1. WEBCAST (2 hours) “Bonds: Shaken, Not Stirred” © Florida Association of Insurance Agents – 2010 © Florida Association of Insurance Agents – 2010 Florida Association of Insurance Agents Tom Ashley, AAI, AIAM, AIP Director of Education

2. Bonds: Shaken, Not Stirred

4. Bonds are an integral part of an agency’s line of products: --- Commercial clients need them --- Allows customers to deal with oneagency / producer for both insurance and surety needs --- To gain new customers --- Increase profits – typically higher commissions, fewer losses

5. As a reminder, there are 3 parties to all surety bonds: 1) Principal – the one whose performance is being guaranteed (worker or contractor) 2) Obligee – the one for whom the work or obligation is being done (customer) 3) Surety – pays if principal fails to perform (insurance company)

6. 6 Characteristics of All Surety Bonds: 1) The surety must respond if the principal fails to perform. 2) The surety vouches for the principal’s integrity, capability, trustworthiness, financial responsibility, or other desired qualities. 3) Surety bonds usually terminate when the principal has fulfilled its obligations.

7. 6 Characteristics of All Surety Bonds: 4) Surety bonds have bond penalties (this is the amount of “coverage”). 5) Surety bonds require a premium. 6) Surety bonds must be in writing to be binding and enforceable.

8. Two basic types of surety bonds: 1) Contract bonds 2) Commercial bonds

9. 1) Contract Bond Guarantees the performance of a bonded contractor. Ex. – Project owner (business owner building a new office) requires a contractor to carry a contract bond to ensure they will perform on time, within budget, according to specs.

10. 2) Commercial (Non-Contract) Bond Covers all other situations in which sureties (ins. cos.) guarantee performance of obligations which do not arise from contracts. Such as license bonds, public official bonds, bonds for executors of wills, etc.

11. Contract Bonds

12. a) Bid bonds b) Performance bonds c) Payment bonds d) Maintenance bonds e) Subdivision bonds f) Supply contract bonds

13. Contract Bonds --- a) Bid bond -- guarantees that if the bid is accepted, the G.C. or sub (principal) bidding for a contract will enter into the contract and furnish all required bonds. If principal refuses to enter the contract or fails to provide bonds, the obligee is entitled to the difference between the amount of the bid and next lowest bid.

14. Contract Bonds --- b) Performance bond -- guarantees that the obligee will be indemnified for any loss resulting from the principal’s failure to perform the work according to the contract, plans, and specs at the agreed price and within the agreed time.

15. Contract Bonds --- c) Payment bond – also called a “labor and materials payment bond” – guarantees that bills incurred by a contractor for project labor and materials will be paid in accordance with the terms of the contract.

16. Contract Bonds --- d) Maintenance bond – guarantees that the contractor will correct faulty work and replace defective materials for a specified period – typically for one year.

17. Contract Bonds --- e) Subdivision bond – guarantees that a contractor, such as a developer will complete improvements required by ordinance within a certain period of time in accordance with the governing body’s requirements. --- Developers (streets, storm sewers, sidewalks, streetlights, etc.)

18. Contract Bonds --- f) Supply Contract Bond – guarantees to the obligee that the supplier (principal) will deliver designated items according to supply contract specifications. A supply contract is an agreement to furnish and deliver materials or supplies at an agreed price. --- Typically between private enterprises and government entities.

19. Commercial Bonds

20. a) License and permit bonds b) Public official bonds c) Court bonds --- These types of bonds are issued by sureties to guarantee performance of obligations NOT generated by contract.

21. Commercial Bonds --- a) License and Permit Bonds -- required by federal, state, or municipal governments that guarantee performance of the laws, regulations, or ordinances relating to what is covered by the license or permit.

22. Commercial Bonds --- a) License and Permit Bonds -- 6 types i) Compliance bond only i) Compliance bond only ii) Compliance bond with 3 rd party liability iii) Forfeiture bond iv) Tax or fee bond v) Merchandising and dealer bond vi) Reclamation and environmental protection bond

23. BREAK (10 minutes)

24. Commercial Bonds --- a) License and Permit Bonds -- 6 types i) Compliance bond only – guarantees that the principal will comply with laws that govern the business or activity it conducts. i) Compliance bond only – guarantees that the principal will comply with laws that govern the business or activity it conducts. (Ex. – municipality requires a plumber to supply bond guaranteeing he’ll comply with building codes)

25. Commercial Bonds --- a) License and Permit Bonds -- 6 types ii) Compliance bond only with 3 rd party liability – same as compliance bond, but also gives a third party the right to sue both the principal and surety to recover damages as described in the bond. ii) Compliance bond only with 3 rd party liability – same as compliance bond, but also gives a third party the right to sue both the principal and surety to recover damages as described in the bond.

26. Commercial Bonds --- a) License and Permit Bonds -- 6 types iii) Forfeiture bond – deals with how the surety pays the claim. The surety pays (forfeits) the entire bond penalty if the principal fails to complete its obligation. iii) Forfeiture bond – deals with how the surety pays the claim. The surety pays (forfeits) the entire bond penalty if the principal fails to complete its obligation.

