Surety Bond News

Starting a new business can be a daunting task. There are so many things to consider prior to opening for business. One of the most important items any business owner needs to research is finding out what government licenses need to be obtained and what type of bond has to be filed with it. Obtaining the proper insurance coverage is equally important prior to start-up. In this article we will review what is means to be bonded, the benefits of doing so, what type of bonds your company needs, and what you need to know prior to purchasing a bond.

What Does it mean to be “bonded”?

The phrase “licensed and bonded” is one you might see on the side of a contractor’s truck, on a mortgage broker’s business card, or on an auto dealer’s billboard. Obviously, they are all using the phrase for a marketing advantage over their competitors to show they are safe to do business with. What does it mean for these companies to be bonded? It means that a bonding company (also known as a surety) is guaranteeing the performance of their business per the terms of the filed license. If the bonded business (the principal) fails to fulfil the bond guarantee, then the obligee (whoever is requiring the bond) can file a claim to recoup losses incurred.

The process of obtaining a bond:

The government requires a bond of the business. The business then obtains the bond from a surety company.

These bonded companies are not purchasing bonds simply for advertising purposes, they obtain them because they are required to by the government to legally operate. There are literally hundreds of different occupations that are required to post a surety bond to local, state, or Federal governments. It is extremely important to find out whether you need to post a bond to run your business. Operating without a bond when one is required always results in the government halting a businesses operations. Typically, the bonds are filed to obtain a license to operate. However, there are instances where the government does not require a business to be licensed, but does require a bond to be posted. There are simply too many business types to go over them all in this article, so feel free to ask about your business getting bonded on The Surety Bond Forums.

What type of bond do you need?

There are two main types of bond products that people refer to when referring to “getting bonded”. The first is a surety bond, which is the type we were referring to above. The second type is a fidelity bond, which is a completely different product than a surety bond. As we learned above, a surety bond involves three parties: the obligee (typically the government), the principal (the business in need of the bond), and the surety (the bonding company backing the bond). A fidelity bond is actually a type of insurance product, not a type of surety. With fidelity bonds, there are only two parties involved: the principal (the business obtaining the bond) and the carrier (the bonding company backing the bond). Since fidelity coverage is a type of insurance, the principal (you) are the beneficiary in the event of a claim. An example scenario would be a fidelity bond that insures your company from employee theft. If a an employee were found guilty of theft, the bond would pay out.

Now that we know there is more than one type of bond, we can answer which one you need. The answer is usually pretty simple. If there is someone requiring the bond of you, it is a surety bond, as there are then three parties. If no one is requiring the bond and you simply want to protect your own interests, it is a fidelity bond.

Benefits of getting bonded

Surety bonds and fidelity bonds are different products and therefore have different benefits (as well as different downsides).

Surety Bonds:
As we went over in the beginning of the article, business often list that they are bonded on marketing materials. What other benefits does a surety bond provide for your company? Not many, as the bond is required by the government to protect the public, not your company. Funds from a bond claim would be distributed to those effected by your company’s lack of compliance with government regulations. One might ask, how is a bond beneficial to my company then? You have to remember, you need to post the bond to operate. The alternative is to never open business or post a irrevocable letter of credit (ILOC). An ILOC typically costs 1% and will require 100% collateral, where a bond usually costs 1-3% and requires no collateral. When you look at the alternatives, it is clear that a bond is very beneficial to your company’s operations.

Fidelity Bonds:
Fidelity bonds are rather strait forward, they are insurance product that protects your business from loss. Unfortunately, a claim will only payout in the event that the individual accused of stealing is found guilty by a court of law. On the bright side, they are relatively inexpensive and can be used for advertising in the same way that a surety bond is. Typically lock smiths and janitorial services will advertised that they are “bonded and insured”. When stating this, they are referring to fidelity coverage.

What you should know before purchasing a surety bond

You will be held responsible for any claims!
A surety bond is not insurance, it is more of a form of credit. Keep in mind the bond is guaranteeing that your business performs as required. If you fail to do so, it could result in a bond claim. Since bonds are not insurance, the bonding company will ultimately hold you and your company responsible for repayment of any losses. They are extending surety credit, not insuring your company. The bonding company will require your company and all owners to sign an indemnity agreement to ensure the bonding company is held harmless against any losses. The agreement can not be modified and they will not bond you if you do not sign.

The process of a bond claim:

The government files a claim with the surety. The surety turns to the business for repayment of losses.

Shopping for bonds can be tricky
Bonding companies are usually hesitant to review applications that they have received from multiple agents. Some carriers will decline an applicant simply because they have received the submission from too many agents. Therefore, it is best to submit to only one agency that is appointed with a large variety of different markets to properly place you bond. You can submit to more than one agency, but it is a good idea to inform all agents that you have applied with others. Any agent worth a grain of salt will then ask what bonding companies your application has been sent to. It is imperative that the carriers are not repeatedly submitted to, otherwise you may shut yourself out from the lowest rates.

