webcast (2 hours) “bonds: shaken, not stirred” © florida association of insurance agents –...

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““Bonds: Shaken,Bonds: Shaken,Not Stirred”Not Stirred”

© Florida Association of Insurance Agents – 2010© Florida Association of Insurance Agents – 2010

Florida Association ofFlorida Association ofInsurance AgentsInsurance Agents

Tom Ashley, AAI, AIAM, AIPDirector of Education

Bonds: Shaken, Not StirredBonds: Shaken, Not Stirred

Bonds are an integral part of an Bonds are an integral part of an agency’s line of products:agency’s line of products:

--- Commercial clients need them--- Commercial clients need them

--- Allows customers to deal with --- Allows customers to deal with oneone agency / producer for both agency / producer for both insurance and surety needsinsurance and surety needs

--- To gain new customers--- To gain new customers

--- Increase profits – typically higher --- Increase profits – typically higher commissions, fewer lossescommissions, fewer losses

As a reminder, there are 3 parties to As a reminder, there are 3 parties to all surety bonds:all surety bonds:

1) 1) PrincipalPrincipal – the one whose – the one whose performance is being guaranteed performance is being guaranteed

(worker or contractor)(worker or contractor)

2) 2) ObligeeObligee – the one for whom the – the one for whom the work or obligation is being done work or obligation is being done

(customer)(customer)

3) 3) SuretySurety – pays if principal fails to – pays if principal fails to perform (insurance company)perform (insurance company)

6 Characteristics of All Surety Bonds:6 Characteristics of All Surety Bonds:

1) The surety must respond if the 1) The surety must respond if the principal fails to perform.principal fails to perform.2) The surety vouches for the principal’s 2) The surety vouches for the principal’s

integrity, capability, trustworthiness, integrity, capability, trustworthiness, financial responsibility, or other financial responsibility, or other

desired desired qualities.qualities.3) Surety bonds usually terminate when 3) Surety bonds usually terminate when

the principal has fulfilled its the principal has fulfilled its obligations.obligations.

6 Characteristics of All Surety Bonds:6 Characteristics of All Surety Bonds:

4) Surety bonds have bond penalties 4) Surety bonds have bond penalties (this is the amount of “coverage”).(this is the amount of “coverage”).

5) Surety bonds require a premium.5) Surety bonds require a premium.

6) Surety bonds must be in writing to be 6) Surety bonds must be in writing to be binding and enforceable.binding and enforceable.

Two basic types of surety bonds:Two basic types of surety bonds:

1) Contract bonds1) Contract bonds

2) Commercial bonds2) Commercial bonds

1) 1) Contract BondContract Bond

Guarantees the performance of a Guarantees the performance of a bonded contractor.bonded contractor.

Ex. – Project owner (business owner Ex. – Project owner (business owner building a new office) requires a building a new office) requires a

contractor to carry a contract bond contractor to carry a contract bond to to ensure they will perform on time, ensure they will perform on time, within within budget, according to specs.budget, according to specs.

2) 2) Commercial (Non-Contract) BondCommercial (Non-Contract) Bond

Covers Covers allall otherother situations in which situations in which sureties (ins. cos.) guarantee sureties (ins. cos.) guarantee

performance of obligations which do performance of obligations which do not not arise from contracts.arise from contracts.

Such as license bonds, public Such as license bonds, public official bonds, bonds for executors official bonds, bonds for executors of of wills, etc.wills, etc.

Contract BondsContract Bonds


a) Bid bondsa) Bid bonds

b) Performance bondsb) Performance bonds

c) Payment bondsc) Payment bonds

d) Maintenance bondsd) Maintenance bonds

e) Subdivision bondse) Subdivision bonds

f) Supply contract bondsf) Supply contract bonds

Contract Bonds ---Contract Bonds ---

a) a) Bid bondBid bond -- guarantees that if the bid -- guarantees that if the bid is accepted, the G.C. or subis accepted, the G.C. or sub

