Electronic Surety Bonding, The Efficient Future

Currently forty six of the fifty states have implemented electronic surety bonding after the enactment of the Uniform Electronic Transactions Act on the state level as well as Global and National Commerce Act at the federal level. Both Acts have given the execution of surety bonds, in the electronic format, and electronic signatures validity by making them legally binding by all parties that are involved in the transaction. Due to technology advances, the delivery of contract bonding is able to be sent between all respectful parties in a safe and secure manner and with the implementation of a Private Key Infrastructure, digital signatures are genuine and cannot be denied due to authenticity.

The process of electronic bonding is based and handled in the same manner that more traditional bonding is being executed today. The bond must still be signed by the principal being required to have the bond and by the surety company that has made the decision to issue the bond, to the obligee who had originally required the necessity of a surety bond. The only major difference is the transferring of the bond in between all of these parties over the Internet or some other web-based formatted environment with the electronic signatures.

Perhaps the strongest supporters of a new way to handle the bonding process comes from The Surety & Fidelity Association of America (SFAA) as well as The National Association of Surety Bond Producers (NASBP). Due to the fact that the processing costs are lowered while efficiency of execution and electronic filing increases, every party involved reaps the benefit. The obligees, contractors and principals can now receive the issued bond in a more-timely manner, while the surety bond producers and the surety companies can execute the bonds in a similar fashion all the while maintaining the necessary security that is required for the existence of the surety bond.

The best example of how this new form of bonding can work is seen by the State Department of Transportation (DOTs) in regards to bidding on DOT construction jobs. An electronic bidding system has been instituted to completely automate the process of bidding on jobs, now all required information is submitted electronically from checking a contractor’s license number, down to line item pricing for the construction project. As of now there are thirty one DOTs that have instituted this new electronic bidding process, with the Pennsylvania Department of Transportation going so far as to also include an electronic step for the final bonds.

The Miller Act & What It Means

Miller ActThe Miller Act (1935) is a federal law that requires contractors performing public work projects (addition or general repairing of any governmental building or public works facilities) to produce a performance bond as well as a labor and material payment bond in any contracts that exceed $100,000. Since government construction projects are unable to protect themselves from non-payment with a traditional lien, the Miller Act was created to protect the subcontractors as well as the suppliers when dealing with projects owned by the federal government. The corporate surety company that is willing to issue these two bonds must be registered as a qualified surety by the United States Department of Treasury, which is issued on a yearly cycle.

The requirement of the payment bond is to protect public money by guaranteeing payment from the prime contractor. It takes the risk off of the shoulders of the subcontractors and placing it directly onto the surety company that has issued the bond. Subcontractors as well as the suppliers of material for the project who have a direct binding contract with the prime contractor are protected by the Miller Act. Other subcontractors as well as material suppliers who have contracts with the subcontractors contracted with the prime contractor are also protected under the Miller Act. Any other parties who find themselves outside of these two tiers of contracts are considered too distant to make a claim against the payment bond.

Performance bonds also protect the government, guaranteeing the completion of the project that has been awarded. Generally, the amount that is required to satisfactorily protect the government by the contracting officer is one hundred percent of the total contract price.

What Are Surety Bonds & How Did They Originate

A surety bond is a legal contract that consists at a minimum of at least three parties. The principle is considered to be the key party who will be performing the contractual obligation. The obligee is the receiving party of the obligation and the surety is the party or entity that ensures the principles obligations are performed and carried out according to the contract.

For the duration of this agreement or contract, the surety concedes that they will be held responsible for the obligations the principle agreed to if the principle does not adhere to their promises to the obligee.

Surety bonds were originally used hundreds of years ago as an instrument to encourage trade over long distances. 1880 was the year the first corporate surety firm was established in American. The company called itself United States Fidelity and Casualty Company of New York. Over the years the Surety & Fidelity Association of America estimates that the annual US surety bond premiums to be in excess of $3.5 billion dollars and growing strong.

There are many types of surety bonds and they fall into 3 categories which consist of Contract, Court and Commercial Bonds. Contract bonds are frequently used in the construction industry and are generally required by the general contractor (and frequently the sub contractor) to guarantee the contract of the building project, referred to as a performance bond. Ultimately owners and contractors alike may also obtain a payment bond as well to guarantee their subcontractors and suppliers are paid for work that is completed. With any federal construction projects in the United States, contractors must provide two bonds, a performance bond and a labor and material payment bond. The issuing surety company must be named as a qualifying surety on the Treasury List, which is updated every year by the U.S. Department of Treasury. This all came about by The Miller Act which stated before a contract exceeds $100,000 for the construction, modification or repair of any community building or work for the Federal Government, the person offering the services must furnish those two bonds.

Compliance Issues for Electrical Contractors Aiding in the Disaster Recovery Efforts in Texas

In the aftermath of Hurricane Ike, many out-of-state electrical contractors are traveling into Texas to assist in the disaster recovery efforts. In order to operate in accordance with the law, it is necessary to become familiar with the both the State’s laws and the local ordinances of the municipality that you plan on performing work in.

Electrical Contractors, who have an equivalent license in their own state, are able to quickly obtain an Emergency License issued by the Texas Department of Licensing and Regulation (TDLR). The specific application for this license is available on their website and must be submitted with a copy of your current license and the application fee. An Emergency License can be issued for the following classifications: Master Electrician, Master Sign Electrician, Journeyman Electrician, Journeyman Sign Electrician, Residential Wireman, and Maintenance Electrician. With this license, you must work under another contractor licensed in Texas. The Emergency License is valid for 90 days and will only allow you to perform within the designated disaster area and during the time of a declared disaster and its recovery period.

