Month: June 2015

Secret # 95: PLASTER – Not The Solution To Bond Problems

apply-plasterIn construction there are physical problems you can solve by plastering over them.  In the world of surety bonds, managing, massaging, covering over, (plastering) is sometimes undertaken to deal with negative facts or situations that are hindering the issuance of surety bonds.

Bond underwriters all know the great earnestness with which bid and performance bonds are requested.

“We need a bid bond because we need the project to get the revenues to meet our obligations and have a successful year!”

The pressure’s on! Sometimes that high level of motivation leads people to take extreme measures… Where do you draw the line?

Let’s talk about some real life examples and you decide (our opinion to follow):

  1. Joe, the founder / owner of ABC Company has an unavoidable problem with bad results.  It could be the bankruptcy of their largest client, forcing ABC into bankruptcy.  It could be an accident resulting in a lawsuit and devastating judgement against the company.  As a result, a new company is formed with Joe’s adult child as owner and President.  Joe is not an officer and officially functions as a consultant to the company, even though he really runs the show.  Is this legit?
  2. Smith Co. cannot get the bonding capacity they need because of poorly or improperly prepared financial statements from their accountant.  They decide, as of the next fiscal year, to engage a Certified Public Accountant experienced with construction clients. Is this appropriate?
  3. For Ajax Inc. the first half of the year did not meet expectations, but the year in total should be OK. When the bonding company asks for their 6 month financial results, the company makes up an excuse saying they have a software problem and cannot produce the statement. The plan is to stonewall the underwriter and only provide the fiscal year-end. Does this really hurt anyone since the 6 month statement is relatively less important?

Before deciding on these specific circumstances, let’s look at the big picture. What is the nature of the relationship between the contractor and surety?

The surety is paid to take a risk on behalf of the contractor, they become their guarantor.  It is a true partnership in the sense that they succeed or fail together. Everyone loses if the contractor defaults on a project.

The surety bases their underwriting decisions on info as provided by the applicant, and depends on them to be “forthcoming.” To put it bluntly, intentionally misrepresenting or concealing relevant facts may be considered fraudulent.  Then there is the gray area.

In our three examples, did you find #1 objectionable? This situation does occur, and we appreciate the motivation. The underwriter might choose to accept it on the condition that the consultant gives personal indemnity, even though he is not a stockholder.

#2? This seems like an appropriately timed, logical response to the problem. A-OK!

#3? The sin being committed is the violation of trust with the surety.  If there is a real partnership, they will proceed based on full disclosure, knowing all the good and bad. Even if the info being withheld is irrelevant, it is inappropriate for one party to intentionally conceal it for their perceived benefit.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.