cynanotary surety bond presentation

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Better known “Bond” types:

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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