Everything you ever wanted to know about surety bonds

Report
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
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
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
Owner -- Obligee
Contractor -- Obligor
Surety -- Secondary Obligor
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:
Insured
•
•
Insurer
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
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 contractor’s specific
obligation (including contract terms), financial status,
work program, and experience, among other factors
Performance bonds address one party’s responsibilities
—they do not address the project goals
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
Surety Underwriting Concerns –
What Makes Sureties Anxious





Consequential damages
(failure to achieve third-party
certification, energy savings)
Lengthened warranty period
Poor operations/maintenance
causing lack of compliance

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
Surety in the Early 1990s





Strong economy
Excess capacity in surety market
Low premiums
Relaxed underwriting
Commercial surety expansion
Surety in the Early 2000s




Sagging economy
Significant commercial losses
Heavy contract surety losses
Increased failure rates
Contract Surety Premiums &
Losses
3.5
Direct Premiums Written
Direct Losses Incurred
3
Billions of Dollars
2.5
2
1.5
1
0.5
0
1994
1996
1998
2000
2002
2004
2006
2008
2010
Source: The Surety & Fidelity Association of America “Twelve-Year Experience
Summaries (1999-2010) Surety Countrywide (Preliminary)”
Top 15 Writers of All U.S. Surety
Surety & Fidelity Association of America
Top 15 Surety Writers
1994 vs 2010
1994
2010
($millions)
Surety
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Premium
($millions)
Surety
Reliance
Travelers
147.1
1 Travelers Bond
USF&G
St. Paul
Travelers
144.1
2 Liberty Mutual Insurance Group
F&D
Zurich
142.5
3 Zurich Insurance Group
St Paul Group
Travelers
140.9
4 CNA Insurance Group
AIG
AIU Holdings
Chartis
111.5
5 Chubb & Son Inc. Group
Aetna
Travelers
106.6
6 Hartford Fire & Casualty Group
Continental
CNA
100.7
7 HCC Surety Group
Fireman's Fund
Out of surety
97.3
8 International Fidelity Insurance Co.
CNA Insurance Companies
92.8
9 ACE Ltd. Group
Safeco
Liberty Mutual
88.9
10 NAS Surety Group
Chubb
77.7
11 Great American Insurance Companies
Hartford
74.0
12 The Hanover Insurance Group
Amwest
Gone
70.2
13 Lexon/BondSafeguard Insurance Cos.
Capsure
CNA
55.3
14 RLI Insurance Group
CIGNA Group
ACE
49.7
15 Arch Capital Group
Companies that are gone in RED
Companies that merged or were sold are in BLUE
Companies that merger or were sold a second time are in GREEN
Premium
857.3
743.0
498.9
398.6
251.6
177.1
176.1
142.7
106.7
104.2
98.1
92.9
80.4
77.5
63.3
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.
Present Market & Beyond



Increased risk for
owners, contractors &
sureties caused by
current economy
Continued disciplined
underwriting, exposure
management & project
analysis
Stabilized capacity &
restored profitability
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
R
T
F
C
No
Surprise
s!
NASB
P
Surety Industry Issues






Bond Threshold Increases
Bond Waivers
Public/Private
Partnerships
Alternative Project
Delivery
Individual Surety
Bond Verification
Bond Threshold Increases



Introduced often as an
alleged “aid” to small and
minority business or a costsavings 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
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
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
Alternative Project Delivery


States and localities wish to
expand project delivery
options, moving away from
design-bid-build to designbuild and CM at risk
methods
Authorizing legislation is not
clear on bonding
requirements – i.e., no clear
reference or link to “Little
Miller Act”
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
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.
Other Threats - Integrity
Challenges

Current economic
environment ripe for
fraud



Unauthorized bonds
Unlicensed surety
companies
Unlicensed individuals
acting as sureties
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!
Bond Verification


Caution and due diligence
are needed in this
economic climate
Obtain a copy of the bond


On federal construction
projects, see FAR 28.1066(b), (c) & (d)
Verify both the surety and
the bond
Bond Verification – Corporate
Sureties

State Insurance Departments


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://www.naic.org/state_web_map.htm
http://www3.ambest.com/ratings/default.asp
Bond Obligee’s Guide – SFAA

http://www.surety.org/resource/resmgr/pubspublic/bondobligeeguide2011.pdf
Federal HR 3534 – Security in
Bonding Act of 2011

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
Contact Information
Mark McCallum
CEO
NASBP
Washington, DC
[email protected]
Susan Hecker
Area Executive VP
Gallagher Construction
Services
San Francisco, CA
[email protected]
For More Information
National Association of Surety Bond Producers
1140 19th Street NW
Suite 800
Washington, DC 20036
Phone: 202-686-3700
Fax: 202-686-3656
www.nasbp.org

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