Another quick way to get licensed is to apply for a temporary apprenticeship license. This temporary license would be valid for 21 days hopefully giving you enough time to obtain your permanent license. Again, you must work under another contractor licensed in Texas.

Be sure to research specific municipality requirements as well. Many cities require contractors to be registered with the municipality. Along with your registration, they may require varying registration fees, additional insurance coverage, and a surety bond.

As an example, here are the licensing requirements for contractors to become registered in the City of Galveston:

  • Completed Contractor License Application
  • $200.00 Registration Fee
  • $300,000 minimum liability insurance listing City of Galveston as an additional insured
  • $5,000 Surety Bond for permitting/general contracting

You can find their Contractor License Application and other helpful information regarding their requirements on their website:
City of Galveston

The State of Texas has adopted the NFPA 70 Electrical Code as published in the NEC 2008 Edition. Check with the local code enforcement office in the city you will be performing work in to find out what electrical code requirements they’ve adopted. It is important to learn state and local standards for electrical work because they could differ from your home state.

It is inspiring to hear from so many contractors wishing to help out those who have faced devastation due to natural disasters such as Hurricane Ike. With great intentions in the front of your mind, it is easy to act in haste and overlook the proper steps essential to stay in compliance. Be sure to protect yourself and your company by doing the necessary research and paperwork. This will save you valuable time and money, so you can put more effort towards what really matters helping those in need.

Oregon Construction Contractors: Change in Licensing Structure means Change in Bond Requirement

The Oregon Construction Contractors Board has changed a requirement for new and renewing licensees in which they must choose an endorsement for their license rather than a licensing category. The endorsements are broken down into either Residential Endorsements or Commercial Endorsements.

The reason for this change is to make it easier for contractors because they would be able to include a range of disciplines under a single license. With over 45,000 licensed contractors in Oregon, this licensing structure also helps the Construction Contractors Board (CCB) to more effectively regulate licensees.

Because of this change, the CCB is also requiring licensees to submit their contractor license bonds on a new bond form and for the amount specified according to the endorsement they choose. For those with a Dual Endorsement, two separate bonds will be required – one for residential and another for commercial.

The change was made effective July 1, 2008 for all new licensees. For existing licensees, it will come up when your license renews. If you are unsure of the bond requirement for your license endorsement, refer to the CCB Licensing Endorsement Chart. You can also refer to the renewal notice packet the CCB sends you – they are providing detailed explanations about the endorsements and the new bond requirements. If you believe your license is up for renewal and have not received a renewal notice, you should contact the CCB immediately.

Once you receive your renewal notice from the CCB, be sure to contact your bond agency to have your bond issued on the new bond form. You will need to let them know which endorsement you have chosen – Residential or Commercial, and the bond amount now being required. If you have chosen a Dual Endorsement, let your agent know that you will need both the Residential Contractor Bond and Commercial Contractor Bond.
They should already be familiar with this new bond requirement and will be able to ease you through the transition from your old bond to the new one.

If there has not been a significant increase in the bond amount, most sureties will be able to issue the new bond without additional underwriting. In the case that additional underwriting is required, be prepared to provide updated information, especially if the bond amount has increased significantly. These updates could include personal financial statements and/or business financial statements (fiscal year-end and year-to-date). In either case, the process should be fairly easy – with the assistance of the CCB’s Customer Service Unit and your bond agency.

How is the rate for a Mortgage Broker Bond determined?

In the past two years, many things have changed in operations of the underwriting departments of Surety Companies nationwide. To start, the criterion had been minimal and the premiums were low prior to 2006. In addition, many Mortgage Brokers have filed Bankruptcy in the past two years leaving the Surety Companies on the hook to pay any outstanding claims. Hence, these have impacted a change in the underwriting process and higher premiums for bonds.

There are many factors that a Surety company will take into consideration to come up with a premium for a Mortgage Broker Bond. One of the important factors that the Surety Companies are now scrutinizing is personal credit of the owners of the company. Typically, any owner of a company applying for a bond and showing over 5% interest in ownership must be listed on the agreements for a bond. A company applying for a bond is only as strong as its weakest link. The basis of the premium will end up being based on the owner with the worst credit. This means if all owners of the company have great credit and one owner is having credit issues the basis for the premium will be the owner’s reports with the credit issues.

Another aspect that the Surety Companies are looking at is the liquid assets of each owner of the company. They want to make sure that in case there is a claim against a bond that the company or owner of the company can cover the claim up to the specified amount of the bond. Additionally, as the net worth of a mortgage companies goes down, it will become harder for them to qualify to obtain or renew their surety bonds they have in place. Also, litigation against mortgage brokers and lenders has made it more difficult to get approval for a surety bond. This is also the reason that most Surety Companies require a spousal indemnification (signature of responsibility) from the spouses of each owner. This will prevent a company owner from transferring all of his or her assets to their spouse and closing up shop. This demonstrates accountability on the part of the small business owner.

Unfortunately, one of the last criterions that a Surety Company is concerned with is the experience that a broker may have in the Mortgage Industry. While it is somewhat important to the Surety, the industry as a whole has shifted to operate as a higher risk industry. Start-up companies are being especially hard-hit by the new underwriting climate, since many of the surety bond companies refuse to underwrite surety bonds to new companies.