(principal) bidding for a contract (principal) bidding for a contract will will enter into the contract and enter into the contract and furnish all furnish all required bonds. Ifrequired bonds. If principal refuses to principal refuses to enter the enter the contract or fails to provide contract or fails to provide bonds, bonds, the obligee is entitled to the the obligee is entitled to the difference between the amount of difference between the amount of the the bid and next lowest bid.bid and next lowest bid.


b) b) Performance bondPerformance bond -- guarantees that -- guarantees that the obligee will be indemnified for the obligee will be indemnified for any loss resulting from the any loss resulting from the

principal’s failure to perform the principal’s failure to perform the work work according to the contract, according to the contract, plans, and plans, and specs at the agreed price specs at the agreed price and within and within the agreed time.the agreed time.


c) c) Payment bondPayment bond – also called a “labor – also called a “labor and materials payment bond” – and materials payment bond” –

guarantees that bills incurred by a guarantees that bills incurred by a contractor for project labor and contractor for project labor and materials will be paid in accordance materials will be paid in accordance with the terms of the contract. with the terms of the contract.


d) d) Maintenance bondMaintenance bond – guarantees that – guarantees that the contractor will correct faulty the contractor will correct faulty

work and replace defective materials work and replace defective materials for for a specified period – typically for a specified period – typically for one one year.year.


e) e) Subdivision bondSubdivision bond – guarantees that – guarantees that a contractor, such as a developer a contractor, such as a developer will complete improvements will complete improvements

required by ordinance within a required by ordinance within a certain certain period of time in accordance period of time in accordance with with the governing body’s the governing body’s requirements. requirements.

--- Developers (streets, storm --- Developers (streets, storm sewers, sidewalks, streetlights, etc.)sewers, sidewalks, streetlights, etc.)


f) f) Supply Contract BondSupply Contract Bond – guarantees – guarantees to the obligee that the supplier to the obligee that the supplier

(principal) will deliver designated (principal) will deliver designated items according to supply contract items according to supply contract specifications. A supply contract is specifications. A supply contract is an an agreement to furnish and deliver agreement to furnish and deliver materials or supplies at an agreed materials or supplies at an agreed price. price.

--- Typically between private --- Typically between private enterprises and government entities.enterprises and government entities.

Commercial BondsCommercial Bonds

Commercial BondsCommercial Bonds

a) License and permit bondsa) License and permit bondsb) Public official bondsb) Public official bondsc) Court bondsc) Court bonds

--- These types of bonds are issued --- These types of bonds are issued by sureties to guarantee by sureties to guarantee performance of obligations NOT performance of obligations NOT generated by contract.generated by contract.

Commercial Bonds ---Commercial Bonds ---

a) a) License and Permit BondsLicense and Permit Bonds -- required -- required by federal, state, or municipal by federal, state, or municipal

governments that guarantee governments that guarantee performance of the laws, performance of the laws, regulations, or ordinances relating regulations, or ordinances relating to to what is covered by the license or what is covered by the license or permit. permit.


a) a) License and Permit BondsLicense and Permit Bonds -- 6 types -- 6 types i) Compliance bond onlyi) Compliance bond only

ii) Compliance bond with 3ii) Compliance bond with 3rdrd party party liabilityliability

iii) Forfeiture bondiii) Forfeiture bondiv) Tax or fee bondiv) Tax or fee bondv) Merchandising and dealer bondv) Merchandising and dealer bondvi) Reclamation and environmental vi) Reclamation and environmental

protection bondprotection bond

BREAKBREAK

(10 minutes)(10 minutes)


a) a) License and Permit BondsLicense and Permit Bonds -- 6 types -- 6 types

i) i) Compliance bond onlyCompliance bond only – – guarantees that the principal will guarantees that the principal will comply comply with laws that govern the with laws that govern the business business or activity it conducts.or activity it conducts.

