SB1289, enacted on April 28, 2008 and made effective October 10, 2008, created flood protection districts and a Board of Directors for each district to construct flood protection facilities. The new law states that performance and payment bonds are required for any construction, and clarifies the process for claims against the performance and payment bonds. The surety has 60 days to act upon a contractor found to be in default by the board or the board may re-let the contract. If the costs to complete the project surpass the finances available for payment, the defaulting contractor’s surety has 20 days after mailing of the notice to satisfy the board’s demand for payment of the difference. This demand cannot be more then the penal sum of the bond, and monies must be used to pay for the costs of completing the work. Delivery of writ may be served on the Surety’s principal office or it’s Attorney-In-Fact. If there is no office or Attorney-In-Fact, it may be service on the insurance commissioner.
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Arizona Flood Protection Facility Performance Bond
September 1, 2009 by Tracy KonopkaCategory: Contract Bonds, Performance Bonds, Surety NewsTags: arizona, az, bond requirements, flood protection, legislation, performance bond, surety bond | Comments (0)
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The Contract Bond Claim Process
February 14, 2009 by Michele HaddonAs a contractor, the notion of a claim arising can be a troublesome thought. However, if a claim does arise it is important to know how the process is managed. Here is a basic breakdown of how claims are handled for performance bonds and payment bonds.
Performance Bond Claims:
As you may already know, a performance bond is in place to protect the obligee against financial loss should the principal fail
to perform their obligations as outlined in the bonded contract. When a claim is filed, the process of investigating the validity of the claim can be timely and judicious. The surety must collect the necessary information from the obligee and principal in order to come to a decision that is fair to both parties. Cooperation and constant communication between the surety, obligee, and principal are fundamental to quickly resolving a claim. If they determine that the claim is valid, there are a variety of resolutions they may employ.
The most common resolution is called the “Tender Option�. Under this option, the surety and the obligee agree on a replacement contractor to complete the work. The replacement contractor’s price may exceed the remaining balance of the contract, in which case the surety would pay any overruns.
Another common resolution is called the “Takeover Option�. Here, the surety hires construction professionals to complete the job. They could either hire a construction manager to finish the job using the original subcontractors. Or, more commonly, the surety simply hires a completion contractor. Under the Takeover Option, the surety and obligee usually puts a Takeover Agreement in place, since the surety is taking over responsibility for seeing that the project is completed. Another option that is more reluctantly considered is for the surety to elect not to be directly involved in the completion work. The surety, of course, is still liable for excess cost beyond the remaining contract balance. However, the obligee would initially finance the completion and seek reimbursement later.
Other resolution options exist, though not as commonly applied. Sometimes the surety and obligee might agree on an upfront cash settlement. Other times they may decide to have the original contractor complete the work under additional monitoring.
Payment Bond Claims:
A payment bond guarantees payment for labor and material used for the bonded contract if the principal defaults. This bond would ensure that the suppliers and subcontractors will be paid. Once again, when a claim is filed, the surety must gather information from both parties in order to make a determination. They may request certain documentation including, but not limited to purchase orders, invoices, payment records, and delivery slips. They may also require the completion of certain forms and affidavits. If it is determined that the principal has in fact defaulted on payment, the surety would pay the claim and pursue the principal for reimbursement.
The claims process can vary from situation to situation. Sometimes the principal admits that they cannot meet their obligations and a claim can be processed and resolved quickly. However, most times the surety must investigate the claim. Be sure to stay in constant contact with the surety throughout the entire process and provide them any requested documentation promptly. With proper communication by all parties, along with reasonable expectations, a claim should be resolved in a fair and timely manner.
Category: Contract Bonds, General Bonding, Performance BondsTags: claims, payment bond, performance bond | Comments (2)
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Tips For Creating Surety Bond Requirements
January 26, 2009 by Michael WeisbrotOur agency has been getting contacted by numerous government officials as of recent; state, Federal, military, etc. All of them have questions about how to best handle bonding requirements for upcoming government contracts from the upcoming stimulus package. This is not new territory for us, as we have various government departments revise bond forms and create new requirements throughout the years.
We expect to hear from many more seeking advice in the coming months. The current stimulus package proposal calls for 180 billion for infrastructure. An investment larger than any other since the creation of the interstate! The flurry of requests for advice prompted me to compile this list of tips on what government workers need to think about when creating contracts. This post will be updated as more questions come in. Feel free to ask a question in the comment box below or by using our agency’s contact email form. Should you find this page useful, please be sure to create a link to it on your department’s website to ensure it is reviewed by those who need it.
