subject: Surety Bonds Are Like Hen's Teeth! [print this page] Well not ALL surety bonds are like hen's teeth. License bonds are common. Contractors get lots of bid bonds. There are notary, permit and sign bonds - all little and easy to get.
But what about Financial Guarantee Bonds? When was the last time you saw one of those? Pretty rare, you may not even hear bonding companies mention them, but they do exist. In fact they are alive and well!
Details: What is a Financial Guarantee Bond?
Like all surety bonds, a Financial Guarantee Bond assures that an event will occur. Bid bonds concern the events following the submission of a proposal. Permit bonds concern the activity described in the related permit. Financial Guarantee Bonds support a financial obligation such as a loan or lease. That sounds simple enough, so why don't all sureties pursue this business? Why are these bonds offered by very few underwriters, even though any surety COULD write these bonds if they chose?
Admittedly, there is a high level of underwriting expertise needed to process these complicated transactions. Not all sureties are up to the challenge. And the dollar amount of the obligations tends to be large possibly beyond the comfort level of most underwriters. But there is a third difference that makes these obligations difficult for most sureties to assume: Recovery.
The largest obligations sureties typically write are Performance and Payment Bonds. These cover a contractor's obligation to complete (Perform) a contract in accordance with all its written terms. It also guarantees proper payment (Labor and Materialman's Payment Bond) to suppliers of labor and material on the project. Sureties write these in multi-million dollar amounts because even in the event of contractor failure / default or insolvency, an important financial resource remains available to the surety: the "unpaid balance of the contract amount." When a Performance Bond default occurs, the surety steps in to complete the obligation. Even in the worst case, when a construction company is financially depleted and the individual indemnitors add nothing to the picture, the remainder of the contract price must be paid to the surety as the work proceeds. If the surety can complete the project for that remaining amount, they will have no out of pocket loss.
Back to the subject at hand herein lays the most difficult aspect of Financial Guarantee underwriting. If the applicant cannot pay their loan, or lease, there is no "unpaid balance of the contract amount" to save the surety. These bonds are literally a guarantee of the applicant's future solvency, not an easy thing to predict. Underwriters have no crystal ball.
Some sureties are "flexible" and will offer to write these with full collateral, meaning they want to hold a security deposit in an equivalent amount. Typically, if the customer could do that they wouldn't need a bond! Not much of a solution
The good news is that unlike hen's teeth, you CAN find a surety willing to provide these unique obligations. When there is a need in the marketplace, the most responsive underwriters act to fill the void.
Surety Bonds Are Like Hen's Teeth!
By: Steve Golia
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