Secrets of Bonding 150: Bonds Are Exactly Like Insurance

This statement might surprise you if you’re a Secrets blogger.

You can go all the way back to article 1 in this series, published in February 2014. It was called “Bonds are not insurance.” Okay, when did they become insurance?

Do you find this familiar?

The contractor client calls you and informs you that they just won a new contract. “We must provide an insurance certificate.”

What would your following comment be? Do you think you would say that you will forward the call to Bertha, who issues certificates? Would you prefer to get a copy of the insurance specification and the contract?

The latter would be your choice. This information is needed to determine whether there are any onerous clauses or special requirements and to establish the coverage levels. You may need to modify the program before issuing the certificate.

Let’s look at Surety Bonds. We always request the written requirements and any mandatory bonds forms when an agent colleague submits a bond request (or bond app) to us. If possible, we also ask for a copy of the contract.

This is precisely what we do with insurance. We are interested in understanding the needs of our customers and making sure that what we offer meets those requirements. It’s good business.

Bonds are, admittedly, very different to insurance. This is except for the common underwriting step. Are you agreeing?

Let’s take it one step further. What are the key points to look for in supporting documents? What are the key issues?

Bond forms

It is essential that you check the specification to see if bond forms have been included. You must check if bond forms are included in the specification. If so, you should determine whether they are required or optional.

All bid bonds in contract surety are basically the same. However, performance and payment bonds can differ significantly depending on the obligee (protected person).

The bond forms for all federal projects are identical, so they must be used.

American Institute of Architects (AIA) has created a standard set of bonds that is well-accepted by all parties and widely used in construction. These forms may be found in your contract.

Private contracts such as subcontractor work for a general contractor can have any number of bond forms. They might use the AIA forms or create their own P&P bonds that are mandatory. It is crucial to understand!

Certainty Credentials

For bonding companies, the standard could be “the obligee must accept the surety.”

There may be licensing or rating requirements that you must follow. “A bonding company authorized for business in New Jersey” may require a license from the local state insurance department.

An indication could be made of the minimum size and strength ratings from A.M. Best.

Similar to the previous example, a surety on Circular 557 (a federal approvals list) is not unusual.

Conclusion

Other than reviewing the requirements, there is no way to ensure your client has what they want. Failing to give the client exactly what they need can result in embarrassment, loss or termination of a contract and one unhappy “former” client.

Although bonds are not exactly insurance, underwriting is similar to insurance. However, there are some elements that bonding has in common with insurance. These include the need for sure when the carrier provides the proper coverage. Read the supporting documents. Talking with the client or underwriter might be a good idea.

This procedure is applicable to both bonds and insurance. It protects your E&O and assures your professional performance. It also leads to stronger client relationships.

Steve Golia has extensive experience providing bid and performance bonds to contractors. He has been solving bond problems for contractors for over 30 years and helping them succeed when others have failed.

Bonding Pros has the market access and underwriting talent you need. All this is complemented by exceptional service and easy access.