Surety Bond Authority Weblog

Like many industries in our economy, the U.S. construction market has taken a hit as a result of the recent credit crisis. Many constructions projects throughout the country have either stopped or been slowed down, and subsequently, the construction bond portion of the surety bond market has seen changes as well. Specifically, perhaps the greatest change to the construction bond market is the level with which underwriters of surety bonds scrutinize the cash flow, or financial health, of contractors seeking surety bonds for their businesses.

It’s important to understand why this additional scrutiny is being placed on the contractors’ cash flow by underwriters, because this is happening despite expectations by brokers that rates will be stable for the near future. However, the U.S. construction market’s recent decline forced related insurance rates (premiums) to fall during the second quarter of this year, which was the first quarterly drop in insurance premiums in the past few years. Additionally, the current market situation has caused a major increase in competition for construction jobs/projects nationwide. Construction companies are forced to lower their prices to get much needed jobs, and therefore their profits (profit margins) are naturally going to take a hit. This makes accurate, efficient management of companies’ financial statements essential to their financial well-being, and possibly to the survival of the business. In particular, proper management of the balance sheet, and the statement of cash flows (SCF) is crucial to a construction companies’ success, because often times they can work for up to a couple of months on a project before they begin receiving cash from customers. Construction expenses and payroll can add up quickly in this environment, and therefore cash flow is vital. Underwriters of surety bonds understand this, which is why they are taking a closer look at contractors’ cash flow when determining the level of risk associated with a bond and the premium rates.

On 9 January 2009, the Wichita Business Journal reported that the Wichita-based Martin K. Eby Construction Company Inc. and Liberty Mutual Insurance Company entered into a surety bond program with one another. This deal comes after a roughly four-year period where Eby Construction Co. was unable to purchase the contract surety bonds required in order to work on certain government projects. This inability to obtain surety bonds came as a result of a number of significant losses on jobs in both the states of Texas and Florida. Eby was forced to sell their operations in TX and FL.

In October of this past year (2008), Eby made the positive announcement that they were on the verge of regaining their ability to obtain surety bonds. A significant settlement in a lawsuit with one of their Dallas-based customers may have been the catalyst for this favorable turn of events.

Now that Eby Construction Co. has begun a surety bond program with Liberty Mutual, the company should soon be able to conduct work in the public sector. Additionally, Eby announced that they will be able to place bids to do work on certain profitable jobs in the private sector that they had previously been unable to bid on due to their inability to obtain surety backing (via surety bonds). Two of the private sector jobs mentioned by the Wichita Business Journal were Via Christi Health System and Cessna Aircraft Co.

In July 2008, North Carolina House Bill 2463 was passed, and contained a number of changes to the state’s “Mortgage Lending Act” (Article 19 of G.S. 53).  While Article 19 applied to just mortgage bankers and mortgage brokers, HB 2463 extended coverage to include “mortgage servicers” in the state of NC. 

This bill requires mortgage servicers to post a $150,000 license bond (type of commercial bond/surety bond), the same type/amount already required by other mortgage lenders operating in North Carolina. 

With the signing of this bill, the NC Banking Commission is now authorized to charge a fee for expenses incurred during examinations of any licensees’ books/records in order to ensure compliance.  Before HB 2463, such examinations were paid for by the Commission. 

To clarify, the term “mortgage bankers” pertains to a person that makes mortgage loans, while “mortgage brokers” are people who solicit applications for such loans, issue loan commitments, etc. 

On 9 October 2008, Pennsylvania Governor Ed Rendell signed 10 bills into law, one of which, Senate Bill 1019, pertained to Pennsylvania Recreational Vehicle (RV) Dealers.

The two major takeaways from SB 1019 are as follows:

1. Any person who wishes to act as an RV dealer in the state of PA is required to purchase/post a $30,000 license bond (a type of commercial surety bond). This is obviously only required of RV dealers that have not already posted a license bond with the Pennsylvania Department of Transportation (PennDOT). The license bond is required by RV dealers to ensure they comply with all the pertinent laws and regulations in the state.
2. SB 1019 (PA) also gives the Pennsylvania State Board of Vehicles the authority necessary to discipline out-of-state RV dealers that choose to violate Pennsylvania law.

