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Executive Insights From Leaders in Insurance and Surety Bonding

Top surety executives share insights on leveraging bonding when competing for private work, expanding the surety line of credit and avoiding fraudulent bonds.

How can contractors leverage surety bonding as an advantage when competing for private work?

Josh-Penwell-2015-Merchants-BondingJosh Penwell
Vice President, Contract Underwriting
Merchants Bonding Company

Surety bonding signifies that the contractor has been extensively prequalified. Not only will the owner be more comfortable regarding the contractor’s capabilities, but it also indicates the contractor is financially sound.
Bonding helps owners distinguish a stable contractor from one with the potential to fail. A contractor with surety bonding is considered to be more experienced. Bonded contractors demonstrate that a surety company has examined banking relationships, references on prior projects and credit history.

Using bonded contractors gives the private owner the ability to require performance and payment bonds to assure project completion and payment for all subcontractors and suppliers.

Contractors should sell these advantages to private owners and educate them on the value of working with bonded contractors. Requiring surety bonds guarantees that the owner will not be financially impacted if the contractor defaults. Surety is the best way to protect their investment.

What documentation should a contractor bring to an initial meeting for establishing a bond limit?

Gerald-Haley-2015-Surety-BondingGerald F. Haley
Senior Vice President
Zurich

Few meetings for contractors are more important than a meeting with a new surety to establish a surety line of credit.

Contractors should plan on establishing an ongoing, honest relationship with the surety and a professional contract surety agent. The experienced agent can bring significant knowledge of the construction business and surety marketplace, and access to and relationships with best-in-class surety underwriters.

A complete background of the contractor’s business is required, with details such as the ownership and legal identity, and a listing of completed projects. The contractor must make arrangements with a construction-oriented CPA firm to provide the surety with audited financial statements.

The surety will be interested in the type of work that will provide the contractor’s revenue base. While the financial statements are important, the business plan and work-in-progress statements provide the basis for surety support going forward.

Henry-Nozko-Jr-2015-ACSTARHenry W. Nozko, Jr.
President
ACSTAR Insurance Company

A relationship usually begins or ends at the conclusion of the first meeting. First impressions are lasting. For almost all size contractors, it would be best for the owner or president and chief financial officer or head bookkeeper to attend the meeting.

Don’t bring a 40-page aging report, a 30-page inventory report and color slides of every job ever done, or you will wind up putting the surety representatives to sleep. Bring a half-page history of the company and a one-page organizational chart showing the ownership structure, including the full legal name of all subsidiaries and affiliates. Also include a one-page list of your largest completed projects and a one-page list of your largest open projects. Append a half-page description of your banking relationship, including the credit terms. Your most recent year-end financial statement should be part of the presentation. If the surety company’s questionnaire was provided before the meeting, it should be completed and included in the presentation.

Being candid and open is the best way to develop a long and productive relationship.

What steps can contractors take to ensure they are not purchasing a fraudulent bond?

STEVEN SWARTZSteven Swartz
President/CEO
South Coast Surety
We have seen many headlines regarding fraudulent bonds. We are seeing contract bonds issued with an established surety company that are not authorized and surety bonds issued by an “individual surety” that may have no value.
It’s best to routinely validate surety bonds. As a bonding agent, we often verify the surety is a licensed, rated firm and that the bond was properly executed and reported. Your professional surety agent should be able to assist with this.This also can be done directly:

  • Verify the license and strength of the surety company using the A.M. Best website, ambest.com, to look up the surety by name.
  • Contact the surety company and ask it to verify that the bond number is authorized.

Do not accept bonds from an individual surety. These are neither licensed nor regulated and have a history of lack of performance in the instance of any claims.
It is also important for subcontractors to verify that the payment bonds filed by the prime contractor are valid.

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