15 Nov Surety Bonds – What Could Possibly Go Wrong?
Most agencies handling Construction accounts will need to provide a Surety Bond at some point. For those agency staff that may not be familiar with Surety Bonds, they are basically an agreement between three parties: Principal, Surety, and Obligee. The Surety provides a financial guarantee to the Obligee (i.e., government) that the principal (business owner) will fulfill their obligations. A Surety Bond is a risk transfer mechanism.
While that may sound fairly simple, there are several areas where, if not handled correctly by the agency, the development/assembly of the Bond can cause some problems which have been known to develop further into E&O claims.
Typically, for construction accounts, the process starts with a Bid Bond issued as part of a supply bidding process by the contractor to the project owner to guarantee that the winning bidder will undertake the contract under the terms at which they bid. While other bonds need to be provided if the contractor is awarded the job, E&O Plus feels that if the Bid Bond is handled correctly, there is a good chance that issues with the other bonds can be resolved without too much problem. Thus, solid attention to the development and assembly of the Bid Bond is critical.
Some key issues where attention to detail is paramount:
- The information needed to be included in the Bid Bond: this includes, among other things, the exact description of the job. It is heavily suggested that agencies require the contractor bidding on the job (this is the agency client) to provide the agency with a completed form (typically a PDF) that provides the information. Agencies should avoid taking down the information over the phone as this can be misunderstood or misinterpreted. Incorrect information on the Bid Bond form could result in the Bond not being considered. This will probably result in a very unhappy contractor.
- Provide this information to the Surety carrier providing the bonds. It is presumed that the carrier has been identified and contracted before you need to provide the Bond. The carrier Surety underwriter will need to give their blessing authorizing the issuance of the Bond. If the authorization is provided via a phone call, confirm your understanding of the approval to the Surety Underwriter.
- Bid Bonds are not difficult to assemble, but there is a need for attention to detail. For this reason, E&O Plus heavily encourages using a second set of eyes to review ALL Bid Bonds. This practice will hopefully catch any issues. The agency file should reflect who assembled the Bond and who provided the “second set of eyes” review.
Have there been E&O claims involving Surety? Definitely, and they can be costly. One that comes to mind (not an E&O Plus agency) involves a $14 million streets and roads job the contractor was bidding on. The Bid Bond was assembled, and while the person signing the Bond had “Power of Attorney” (a very important document), the Power of Attorney form did not include her name. The Bond was ultimately rejected at the bid opening as it was not technically correct. The #2 bidder on the job had their bid thrown out because of a “typo” on the bond form. Once again, both disqualified bonds show how important attention to detail is. The first contractor that lost the job sued the agency, and the E&O carrier paid $1.4 million to settle the matter.
Would a “second set of eyes” find these errors? Probably.
For the record, it is preferred for the agency to have a division handling the development and assembly of Bonds. I have seen some agencies where this task is handled by the person handling the other parts of the P&C account. This raises the potential for inconsistencies in the handling of Bid Bonds.