Surety Bonding Solutions for Risk Management GFOABC May 31, 2012, Kelowna

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1 Surety Bonding Solutions for Risk Management GFOABC May 31, 2012, Kelowna

2 Introduction: Surety Association of Canada National & Regional Presence Your bonding resource Membership: Surety (Bonding) Companies Brokers Related professionals (e.g.) lawyers, claims managers SAC members write 95% of the bonds in Canada

3 Agenda 1. How the Bonding Industry Works 2. Bonds What does each type do? 3. Claims Process more information 4. Comparison Bonds vs. CDI (Subguard) and/or Letters of Credit

4 Presenters Angela McKerlich, BA, CAIB, FCIP, Surety Manager, Capri Insurance Services Ltd., Kelowna, Bob Sloat, Director of Business Development Western Canada, Surety Assoc. of Canada

, Kelowna, 800-670-1877 amckerlich@capri.

6 How the Industry Works Surety Brokers The eyes and ears on the ground for the industry The people you as contractors will normally deal with Surety (Bonding) Companies How surety companies are licensed why this is important Re-insurers

will normally deal with Surety (Bonding) Companies How

7 Prequalification Standard Checklist: Good character Experience a good contracting track record on similar projects (Owner, contract price, date completed, profit earned) The right key people succession plan Financial strength Credit history Established banking relationships Line of credit

date completed, profit earned) The right key people succession plan

8 The Care and Feeding of Sureties (four tips we give to Contractors) 1. Establish a relationship with a professional broker (SAC can help). 2. If you re declined, FIND OUT WHY!! Many problems can be solved. 3. Communicate with the bonding company; it is truly a relationship 4. There IS competition among sureties they want your business!

If you re declined, FIND OUT WHY!! Many problems can be solved. 3.

10 Surety is NOT Insurance INSURANCE 2 party agreement; Insured & Insurer Premiums actuarially determined Losses anticipated No recourse against insured in the event of loss SURETY 3 party agreement; Principal, Surety & Obligee Premiums are only a service charge No losses anticipated Recourse against the Principal via Indemnity Agreement

of loss SURETY 3 party agreement; Principal, Surety & Obligee Premiums are only a

11 Surety Bonds: Three Essential Services 1. Prequalification: Assurance that the bonded contractor is qualified for the job for which they are contracted 2. Ongoing monitoring ( hidden services ): Sureties monitor all of the bonded contractor s work and can supply technical, management and even financial assistance to prevent a default 3. Security: Financial protection in the event that the bonded contractor should default on its obligation.

2. Ongoing monitoring ( hidden services ): Sureties monitor all of the bonded contractor s work and can supply

12 Standard Contract Bonds Prequalification at tender stage Prequalification Letter Bid Bond Consent of Surety Security after the contract is awarded Performance Bond Labour & Material Payment Bond Renewable Multi-Year Bonds (service contracts)

after the contract is awarded Performance Bond Labour &

13 Bid Bonds protection from the lowest irresponsible bidder provide assurance that contractor will: enter into contract provide the required security hold its price for the period specified in the Bid Bond (usually 60 days) typically required in the amount of 10% of tender if contractor defaults, surety pays the difference between successful bid and second bidder Tender must be accepted within time frame set out in tender documents seven months to file suit

typically required in the amount of 10% of tender if contractor defaults, surety pays the difference between

14 Performance Bonds Guarantees Contractor will perform contract in accordance with its terms & conditions. Contractor must be in default and the default must be declared by the obligee Owner must perform their obligations 4 options available to Surety: Remedy the default Complete the Contract Arrange for new contractor to complete Tender Payment Two years to file suit

Contractor must be in default and the default must be declared by the obligee Owner must

15 Labour & Material Payment Bonds Guarantees that the contractor will pay all direct subcontractors, suppliers for materials and services provided to bonded project. Obligee is trustee on behalf of the claimants Claimant must have a direct contract with the Principal Claimants may only claim for goods and services supplied to the bonded job Claim must be filed within 120 days of the last day worked or the date material shipped One year to file suit

Obligee is trustee on behalf of the claimants Claimant must have a direct contract with the Principal Claimants

16 Unseen Services of Surety Bonds A surety can provide assistance and default prevention services to owners & lenders by: Facilitating the resolution of construction performance issues that could lead to default Providing management and business assistance to assist contractors with administrative issues. Providing financial assistance to financially distressed contractors Providing technical/engineering expertise if required

Providing management and business assistance to assist contractors with administrative issues.