On 1 July 2009, California State Assembly Bill 180 will become operative, and will set forth tighter laws governing the state’s Foreclosure Consultants.

AB 180 allows homeowners the right to cancel on a contract up to 5 business days, as opposed to 3 business days, as was previously the case, and also makes delivery of a cancellation notice easier than before. Furthermore, the bill prevents foreclosure consultants from getting a power of attorney from the homeowner, regardless of the purpose.

In July 2009, upon becoming operative, the bill will require all California foreclosure consultants to register with the Department of Justice, and also to purchase a $100,000 surety bond (commercial bond) in order to guarantee they all foreclosure consultants follow state law. The Department of Justice will then have proper oversight of the foreclosure consultants throughout the state of CA. The surety bond requirement was put in place to benefit/protect homeowners.

In July 2008, in response to an extreme drought and in an effort to more efficiently use the precious resource, water, the General Assembly of North Carolina passed House Bill 2353 (Senate Bill 1795), short title “Irrigation Contractors Licensure/Fees”, which created “The North Carolina Irrigation Contractors’ Licensing Board”. The initial board was to be selected no later than 1 October 2008.

According to the law, any person in the state that operates as an “irrigation contractor”, or under the appearance of an irrigation contractor must be properly licensed in North Carolina. The bill requires all “irrigation contractors” in the state to purchase a $10,000 license bond in order to operate.

Any irrigation contracting or construction performed by a person, partnership, association, or any other type of group must be directly supervised by a licensed member of the state’s “Irrigation Contractors’ Licensing Board”, which was created from this bill.

Legislation was recently passed that now places Alaska-based mortgage bankers and mortgage brokers under the direct regulation of the state’s Division of Banking and Securities. The new legislation requires all brokers and lenders that apply in the state after 1 July 2008 to ensure compliance with the new regulations. The law requires all mortgage brokers and mortgage bankers throughout Alaska, not just new applicants, to be in compliance with the new regulations no later than 1 March 2009.

Some of the new regulations under the Alaska Division of Banking Securities are a more extensive background check, additional monitoring of company records and applications. There will also be a mandatory examination and annual continuing education requirements for Mortgage Originators. A surety bond in the amount of $25,000 will be required as well. However, since Alaska is not considered to be a “brick & mortar state”, physical offices will not be required for mortgage brokers/bankers.

I recently posted an article on the two major categories of surety bonds: Contract Bonds and Commercial Bonds. However, another much smaller yet significant category of surety bonds are Court Bonds. While this category of bond does not make up as much of the surety bond market as the previously mentioned categories, it is important to understand what they are, and the primary types of surety bonds that fall under court bonds.

In a nutshell, court bonds are a form of surety bonds that are required in many court proceeding in order to allow litigants to engage in the requisite legal proceedings. They can ensure that a person has the necessary protection from possible loss that could come about as a result of courts outcome. Court bonds can also guarantee that a person assigned as a fiduciary carries out his/her duties in accordance with the terms of an agreement or the orders of the court.

Here are the most common types of Court Bonds:

• Appeal Bonds - Required by a court before any appeal is made.
• Guardianship Bonds - These types of bonds ensure that legal guardians of minors or incapacitated individuals will not misuse any funds that are supposed to utilized to support that individual. (also known as Custodian Bonds)
• Probate Bonds - Bonds that are required by the court to guarantee the proper distribution of assets by the executor of an estate whenever an person passes away or becomes incapacitate. (also referred to as Estate Bonds, Executor Bonds, and/or Fiduciary Bonds)

For many new to the world of surety bonds, the renewal process can be slightly surprising. The purpose of this post is to shed light on the timing of renewal payments in order to prevent unnecessary confusion. Typically, invoices for renewals of surety bonds are sent to the principal months before their surety bond expires. Additionally, payments are due months prior to the bond expiration date as well. While some principals may prefer to hold off on paying for a renewal until the day the bond expires, that is not how the process works.

