1. The Contract Bond Claims Process

    January 15, 2009 by Michele Haddon

    As 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.

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  2. Understanding Conservative Surety Bond Underwriting

    January 6, 2009 by Matt Gerdes

    For many years the surety industry has experienced considerable profitability due to the backing of a strong economy and a theoretical zero percent loss ratio business plan. This model for operations worked very well for many years, but also set the stage for a few years that hurt the surety industry on a whole, leading to much stricter underwriting guidelines and pricing.

    Up until around 1989 the surety industry had experienced a fairly consistent low loss ratio, with moderate times of increasing and decreasing loss amounts, combined with considerable premiums being earned, newer players entered the market and began competing with previously existing players. This resulted in a much more lax standard on background checks for the principals applying for the bonds as well as driving costs down. It is widely noted that many bonds began to be written with little regard to risk consideration due to this more aggressive market with underwriters competing with each other. Around 2000 the economy experienced a faltering that resulted in principals getting into financial difficulties, requiring support of the surety bonds and ultimately the bond companies. The number of claims that were experienced between 2000 and 2002 were staggeringly high, resulting in a huge direct loss ratio that contradicted to original model of zero loss. Many carriers were forced to withdraw themselves from the market as others became insolvent.

    While the terrorist attacks on September 11, 2001 did not directly affect surety companies in the same sense as careless underwriting did, there was an adverse effect that was experienced. The insurance companies that paid out money for property and casualty losses were in many cases the sureties’ parent companies as well as their affiliates. This caused the insurance companies to tighten up on requirements from the primary sureties that they owned, which in turn caused bond underwriters to make more disciplined decisions while trying to place their bonds. Around this same time period Enron filed for bankruptcy, which in turn had a negative impact on economy. Once again this created a difficult time for principals that were trying to maintain their bonds, relying on help once again from the surety bonds causing more claims.

    All these events have led up to this current state of conservative guidelines for underwriters to consider while they issue the bonds, although this does have a positive consequence for all parties involved in the bonding relationship. The surety companies can avoid hazardous claims and work back closer to a zero loss ratio, stabilizing the bond market which will ease guidelines and pricing in the near future. Principals also benefit from this; companies that would have a difficult time meeting their requirements won’t get into any obligations that will hurt them financially in the long run during this unstable economy.

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  3. California Wholesaler or Nonresident Wholesaler Surety Bond

    December 17, 2008 by Steve Varga

    A wholesaler license is compulsory for any company or business that brokers, distributes or transacts the retailing or return of dangerous drugs or dangerous devices into or inside California to other wholesalers, pharmacies or practitioners.

    A licensed manufacturer that only dispenses drugs of their own manufacture, all of which have an accepted new drug manufacturing application on file with the FDA (Food and Drug Administration) are free from having to acquire this surety bond obligation. If you need to document this exemption all you need to do is provide the California State Board of Pharmacy a list of manufactured drugs which would include the respective NDC Number (National Drug Code, which is a universal product identifier for human drugs) along with a statement certifying that the business only distributes its own products.

    Any contender for initial licensure or license renewal as a wholesaler or nonresident wholesaler (previously known as an out-of-state distributor or dispenser) must present a surety bond of $100,000 made payable to the Pharmacy Board Contingency Fund. All new businesses and/or companies must do one of the following three (3 )options in order to get their license: 1) Obtain the required $100,000 surety bond, 2) obtain an ILOC (Irrevocable Standby Letter of Credit) or 3) provide a Cash Deposit in Lieu of Bond. The ILOC is a document issued by your bank that essentially acts as an irrevocable guarantee of payment to an obligee. This means that if you do not perform your obligations, your bank pays. ILOC’s cannot be cancelled or amended without all the parties in agreement. A Cash Deposit In Lieu of Bond is essentially the principle (or Assignor as they are know in this instance) providing the required cash dollar amount to the California State Board of Pharmacy that is equivalent to that of the surety bond requirement. It is understood that the Board is not authorized to give back the cash deposit until sixty days beyond the date upon which an owner no longer licensed by the Board, or ceases to do business as a wholesaler.

    If your company and/or business own several subsidiary companies that are reflected as the owners of wholesalers, then you are only required to have one bond. Simply provide the California State Board of Pharmacy a copy of the organization chart documenting the ultimate owner of the subsidiary companies verifying the familiar ownership.

    In the future should the company or business be able to demonstrate their annual gross receipts of $10,000,000 or less, a new and lesser bond amount of $25,000 may be secured in lieu of the initial $100,000 bond amount.