(Ex. – municipality requires a (Ex. – municipality requires a plumber to supply bond plumber to supply bond guaranteeing guaranteeing he’ll comply with he’ll comply with building codes)building codes)



ii) ii) Compliance bond only with 3Compliance bond only with 3rdrd party liability party liability – – same as same as

compliance bond, but also gives a compliance bond, but also gives a third party the right to sue both the third party the right to sue both the principal and surety to recover principal and surety to recover damages as described in the bond. damages as described in the bond.



iii) iii) Forfeiture bondForfeiture bond – deals with – deals with how the surety pays the claim. The how the surety pays the claim. The surety pays (forfeits) the entire bond surety pays (forfeits) the entire bond penalty if the principal fails to penalty if the principal fails to complete its obligation. complete its obligation.



iv) iv) Tax or Fee bondTax or Fee bond – guarantees – guarantees that the principal will properly that the principal will properly

account for and remit taxes or fees account for and remit taxes or fees collected. (Ex. -- tobacco, liquor, collected. (Ex. -- tobacco, liquor, fuel, fuel, sales taxes)sales taxes)



v) v) Merchandising and Dealer bondMerchandising and Dealer bond – guarantees that the principal – guarantees that the principal

will will properly account for and remit taxes properly account for and remit taxes or fees collected. (Protects the or fees collected. (Protects the

public from misrepresentation or public from misrepresentation or fraudulent practices by the seller.)fraudulent practices by the seller.)



vi) vi) Reclamation and Environmental Reclamation and Environmental Protection bondProtection bond – guarantees that – guarantees that the principal will restore land to its the principal will restore land to its original state after operations are original state after operations are completed.completed.


b) b) Public Official BondsPublic Official Bonds (non-federal) -- (non-federal) -- Guarantee the faithful performance Guarantee the faithful performance of the duties of a public official and of the duties of a public official and also provide for an honest also provide for an honest

accounting of all public funds accounting of all public funds handled by that public official.handled by that public official.

--- 2 types:--- 2 types:i) honestyi) honestyii) faithful performanceii) faithful performance


c) c) Court BondsCourt Bonds -- guarantee that a -- guarantee that a person or an organization will person or an organization will faithfully perform certain duties faithfully perform certain duties prescribed by law, or by a court, or prescribed by law, or by a court, or will will demonstrate financial demonstrate financial responsibility responsibility for another’s benefit for another’s benefit until the final until the final outcome of a court’s outcome of a court’s decision.decision.


c) c) Court BondsCourt Bonds

2 types –2 types –

i) Judicial bondi) Judicial bond

ii) Fiduciary bond ii) Fiduciary bond


c) c) Court BondsCourt Bonds i) i) Judicial bondJudicial bond – arises out of – arises out of

litigation and are required by the litigation and are required by the courts. courts. Posted by a person seeking Posted by a person seeking or or appealing a remedy in court to appealing a remedy in court to protect protect the party against whom a the party against whom a claim is claim is made from damages made from damages sustained if the sustained if the person seeking or person seeking or appealing the appealing the remedy does not remedy does not prevail. prevail.



i) i) Judicial bondJudicial bond – 4 types – 4 types

A) Attachment bondA) Attachment bond

B) Release of attachment bondB) Release of attachment bond

C) Plaintiff’s appeal bondC) Plaintiff’s appeal bond

D) Defendant’s appeal bond D) Defendant’s appeal bond


c) c) Court BondsCourt Bonds i) i) Judicial bondJudicial bond – 4 types – 4 types A) A) Attachment bondAttachment bond – required – required before a court will attach property. before a court will attach property. Guarantees that if the court rules Guarantees that if the court rules

against the plaintiff, the defendant against the plaintiff, the defendant will will be paid any damages arising be paid any damages arising from the from the attachment. If court rules attachment. If court rules for the for the plaintiff, the bond plaintiff, the bond automatically automatically terminates.terminates.


c) c) Court BondsCourt Bonds i) i) Judicial bondJudicial bond – 4 types – 4 types B) B) Release of Attachment bondRelease of Attachment bond – after a defendant’s property is – after a defendant’s property is

attached, it can be released to the attached, it can be released to the defendant pending final outcome of defendant pending final outcome of the the court’s decision if the defendant court’s decision if the defendant provides the court with a release of provides the court with a release of attachment bond. IMPORTANT: A attachment bond. IMPORTANT: A release of attachment bond is …..release of attachment bond is …..




