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
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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 failuresSlide15Slide16Slide17Slide18Slide19Slide20
No
Surprises!
RT
FCSlide21Slide22Slide23
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