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  4. New York Health Club Bonds

    December 7, 2008 by Steve Varga

    There are numerous types of Commercial Bonds such as License & Permit, Health Club, Insurance Broker, Title Agency and Sales Tax, just to name a few. For example, Health Club Bond requirements according to the law for the state of New York requires that most health clubs post a bond to protect their members against breaches of contract. Expressly, the law dictates bonds for the following tiers: $50,000 for health clubs that provide contracts for a period of no more than 12 months; $75,000 for health clubs that provide contracts of 12 – 24 months; and $150,000 for health clubs that provide contracts of 24 – 36 months.

    Health clubs with more than one location are required to post supplementary amounts up to $200,000. There are several examples of when Health clubs are exempt from this requirement such as not advertising memberships valued at more than $150, Health clubs that require longer term contracts or if the monthly dues do not surpass $150. In addition to those, if the fully paid contracts are not discounted by more than ten percent, memberships no longer than a 12 month term, and if the contract does not include an automatic renewal clause.

    New York State Health Club Services Law covers contracts for educating or teaching in bodybuilding, exercising, weight decline and body development or other types of physical preparation and contracts for sports & health spas, tennis and/or racquetball clubs. In particular, this law offers the following protections: Limiting health club contracts to $3,600 per year (not including tennis and racquet ball amenities) and to terms no longer than 36 months; providing patrons with the three-day right to terminate the contract after signing; the Law also offers patrons the right to cancel a contract at any time for any of the following reasons:

    • The health club stops offering any services acknowledged in the contract
    • The patron moves 25 miles from any health club operated by the seller
    • Upon a physician’s order

    The patron cannot use the services as stated in the contract because of considerable physical disability for a period in excess of six months; Requires health clubs to provide refunds within 15 days of cancellation; and Provides wronged patrons the right to bring a claim in small claims court and receive a sum of not more than three times the tangible damages plus reasonable legal fees.

    Before joining a Health Club you may want to verify the club’s compliance with your state’s requirements.

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  5. Nationwide Mortgage Licensing System (NMLS)

    December 3, 2008 by Rick Bredow

    The Nationwide Mortgage Licensing System provides new Mortgage Brokers a system that simplifies and combines the application process for applying for a Mortgage Broker License within multiple states.

    Since its inception in 2003, the Nationwide Mortgage Licensing System (NMLS) has obtained commitments of more than 40 states, which will utilize the system by 2010. The NMLS has created a uniform licensing system for applicants interested in the residential mortgage business. By providing this system, improvements exist for the supervision of the industry, modernization of the licensing procedure for both mortgage companies and professionals alike, and augmentation of buyer protection. The goal to have all US States participate in the system provides protection to the licensees, as well as the consumers.

    The Nationwide Mortgage Licensing System (NMLS) is a secure “web based� system, which allows for quick and accurate applications, updates, or renewals of licensee requirements. It utilizes standard forms for all functions, which maintains uniformity among the states using the system. The main benefits for the State to utilize the NMLS process for mortgage broker licensing not only provides uniform license applications, but allows for electronic work cues, online communications, system notifications, and amendments. It will allow the applicants to view, update, and make any changes to their license at almost any time. It will allow the applicant to check the status of their application and license, make online payments for renewal or amendments, provide real-time online support, run reports, and view an applicant’s historical data.

    The NMLS system allows for real time access through a secure web site 7 days a week and 362 days a year. The system went live on January 2, 2008 with seven (7) states participating initially including: Idaho, Iowa, Kentucky, Massachusetts, Nebraska, New York, and Rhode Island. In July of 2008, seven (7) additional states joined the NMLS system including: Connecticut, Louisiana, Mississippi, North Carolina, New Hampshire, Vermont, and Washington.

    In addition to state license and investigation fees, the Nationwide Mortgage Licensing System (NMLS) consists of three types of system charges. The first charge is the “Initial Set Up Fee� that ranges between $20.00 to $100.00, based on the application types, as follows:

    Company Initial Fee (MU1) – $100.00
    Branch Office Initial Fee (MU3) – $20.00
    Loan Officer Initial Fee (MU4) – $30.00

    The second charge is the “Annual Processing Fee� which will be charged upon license renewal of renewal of the license, as follows:

    Company Annual Fee (MU1) – $100.00
    Branch Office Annual Fee (MU3) – $20.00
    Loan Officer Annual Fee (MU4) – $30.00

    The third charge is the Loan Officer Sponsorship Transfer Fee, which only applies to the Loan Officer. This charge is $30.00 for each Loan Officer request. This fee is charged upon NMLS establishing an association with a Loan Officer and sponsorship requests for the prospective licenses.

    The long term goal of the Nationwide Mortgage Licensing System (NMLS) will be to establish all US States within the system and require the adoption by Mortgage Industry applicants to further streamline usage of the national system.

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