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Learning The Importance Of Bonding, The Hard Way
By: Michael Weisbrot
I have written many articles about the hard surety bond market. To my surprise,
many want to know more details as to how we got to where we are at. Like all
industries, the surety bond industry is heavily influenced by the economy. We
can all remember the strength of the US economy at the end of the millennium; it
seemed that businesses were flourishing with prosperity everywhere you turned.
By the end of 2000, the economy began to slow down. The success of any
contractor is directly effected by changes in the economy, thus more
contractor’s businesses began to fail. With the failing of the contractor
businesses came an abundance of claims. This is not to say that the soft economy
was the only cause for the increase in claims, but it was the start of the
domino effect.
What actions set up the rest of the dominos to trigger the current hard market?
In an attempt to generate more premium, bonding companies used very loose
underwriting practices. These loose underwriting guidelines allowed for
contractors to be approved for bonds they should not qualify for. The sureties
were not only writing bonds for contractors that do not qualify, they also wrote
bonds that should not be written even for the best contractors. Maintenance
bonds exceeding 5 years were much more common; these days anything over 3 years
is pretty much unheard of. To put it simply, the sureties grew too hungry for
business and wrote what they should not have and got burnt because of it.
The bonding companies set up the dominos and the softening economy started the
chain reaction of them falling. What was the outcome for the bonding companies?
In the past, the surety bond industry saw losses around 25%. In 2001, the
industry saw a staggering 82% loss for the year. In 2002, the industry produced
$3.7 billion in premium, however the industry as a whole showed a 70% loss. The
2002 Insurance Expense Exhibit reported the industry losing more than $2.5
billion from 2000-2002. The losses resulted in many bonding companies getting
downgraded to junk status by AM Best. Others simply had to close Sometimes
people won’t listen to solid advice unless it directly effects them.
Unfortunately, some people simply need to learn the hard way before they make
more sound decisions. This can be seen almost every time suretyship makes its
way to the news. Since surety bonds are not the most exciting thing in the
world, you typically only hear about them when there is a problem, especially
when it comes to contract bonds.
The Westchester, New York School District is a prime example of city officials
learning the importance of requiring bonds. In the article “Westchester
Schools’’ Dumping Deals Costly To Taxpayers“, the contractor hired to do the
work never submitted a surety bond guaranteeing the work. The district allowed
the contractor to begin work prior to submitting the bond. The end result was
the contractor running out of funds and defaulting on the project. Had the job
been secured by a bond, the surety could have hired another local company to
complete the work.
Why would an obligee not require a bond? There are numerous reasons why,
sometimes the government simply lets it slide by due to red tape. Often, private
obligees and sometimes public, simply do not want the cost of the bond to be
included with the bid and therefore do not require it. Sure this keeps costs
down, if everything goes right that is. By that logic, there is no reason to
have any type of insurance product at all. However, we all know gambling is not
a wise decision if you plan on being fiscally responsible.
Tax payer should be pleased to hear that most articles found in the news
regarding suretyship are situations where a bond was obtained. Jackson County,
Indiana required a bid bond for the demolition of a building to make way for a
new police station. The lowest bidder was unable to do the work at the amount
submitted. The city attorney stated: “I am not sure how they think they could do
this job with that low of an amount,”” and ““They might as well have written
their bid proposal on a napkin and submitted it.””. The Fidelity and Deposit Co.
of Maryland, Colonial American Casualty and Surety Co., and Zurich American
Insurance Co. had to assume control of a project for an addition to a Dallas
courthouse after the contractor walked off the job.
Surety associations are making a great effort to show the private sector the
importance and benefits of surety bonds. I do not know of any statistics
regarding increases in surety requirements requested from the private sector.
However, personally I have seen little difference. Hopefully businesses
nationwide will open their eyes to the benefits of suretyship.
About the Author:
Michael Weisbrot is Vice-President of JW Bond Consultants, Inc.http://www.jwsuretybonds.com
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