Everything you ever wanted to know about surety bonds WCOE, USA Annual Congressional and Leadership...
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Everything you ever wanted to know about surety bonds WCOE, USA Annual Congressional and Leadership Conference February 4, 2012 Mark McCallum, National
Everything you ever wanted to know about surety bonds WCOE, USA
Annual Congressional and Leadership Conference February 4, 2012
Mark McCallum, National Association of Surety Bond Producers
(NASBP), CEO Susan Hecker, NASBP Board Director and Area Executive
Vice President of Gallagher Construction Services
Slide 2
National Association of Surety Bond Producers (NASBP) NASBP
serves insurance agencies employing bond producers NASBP membership
includes about 500 companies NASBP producers engage in construction
contract surety production throughout the US, Puerto Rico, Guam,
and a number of other countries
Slide 3
Surety Bonds - What are they? And what do they do? A
performance bond is a three-party contract that guarantees to the
Owner that the Contractor will perform in accordance with the
contract documents, including the plans and specifications
Contractor -- ObligorSurety -- Secondary Obligor Owner --
Obligee
Slide 4
Surety Bonds - What are they? And what do they do? (Contd)
Admitted Insurance Companies are the main issuers of surety bonds,
but bonds and traditional insurance policies are not the same
Traditional two-party insurance presumes the possibility of a loss,
insuring against unknown or fortuitous events: A performance bond
is a three-party instrument - presumes no loss because the bond is
provided to those entities determined by the surety to be capable
and qualified to perform the contract obligation Performance bonds
- prequalification of the contractor and financial protection of
the owner InsuredInsurer
Slide 5
Surety Bonds - What do they do? Zero-Loss Goal Surety companies
expect zero loss rigorous underwriting and general indemnity
agreement from the contractor -- corporate and individual indemnity
Performance bonds are underwritten for a specific entity, not for
the project or for all the project stakeholders Surety company
analyzes the contractors specific obligation (including contract
terms), financial status, work program, and experience, among other
factors Performance bonds address one partys responsibilities they
do not address the project goals
Slide 6
Surety Bonds: Myth v. Reality A performance bond on a
construction contract does not guarantee completion of the project
A performance bond is not a default recovery mechanism for failure
of the project to achieve a sustainability goal A performance bond
surety is not the insurer of the project
Slide 7
Surety Underwriting Concerns What Makes Sureties Anxious
Contractual shifting of risks to party not in best position to
control the risk Potential guarantee of a sustainable objective
that is the collective responsibility of multiple parties,
including those outside the bonded relationship Tying contractor
payments to achievement of third-party certification Consequential
damages (failure to achieve third-party certification, energy
savings) Lengthened warranty period Poor operations/maintenance
causing lack of compliance
Slide 8
Surety in the Early 1990s Strong economy Excess capacity in
surety market Low premiums Relaxed underwriting Commercial surety
expansion
Slide 9
Surety in the Early 2000s Sagging economy Significant
commercial losses Heavy contract surety losses Increased failure
rates
Slide 10
Contract Surety Premiums & Losses Source: The Surety &
Fidelity Association of America Twelve-Year Experience Summaries
(1999-2010) Surety Countrywide (Preliminary)
Slide 11
Top 15 Writers of All U.S. Surety
Slide 12
Surety Market Todays Top 10 Sureties CompaniesDirect Premium
Written (Millions $) 1. Travelers Bond867.8 2. Liberty Mutual
Insurance Group751.2 3. Zurich Insurance Group512.3 4. CNA
Insurance Group406.5 5. Chubb & Son Inc. Group256.9 6. Hartford
Fire & Casualty Group177.2 7. HCC Surety Group176.1 8.
International Fidelity Ins. Co.143.3 9. ACE Ltd. Group109.5 10. NAS
Surety Group104.8 *Includes contract and commercial surety Source:
The Surety & Fidelity Association of America (SFAA), Top 100
Writers of Surety BondsUnited States & Territories, Canada
& Aggregate Other Alien, 2010 (Preliminary). Additional
information and reports are available for purchase from the SFAA
website at www.surety.org. See Statistical Services, then List of
Statistical Repts.
