractor’s file should make it obvious that full disclosure is provided and the surety is appreciated as a partner – not just a vendor.  Answer all the written questions completely and candidly.  It makes the reader confident that everything relevant (the good and the bad) is all being laid out for review.

During the initial evaluation, the underwriter should visit the contractor’s business.  It is a chance to kick the tires and see the company in action.  Hey, they’re not just a file, they’re real people!

A periodic underwriting meeting with the bonding company is appropriate.  At IBCS, we like to meet with the contractors when a draft of the year-end data is available.  This is a great opportunity to provide guidance before the final version of the financial statements is produced.

Summary

The point is that bonding is based on information and the underwriter’s confidence.  Building a rapport with the decision maker is as important as any piece of information. With the help of the agent, Manage the Bond Manager and maximize the bond account for everyone’s benefit.

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.

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