B) B) Release of Attachment bondRelease of Attachment bond

…….. required only if the defendant .. required only if the defendant desires to maintain possession of desires to maintain possession of the property until the dispute is the property until the dispute is

settled.settled.




C) C) Plaintiff’s Appeal bondPlaintiff’s Appeal bond -- -- when a plaintiff wants to appeal a when a plaintiff wants to appeal a case to a higher court, an appeal case to a higher court, an appeal bond bond may be required. Guarantees may be required. Guarantees that that the plaintiff will pay all court the plaintiff will pay all court costs for costs for the appeal.the appeal.


c) c) Court BondsCourt Bonds i) i) Judicial bondJudicial bond – 4 types – 4 types D) D) Defendant’s Appeal bondDefendant’s Appeal bond -- -- when a defendant wants to appeal a when a defendant wants to appeal a case to a higher court, this bond case to a higher court, this bond

may be required. Guarantees that may be required. Guarantees that the the defendant will pay the entire defendant will pay the entire judgment, judgment, plus court costs and plus court costs and interest should interest should a higher court a higher court uphold the original uphold the original judgment.judgment.



ii) ii) Fiduciary bondFiduciary bond – generally – generally guarantee that persons entrusted guarantee that persons entrusted with the care of others’ property will with the care of others’ property will exercise their duties faithfully, exercise their duties faithfully, account for all property received, account for all property received, and make good for any deficiency fand make good for any deficiency f or or which court may hold them liable.which court may hold them liable.



ii) ii) Fiduciary bondFiduciary bond – –

Fiduciaries who are frequently bonded: Fiduciaries who are frequently bonded:

A) GuardiansA) Guardians

B) Administrators and ExecutorsB) Administrators and Executors

C) Trustees in BankruptcyC) Trustees in Bankruptcy

Miscellaneous BondsMiscellaneous Bonds


Miscellaneous bonds often support Miscellaneous bonds often support private relationships and unique private relationships and unique business needs. Because of the specific business needs. Because of the specific nature of each bond obligation, nature of each bond obligation, producers and underwriters need to look producers and underwriters need to look beyond the form to the underlying beyond the form to the underlying agreement or law that required the bond. agreement or law that required the bond. Many of these bonds contain a Many of these bonds contain a financial financial guaranteeguarantee. Some combine this guarantee . Some combine this guarantee with with onerousonerous provisions. provisions.


3 largest categories:3 largest categories:

a) Lost securities bondsa) Lost securities bonds

b) Hazardous waste removal bondsb) Hazardous waste removal bonds

c) Credit enhancement fiduciary c) Credit enhancement fiduciary guaranty bondsguaranty bonds


a) a) Lost securities bondsLost securities bonds – also called – also called “lost instrument” bonds. Owners of “lost instrument” bonds. Owners of stock certificates, life insurance stock certificates, life insurance

policies, check, certificates of policies, check, certificates of deposit, mortgages, or other deposit, mortgages, or other securities securities sometimes lose the sometimes lose the document and document and request duplicates. If request duplicates. If the original the original document is document is subsequently found, the subsequently found, the entity…. entity….


a) a) Lost securities bondsLost securities bonds – –……. that issued the duplicate is . that issued the duplicate is

legally liable for any damages that legally liable for any damages that result. They are easily sold if stolen, result. They are easily sold if stolen, so so even if a duplicate is issued, the even if a duplicate is issued, the issuer issuer is liable for the original is liable for the original security as security as well. Entities which issue well. Entities which issue duplicate duplicate securities require parties securities require parties that that request them to post lost request them to post lost securities securities bonds. bonds.


b) b) Hazardous Waste Removal bondsHazardous Waste Removal bonds – –

laws require owners and operators laws require owners and operators of hazardous waste facilities to of hazardous waste facilities to

provide financial assurance of post-provide financial assurance of post-closure care and to file and carry out closure care and to file and carry out cleanup plans. Hazardous waste cleanup plans. Hazardous waste removal bonds are one option to removal bonds are one option to ensure ensure compliance.compliance.


c) c) Credit Enhancement Fiduciary Credit Enhancement Fiduciary Guaranty bondsGuaranty bonds – issuers of – issuers of municipal bonds (not surety, but municipal bonds (not surety, but debt debt instruments), can save instruments), can save substantial substantial amounts of interest amounts of interest expense if they expense if they obtain this type of obtain this type of bond to guarantee bond to guarantee that their that their investors would receive investors would receive their their interest payments as promised interest payments as promised and and receive their principal at receive their principal at maturity.maturity.

