Secrets of Bonding 124: Underwriting Challenge – What’s Wrong With This Picture?

Secrets of Bonding 124 Underwriting Challenge - What's Wrong With This Picture

A few years ago, when I began my career in the role of a reporter cub at Daily Planet, I mean surety underwriter, I was faced with the same situation, which was then repeated. In this piece, we’ll discuss the problem and ask you to apply your judgment when you underwrite. The issue will be “What’s missing in the image?”

Scenario #1

This was first reported in the form of the Lost Instrument bond. The bondholder claimed that an instrument that was negotiable (anyone in possession of it could take it to cash) was destroyed in error. He was a young man in his 20s who acquired the asset. The financial statement of his was not revealing anything other than the asset at issue, and this was a concern because underwriters don’t think that the individual has a legitimate reason to change to the “lost” help and its replacement.

We wrote back and stated the underwriting concern that the financial situation of the applicant was not adequate. We were then provided with an innovative suggestion: Once an alternative instrument has been released and subsequently transferred directly to the Surety company who can use it as security against their risk, till the bond’s release (years!) “There is no risk for the security.” It sounds pretty good?

In my naive underwriting mind, I thought this was intriguing, but I also felt feel uncomfortable. Why hadn’t I had the opportunity to do this before? Perhaps I was on the stage of developing an entirely new underwriting process. Are they going to name this after me?

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What’s missing from this photo?

Scenario #2

In the latest case, the surety was required to provide support for the purchase of a multi-million-dollar transaction. The person who applied (a person) was a foreign national and a successful businessperson but was not acquainted with the requirements of surety underwriting. They were not used to giving personal financial information or including spouses in the business.

To aid in facilitating the purchase and possibly to avoid the indemnity requirements, there was a suggestion that the title to the property purchased be transferred directly into the company that guarantees the property (sound like something you’ve heard before?). Once this financial deal (which was the basis of the guarantee of the surety) is concluded, and the surety is released, and the title will be handed over to the buyer in addition, “the surety will no longer be placed in a position of risk.” It’s a boom! Let’s do it!

Why is this photo?

The Solution

Here are some great tips. If your underwriting brain is feeling that something isn’t right, there is a good chance that it is!

The issue with both scenarios is their timing.

Companies that bond ALWAYS protect their positions prior to taking on an obligation. It is the responsibility of the underwriters to safeguard the company’s assets as well as its owners by doing so.

Consider banking lending practices that aren’t different from the practice of underwriting for surety. Can a bank issue an investment loan solely on the potential value of the project? They must be secured with enough assets prior to the project, such as the personal assets of the person applying and, possibly, other collateral.

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Financial obligations require that the creditor be secured prior to the due date. A careful decision-making process requires this.

If you notice something isn’t right, follow your instincts. Examine it before jumping.

Steve Golia is an experienced contractor who offers performance and bid bonds for contractors. For over 30 years, his expertise has been in the field of solving issues with bonds for contractors and assisting them when other providers have failed.

The specialists in Bonding Pros have the underwriting expertise and market access you require. They also provide exceptional service and an excellent level of accessibility.