Break Up Large Contracts
It may require a little more work to do, but breaking up large contracts into several smaller ones is a good idea. Doing so allows smaller contractors to get involved, that would otherwise not qualify due to bond line limitations. This means that there will be increased competition for each bid. The recession has hit the balance sheets of contractors throughout the country, often resulting in reduced bonding capacity. Don’t limit your projects to the largest of contractors by not breaking up contracts when possible.
Less Than 100% Requirements Are A Waste
At times, government policies do not meet real world situations. The intentions may be good, but failures to consult industry professionals result in useless or harmful policy. Requiring a bond less than 100% of the contract amount is a prime example (see: FAR 28.102-2). Bonding companies underwrite and charge based on contract amounts, not bond amounts. Therefore, requesting less than a 100% bond only lowers the maximum amount that can be filed for any possible claims. It does not allow for smaller contractors to participate as intended.Use AIA Standard Forms
A bad bond form can make a contract “unbondable”. Keep in mind, the bond form declares precisely what the bonding company is guaranteeing on behalf of the contractor. Therefore, if they don’t like the terms of it, they will not write it, even if the contractor qualifies for the bond amount. The AIA has standardized bond forms that should be used when possible. Doing so will protect the government from a defaulting contractor properly and ensure a smoother process for all involved.Do you have questions of suggestions of your own? Please feel free to comment below!
Category: Bid Bonds, Contract Bonds, General Bonding, Surety NewsTags: government, infrastructure, policy, regulations, stimulus package | Comments (2)
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The Contract Bond Claims Process
January 15, 2009 by Michele HaddonAs a contractor, the notion of a claim arising can be a troublesome thought. However, if a claim does arise it is important to know how the process is managed. Here is a basic breakdown of how claims are handled for performance bonds and payment bonds.
Performance Bond Claims:
As you may already know, a performance bond is in place to protect the obligee against financial loss should the principal fail to perform their obligations as outlined in the bonded contract. When a claim is filed, the process of investigating the validity of the claim can be timely and judicious. The surety must collect the necessary information from the obligee and principal in order to come to a decision that is fair to both parties.
Cooperation and constant communication between the surety, obligee, and principal are fundamental to quickly resolving a claim. If they determine that the claim is valid, there are a variety of resolutions they may employ.
The most common resolution is called the “Tender Option�. Under this option, the surety and the obligee agree on a replacement contractor to complete the work. The replacement contractor’s price may exceed the remaining balance of the contract, in which case the surety would pay any overruns.
Another common resolution is called the “Takeover Option�. Here, the surety hires construction professionals to complete the job. They could either hire a construction manager to finish the job using the original subcontractors. Or, more commonly, the surety simply hires a completion contractor. Under the Takeover Option, the surety and obligee usually puts a Takeover Agreement in place, since the surety is taking over responsibility for seeing that the project is completed.
Another option that is more reluctantly considered is for the surety to elect not to be directly involved in the completion work. The surety, of course, is still liable for excess cost beyond the remaining contract balance. However, the obligee would initially finance the completion and seek reimbursement later.
Other resolution options exist, though not as commonly applied. Sometimes the surety and obligee might agree on an upfront cash settlement. Other times they may decide to have the original contractor complete the work under additional monitoring.
Payment Bond Claims:
A payment bond guarantees payment for labor and material used for the bonded contract if the principal defaults. This bond would ensure that the suppliers and subcontractors will be paid. Once again, when a claim is filed, the surety must gather information from both parties in order to make a determination. They may request certain documentation including, but not limited to purchase orders, invoices, payment records, and delivery slips. They may also require the completion of certain forms and affidavits.If it is determined that the principal has in fact defaulted on payment, the surety would pay the claim and pursue the principal for reimbursement.
The claims process can vary from situation to situation. Sometimes the principal admits that they cannot meet their obligations and a claim can be processed and resolved quickly. However, most times the surety must investigate the claim. Be sure to stay in constant contact with the surety throughout the entire process and provide them any requested documentation promptly. With proper communication by all parties, along with reasonable expectations, a claim should be resolved in a fair and timely manner.
Category: Contract Bonds, General Bonding, Performance BondsTags: claims, payment bonds, Performance Bonds | Comments (0)
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How is the rate for a Mortgage Broker Bond determined?
October 1, 2008 by Rick BredowIn 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.
Category: Commercial Bonds, Mortgage Banker Bonds, Mortgage Broker Bonds, OtherTags: bonds, license bond, mortgage banker, mortgage broker, mortgage crisis, mortgage market, rate, rates, surety bond, surety companies, underwrite | Comments (0)
