Legal Spotlight

  

Let Us Now Praise Surety Bonds

The theme for this Legal Spotlight initially suggested itself to me when I read a Lexology article recently forwarded to me and others from NASBP President Lynne Cook. The article is entitled Subcontractor default insurance—a cautionary tale and was published on October 2, 2013. To read this article, click here. The article discusses a New York appellate decision that “highlights the potential inadequacies of subcontractor default insurance (‘SDI’).” This tale serves as “a warning to construction project owners who would like to rely on SDI policies in lieu of a bond or other forms of protection for the owner.” The authors note that the “case demonstrates that SDI policies do not normally provide the coverage an owner might expect . . . .”

This article appeared over 2½ years ago, and while SDI policies remain in a state of flux, they often do not provide the coverage expected by owners. As this article illustrates, owners need to be proactive in reviewing policies that might--or might not--provide them protection. After all, most documents are subject to negotiation. Owners should be vigilant in inquiring about the cost of such policies--and what protection is offered and to whom and under what circumstances. I suggest that this article might be a good one to distribute to owners that might be wobbling about whether to accept SDI in lieu of surety bonds on their projects and who need to be reminded about the unique protections provided by and the value of surety bonds. 

Those of us involved in the construction and surety industries must be more effective in selling surety bonds, especially against alternative products. We have a wonderful value proposition, embodied in NASBP’s tag line, Surety Is Smart Business; and NASBP has made significant strides in trumpeting the value of surety bonds—and plans to do more of it in the future. We should not hide surety’s light under a bushel but should discuss its virtues candidly and honestly in the marketplace of ideas.

To that end, the spring issue of NASBP’s Surety Bond Quarterly, which is now available online, spotlighted the ongoing issue of Forces Transforming the Surety World, including SDI. Included in that issue were the following: (1) a white paper produced by NASBP on the distinctions between subcontractor default insurance and subcontract bonds; (2) a candid perspective from an officer of a large construction firm on his firm’s use of subcontractor default insurance and subcontract bonds; (3) an article by an officer of a large construction company on why his company prefers to use subcontract bonds over SDI to address the risk of subcontractor default; and (4) an article by a construction attorney on a recent case that addresses an insured’s obligatory burdens to recover money under a CGL policy for the benefit of the insured’s SDI carrier. This latter article provides a reminder that with SDI the contractor-insured may have an affirmative responsibility to shoulder the burden and expense in a legal contest between the SDI insurer and the CGL insurer. NASBP’s intent behind this array of articles is to convey to industry stakeholders an honest and open discussion of the value provided by surety bonds and how that value is distinguished from SDI. To conveniently read these articles, click here for the spring issue of SBQ. 

The two-page white paper comparing subcontractor bonds with SDI, “Managing Subcontractor Risks of Non-Performance and Financial Failure: A Flash Guide to Subcontract Bonds and Subcontractor Default Insurance,” is a particularly useful and convenient educational tool to provide to owners (and others). In fact, NASBP created this document for just that purpose, and we hope that our members, affiliates, associates, and the general public will use it as an educational tool about the value of surety bonds.

NASBP is pleased to provide forums for candid discussions of changes in the construction industry and how those changes might impact the surety world and the surety product. At the NASBP 2016 Annual Meeting & Expo, May 15-18, in Colorado Springs, CO, A State of the Industry Panel was led by NASBP CEO Mark McCallum and the panel included the following distinguished speakers: Michael Bond of Zurich Surety; Josh Etemadi of Construction Bonds, Inc.--A Division of Murray Securus; John Knox of SureTec Insurance Company; and Robert Raney of Travelers Bond. The panelists engaged in a number of robust discussions, on topics as diverse as SDI and subcontractor bonds, general changes in the construction industry, the future of the surety industry, and, in particular, the time needed for a surety to respond to a formal bond claim. 


This latter topic is the subject of an article in the May 30/June 6, 2016 issue of Engineering News-Record (ENR), written by Deputy Editor, ENR.COM, Richard Korman, “Some Surety Bonds Cut Sub Default-Claim Response Time.” Click here to read the article. Korman observes that “[c]hange has been a consistent theme at [NASBP] conventions,” and cites the most recent Annual Meeting in Colorado Springs. Included in the article is a quotation from Robert Raney, Construction Surety Business Unit Leader at Travelers, concerning the hot issue of surety response times to bond claims:

    “There are some sureties that are looking at or promoting bond language which is more responsive, including, perhaps, faster response times, increased flexibility for a prime contractor or owner to continue a contract during the investigation process, as well as clearer instructions on how to file a claim and who to contact . . . . And those things are needed to make the bond more attractive as a performance security option.”

The article quotes Raney’s thoughts about a quicker response time that some sureties now offer in subcontractor performance bonds:

     “We want to make our product a great product as an alternative to [subcontractor default insurance], so that’s where we are seeing flexibility in keeping [a project] moving and a commitment to conduct the investigation more promptly.”

During this time of change in the construction and surety industries, how appropriate that NASBP’s 75th anniversary will be celebrated in 2017. Under the leadership of Lynne Cook, Senior Vice President at Early, Cassidy and Schilling of Rockville, MD, and NASBP President for 2016-2017, this significant NASBP anniversary will focus on the future of surety bonds, with a respectful nod to the past. At the Annual Meeting in Colorado Springs, Cook unveiled the 75th anniversary theme: “Building the bonds of surety: Honoring our past. Defining our future.” And we should be the ones to define our successful future.

So, with an apology to James Agee and Walker Evans, I say, “Let us now praise surety bonds.”  Those of us who are privileged to work in this exciting, fascinating world of surety products that serve and protect so well the end beneficiaries have the happy duty to examine and maintain the relevance of the products and extol the value and virtues of these products to the public. After all, surety is smart business. 

The author of this article is Martha Perkins, General Counsel at NASBP. Martha Perkins can be reached at mperkins@nasbp.org or 202.686-3700.

This article is provided to NASBP members, affiliates, and associates solely for educational and informational purposes. It is not to be considered the rendering of legal advice in specific cases or to create a lawyer-client relationship. Readers are responsible for obtaining legal advice from their own counsels, and should not act upon any information contained in this article without such advice.    

 

 “There are some sureties that are looking at or promoting bond language which is more responsive, including, perhaps, faster response times, increased flexibility for a prime contractor or owner to continue a contract during the investigation process, as well as clearer instructions on how to file a claim and who to contact . . . . And those things are needed to make the bond more attractive as a performance security option.”

 “There are some sureties that are looking at or promoting bond language which is more responsive, including, perhaps, faster response times, increased flexibility for a prime contractor or owner to continue a contract during the investigation process, as well as clearer instructions on how to file a claim and who to contact . . . . And those things are needed to make the bond more attractive as a performance security option.”