|
|
Making Sure
Sureties are more cautious than in
the past, but companies with proven track records and solid
growth plans are faring well in a tight market
By Sheila Bacon
Five years after 9/11 terrorist attacks added insult to injury
during a faltering U.S. economy, the surety bonding market
is continuing to make a slow recovery. As the economy improves,
bonding companies are loosening up on the self-preservation
safeguards imposed when the reinsurance market nosedived.
"Surety companies did tighten up and weed out some of
the accounts that were less than solid," says Judy Rapp,
vice president and partner at AGC-member firm Wolf-Majeskey-Rapp,
a Spokane, Wash.-based insurance and bonding agency. "Today,
though, many sureties are reporting good underwriting results."
Reinsurance allows a bonding company to spread its risk among
special reinsurance markets, lessening the impact of claims
on any one company. The claims generated by 9/11 losses caused
turmoil among many reinsurance providers. That market still
has not fully recovered, leaving fewer reinsurance companies
available for bonding companies to spread risks, says Rapp.
As a result, sureties offering performance and payment bonds
are more selective in allocating their capacity and have less
tolerance for underperforming or risky clients.
Bonding companies are more judicious in that they are choosing
clients with stronger financial margins and high-quality accounting
presentations, both internal and outside reporting, Rapp says.
Coming out of a "hard" market, sureties are still
cautious, which means contractors often feel the consequences.
Contractors that work for private sector owners may often
secure a job on a handshake, but contractors doing hard-bid
work for public agencies are required by law to be bonded.
Larger contractors may have trouble bonding projects over
$100-million due to the reinsurance market. Contractors sometimes
find that the bonding capacity just isn't available for larger-sized
projects. In these cases, it may take the involvement of several
surety companies to secure the required bonding.
Doing the Right Thing
These days, sureties are adhering to fundamental underwriting
standards, having learned from mistakes made in years past
when sureties as a whole were not sufficiently scrutinizing
their clients, says Troy Wagener, senior vice president of
BancorpSouth Insurance Services, Biloxi, Miss. The booming
economy across the country is making it easy for sureties
to be selective about the contractors they bond.
"There's so much work for sureties that they are much
more prone to stretch for contractors who are doing the right
thing, simply because it makes sense," says Wagener.
"On the other hand, if the contractor is not making money
and not providing the information the surety requires, they're
finding it harder to get bonds."
In general, good contractors are still enjoying an equally
good surety bonding market, says Bill Ernstrom, general counsel
of St. Louis-based Alberici Constructors. "The surety
industry has put more and better underwriting discipline into
the marketplace, so they are looking carefully at the 'three
Cs' of a contractor-capacity, character and cash. This all
bodes well for a good contractor. It evens out the playing
field for contractors who have their act together. We're competing
evenly against each other."
Marvin House, CEO of Knoxville, Tenn.-based Merit Construction
and the chairman of AGC of America's Surety/Bonding Committee,
believes the efforts his company has made to minimize risk
have kept his firm in the bonding company's good graces. The
mid-sized contractor practices within a 100-mile radius of
Knoxville and stays within its expertise-two things sureties
look favorably upon, says House.
Although Merit has experienced recent growth, it has addressed
issues that could potentially limit its bonding capacity.
Merit's leaders instituted a quality-control program within
the company and put its superintendents through a training
program as the firm took on new projects and added staff,
House says. "Implementing good business practices as
your company grows makes for a good relationship with your
bonding company," House says. "Essentially, we're
minimizing their risk."
|
Other Coverage Options
In an attempt to avoid high bond premiums and potentially
time-consuming and expensive investigations, some contractors
are turning to an alternative form of protection against
subcontractor default.
Contractor default insurance (CDI) is a policy that
replaces traditional subcontractor bonds. A contractor
or construction manager purchases the policy, which
obligates the insurer to reimburse it for costs related
to subcontractor default. The subs are added to the
contractor's policy instead of requiring them to post
bonds.
The advantages of an insurance policy over traditional
bonds are lower premium costs and a greater flexibility
in addressing and resolving subcontractor defaults.
Since a surety is entitled to conduct a routine and
often time-consuming investigation in the case of a
default, a CDI may bring a more timely response to the
problem. A contractor can remedy a situation by using
its own forces or hiring a new subcontractor as soon
as a sub defaults, then immediately submit the costs
for later reimbursement.
On the other hand, there is no contractual obligation
under a CDI policy for an insurer to step in and complete
a subcontractor's work, unlike a bonding company. The
CDI underwriter also has no payment obligation to a
sub or its suppliers, as a bonding firm would. The construction
manager assumes these risks and is held to the terms
and conditions of the insurance policy. Where a loss
is reimbursed, the payout is subject to typically large
deductibles, co-payments by the insured and strict project-specific
and overall loss limits.
St. Louis-based Alberici Constructors historically
had self-insured the viability of its subcontractors
but it came to a point where that practice became too
risky, says Bill Ernstrom, Alberici's general counsel.
A corporate decision was made to use a CDI product in
conjunction with subcontractor surety bonds. The lure
of less downtime in the case of subcontractor default
attracted the firm to the CDI program. That benefit
is particularly attractive in a healthy construction
market when projects move at a brisk pace.
"We like the fact that the CDI gives us the ability
to continue to control the schedule," says Ernstrom.
"If a subcontractor went into default, and that
subcontractor was bonded, we would have to wait for
the subcontractor's surety to inspect, investigate and
make a decision; then we've lost total control of our
schedule. Our CDI program allows us to fix [a problem]
how we want to fix it."
|
|