The language of surety bonds requires bonding companies to collect renewal premium payments well before bond expiration. For instance, each surety bond will have a “cancellation clause” that specifically states how much advance notice bonding companies are required to give principal and obligee prior to the bond’s expiration date. Most cancellation clauses require notification to be delivered in writing either 30, 60 or 90s prior to expiration. Hence, cancellation clauses must be considered when determining when payment for renewals will be due to the bonding companies, which as I previously stated can be a few months out (prior to bond expiration).

To understand surety bonds, and how they work, it is best to start off by breaking them down into larger groups or categories. There are two major categories of surety bonds: Contract and Commercial Bonds. In this article, I will briefly explain what each of the previously listed bond types guarantees, and will also provide you with a few examples of each.

The first category of bonds I will discuss are contract bonds. Contract Bonds are purchased by a contractor (or principal) from a surety at the request of a project owner (obligee), and essentially provide obligee with assurance that the principal will perform in accordance with the terms of the contract (i.e. complete the work, pay subcontractors, material suppliers, etc.).

Examples of Contract Bonds:
• Bid Bonds - Bonds that guarantee that a contractor will enter into a contract at the amount bid and post the appropriate performance bonds.
• Construction Bonds - These are bonds designed to guarantee the performance of obligations under a construction contract.
• Payment Bonds - These bonds guarantee payment of the contractor’s obligation under the contract for subcontractors, laborers and materials suppliers associated with the project.
• Performance Bonds - Guarantee performance of the terms of a contract by a contractor.
• Site Improvement Bonds - These bonds guarantee that any public property that was disturbed or altered during the conduct of a private project will be completely restored upom completion of the project.
• Subdivision Bonds - May be required by local government to ensure that landowners follow-through and complete mandatory public improvements made to their property by builders.

The next category of bonds we will cover are Commercial Bonds. There are dozens of different types of commercial bonds, which guarantee the obligee that the principal (purchaser of the bond) will perform per the terms listed on the bond.

Some examples of the many types of Commercial Bonds are:
• ARC Bonds - Required by the Airlines Report Commission.
• Auto Dealer Bonds - Bonds required by each state to ensure auto dealers abide by state regulations.
• Broker Bonds - The different types of Broker Bonds available are Freight Broker, Insurance Broker and Mortgage Broker Bonds.
• Cigarette Tax Bonds - Cigarette distributors may be required to obtain this type of bond to ensure payment of taxes.
• Collection Agency Bonds - Bonds required by a governing body to ensure collection agencies operate within rules and regulations.
• Freight Broker Bonds (BMC-84) - These federally-mandated bonds must be obtained by freight brokers to ensure delivery of brokered goods.
• License & Permit Bonds (not listed) - Due to the very high number of bonds nation-wide that fall under this category, this link will provide general information on license & permit bonds.
• Liquor Tax Bonds - Bonds required to guarantee the payment of taxes collected on liquor and other alcoholic beverage sales.
• Mortgage Broker Bonds - Bonds that are required by many states to ensure that mortgage brokers operate in accordance with all pertinent rules and regulations of that particular state.
• Sales Tax Bonds - Required by the government to ensure timely payment of sales tax by a company.
• Telemarketing Bonds - These types of bonds are required by the state to ensure that telemarketers, or phone solicitors, follow all rules and regulations set forth by that particular state in the conduct of their solicitation.

 
Contract and Commercial Bonds can also each be further broken-down into many more sub-categories (i.e. A License & Permit Bond is a sub-category of Commercial Bonds), and some of these sub-categories can have numerous different types themselves. Each and every sub-category of surety bond is underwritten differently by the surety bond companies, and there may also be different application requirements for each types as well.