18 Before a Default is Declared Surety companies have extensive experience with contracts and solving construction problems. Sureties have intimate knowledge of their bonded contractors and their operations Sureties can provide informal assistance to solve problems that can lead to a default Will convene meeting or teleconference among the parties to address problems Can assist in formalizing solutions Note: Performance bonds do not replace the dispute resolution mechanisms in the contract and/or at law

solve problems that can lead to a default Will convene meeting or teleconference among the parties to address problems Can

19 Default Must be Declared There are three conditions precedent to a Surety acting under a Performance Bond: 1. The Obligee must have declared the Principal to be in default of the contract. 2. The contractor must be in default of the subject contract. 3. The Obligee must have fulfilled its obligations under the contract.

The Obligee must have declared the Principal to be in default of the contract. 2.

20 Steps in the Claims Process When A Contractor Defaults: Surety will promptly acknowledge notice of default and begin its investigation as soon as possible. Surety will conclude the investigation as soon as possible. If requested by owner, surety will provide periodic written updates on investigation status and best estimates as to completion date. Note: SAC s new model Performance Bond sets out these steps for the first time, including timelines.

If requested by owner, surety will provide periodic written updates on investigation status and best estimates

21 How can the Project Owner Help? Comply with bond & contract terms! (e.g. proper notifications, payments and certifications) Communicate: keep surety appraised of problems before it is too late and provide default notice promptly. Cooperate: Ensure surety has timely access to knowledgeable staff and relevant documents. Keep expectations realistic.

23 Letters of Credit (LoC) Yield cash; not performance Provide no prequalification assurance Available in smaller; usually insufficient amounts (5% to 10%) Deplete a contractor s borrowing power - can bring on the very problem they seek to avoid Provide no dedicated protection for subs or suppliers (only payment bonds do this)

24 Contractor Default Insurance (CDI, or Subguard ) Introduced in 1996 to protect very large General Contractors from subcontractor default Only one insurance company supplies the product Insurance product compensates for loss incurred by the GC Insured GCs must have in-house admin, underwriting expertise and strong cash flow Very large deductibles and co-payment requirements

25 Contractor Default Insurance (CDI) Designed to protect large GCs against key subcontractor default. NOT designed to protect end-users (public or private) or lenders from risks associated with default of prime contractor. Provides no protection for subs and suppliers

26 Another side to CDI Subtrade and Supplier resistance is a growing issue, as construction economy has tightened No payment assurance for subtrades & suppliers Without a L&MP bond, there is no payment protection for them This will be reflected in their pricing, as there is obviously more risk Trades may object to being forced into CDI program It requires that they surrender sensitive financial information to the GCs they are bidding to Less protection against unilateral action by the GCs

27 Closing Messages 1. SAC is available to help you make informed decisions regarding surety securities. We are available to: answer your questions help you train and educate your team members provide consultative support 2. Open communication between you representing the owner and the bonding company will allow preventative measures often avoiding default. If you see issues or problems developing, let us know sooner rather than later. 3. Surety s goal is the same as yours: to see the contract through to successful completion to see no interruptions or delays

28 Discussion and Thank You Bob Sloat, Director Business Development Western Canada (Vancouver) Content, data and facts have been obtained from various sources to prepare this presentation including the members of the Surety Association of Canada, the Surety Association of Canada itself, the Surety and Fidelity Association of America, and FMI Corporation. The material presented in this meeting is illustrative and promotional in nature. It is not intended and must not be relied upon as providing specific information about the legal liability of The Surety Association of Canada or any of its member companies under any product, bond, or otherwise. Nothing in this material shall be construed as modifying, amending or in any way affecting the rights and obligations of the parties under any Bond.

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