During the fifteen-minute interview, conducted by editor for the site, Sam Simon, Maroney provided contractors important information about surety bonds and insight into what to expect as the market becomes tighter.

NASBP has posted a link to the audio broadcast, which is titled “Surety Bonds in the Construction Industry,” at NASBP’s home page http://www.nasbp.org.

The article indicates that two regulatory agencies, the District of Columbia Department of the Environment and the Department of Consumer Regulatory Affairs, are discussing the concerns about the bond requirements.

Background
In August of 2007, NASBP together with SFAA submitted joint comments on the bond requirements in the District of Columbia Green Building Act of 2006.

NASBP approached the AGC of Metropolitan Washington D.C. to assist them in educating the regulatory authorities charged with implementing the Act.

Representatives of NASBP, SFAA, and AGC met in October of 2007 with the District of Columbia Green Building Advisory Council to talk about the bond requirements and changes that could improve the Act. Since that meeting, there has not been any movement to address these concerns.

To access the joint letter submitted by NASBP and SFAA about the Act, click here. A few of the concerns highlighted in the letter include the following:

NASBP will continue to advocate for workable bonding requirements in the Act, especially since the Act may serve as a template for other municipalities thinking of mandating green building requirements.

These materials are provided to NASBP members and affiliates solely for educational and informational purposes. They are 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 these materials without such advice.

The Senator’s staff stated that they had been receiving calls from contractors who were having difficulty obtaining surety bonds in Maryland.

The meeting with Cardin’s staff was just one of several ways NASBP sought to address the Senator’s statement. NASBP also notified NASBP Maryland members to make them aware of Cardin’s statement and to encourage them to contact their state elected officials to explain the importance of bonds.

In addition, NASBP with The Surety & Fidelity Association of America (SFAA) co-authored a joint letter to the Gazette in response to the Senator’s comments, which the Gazette published on Friday, December 19th. (Click here, to see this December 19th article, titled “Waiving surety bonds won’t help small businesses,”).

Click here to view the joint letter sent by NASBP and SFAA.

The NASBP Pipeline will keep you apprised of any developments on this matter.

The Government Relations team has composed several position papers on issues of concern to NASBP and for use during NASBP visits to Congressional offices in 2009. These position papers will be posted at an online library at http://www.nasbp.org as they are developed throughout 2009.

The position papers developed to date are as follows.

1. The NASBP infrastructure document described above was accompanied by a cover letter from President Maroney and sent to all Congressional offices. Click here to view the document.

2. This more encompassing position paper on infrastructure reinvestment describes NASBP’s position and how, due to the current state of the economy, now, more than ever, surety bonds are essential for government-sponsored construction projects to ensure that taxpayer funds will be preserved. Click here to view the paper.

3. This NASBP contract bundling position paper supports the unbundling of federal construction projects to allow small contractors the opportunity to participate. Click here to view the paper.

For more information on NASBP Advocacy, click here.

What Is Contractual Risk Transfer?

The primary purpose of CRT is to transfer the legal liability and responsibility for certain potential losses to another party. This transfer is accomplished through the use of various provisions within the construction contract. The processes that a contractor has in place to evaluate their contracts should address the following risk transfer mechanisms and their potential financial impact.

Indemnity Provisions

Indemnity provisions are the most common method of shifting risk contractually. Indemnity provisions, which are often referred to as hold harmless provisions, state that one party to the contract will pay and/or reimburse the other party for certain losses it incurs. The scope of the liabilities transferred by indemnity provisions can vary greatly and is statutorily regulated in many states.

Most contractors are able to obtain insurance coverage for the indemnity obligations they assume, but this coverage is usually limited to losses resulting in bodily injury and/or property damage sustained by a third party. Thus, if a contractor has signed an indemnity agreement that includes losses beyond third party bodily injury and property damage, that contractor has created an uninsured exposure for itself.

Additional Insured Requirements

Another common method of CRT is the additional insured requirement, by which one party to the contract (typically the lower-tiered party) is required to name the other party as an additional insured under the first party’s insurance policy. This practice is most crucial for Commercial General Liability exposures.

In theory, the additional insured would be entitled to all of the same coverages provided to the named insured on the policy. In reality, most insurance policies limit the coverages available to additional insureds. Thus, if a contractor has not specified the coverages required in the contract or has not reviewed the terms of the additional insured coverage provided by the other party, it runs the risk that any future losses may not be covered.

