Surety Bond Authority Weblog

Enacted on May 13, 2009, Alabama House Bill (HB) 184 increased the bond amount that can be required by the State Board of Heating and Air Conditioning Contractors of certified heating and air conditioning contractors in the state. The amount that the State Board can require went up from $10,000 to $15,000.

HB 184 subjects all active heating and air conditioning contractors to this surety bond (license bond) requirement, to include refrigeration contractors.

According to the recently enacted Iowa House Bill 2646 (HB 2646), fire sprinkler installers and maintenance workers are required to become officially licensed, purchase public liability insurance, and must obtain a surety bond (specifically a license bond). The amount of this commercial bond will be determined by Iowa’s Department of Public Safety.

In the state of New Mexico, HB 199 was enacted, which requires replaces the existing contractors’ license bond requirement with a $10,000 surety bond from a corporate surety bond company licensed in New Mexico. The existing contractors’ license bond needed to be replaced because the bond amounts were too small, and were based on size of projects already completed. Payments from the license bond can only be utilized to cure code violations of the licensee. Any claims that arise against the surety bond must be brought up within two years after the final inspection, or within two years of a certificate of occupancy being issued. Typically, whichever is earlier is what will be used. Furthermore, the surety bond company’s total aggregate liability cannot be higher in value than the surety bond’s face amount. Lastly, this bond requirement has a 30-day cancellation provision.

With the enactment of North Carolina HB 2353 and SB 1795, the state’s Irrigation Contractors’ Licensing Board was created. This new law requires all irrigation contractors operating in the state either obtain a $10,000 license bond from a state-licensed issuer (surety), or a letter of credit (LOC). If a surety bond is obtained, it must be conditioned on compliance, and be open to claims arising from people injured as a result of a direct violation of the newly enacted law.

Over the past decade, the surety bond industry has seen some significant changes that have changed the industry landscape, particularly when it comes to high risk bond programs. Companies that were dropped by their bond companies as a result of bad credit, etc, have been forced to find new bond agents in order to help them attain new surety bonds. This created a slew of challenges for agents, as they now have to find markets for these customers with credit problems, and will typically require significant collateral in order to write a bond for someone with bad credit. To serve these types of principals, Bad Credit Surety Bond Programs came into play.

High Risk = Higher Premium: Before there were high risk bond programs, underwriters of surety bonds would only write bonds for customers (or principals) that presented little to no risk of having a claim arise against them. In other words, they went after a “0% loss ratio”, and the bond companies were in a position to do so. With Bad Credit Surety Bond Programs, the underwriters of bonds are able and willing to write bonds for principals that are higher risk (of having a claim), and can do this by approving them at higher premiums. Similar to insurance companies, surety bond underwriters can approve a wider array of customers, but approval for those more likely of having a claim obviously comes at a cost to the principal… higher rates.

Collateral vs. Increased Premiums: Early on in the process, Bad Credit Surety Bond Programs brought about a need for bond companies to require collateral from principals. This tends to be a cumbersome, time-consuming process that involves a lot of administrative effort, and therefore many bond companies decided to avoid the collateral requirement by offering higher premium rates to their principals. Customer preference depended on the specific principal’s financial situation. Typically, however, the bond programs that offered higher premiums vice collateral were less expensive for the first year of the bond, but over time those that required collateral proved to be less expensive. This was due to the fact that the collateral would eventually be returned to the customer (roughly a year after the bond’s release) if no claims arose.

Knowing Your Options: It is important for principals with bad credit to understand what all of their options are. While many Bad Credit Surety Bond Programs are designed to meet the needs of customers with poor credit, and often times prove to be the most cost-effective option, they are not the only option available. For example, an Irrevocable Line of Credit (ILOC) is an alternative whereby the bank will freeze liquid assets of a principal in an amount equal to the total amount of the surety bond they would need to purchase. This would only be more preferable for principals with enough liquid assets to comfortably have the amount of the ILOC frozen by a bank. For customers that truly value their liquidity, and ability to quickly have cash on hand, an ILOC is probably not a viable option. While ILOCs have traditionally had service fees of around 1% the cost of the line of credit, the money market rate will have an impact on that as well, and can significantly raise the annual rate of the ILOC for the customer. For example, if the money market rate is 5%, and the service fee for the LOC is just 1%, the actual annual rate the principal pays for the ILOC is 6%. Customers must understand the choices available to them, and should choose the option that best fits their specific needs.

Outlook: High Risk Surety Bond Programs have been around for more than 5 years now, and it does not appear that they are going anywhere in the foreseeable future. More and more companies are willing to write surety bonds for principals with bad credits, and those that carry some sort of risk of having a claim arise. While increased premiums are part of what makes bonding companies willing to do this, the increasing number of bonding companies writing high risk has created competition. Competition is obviously a good thing for the customers, in this case the principals with bad credit, because it will eventually drive premium rates down, making Bad Credit Surety Bonds more affordable.

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.