Agent’s Role inAgent’s Role in


Agent’s Role / Contract BondsAgent’s Role / Contract Bonds

Pre-qualifying a new client is the first Pre-qualifying a new client is the first step in writing the business. Based on:step in writing the business. Based on:

1) Credit strength1) Credit strength

2) Professional competence2) Professional competence

3) Character3) Character

4) Capacity4) Capacity

5) Capital5) Capital


When it comes to field underwriting, When it comes to field underwriting, producers have responsibilities in the producers have responsibilities in the following areas:following areas:

1) Financial documents1) Financial documents2) Background investigation2) Background investigation3) Surety selection (ins. co.)3) Surety selection (ins. co.)4) Credit analysis4) Credit analysis5) Presentation5) Presentation6) Communications6) Communications


1) 1) Financial documentsFinancial documents – liquidity is key – liquidity is key

--- Expenses and income in excess --- Expenses and income in excess of billingsof billings

--- Billings in excess of expenses --- Billings in excess of expenses and incomeand income--- Aging of accounts receivable and --- Aging of accounts receivable and

payablepayable--- Earned income--- Earned income


1) 1) Financial documentsFinancial documents – liquidity is key – liquidity is key

--- Schedule of general and --- Schedule of general and administrative expensesadministrative expenses

--- Gross profit or loss--- Gross profit or loss


2) 2) Background investigationBackground investigation

--- Suppliers, subcontractors, --- Suppliers, subcontractors, lawyers, CPAs, bankers … who lawyers, CPAs, bankers … who have had a business, credit, or have had a business, credit, or professional relationship with professional relationship with the contractor. Make contacts.the contractor. Make contacts.

--- Evaluate past obligations--- Evaluate past obligations--- Fail this? Go no further ------ Fail this? Go no further ---


3) 3) Surety (insurance co.) selectionSurety (insurance co.) selection

--- Desired risks--- Desired risks

--- Financial capacity--- Financial capacity

--- Philosophy and operating plan--- Philosophy and operating plan

--- Ability, resourcefulness, and --- Ability, resourcefulness, and responsiveness of the surety’s responsiveness of the surety’s underwritersunderwriters


3) 3) Surety (insurance co.) selectionSurety (insurance co.) selection--- Pricing and risk philosophies--- Pricing and risk philosophies--- Financial condition--- Financial condition--- Quality of relationship between --- Quality of relationship between

the producer (agency) and the the producer (agency) and the suretysurety

--- Volume and quality of other --- Volume and quality of other business the surety handles for business the surety handles for the agencythe agency


4) 4) Credit analysisCredit analysis--- Company history--- Company history--- Organization--- Organization--- Management--- Management--- Outside professionals of the --- Outside professionals of the

contractor’s management team contractor’s management team (accountant, lawyer, banker)(accountant, lawyer, banker)

--- Type of work--- Type of work--- Performance track record--- Performance track record


4) 4) Credit analysisCredit analysis

--- Financial perform. & condition--- Financial perform. & condition

--- Five-year financial trend--- Five-year financial trend

--- Bidding history--- Bidding history

--- Desired work program--- Desired work program

--- Future work prospects--- Future work prospects

--- Trade and bank credit --- Trade and bank credit relationshipsrelationships


5) 5) PresentationPresentation -- submission package -- submission package--- Cover letter--- Cover letter--- Contractor questionnaire--- Contractor questionnaire--- Financial statements (most --- Financial statements (most

recent year-end and prior)recent year-end and prior)--- Contract status report (shows --- Contract status report (shows

each of the current jobs – brief each of the current jobs – brief description, contract price, % description, contract price, % completed to date)completed to date)


5) 5) PresentationPresentation -- submission package -- submission package

--- Additional information (to be --- Additional information (to be determined by the underwriter – determined by the underwriter –

(bios of owner and key (bios of owner and key employees, business plan, employees, business plan, largest completed projects, largest completed projects, perpetuation plan, sub & perpetuation plan, sub &

supplier references, evidence of supplier references, evidence of line of credit, etc.)line of credit, etc.)