Slide 13
Present Market & Beyond Increased risk for owners,
contractors & sureties caused by current economy Continued
disciplined underwriting, exposure management & project
analysis Stabilized capacity & restored profitability
Slide 14
Present Market & Beyond Optimism about surety capacity
& demand Surety available for contractors at all levels
Marginal contractors will have difficulty obtaining bonding More
competition, fewer projects Tightened operations for contractors
Increase in contractor failures
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No Surprise s! RTFCRTFC
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NASB P
Slide 24
Surety Industry Issues Bond Threshold Increases Bond Waivers
Public/Private Partnerships Alternative Project Delivery Individual
Surety Bond Verification
Slide 25
Bond Threshold Increases Introduced often as an alleged aid to
small and minority business or a cost- savings measure State bond
thresholds vary in amount; most are equal to or less than $100,000
Most bill sponsors do not understand how increasing the bond
threshold impacts downstream parties subcontractors, suppliers
Slide 26
Bond Waivers Bond waiver legislation typically arises in two
contexts: Belief that bonding is an obstacle to small or minority
contractor participation Belief that bonding capacity does not
exist for larger projects Bond waiver legislation may: Vest
procuring officials with discretion to require performance and
payment bonds, or Exempt small or minority contractors from having
to furnish payment and performance bonds
Slide 27
Public/Private Partnerships Legislature introduces measure to
authorize private developer to construct project Sometimes payment
bond requirement is omitted or is made discretionary in authorizing
legislation Need to ensure that authorizing legislation references
state Little Miller Act or contains its own payment bond
requirement
Slide 28
Alternative Project Delivery States and localities wish to
expand project delivery options, moving away from design-bid-build
to design- build and CM at risk methods Authorizing legislation is
not clear on bonding requirements i.e., no clear reference or link
to Little Miller Act
Slide 29
Individual Surety Misperception that corporate sureties will
not write small and minority contractors Legislature seeks
alternative market, introducing measure that permits an unlicensed
natural person to write surety bonds on public or private
construction contracts
Slide 30
Individual Surety As unregulated surety, certain state
protections do not apply, such as market conduct investigations,
recovery funds etc. Case example MD HB 1071/SB 782 (2011)
Presumably as an aid to minority businesses, a bill is introduced
to exempt individual sureties from obtaining a certificate of
authority from insurance commissioner to write on private
contracts. Bill never leaves committee.
Slide 31
Other Threats - Integrity Challenges Current economic
environment ripe for fraud Unauthorized bonds Unlicensed surety
companies Unlicensed individuals acting as sureties
Slide 32
Other Threats - Integrity Challenges Subcontractors and
suppliers should not rely on contracting officials to exercise
sufficient due diligence If an insurer is not subject to
governmental oversight i.e., under the control of the state
insurance commissioner - watch out!
Slide 33
Bond Verification Caution and due diligence are needed in this
economic climate Obtain a copy of the bond On federal construction
projects, see FAR 28.106- 6(b), (c) & (d) Verify both the
surety and the bond
Slide 34
Bond Verification Corporate Sureties State Insurance
Departments http://www.naic.org/state_web_map.htm US Department of
Treasury, Circular 570 http://www.fms.treas.gov/c570/c570_a-z.html
Private rating organizations e.g., A.M. Best
http://www3.ambest.com/ratings/default.asp Bond Obligees Guide SFAA
http://www.surety.org/resource/resmgr/pubs-
public/bondobligeeguide2011.pdf
Slide 35
Bill would change how the federal government treats the assets
of individual sureties ensuring that such assets are real and in
the care and custody of the federal government Federal HR 3534
Security in Bonding Act of 2011
Slide 36
Contact Information Mark McCallum CEO NASBP Washington, DC
[email protected] Susan Hecker Area Executive VP Gallagher
Construction Services San Francisco, CA [email protected]
Slide 37
For More Information National Association of Surety Bond
Producers 1140 19 th Street NW Suite 800 Washington, DC 20036
Phone: 202-686-3700 Fax: 202-686-3656 www.nasbp.org