Waivers of Subrogation

In order for indemnity provisions and additional insured requirements to transfer risks as intended, it is imperative that contractors utilize waivers of subrogation as well. Generally speaking, insurance companies are permitted to recoup (“subrogate”) the claims they have paid to the extent that the claim was caused by a party other than the insured. Waivers of Subrogation should be used in construction contracts in conjunction with indemnity provision and additional insured requirements because they state that one or both parties waives its rights (and consequently the rights of its insurer) of subrogation against the other. Without a Waiver of Subrogation, indemnity provisions and additional insured requirements are rendered ineffective.

Waivers of Consequential Damages

Consequential damages, such as lost revenues and lost profits, are those that are not a direct result of the responsible party’s acts or omissions. Some construction contracts contain provisions whereby one or both parties give up their rights to recover consequential damages in the event of a loss, regardless of whether the at-fault party has insurance coverage for such damages. These waivers transfer the risk of consequential loss back on the injured party. Often, the amount of consequential damages far exceeds the amount of actual damages. For example, if a contractor accidentally hits an underground power cable while building an addition to an existing casino, the revenues lost by the casino as a result of being forced to close for an evening would far outweigh the cost to repair the damaged cable. Contractors that utilize waivers of consequential damages in their contracts drastically limit their potential liability.

Payment of Deductibles

Many project owners provide contractors with Builder’s Risk insurance. Some contractors assume that because they are receiving coverage under another’s policy, that they have successfully transferred the risk of property loss. Most contractors contractually agree to pay the Builder’s Risk deductible if the contractor’s property is damaged without inquiring as to the deductible amount, (which tends to be quite large). Contractors also usually agree to pay the deductible regardless of fault, meaning that the contractor will pay the deductible even if the property damage was caused by another contractor on the job with little chance of recovery.

How Does CRT Affect The Three “C’s”?

Capital

The most obvious correlation between CRT and the three “C’s” is the effect on a contractor’s capital. The primary purpose of CRT is to keep the contractor from having to spend money. If a contractor can minimize its liability with CRT practices, that contractor will pay fewer claims. Many contractors also have loss sensitive insurance programs, meaning that the amount of their insurance premiums is dependent upon the number and severity of losses they incur. Even if a contractor has claims made against it, CRT practices can minimize the claims paid by its insurance carrier; potentially decreasing the contractor’s insurance premiums while preserving their available limits of insurance. These savings can have a profound impact on the contractor’s available capital and that contractor’s ability to fulfill its performance and payment obligations, thus making the contractor a more attractive surety client.

Capacity

The effect that CRT has on a contractor’s capacity is less obvious, but equally valid. A contractor’s capacity is dependent upon its access to quality personnel and proper equipment. Sound CRT practices can minimize the strain placed on a contractor’s personnel and equipment in the event of a claim. A broad transfer of risk will include losses to the contractor’s equipment (usually to the extent caused by the lower-tiered party) in addition to losses suffered by third parties. A well drafted risk transfer provision will clearly allocate responsibility and will not require interpretation in the event of a loss. Not only will the claims be paid quickly, but the contractor will not lose access to key personnel forced to spend their time participating in investigations and litigation proceedings.

Character

Of the three “C’s”, character has always been the most difficult for surety underwriters to quantify and measure. A contractor’s level of commitment to sound CRT practices is a means to evaluate that contractor’s character. There are many contractors that sign contracts without reading them. By doing so, these contractors are assuming a great deal of risk, not only for themselves but for their sureties as well. Those Contractors that are committed to reviewing their contracts, to understanding how the different risk transfer mechanisms operate and to negotiating aggressively for beneficial terms are demonstrating their dedication to the overall success of the company and to the relationship between the client and its surety.

In conclusion, surety underwriters must have an understanding of their clients’ activities to properly evaluate the potential risks involved. It is crucial for surety underwriters to understand what contractors are agreeing to in their contracts and the processes used by these contractors to address CRT issues. While it might not ever become the official fourth “C” of surety bond underwriting, CRT can provide underwriters with a great deal of insight into a contractor’s Capital, Capacity and Character.

This is the second in a series of articles on Risk Management and Insurance coordinated by the NASBP Risk Management and Insurance Committee. The author of this article is George Schneller, J.D., Contract Administrator, of IMA of Texas, Inc. in Dallas, Texas.