Bad Credit Programs
Tremendous changes have been brought about in the surety bond industry since the turn of this new century. What once was the soft market, now agents are finding themselves with much work ahead of them. Accounts that were dropped by previous bonding companies now are seeking new agents, which are forced to find new markets for their customers. This is a very difficult task for many bond companies with credit issues. Extensive collateral was required to a principal with bad credit. As a result, Bad Credit Surety Bond Programs were put into place to fullfill the capitalist idealology of supply and demand.

High Risk Programs
By tradition, surety bond underwriting tries to achieve a 0% loss ratio. Simply put, bond companies would only write bonds if there were little or no chance of having a claim. Conversely, Bad Credit Bond Programs came into effect and underwriting was closer to insurance policies. This program would write higher risk accounts, rather than 0% loss ratio, and were approved at a higher rate. Claims were automatically built into the premiums with accounts in which claims were more likely.

Collateral Requirements
As mentioned above, with the Bad Credit Programs, so came collateral requirements. Bonding companies took no pleasure in this because of the additional and unnecessary paperwork. Instead, Bonding companies raised premiums higher to replace the collateral requirement. Sometimes this was favorable to the principal and other times it was a disadvantage. Other programs that did not require collateral cost less for the first year however, the programs that did require collateral were more cost effective eventually. The reason was the collateral was returned approximately one year after the release of the bond.

Choices
For obvious reason, some bond agencies will omit to their clients that there are alternatives to surety bonds. JW Bond Consultants Inc. believes in giving you options. Perhaps an Irrevocable Letter of Credit (ILOC) would be more suitable than a surety bond to the obligee. Those who have liquid assets may think this is a better option. In other words, a bank can freeze $75,000.00 cash for an ILOC. This can replace your $75,000.00 bond. The 1% service fee that banks usually charge is less costly than expensive High Risk Surety Bonds. For those who do not have liquid assets for an ILOC, maybe the high risk bond is your better option. After you compare the costs between an ILOC and a high risk surety bond, you can make an intelligent decision for what is best for you. Choose the bond if the additional cost of the bond is worth having increased liquidity. Choose the ILOC if cost over time is more valuable to you than liquidity. Keep in mind that the money market rate is now 4%. With the 1% mentioned above, that means the ILOC is actually 5% annually. To learn more about other considerations and compare in greater detail, read “Saving Money Using Surety Bonds�

The key is – you have choices. We pride ourselves in expert advice even at the risk of not writing bonds to the principal today. When clients realize that our concern is in their best interest, they return and remain with us. This is one reason we are still here today.

Are Bad Credit Bond Programs here to stay?
Since Capitol Indemnity Corporation, the founder of High Risk Programs, started this program over 3 years ago; they are profitable and running strong. Because of Capitol’s success, other companies have started writing their own high Risk Program and have proved successful as well. More companies are willing to write High Risk Bonds than ever before. This is good news for the principal with bad credit. There more sureties to choose from and the costs are similar among competing companies. Consequently, premiums should decline with the increase of bond companies writing more bonds. Never the less, this is high risk underwriting and still considered to be a minority in the bonding industry.

In a strong market, commercial bond accounts would post a letter of credit but with the market yet recovering soft, they find it difficult to do so. Capitol Indemnity has written many who were left high and dry. High risk programs are high premiums although cost are likely to drop in years forthcoming. Even though there are alternative to these high premiums, bonding companies can still make a profit writing high risk bonds and the market for high risk will remain.
Yes, bad credit bond programs are here to stay.

The surety bond industry has and still is struggling to categorize commercial bond forms required throughout the nation. A surety bond is made up of the bond form attached to a power of attorney. The bond form contains the language of the guarantee, telling you exactly what the bond is guaranteeing. Unfortunately, there is an astounding amount of different bond forms throughout the country. Think of how many different professions there are throughout the nation, everyone from mortgage brokers to auto dealers need bonds in order to legally operate in most states. Now take into consideration that the Federal Government, each state, and local municipality requiring a bond will have their own form. A mortgage broker in New Jersey needs to post a separate bond if they plan in operating in Maryland as well. A contractor may have a bond to file with their state license and a separate bond for their local government. I think you get the picture.

The Surety & Fidelity Association of America (SFAA) has taken on the task of creating an online database of bond forms. The database is constantly growing with additional bond forms being added from industry professionals throughout the states. You can search the bond form database free of charge. The abilities of the search are quite versatile. One can do a broad search for types of bonds or extremely narrow for a specific bond form.

The SFAA has done the surety industry a great deed by taking the time to create such a system. However, there are some unavoidable downfalls to the system. The disclaimer is as follows, “The BNI is not intended to be a source of bond forms to submit to obligees. It assumes you have the proper bond form and need its number to aid in the submission of an electronic execution report. Although SFAA makes every reasonable effort to keep the BNI up to date, the number of bond forms used in the marketplace makes it impossible to assure either comprehensive coverage or incorporation of every change to an existing bond. SFAA, therefore, must disclaim any responsibility for the accuracy, completeness or currency of the BNI. By using the BNI you agree: (a) that you release SFAA from any liability arising out of such use, (b) that you will take appropriate steps to verify that the bond form you propose to use is the form required for the transaction, and (c) that you will tell SFAA if you discover that a bond form in the BNI is no longer current or is otherwise incorrect.”. This means that you can not count on the system to ensure you are using the most up to date copy of a bond form. Unfortunately, obligees do not notify the SFAA when a bond form is updated. Relying solely on the SFAA’s system could result in a rejected bond due to use of an incorrect bond form. One might ask what good is the database if you can not count on the bond forms being up to date. I believe the system is currently good to find a clean copy of a bond form. I am more so hopeful for the future of the database, in hopes that obligees will eventually take the responsibility to update the system to make the bond process easier for all.

