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Everything you ever wanted to know about surety bonds Everything you ever wanted to know about surety bonds

Everything you ever wanted to know about surety bonds - PowerPoint Presentation

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Everything you ever wanted to know about surety bonds - PPT Presentation

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 ID: 416846

bond surety amp bonds surety bond bonds amp performance project insurance contract group sureties nasbp contractor state party market

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Slide1

Everything you ever wanted to know about surety bonds

WCOE, USA Annual Congressional and Leadership ConferenceFebruary 4, 2012Mark McCallum, National Association of Surety Bond Producers (NASBP), CEOSusan Hecker, NASBP Board Director and Area Executive Vice President of Gallagher Construction Services Slide2

National Association of Surety Bond Producers (NASBP)

NASBP serves insurance agencies employing bond producersNASBP membership includes about 500 companiesNASBP producers engage in construction contract surety production throughout the US, Puerto Rico, Guam, and a number of other countriesSlide3

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 -- Obligor

Surety -- Secondary Obligor

Owner -- ObligeeSlide4

Surety Bonds - What are they?

And what do they do? (Cont’d)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

Insured

InsurerSlide5

Surety Bonds - What do they do?

Zero-Loss GoalSurety 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 stakeholdersSurety company analyzes the contractor’s specific obligation (including contract terms), financial status, work program, and experience, among other factorsPerformance bonds address one party’s responsibilities —they do not address the project goalsSlide6

Surety Bonds: Myth v. Reality

A performance bond on a construction contract does not guarantee completion of the projectA performance bond is not a default recovery mechanism for failure of the project to achieve a sustainability goalA performance bond surety is not the insurer of the projectSlide7

Surety Underwriting Concerns –

What Makes Sureties AnxiousContractual shifting of risks to party not in best position to control the riskPotential guarantee of a sustainable objective that is the collective responsibility of multiple parties, including those outside the bonded relationshipTying 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 complianceSlide8

Surety in the Early 1990s

Strong economyExcess capacity in surety market

Low premiums

Relaxed underwriting

Commercial surety expansionSlide9

Surety in the Early 2000s

Sagging economySignificant commercial losses

Heavy contract surety losses

Increased failure ratesSlide10

Contract Surety Premiums & Losses

Source: The Surety & Fidelity Association of America “Twelve-Year Experience Summaries (1999-2010) Surety Countrywide (Preliminary)”Slide11

Top 15 Writers of All U.S. SuretySlide12

Surety Market – Today’s Top 10 Sureties

Companies

Direct Premium

Written (Millions $)

1. Travelers Bond

867.8

2. Liberty Mutual Insurance Group

751.2

3. Zurich Insurance Group

512.3

4. CNA Insurance Group

406.5

5. Chubb & Son Inc. Group

256.9

6. Hartford Fire & Casualty Group

177.2

7. HCC Surety Group

176.1

8. International Fidelity Ins. Co.

143.3

9. ACE Ltd. Group

109.5

10. NAS Surety Group

104.8

*Includes contract and commercial surety

Source: The Surety & Fidelity Association of America (SFAA), “Top 100 Writers of Surety Bonds—United 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.Slide13

Present Market & Beyond

Increased risk for owners, contractors & sureties caused by current economyContinued disciplined underwriting, exposure management & project analysisStabilized capacity & restored profitabilitySlide14

Present Market & Beyond

Optimism about surety capacity & demandSurety available for contractors at all levelsMarginal contractors will have difficulty obtaining bondingMore competition, fewer projectsTightened operations for contractorsIncrease in contractor failuresSlide15
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No

Surprises!

RT

FCSlide21
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NASBPSlide24

Surety Industry Issues

Bond Threshold IncreasesBond WaiversPublic/Private PartnershipsAlternative Project DeliveryIndividual SuretyBond VerificationSlide25

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, suppliersSlide26

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 bondsSlide27

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 requirementSlide28

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” Slide29

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 contractsSlide30

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.Slide31

Other Threats - Integrity Challenges

Current economic environment ripe for fraud

Unauthorized bonds

Unlicensed surety companies

Unlicensed individuals acting as suretiesSlide32

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!Slide33

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 bondSlide34

Bond Verification – Corporate Sureties

State Insurance Departmentshttp://www.naic.org/state_web_map.htm US Department of Treasury, Circular 570http://www.fms.treas.gov/c570/c570_a-z.htmlPrivate rating organizations – e.g., A.M. Besthttp://www3.ambest.com/ratings/default.aspBond Obligee’s Guide – SFAAhttp://www.surety.org/resource/resmgr/pubs-public/bondobligeeguide2011.pdf Slide35

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 2011Slide36

Contact Information

Mark McCallumCEONASBPWashington, DCmmcallum@nasbp.org

Susan Hecker

Area Executive VP

Gallagher Construction Services

San Francisco, CA

Susan_hecker@ajg.comSlide37

For More Information

National Association of Surety Bond Producers1140 19th Street NWSuite 800Washington, DC 20036Phone: 202-686-3700Fax: 202-686-3656

www.nasbp.org