Surety Bond News

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 weathered the storm of the hardest bond market seen to date. The Surety & Fidelity Association of America (SFAA) reported that the surety bond industry as a whole returned to profitability in 2005 after repeated years of record losses. The SFAA’s report included both contract and commercial surety bonds.

Mcgraw Hill Construction’s Engineering News-Record provided a special on suretyship in the June 2006 issue. The article listed the views of many industry top executives for the future and current status of the industry. Almost every executive editorial asserted the same opinions, surety capacity is large enough for current demands. However, they were all quick to note that the capacity available was only for qualified contractors.

Surety capacity is readily available for small to medium sized contracts, but there is a lack of willingness to guarantee larger contractors and so called mega-contracts. Several years ago, our agency was the test agency for Western Surety-CNA’s Fast Track program, which was the first to offer contract bonding based on personal credit for small contractors. At present, Western Surety-CNA has over 12 new competitors to the program they began several years back. The Fast Track program is an excellent example of how the surety market has grown for the small contractor.

Surety associations throughout the country have been pushing to expand bond awareness in the private sector. It appears their efforts are quite successful, as a good amount of growth for the industry is from bonds requested in the private sector. However, there is still a common misconception that bonds can be used to guarantee financing. Surety bonds are a product that guarantee performance, not financing.

2005 proved to be the best year the surety industry saw in many years. Carriers should continue to see profits and expanded growth for years to come, provided they show enough restraint to reserve capacity for those who qualify, not simply those in need. Inflation is a concern for the industry, but there is nothing that analysts can currently forecast that should be of great worry.

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.

The Surety Association of America (SAA) changed their name to The Surety & Fidelity Association of America (SFAA) earlier this year. The name change was made effective on May 18, 2006. The association has always been involved with surety bonds and fidelity bonds, but the name change clarifies that there is a difference between the two.

Many assume that fidelity bonds are a type of surety bond. It is easy to understand why one can misinterpret a fidelity policy as a surety bond. Typically any agency that offers surety bonds also offers fidelity as well. There are numerous different surety bond types, which only adds to the confusion. Rather than memorize a plethora of bond types it is easier to simply learn how each bond type works.

The two products are quite different. A surety bond is a three party agreement involving a principal (who is being bonded), obligee (who is requiring the bond), and carrier (who is backing the bond). The surety bond guarantees the performance of the principal to the obligee. Make no mistake, surety bonds are not insurance, as the bonding company will look to the principal for payment of the claim. This makes a surety bond more of a form of credit than insurance. Traditional surety underwriting is done with the idea of a 0% loss ratio. Fidelity bonds are more of an insurance product, as the principal purchases the policy to insure themselves. There are only two parties, the principal (who is purchasing the bond) and the carrier (who is backing the bond). If a claim arises, the carrier pays out to the principal, who is the beneficiary when it comes to fidelity.

Hopefully the name change of the Surety & Fidelity Association of America will help many to realize that surety and fidelity bonds are not one in the same.

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.