Electronic Bonding – Today and Tomorrow

By ROBERT J. DUKE, Director of Underwriting, Surety Association of America, Washington, DC and DEBRA J. NIEMEYER, Vice President, John Burnham & Company, San Diego, CA

With the enactment of the Uniform Electronic Transactions Act (“UETA”) in a number of states and the Electronic Signatures in Global and National Commerce Act (“E-Sign”) at the Federal level, electronic documents and signatures have legal standing. With this legal foundation, the electronic execution of contracts, including surety bonds, is becoming a reality. Automation produces benefits such as: reducing paper flow, eliminating redundant data entry, and accelerating the information flow. These benefits reduce processing costs and increase efficiency for all parties including bond obligees, principals, agents, brokers and surety companies.

The trend toward full automation of the bond execution process is still in its early stages and much needs to be done in order to achieve the ideal methodology. However, a review of current developments is revealing about where we are today and where we need to go. 

    Current Developments
    What is electronic bonding?

Before discussing electronic bonding, it is important to clarify that the concept of electronic bonding can be viewed as a two-dimensional spectrum of services. The first dimension involves what is being transmitted, data about the bond or the bond itself. The second dimension involves the level of data integration.

On the first dimension, the spectrum runs from simple bond authentication to the electronic execution and delivery of an actual, valid, and verifiable electronic bond with digital signatures from the surety and bond principal.

With electronic bond authentication, the party that receives the executed bond, the bond obligee, receives electronic verification from a third party that the agent that executed the bond on behalf of the surety company was authorized to do so. In a sense, this is similar to an electronic power of attorney. The electronic verification involves data that describes the bond that was executed (name of surety, obligee, description of project, bond amount and execution date) and a verification number issued by the third party. The bond authentication systems that are available today are web-based systems and the data can be found on the third party authentication provider’s web site. In its simplest form, the authentication is the only part of the bond transaction that is electronic. The bond still is submitted in paper form.

Electronic execution and delivery of a bond is at the other end of the spectrum and completely eliminates the paper. Further, the electronic document is enforceable and binding and includes the required signatures of the principal and surety.

The second dimension of the spectrum involves the ability to integrate the transmitted data from one system to another. At one end, the data is sent to the obligee but it cannot be integrated automatically into the obligee’s systems. The data must be manually reentered, thus creating redundant data entry. At the other end on the spectrum is full integration. The surety or surety agent transmits the bond and bond data to the obligee and that data is automatically integrated into the obligee’s systems without any human intervention.

The full spectrum of electronic bonding can be viewed in terms of the following graph:

Electronic Bonding Today

State departments of transportation (DOTs) have been the first to utilize some form of electronic bonding. Electronic bonding is being used in conjunction with electronic bidding systems that fully automate the bid submission process for the DOTs’ construction projects. By using an electronic bidding system, the contractor is able to input its bid data, such as name of contractor, contractor license number, project number and line item prices directly into the DOT’s system through the DOT web site. Many of these bidding systems work in conjunction with bond authentication systems. One of the data elements that the contractor inputs into the bidding system is the bid bond authentication number. With the authentication number the bidding system is able to access the bid bond data. Departments of transportation in California, Illinois, South Carolina, Georgia, Oklahoma, and Wyoming are examples of DOTs that have implemented or are considering the implementation of electronic bidding and bid bond authentication systems.

Although the bond data can be fully integrated into the obligee’s systems, these bid bond authentication systems are at the lower end of the spectrum and do not involve the execution of an electronic bond which sets forth the terms and conditions of the bond and includes the digital signatures of both the contractor and surety affixes to or logically associated with the bid bond electronic document. Some DOTs still rely on a paper bond. Others seem willing to rely on the bond data that is included in the bond authentications system (name of surety, obligee, description of project, bond amount, execution date, description of bond form used), and believe that the surety would be bound by the terms of the bond with such a transmission. A claim on a bid bond sent through a simple authentication system will be a test case as to the bond’s enforceability.

Technology exists today to permit the delivery of an electronic bond that is signed by the contractor and surety in a secure manner. Private Key Infrastructure technology (“PKI”) provides a secure means to use digital signatures that are verifiable, secure, and cannot be repudiated. Delivery technology is available to deliver secure documents that can be verified when they were received by the obligee.

The following is an example of such a delivery methodology:

1.      Agent completes electronic bond form, and power of attorney if necessary, and affixes digital signature.

2.      Agent transmits bond and an electronic power of attorney to principal via e-mail or other electronic means. (The power of attorney could be sent to the agent by the surety upon authorization of the bond.)

3.      Principal affixes its digital signature.

4.      Principal sends bond and power of attorney to obligee at the designated electronic address.

5.      Obligee uses the public keys to authenticate the documents and signature.

The shortfall of current methodologies that deliver executed and enforceable documents is that the data in the documents cannot be automatically integrated into the DOTs’ bidding systems. 

The Future

As the use of electronic bonding expands beyond DOTs and the technology matures, the surety industry must remain focused on two important principles. First, all parties are served best if a bonding methodology that is positioned at the far ends of the spectrum is developed. That is, the ideal methodology is one that delivers an actual electronic bond that is signed by principal and surety and the data on the bond form can be fully integrated into the obligee’s systems. Second, as obligees consider different technologies and methodologies for electronic bond execution, it is important that some standardization is developed. If each obligee develops its own system or requires the use of a proprietary system or service, sureties will be forced to adapt a dizzying array of systems and technologies. Such an array raises the cost of automation for sureties and discourages participation. Any technology or methodology should have no barriers to participate in full automation. Standardization of systems or methodologies eases the barriers to participation.

At the end of the day, any methodology or technology for the electronic execution of bonds should be open to all participants with little or no barriers, assure the validity and authenticity of all contracting parties, be able to deliver a binding and legally enforceable document from one location to another, and be able to fully integrate the data from one system to another. We are not there yet, but full automation may be here before you know it.

    About the authors:

Robert J. Duke and Debra J. Niemeyer are members of the SAA/NASBP Joint Automation Committee. The Joint Automation Committee is comprised of representatives from the Surety Association of America (SAA) and the National Association of Surety Bond Producers (NASBP). The Committee serves as a focal point for addressing automation issues related to the surety industry and provides recommendations to the respective Boards of Directors.

More information about the Uniform Electronic Transactions Act (“UETA”) 

More information about the Electronic Signatures in Global and National Commerce Act (“E-Sign”)