Contract Bond Forms What to Look For and What Might be Missing Presented by Steve Nelson EVP & General Counsel SureTec Insurance Company 1

BIOGRAPHY Steve Nelson is the Executive Vice President and General Counsel of SureTec Insurance Company and President of SureTec Information Systems, Inc. Prior to SureTec, he practiced construction law for 20 years in Dallas, Texas, and was CEO of a large commercial construction company in Central Texas for six years. Mr. Nelson oversees SureTec’s Claims, Funds Disbursement, and Subcontractor Prequalification operations, mediates construction industry disputes for others, and teaches construction and procurement law and dispute resolution at the University of Texas, where he is an adjunct faculty member in its School of Engineering. He is a Fellow of the Center for Public Policy Dispute Resolution and a Distinguished Credentialed Mediator by the Texas Mediator Credentialing Association. He is a Fellow of the American College of Construction Lawyers and a past Chairman of the Construction Law Sections of the State Bar of Texas, Austin Bar Association, and Dallas Bar Association. He is active in the ABA Fidelity & Surety Committee, the ABA Forum on the Construction Industry, the Surety Claims Institute, and National Bond Claims Institute. 2

What are we looking for? Terms that expose the surety and/or the contractor to risks that are: beyond commercially reasonable unconscionableunmanageable not “underwriteable” beyond our appetites for risk 3

Why are we looking? To protect the surety To protect the surety To protect the contractor To protect the contractor To preserve relationships To preserve relationships To keep risks allocated to those best able to handle/avoid/protect against them To keep risks allocated to those best able to handle/avoid/protect against them 4

Where are we looking? In the bond forms In the bond forms In the underlying contracts In the underlying contracts In statutes, regulations, general conditions, and other places that might “read something in” to the bond liability In statutes, regulations, general conditions, and other places that might “read something in” to the bond liability 5

And what happens when we find a problem? Consider its implications and proceed without changes Consider its implications and proceed without changes Suggest a different bond Suggest a different bond Make changes Make changes Negotiate for better terms Negotiate for better terms Not write the bond Not write the bond Write the bonds with additional premium, safeguards, controls, etc. Write the bonds with additional premium, safeguards, controls, etc. 6

Terms that make it easier for the obligee to pull the trigger and invoke the surety’s liability Terms that make it easier for the obligee to pull the trigger and invoke the surety’s liability Terms that increase the surety’s monetary liability beyond that originally stated in the bond Terms that increase the surety’s monetary liability beyond that originally stated in the bond Terms that vary the burden or proof Terms that vary the burden or proof Terms that limit the options available to the surety in the event of default Terms that limit the options available to the surety in the event of default Terms that enlarge upon the obligations covered Terms that enlarge upon the obligations covered Terms that control the length of time the surety remains liable Terms that control the length of time the surety remains liable Performance Bonds- What to look for 7

Bond Terms & Provisions that make it easier to trigger surety liability- breach, default, termination, or none of the above COMPARE The Surety further agrees that in the event of a breach of the Contract on the part of the Principal (as determined by the sole discretion of the Obligee)… The Surety further agrees that in the event of a breach of the Contract on the part of the Principal (as determined by the sole discretion of the Obligee)… In the event the Principal is in default in any respect and/or there is a termination under the Contract in accordance with the terms thereof, the Surety shall.. In the event the Principal is in default in any respect and/or there is a termination under the Contract in accordance with the terms thereof, the Surety shall.. 8

Bond Terms & Provisions that increase the surety’s $ liability beyond the bond’s penal amount In addition to waiving notice of changes, extensions of time, etc. the bond (or an incorporated contract term) adds: In addition to waiving notice of changes, extensions of time, etc. the bond (or an incorporated contract term) adds: “The penal sum of this Bond shall automatically be adjusted to reflect the addition or subtraction of amounts of all change orders issued.” “The penal sum of this Bond shall automatically be adjusted to reflect the addition or subtraction of amounts of all change orders issued.” 9

Bond Terms & Provisions that increase the surety’s $ liability beyond the bond’s penal amount If the Surety fails to remedy the Principal’s default then Surety shall pay Obligee’s attorneys’ fees and costs incurred in enforcing Surety’s obligations hereunder, and such obligation shall be in addition to and not a part of the penal sum of this Bond. If the Surety fails to remedy the Principal’s default then Surety shall pay Obligee’s attorneys’ fees and costs incurred in enforcing Surety’s obligations hereunder, and such obligation shall be in addition to and not a part of the penal sum of this Bond. 10

