What s New with Surety Bonds

Transcription

1 Project Management Conference Yellowknife NWT What s New with Surety Bonds November 23, 2015

2 Change at the Speed of Light

3 Change at the Speed of Light Surety Industry; traditionally slow to embrace change. Same suite of products and services in place for last 75 years. Past three years has seen rapid change in products and service commitment. Outward focus; customer driven; less risk averse Adapting to the new reality

4 I Construction Risk

5 Construction Risk 2015 From , the Surety industry paid out almost $800 million in claims; more than all of the previous decade a year to forget: Loss ratio; 52% - industry unprofitable Premiums flat after two years of decline Across all lines and all sectors of the country 2014 a record year: DWP $560 M. Loss ratio drops 32 points to 19%. 2015: first half continues the trend; slight increase in premium and loss ratio of 16%.

6 Construction Risk 2015 Continuing growth in Institutional Construction investment Challenges await: Regional Disparity: West Up, East down Oil prices: Impact yet to be felt. Paradigm Shift: AFP s, P3 s Larger and longer projects Challenges to small and mid-sized firms

7 II Surety Bonds &The New Paradigm Discount Surety Company Good News I hear the paradigm is shifting

8 The New Paradigm Five years ago, who would have heard of a billion dollar project, but now there are two in the Toronto area alone and business models are changing too. Now you have to design, build, finance and, if you are smaller it s become tougher. Geoff Smith President & CEO; EllisDon

9 Evolving Political Environment Globalization of the construction industry with the collapsing of trade barriers Canada Europe Free Trade Agreement, Trans-Pacific Partnership Participation of large multinationals will increase completion further. liquid balance sheets and demand for liquid security

10 Bigger, Longer & Tougher New Federal Government to fund ambitious infrastructure program; provinces following suit. New Models of Project Delivery and Procurement P3 s, AFP s Bundling Building Information Modeling (BIM) Mega-Projects becoming the norm Small to mid-sized contractors feeling the squeeze

11 and Faster - Technology Last 20 years, internet, social media etc revolutionize business and life. Gen Y Gen Z the WrRU generation

12 and Faster - Technology Demand for instantaneous information and immediate satisfaction. Pressure for quicker, more expedient resolution to construction and other business problems. Challenges to the Surety Industry.

13 III So What are we doing about it??

14 P3 Performance Bond Designed by SAC Member firms to respond to unique risk matrix on P3 and AFP projects Flexible packages to respond to project specific needs. Specialty P3 bonds: Financial & Performance Risks Provide liquid / cash on demand protection. Built-in fast-track dispute resolution Early Response; surety involved pre-default. Include surety performance component Protection for trades & suppliers via the payment bond. Called for on Infrastructure Ontario Build-Finance and Design-Build-Finance projects. Have been used to secure P3 risks in Canada and US

15 Enhanced Performance Bond SAC consultations with Owners & Contractors; More certainty in the claims process. More responsiveness to a claim More frequent and effective communication between sureties and owners. New enhanced performance bond provides construction buyers with more timely &responsive claim service. Has been used by owners across the country and will be adopted by CCDC as the new standard. Provides more responsive services to owners by..

16 Enhanced Performance Bond Pre-Demand Conference to allow surety and owner to prevent problems from turning into a default. Timelines for Surety s Response: 5 days to acknowledge a response & request info. 21 days (from receipt of information) for surety to respond to owner with their response. Emergency Remedial Work: Allows Owner to address urgent issues (e.g. safety) under the bond. Post-Demand Conference: Mechanism to minimize or eliminate work stoppages while surety investigates. Contact Coordinates: Contact information for all parties to facilitate notices and communication.

17 And Coming Soon. Enhanced Payment Bond: Prompt payment of undisputed amounts Timelines for response to claims Option to extend protection to the second tier subcontractors and suppliers. Protection for Liquidated Damages: Current Bond Language unclear as to treatment of LD s; jurisprudence inconsistent. Rider to add coverage for LD s up to 10% of contract amount. Owner required to notify surety when LD s arise.

18 Code of Best Practices Sets out standards of professionalism for a surety s response to a performance bond claim. Provides Obligees with a guide to what it can expect when claiming under a performance bond. Incorporates principles of Enhanced Bond: Prompt Resolution Pre-default meeting. Standards of professional conduct in claims handling

19 Headstart Performance Bond TM Created to protect GCs from sub default (competitive alternative to SDI) Flexibility: Obligee given two mitigation options: Traditional Option: Surety investigates and implements solution (as in standard bond); or, Headtstart Option: Obligee implements its own solution upon surety s acceptance of Obligee s completion proposal. Responsiveness: First dollar protection(no deductible or co-payment). Surety will respond in 3 days from receipt of Claims letter. Standard claims notice and mitigation agreement.

20 e-procurement &e-bonding Consult Consult Consult: Industry buy-in and engagement is critical; early in the process Don t Reinvent the Wheel: are you a software developer? Insist on Verifiability: a true ebond; responsive vendor Scanned pdf??? Take the Time to get it right: Not difficult just different; Lead time to allow industry to adjust; Mock Tenders, Phase-in Periods SAC can Assist: Vendor evaluations Visit SAC Website:

21 Prompt Payment Slow payment/non-payment; leading cause of insolvency and financial distress in construction industry. Prompt Payment legislation in U.K. and U.S.; none in Canada. Ontario leading the way Attorney General initiates review of Lien Act; prompt payment to be incorporated Report submitted by March 2016 Five other provinces exploring legislation

22 SURETY ONLINE LEARNING CENTRE The Surety Online Learning Centre accessible from SAC website; Five learning modules that introduce the basics of surety bonds and the suretyship process Learn at your own pace. Ideal for review or for colleagues who can t attend a live information session. It s FREE

23 Questions???