A good example is the contractor’s license bond. The bond itself runs to the state as the Obligee, but it protects any customer of that contractor. In some states, the bond extends to non-payment by the contractor to its suppliers and subcontractors. This bond used to be a simple $10,000 bond and in some Western states even less. However, many states are realizing that the bond penalty is not sufficient to cover its intended purposes. First, with the advent of online, instant issue underwriting systems and non-standard bond programs, it has become easier to obtain a contractor’s license bond. Granted, an individual has to take courses and tests in order to become a contractor, but the bond is no longer acting as a barrier of entry into the profession.

Second, costs have increased. In most areas of the country, even a basic bathroom-remodeling job may cost twice as much as the $10,000 bond amount. As a result, when a claim has been made, the states have found that the bond penalty has not been satisfying all of the parties that had been wronged by the contractor. In addition, legislators are looking for “deeper pockets” that can protect the general public. More legislation is being proposed and adopted, often adding additional bond requirements and more bond penalties. Some believe these new requirements and penalties provide the public some non-governmental protection against losses resulting from poor or unscrupulous licensed practitioners. All of these issues are driving the bond penalties upward.

Each state faces a dilemma. How does the state balance increasing the penal sum of the bond to an amount that will satisfy claimants in the case of a claim without jeopardizing the ability of the good contractor to obtain the required bond? As prices for materials and labor continue to rise, the bond limits will follow, and that is going to spell the death of the $10,000 License and Permit Bond.

This is the sixth in a series of articles on Commercial Surety.

This article is authored by NASBP Commercial Surety Committee Member James J. Crinnion, Regional Manager of Capitol Insurance Companies of San Francisco, California.

This unique and interactive workshop is designed to familiarize surety professionals with the complex risk environment that construction contractors operate in today’s market. Gaining this understanding is a key element in becoming a trusted advisor to clients in these challenging times.

For most states, the NASBP Risk Workshop qualifies for an average of 18 hours of Continuing Education Credit. Check with NASBP at 202-686-3700 for the number of hours required by each state.

NASBP Member/Affiliate fees are $1190 and Non-Member/Non-Affiliate fees are $2380. Class size is limited. To register and for more information, please click here.

NASBP Annual Meeting and Expo

Be sure to attend the NASBP Annual Meeting and Expo that will be held April 26 through 29, 2009 at the La Quinta Resort & Spa in Palm Springs, California. The meeting will provide an opportunity for surety professionals to meet with leaders of the surety industry. Producers and company representatives will share ideas and build strong relationships at this beautiful resort that features a world class spa and some of the country’s best golf courses.

The theme of the 2009 NASBP Annual Meeting will be “Celebrating Surety” and the focus of the meeting will be critical industry topics, such as successful claims, credit crisis in construction lending, and fidelity and risk.

NASBP has organized a panel of industry leaders who will provide their candid assessment of bonding and the bond product as principals and claimants. The panelists will include representatives from the Associated General Contractors of America, American Subcontractors Association, Inc., Associated Specialty Contractors, Inc., and Associated Builders and Contractors.

The registration fee for NASBP Member/Affiliates is $795.00 and the fee for Non-Affiliates is $1590.00.

To register for the 2009 NASBP Annual Meeting, click here

For information about the La Quinta Resort & Spa, click here

Since 1995 the BBB serving Nebraska, South Dakota and southwest Iowa has presented the prestigious BBB Integrity Awards recognizing those firms whose business practices and related activities exemplify the BBB’s mission and principles which include honesty, commitment, and accountability.

The BBB Integrity Awards recognize companies that go above and beyond in serving their customers and communities and focus on demonstrated ethical business practices, rather than a company’s growth, profitability or popularity. The independent panel of judges who select award winners are from the business and academic communities.

Passing—John T. (Jack) Warnock

NASBP is saddened to announce that on November 13th, John T. (Jack) Warnock, 65, a longtime NASBP activist, has passed away. Jack was a tireless supporter and promoter for Alliant Insurance Services, Inc. (Driver) and the surety and insurance community.

NASBP Government Relations Committee Chair Larry McMahon related, “Jack was always a mentor, a friend, and the person I would always look to who helped me understand this business, like no other; and, more importantly, he gave me my start in the agency business with Alliant.”

Jack was born in Albany, New York on February 5, 1943 to Stanley and Alice (Derry) Warnock. He attended Christian Brothers Academy, SUNY Cobleskill, and the University of Buffalo. He received his degree from the University of Nebraska in 1971 after moving there because of a job transfer.