Bond Terms & Provisions that increase the surety’s $ liability beyond the bond’s penal amount Any provision that could expose the surety’s liability beyond the penal sum of the bond Any provision that could expose the surety’s liability beyond the penal sum of the bond Example : AIA provisions not limiting exposure on surety takeover Example : AIA provisions not limiting exposure on surety takeover 11

Bond Terms & Provisions that vary the burden of proof In the event of a dispute between Surety and Obligee related to the Contract or the Bond, the dispute shall be resolved by the dispute resolution procedures set forth in the Contract. Surety shall be bound by any decision or ruling issued in any legal proceeding relating to the Contract involving Obligee and Principal concerning Principal’s obligations under the Contract. In the event of a dispute between Surety and Obligee related to the Contract or the Bond, the dispute shall be resolved by the dispute resolution procedures set forth in the Contract. Surety shall be bound by any decision or ruling issued in any legal proceeding relating to the Contract involving Obligee and Principal concerning Principal’s obligations under the Contract. 12

Bond Terms & Provisions that vary the burden of proof Surety does hereby relieve the Obligee or its representatives from the exercise of any diligence whatsoever in securing compliance on the part of the Contractor with the terms of the Contract and the Surety hereby waives any notice of default or delay and agrees that the Surety shall be bound to take notice of and shall be held to have knowledge of all acts and omissions of the Contractor. Surety does hereby relieve the Obligee or its representatives from the exercise of any diligence whatsoever in securing compliance on the part of the Contractor with the terms of the Contract and the Surety hereby waives any notice of default or delay and agrees that the Surety shall be bound to take notice of and shall be held to have knowledge of all acts and omissions of the Contractor. 13

Bond Terms & Provisions that vary the burden of proof Consider, for example, arbitration provisions in a bond form or underlying contract Is the Surety bound to arbitrate? Is the Surety bound to arbitrate? Or…just bound by the factual results of the principal’s arbitration Or…just bound by the factual results of the principal’s arbitration Or…not bound at all Or…not bound at all 14

Bond Terms & Provisions that limit options available to the surety Anything that does not give the Surety all of its traditional options, ie: Cure/Finance/Shore up Cure/Finance/Shore up Take over Take over Re-let Re-let Deny Liability Deny Liability 15

Bond Terms & Provisions that enlarge upon the obligations covered Personal injury obligations Personal injury obligations Obligations covered by insurance Obligations covered by insurance Infringement of patent, trademark and copyrights Infringement of patent, trademark and copyrights Liable, slander, defamation Liable, slander, defamation Gross negligence Gross negligence Negligence of the Obligee, Obligee’s agents and employees Negligence of the Obligee, Obligee’s agents and employees Consequential Damages Consequential Damages 16

Bond Terms & Provisions that control the length of time a surety remains liable Does the bond contain  No limitation on time to file suit?  A specified, but long period of time, to file suit  A time to file suit that is unenforceable 17

Bond Terms & Provisions that control the length of time a surety remains liable Savings clauses: Savings clauses: If any limitation embodied in this bond is prohibited by law controlling construction hereof, such limitation shall be deemed to be amended so as to be equal to the minimum period of limitation permitted by such law. If any limitation embodied in this bond is prohibited by law controlling construction hereof, such limitation shall be deemed to be amended so as to be equal to the minimum period of limitation permitted by such law. 18

Payment Bond Terms & Provisions What are we looking for:   Terms that vary the definition of a claimant   Terms that vary notice requirements for perfection of claims   Terms that control the length of time the surety remains liable 19

Payment Bond Terms & Provisions – definition of claimant  How many tiers are covered?  Sticks and bricks…or overhead, home office, taxes, insurance premiums and similar items?  Just those that are lienable?  Named Obligee too? 20

Payment Bond Terms & Provisions – notice requirements  What notice is the surety entitled to?  How about the principal?  Every tier required to give notice, or just those not in privity?  Does the notice run from time of delivery? Last delivery? End of project? 21

Payment Bond Terms & Provisions – length of time the surety remains liable Does the bond contain  No limitation on time to file suit?  A specified, but long period of time, to file suit  A time to file suit that is unenforceable 22

Payment Bond Terms & Provisions – length of time the surety remains liable Savings clauses: Savings clauses: If any limitation embodied in this bond is prohibited by law controlling construction hereof, such limitation shall be deemed to be amended so as to be equal to the minimum period of limitation permitted by such law. If any limitation embodied in this bond is prohibited by law controlling construction hereof, such limitation shall be deemed to be amended so as to be equal to the minimum period of limitation permitted by such law. 23

Questions/Comments? Steve Nelson (512) Direct (512) Direct Fax 24