6) 6) CommunicationsCommunications – producer is – producer is responsible for maintaining open responsible for maintaining open channels of communication.channels of communication.

--- Status reports of work in --- Status reports of work in progressprogress

--- Quarterly, semi-ann., or annual --- Quarterly, semi-ann., or annual financial statementsfinancial statements

--- Annual business plans--- Annual business plans


6) 6) CommunicationsCommunications – producer is – producer is responsible for maintaining open responsible for maintaining open channels of communication.channels of communication.

--- Ongoing information (any --- Ongoing information (any developments which may affect developments which may affect the contractor’s ability to the contractor’s ability to complete the work)complete the work)

--- Job site visits--- Job site visits

Representing Representing Unauthorized Unauthorized

EntitiesEntities

The state of Florida has taken a The state of Florida has taken a very strong position on the very strong position on the issue of unauthorized entities. issue of unauthorized entities. An unauthorized entity is an An unauthorized entity is an insurance company that is not insurance company that is not licensed by the Florida licensed by the Florida department of financial department of financial services. Agents and brokers services. Agents and brokers have responsibility for have responsibility for conducting reasonable research conducting reasonable research to ensure that they are not to ensure that they are not writing policies or placing writing policies or placing business with unauthorized business with unauthorized entities. Lack of careful entities. Lack of careful screening can result in screening can result in significant financial loss to significant financial loss to Florida residents due to unpaid Florida residents due to unpaid claims and/or theft of claims and/or theft of premiums.premiums.

Agents may be held liable when Agents may be held liable when representing these representing these unauthorized entities. It is the unauthorized entities. It is the agents and brokers agents and brokers responsibility to give fair and responsibility to give fair and accurate information regarding accurate information regarding the companies they represent. the companies they represent. Any question about the Any question about the authorized status of a company authorized status of a company can be checked by calling the can be checked by calling the Florida department of financial Florida department of financial services at 877-693-5236 or for services at 877-693-5236 or for out of state agents, 800-413-out of state agents, 800-413-3089 .We urge all agents and 3089 .We urge all agents and brokers to adhere to this brokers to adhere to this admonition.admonition.

For more information on For more information on unauthorized entities go to unauthorized entities go to FAIA’s website at FAIA’s website at www.faia.comwww.faia.com and under the Education and under the Education section you will find a handout section you will find a handout that you can download.that you can download.

Florida Agents -- ImportantFlorida Agents -- ImportantPer DFS requirements, you'll need to sign

the Acknowledgement Form in order for us to process your CE credit.

1) Please fax the Form to 850-668-2852 OR mail it toPO Box 12129, Tallahassee, FL, 32317 OR scan it to a .pdf file and e-mail it to [email protected].

2) Be sure to complete all the required information and sign it below. The Acknowledgement Form is located on the FAIA website, www.faia.com, under “Education”.

3) You need to send this form to us within three (3) business days.

4) The quickest option is the Electronic Acknowledgement Form.

WEBCAST (2 hours)WEBCAST (2 hours)

““Bonds: Shaken,Bonds: Shaken,Not Stirred”Not Stirred”

© Florida Association of Insurance Agents – 2010© Florida Association of Insurance Agents – 2010

Florida Association ofFlorida Association ofInsurance AgentsInsurance Agents

Tom Ashley, AAI, AIAM, AIPDirector of Education

webcast (2 hours) “bonds: shaken, not stirred” © florida association of insurance agents –...

Documents

commercial bonds

license bonds

hours bonds

required bonds

basic types of surety

public official bonds

commercial noncontract

surety needs