For whatever reason, it seems that many in need of a bond, procrastinate in getting the process started. This often ends in the obligee stopping the principal from operating, or not allowing them to start operating when they would like. Frustrations such as this can be avoided if one pays closer attention to state requirements and bond expiration dates. Obviously, no one is perfect and sometimes due to an oversight, you need your bond yesterday. In fact, it seems that roughly half of our clients ask us to put a rush on their bond. Since almost everyone wants their bond right away, the only fair way for us to operate is on a first come first serve basis. However, there are some items that the principal can do in order to speed up the process.

1) Be sure to respond to agent questions in a prompt manor. If your agent is asking for additional information, then give it to him/her as soon as you can. The agent will not ask for information if it is not necessary. Your application can not move forward until the requests are met.

2) Make sure all information is accurate and clear. Providing an agent information that is unclear will usually result in the agent contacting you to clarify. Misinformation could create bigger problems. A blatant lie could result in fraud charges. Stretching the truth could result in a particular bonding company declining the account based on misinformation. This would force the agent to re-market the account, adding additional time to the approval process and possibly increasing your rate.

3) Keep your agent informed of any previous bonding experiences. The surety industry is relatively small. Therefore, it is a good idea to inform your agent of any past bonding you have had.

• What was your previous surety? Telling your agent what bonding company you were previously with will prevent him/her from wasting time by submitting to that surety.
• Why did you leave them? If you left a bonding company, you should let your agent know why so they do not submit your application to a similar company. If the previous company decided no longer to write you, the agent should have a good idea as to who would be willing to.
• Have you applied to any companies recently? Many bonding companies will decline an applicant if they receive the same submission from multiple agents. They feel this is a reflection that the principal is in a desperate situation and not a good risk to write.

4) Spend the additional money on shipping overnight fees when necessary. Often, bonding companies will require original copies of indemnity agreements prior to issuance. Be sure not to ship the agreement regular mail if you are in a rush. Overnight services offer tracking and require delivery signatures, ensuring you save time.

Many of the above tips are common sense, but many of our clients seem to get frazzled, especially if they are new to bonding. JW Bond Consultants will always work hard to process all requests in a timely manor. However, certain aspects are in the hands of the client. If you follow the tips above, you will obtain your bond sooner, whether we write your bond or any other agency.

At the turn of the millennium, the surety bond industry experienced some major changes. Consecutive years of record breaking losses forced many bonding companies to close their doors. The sureties that weathered the storm of the “soft market” backlash has some serious changes to make in their underwriting guidelines. The industry as a whole became much more conservative, leaving many high risk applicants hanging out to dry.

A good portion of America has credit flaws. Therefore, there was a large section of the bond market that was considered “unbondable” in the conservative standard market programs. For the most part, the higher risk applicants could not obtain a bond without posting 100% collateral. Then the bad credit surety bond programs came about, which offered an alternative that went against traditional suretyship ideology. The surety would write high risk commercial bond applicants, but at a much higher rate. The solution may seem obvious from an outsiders perspective, but traditional surety underwriting is done with a 0% loss ratio. This means that, unlike insurance, there is no loss built into the premium, and only the cream of the crop should be approved.

Bonding companies that consider high risk applicants are few and far in between. However, there seems to be about one new company a year willing to write the applicants using the insurance based philosophy. A program that was once a monopoly, is now offered by a handful of sureties. The increased competition is good for the principal. Certain requirements of the program, such as cash collateral, are no longer. Classes of business that were previously excluded are now once again available.

So what is the future of the bond industry’s bad credit surety bond programs? We have already seen collateral requirements discarded. Will the premiums start to drop? Unfortunately, the answer can not be stated in a simple yes or no. We may see rates drop slightly due to increased competition, but don’t count on it being anything too significant, as losses are built into the premium. Currently, the bond market is very black and white. A principal is either in the standard market or the high risk market. We more than likely we will start to see a middle ground of bond rates begin to form. For instance, an applicant with some collections could be written at a 5-10% rate, rather than be lumped into the same rates as an applicant with a bankruptcy. However, creating a middle ground market will take time. Bonding companies are going to want to see concrete data that there is a way to underwrite these bonds without having losses too high.

The end of the “soft market” brought about the high risk programs. Over the years the high risk programs have seen slow change as additional bonding companies practice this new type of surety underwriting. Eventually the market should develop a grey area of middle-ground rates, rather than being so black in white. However, this will take years to come about, as bonding companies are conservative in nature and are not quick to change their policies.