Jack’s career began with Aetna Casualty and Surety (now known as Travelers), starting in Aetna’s Albany, NY office in 1967 before transferring to the Omaha offices in 1968. Jack and his family moved to San Diego in 1972. He started working with the Robert F. Driver Company as a broker. He steadily rose through the company. For 20 years, he managed the surety department that had an emphasis on construction. He was one of the key members of the management team that purchased the company in 1998 that is now known as Alliant Insurance Services. He was a past president of the Surety Association of San Diego and was active in public relations efforts for the National Association of Surety Bond Producers (NASBP) and the Surety Information Office (SIO).

Jack is survived by his wife, Pam, sons, Dan (Kimberly) of Ramona, CA, Ryan of San Diego, CA, and his mother, Alice Warnock of Albany NY, sister Pat Rafferty (Jim) of Ravena, NY, his loving nieces and nephews, and two grandchildren, Skylar and Dylan. He was preceded in death by his father, Stanley, and sister, Mary.

Visit the online guestbook by clicking here.

Central Bonds & Insurance Agency, Inc.
http://www.centralbonds.com
Midvale, UT
Key Contact: Edward Golub

Cook, Hall & Hyde, Inc.
http://www.chhins.com
Melville, NY
Key Contact: Thomas Niland

• Allegheny Surety Company (NAIC #34541), has been certified and added to the Treasury’s Listing of Approved Sureties effective 11/20/08.
• Argonaut Insurance Company (NAIC #19801), has been certified and added to the Treasury’s Listing of Approved Sureties effective 12/19/08.
• Folksamerica Reinsurance Company has changed their name to White Mountains Reinsurance Company of America (NAIC# 38776).

For a complete listing of all states where these companies are licensed to transact surety business, please refer to the Circular 570 and its supplements at: http://fms.treas.gov/c570/c570.html and
http://fms.treas.gov/c570/supplements.html

The Automation and Technology Committee designed the survey, titled Information Technology Survey Results, with a goal of examining the current use of technology by NASBP members. NASBP had an excellent response rate to the survey and was able to produce detailed statistics from the survey’s more than 35 questions.

The Executive Summary of the results provide insight into members’ information and technology needs and concerns for 2009 and beyond. Among the survey findings are several interesting points including:

• Two-thirds of the respondents plan to spend about the same amount of money on information technology in 2009 as they did in 2008. Almost one-quarter (22%) of small agencies plan to spend more in 2009.
• Only 25% of agencies require e-mail encryption measures to enhance privacy when sending e-mail. Smaller agencies more frequently mandate security measures than medium to larger agencies.
• The results indicate 79% of the respondents have gone paperless or plan to move in that direction.
• Nearly half (48%) of respondents indicated agencies use a Blackberry® to access e-mails outside their office. Nearly the same amount (49%) indicated they use remote access for their office PC, via Citrix, Remote Desktop, or other remote access software.

The survey results and the Executive Summary are available for members and affiliates on the NASBP web site at http://www.nasbp.org/itsurvey. As technology becomes a more important and an integral part of the day-to-day activities of surety bond producers and their agencies, NASBP will continue to develop tools and resources for members to assist them in addressing their automation and technology challenges. Moon said, “The Automation and Technology Committee plans to use the survey results to assure the tools and activities it develops in 2009 meet members’ needs.”

For more information on the NASBP Information and Technology Survey and the work of the Automation and Technology Committee, please contact Dave Golden, Technology Manager, at dgolden@nasbp.org.

• Step 1: Visit http://awards.suretyinfo.org
• Step 2: Select “Competition” to review criteria
• Step 3: Select “How to Enter” for details
• Step 4: Select “Nomination Forms” to begin

Entries are due February 13, 2009. Please keep in mind that while supporting documentation and photos may be submitted separately from the online nomination forms, they must be received by February 13, 2009, for entries to be considered complete.

Other information about deadlines, judges, past winners and Tiger Trust inductees, and advice also is available.

For questions, contact Marc Ramsey, Manager, Information and Communications, at mramsey@sio.org or (202) 686-7463.

Order Construction Executive Surety Section Reprints Today

If you haven’t ordered copies of the November 2008 Construction Executive Surety Section reprints yet, now is the time to do so. The Surety Section is a perfect resource for contractors and others in construction providing a comprehensive look at the surety product and the surety bonding process to help contractors face today’s challenging construction economy.

The Surety Section features advice and knowledge about today’s surety market and covers such topics as legislation, disciplined underwriting, contract review, business plans, construction accounting, claims, electronic bonding, subcontractor bonding, qualifying the surety, bonding emerging contractors, and changes to the Small Business Administration’s Surety Bond Guarantee Program.

Order reprints today while the information is still fresh off the press! Visit SIO’s website at www.sio.org/fstore.html.