Better known “Bond” types: ©CynANotary, LLC 2016 All Rights Reserved
©CynANotary, LLC 2016 All Rights Reserved
Better known “Bond” types:
©CynANotary, LLC 2016 All Rights Reserved
Last known “Bond” Daniel Craig
• Sometimes money — even a massive pile of it — just isn’t enough to make a job worth it. Actor Daniel Craig, who has played James Bond in four films
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Surety Bonding
The “Simple” Definition:
• A promise by which one person (the SURETY) becomes
accountable to another person (the OBLIGEE) for the debt
obligation or conduct of a third person (the PRINCIPAL).
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Surety Bonding The “Complex” Definition:
• A contractual Agreement whereby a SURETY joins with the PRINCIPAL in order to guarantee to the OBLIGEE
the fulfillment of the principal’s contractual obligation.
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Surety Bonding Parties to the Agreement: “Simple” Definition
• The PRINCIPAL is the party that undertakes the obligation.
• The OBLIGEE is the party who receives the benefit of the bond.
• The SURETY guarantees the obligation will be performed.
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Surety Bonding Parties to the Agreement: “Complex” Definition
• The PRINCIPAL is the party primarily responsible for the fulfillment of the obligation set forth in the bond. The principal must perform some act under certain conditions or respond in damages.
• The OBLIGEE is the beneficiary under the terms of the bond. Either the obligation is fulfilled or the amount of the bond responds for any shortfall.
• The SURETY joins with the PRINCIPAL in order to guarantee to the OBLIGEE the fulfillment of the principal’s obligation.
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The 1st Rule of Surety Bonding:
• “Surety Bonding is
NOT
Insurance.”
The Rule:
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Surety BondingSimilarities to Insurance:
• Both are subject to insurance law and regulatory requirements.
• The OBLIGEE’s interest is to protect against loss.
• Surety-ship is based on the insurance concept whereby the many pay for the losses of the few.
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Surety BondingDifferences from Insurance:
• There is no transfer of risk between the PRINCIPAL and the SURETY. The PRINCIPAL retains all responsibilities in respect of the OBLIGEE.
• The premium charged is a “SERVICE FEE. The assumption is that there will be no loss.
• Surety-ship underwriting principles more closely resemble banking than insurance. The surety assesses the principal’s (financial) Capacity, Capabilities, and Character to perform its obligation under the agreement
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Surety Bond Underwriting Fundamentals
• Capital – Financial Condition (strength / wherewithal)
• Capacity – Skill and Ability to perform
• Character – Good Character
The “3 C’s”:
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Types of Surety Bonds
• Contract Surety Bonds
• Non-Contract (or Commercial) Surety Bonds
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Types of Contract Surety Bonds
• Bid Bonds
• Performance Bonds
• Advance Payment Bonds
• Payment Bonds (or Labor & Material Bonds)
• Maintenance Bonds
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Types of Non-Contract (or Commercial) Surety Bonds
• Taxes Bonds including Customs
• Judicial Bonds
• Supply Bonds
• Other Miscellaneous Bonds
Surety BondsManaging the
Risk of
Contractor Default
What Is Surety Bonding?
Surety
Obligee(owner)
Principal
Types of Contract Surety Bonds
• Bid Bond• Performance Bond• Payment Bond
Types of Contract Surety Bonds
• Bid Bond• Performance
Bond• Payment Bond
Types of Contract Surety Bonds
• Bid Bond• Performance Bond• Payment Bond
How Surety Bonds WorkProtect owner against
contractor failure
Protect subcontractors, laborers, & suppliers against nonpayment
Role of the Producer
• Prepare case for surety underwriting
• Preparation for prequalification
• Relationship between contractor & surety company
• Keep & increase surety capacity
ProducerCynanotary
Getting Projects
Completed
and
Subcontractors Paid
Contractor Failure Rates
Source: Several Magzines
Building, heavy/highway, and specialty trade contractorsIn Business Survivors Failure Rate
853,372 (2007) 610,357 (2008) 28.5%
850,029 (2009) 649,602 (2010) 23.6%
1,155,245 (2011) 919,848(2012) 20.4%
897,602 (2012) 702,618 (2013) 21.7%
918,483 (2014) 696,441 (2015) 24.2%
Surety’s Areas of Expertise
Prequalification Claims Handling
Capacity FinancialStrength
CompanyHistory
Organization ContinuationPlans
References
Projects in progress
Prequalification
Surety Company’s Checklist
Good character Experience matching contract
requirements Financial strength Good credit history Established banking relationship Line of credit Necessary equipment Pay child support
Benefits of Surety Bonds
FinancialSecurity
ConstructionAssurance
Benefits of Performance Bonds
• Increase likelihood of timely project completion
• Assure compliance with contract
• Surety may resolve contractor problems
• Fulfills contractual obligations if contractor defaults
PerformanceBond
Benefits of Payment Bonds
• Protects certain subcontractors, suppliers, & laborers from non-payment
• Eliminates mechanics’ liens• Competitive pricing• No cost when purchased
with performance bond
PaymentBond
Cost of Surety BondsProject Amount
Approx. Bond Premium0.5% - 2%
$1 Million $5,000 – $20,000
$5 Million $25,000 – $100,000
$10 Million $50,000 – $ 200,000
$20 Million $100,000 – $400,000* Premiums may vary depending on size, type &
contractors bonding capacity.
Responding to claims
is the fulfillment
of the surety’s promise
made in its bond.
Reasons For Contractor Failure
AccountingProblems Change in
Leadership
Scope of Business
Material/EquipmentShortages
UnrealisticGrowth
Failure
LaborDifficulties
Lack ofExperience
Protection
• Provide trained personnel• Provide payment to subs &
suppliers• Offer financial assistance to
contractor
Surety
ClaimsInvestigation
Review Options
Resolution
Completion
Declaration of Default &Termination
of Contractor
Steps in the Claims Process
ClaimsInvestigation
Review Options
Resolution
Completion
Declaration of Default &
Termination ofContractor
Steps in the Claims Process
ClaimsInvestigation
Review Options
Resolution
Completion
Declaration of Default &
Termination ofContractor
Steps in the Claims Process
Actions of a Surety
• Re-bid job for completion• Arrange for replacement
contractor• Retain original contractor• Pay the penal sum of the bond
Surety
Case in Point
Surety
Involvemen
t Saves
Projects
The Facts
• Old line family-owned contracting company
• Company sold to 5 key employees
• 16 projects in progress• $20 million school with cost
overruns & schedule delays
The Problems
• Default on 3 senior citizen homes & 1 low income community rehab center
• Delays would hinder substantial HUD financing and tax credits
What Happened
• Contractor over-extended
• Re-work slowed schedule
• Key subs not bonded
The Surety’s Solution• Hired a replacement contractor with experience
on City projects• Assembled a team to handle City, federal, &
state requirements• Retained and paid subcontractors, laborers &
suppliers• Provided financial help to the contractor
The Outcome• City projects completed on time• Paperwork not delayed• Work completed on time• No loss of tax credits or financing• Occupied in time to satisfy City deadlines• Construction company stayed in business
The OutcomeSurety protected Cities
and taxpayers from $1,865,753 loss
Premium paid for bonds:$129,290
The Goal Is Project Completion
For More Information
Joyce Loke Cynanotary Insurance &
Bonding Agency954-977-9905
www.cynanotary.com