Surety Bond News

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the form required for the transaction, and (c) that you will tell SFAA if you discover that a bond form in the BNI is no longer current or is otherwise incorrect.”.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.

Surety bond renewal invoices are usually sent months prior to the actual bond expiration. Most new to suretyship are surprised to find out that the due date for payment is also months prior to the bond expiration, rather than the day of. Obviously, there is a reason for this. The bonding companies are not simply trying to bill the principal early.

Surety bond renewal premium payments must be collected early due to the language of the bonds. The “cancellation clause” in the bond form determines how much notice the bonding company must give the obligee prior to canceling a bond. A typical cancellation clause requires that the bonding company notify the principal and the obligee of cancellation in writing within 30, 60 or 90 days. Therefore, payment due dates for renewals must take cancellation clauses into consideration. Otherwise, a principal could remain bonded past the period they have paid for.

The surety bond industry has been through tremendous changes since the turn of the millennium. The “soft market” came to an end and bond agents throughout the country had a lot of work ahead of them. Agents were forced to find new markets for accounts that were dropped by their bonding companies. Unfortunately, this was easier said than done for many commercial bond accounts with credit issues. A principal with bad credit could not be bonded without extensive collateral requirements. Eventually, the supply and demand of our capitalist economy brought about Bad Credit Surety Bond Programs.

Standard Bond Programs vs. High Risk Bond Programs:
Traditional surety bond underwriting strives to have a 0% loss ratio. In other words, they only write bonds when there is slim to no chance of a claim. Bad Credit Surety Bond Programs are quite different than traditional surety and are underwritten more similar to insurance. Rather than attempting to underwrite with a 0% loss ratio, higher risk accounts are approved at a higher rate. The premiums actually have the claims built into them, as they are written for accounts in which claims are more likely.

Collateral Requirements:
Some Bad Credit Surety Bond Programs also require collateral. However, the bonding companies are trying to get away from the collateral requirement, as it creates unnecessary additional paperwork. To replace the collateral requirement, the bonding companies raise the premium even higher. At times this works to the advantage of the principal, other times it works against them. Programs with no collateral requirement need less money put up for the first year. However, programs that require collateral cost less in the end, as the collateral is returned within about 1 year of release of the bond.

Alternatives:
Many bond agencies will neglect to tell the principal that there are alternatives to surety bonds. At JW Bond Consultants, we believe in giving the client the best advice, even if it means we do not write their business. This ideology has brought those same clients back to us when a bond is in their best interests. Many obligees will accept an Irrevocable Letter of Credit (ILOC) rather than a bond. This is a better option for those that have liquid assets they can have tied up. This means a $50,000 bond can be replaced having a bank freeze $50,000 cash in exchange for an ILOC. Banks typically charge a 1% service fee for an ILOC, much cheaper than a high risk surety bond. Obviously, not everyone has enough liquid cash to obtain an ILOC and that is where the high risk program is better alternative. To decide what is best for you, simply compare the cost differences between the bond and the ILOC. If the additional cost for the bond is worth having increased liquidity then the bond is a better choice. If cost over time is more important to you than liquidity then an ILOC is a better choice. Just be sure to keep in mind that one can easily obtain 4% in a money market right now. Therefore, an ILOC really costs approximately 5% annually. Read “Saving Money Using Surety bonds” to learn how to compare the two in greater detail.

The Future of Bad Credit Bond Programs:
The original company to offer a high risk option, “Capitol Indemnity Corporation”, has been successfully running the program for over 3 years. Capitol’s success has inspired other bonding companies to offer high risk programs. In fact, the amount of bonding companies willing to write high risk commercial bonds is increasing every year. The costs between the competing companies are similar. However, as more sureties offer high risk bond programs, we may see lower rates in the years to come. While the number of bonding companies that write high risk applicants every year, they are still in the minority when it comes to the rest of the industry.

The end of the “soft market” left many looking to obtain surety bonding high and dry. Capitol Indemnity picked up many of the commercial bond accounts that would of had to otherwise post a letter of credit. High risk programs are more expensive, as losses are built into the premium. The high premium costs of high risk programs may drop in years to come as more bonding companies write this market segment. Often, there are alternatives to posting a surety bond, which many agents neglect to mention. High risk markets will remain available for as long as the bonding companies loss ratio is low enough for them to turn a profit.