27. Commercial Bonds --- a) License and Permit Bonds -- 6 types iv) Tax or Fee bond – guarantees that the principal will properly account for and remit taxes or fees collected. (Ex. -- tobacco, liquor, fuel, sales taxes) iv) Tax or Fee bond – guarantees that the principal will properly account for and remit taxes or fees collected. (Ex. -- tobacco, liquor, fuel, sales taxes)

28. Commercial Bonds --- a) License and Permit Bonds -- 6 types v) Merchandising and Dealer bond – guarantees that the principal will properly account for and remit taxes or fees collected. (Protects the public from misrepresentation or fraudulent practices by the seller.) v) Merchandising and Dealer bond – guarantees that the principal will properly account for and remit taxes or fees collected. (Protects the public from misrepresentation or fraudulent practices by the seller.)

29. Commercial Bonds --- a) License and Permit Bonds -- 6 types vi) Reclamation and Environmental Protection bond – guarantees that the principal will restore land to its original state after operations are completed. vi) Reclamation and Environmental Protection bond – guarantees that the principal will restore land to its original state after operations are completed.

30. Commercial Bonds --- b) Public Official Bonds (non-federal) -- Guarantee the faithful performance of the duties of a public official and also provide for an honest accounting of all public funds handled by that public official. --- 2 types: i) honesty ii) faithful performance

31. Commercial Bonds --- c) Court Bonds -- guarantee that a person or an organization will faithfully perform certain duties prescribed by law, or by a court, or will demonstrate financial responsibility for another’s benefit until the final outcome of a court’s decision.

32. Commercial Bonds --- c) Court Bonds 2 types – i) Judicial bond ii) Fiduciary bond

33. Commercial Bonds --- c) Court Bonds i) Judicial bond – arises out of litigation and are required by the courts. Posted by a person seeking or appealing a remedy in court to protect the party against whom a claim is made from damages sustained if the person seeking or appealing the remedy does not prevail.

34. Commercial Bonds --- c) Court Bonds i) Judicial bond – 4 types A) Attachment bond A) Attachment bond B) Release of attachment bond C) Plaintiff’s appeal bond D) Defendant’s appeal bond

35. Commercial Bonds --- c) Court Bonds i) Judicial bond – 4 types A) Attachment bond – required before a court will attach property. Guarantees that if the court rules against the plaintiff, the defendant will be paid any damages arising from the attachment. If court rules for the plaintiff, the bond automatically terminates. A) Attachment bond – required before a court will attach property. Guarantees that if the court rules against the plaintiff, the defendant will be paid any damages arising from the attachment. If court rules for the plaintiff, the bond automatically terminates.

36. Commercial Bonds --- c) Court Bonds i) Judicial bond – 4 types B) Release of Attachment bond – after a defendant’s property is attached, it can be released to the defendant pending final outcome of the court’s decision if the defendant provides the court with a release of attachment bond. IMPORTANT: A release of attachment bond is ….. B) Release of Attachment bond – after a defendant’s property is attached, it can be released to the defendant pending final outcome of the court’s decision if the defendant provides the court with a release of attachment bond. IMPORTANT: A release of attachment bond is …..

37. Commercial Bonds --- c) Court Bonds i) Judicial bond – 4 types B) Release of Attachment bond B) Release of Attachment bond ….. required only if the defendant desires to maintain possession of the property until the dispute is settled.

38. Commercial Bonds --- c) Court Bonds i) Judicial bond – 4 types C) Plaintiff’s Appeal bond -- when a plaintiff wants to appeal a case to a higher court, an appeal bond may be required. Guarantees that the plaintiff will pay all court costs for the appeal. C) Plaintiff’s Appeal bond -- when a plaintiff wants to appeal a case to a higher court, an appeal bond may be required. Guarantees that the plaintiff will pay all court costs for the appeal.

39. Commercial Bonds --- c) Court Bonds i) Judicial bond – 4 types D) Defendant’s Appeal bond -- when a defendant wants to appeal a case to a higher court, this bond may be required. Guarantees that the defendant will pay the entire judgment, plus court costs and interest should a higher court uphold the original judgment. D) Defendant’s Appeal bond -- when a defendant wants to appeal a case to a higher court, this bond may be required. Guarantees that the defendant will pay the entire judgment, plus court costs and interest should a higher court uphold the original judgment.

40. Commercial Bonds --- c) Court Bonds ii) Fiduciary bond – generally guarantee that persons entrusted with the care of others’ property will exercise their duties faithfully, account for all property received, and make good for any deficiency f or which court may hold them liable.

41. Commercial Bonds --- c) Court Bonds ii) Fiduciary bond – Fiduciaries who are frequently bonded: A) Guardians B) Administrators and Executors C) Trustees in Bankruptcy

42. Miscellaneous Bonds

43. Miscellaneous bonds often support private relationships and unique business needs. Because of the specific nature of each bond obligation, producers and underwriters need to look beyond the form to the underlying agreement or law that required the bond. Many of these bonds contain a financial guarantee. Some combine this guarantee with onerous provisions.

44. Miscellaneous Bonds 3 largest categories: a) Lost securities bonds b) Hazardous waste removal bonds c) Credit enhancement fiduciary guaranty bonds

45. Miscellaneous Bonds a) Lost securities bonds – also called “lost instrument” bonds. Owners of stock certificates, life insurance policies, check, certificates of deposit, mortgages, or other securities sometimes lose the document and request duplicates. If the original document is subsequently found, the entity….

46. Miscellaneous Bonds a) Lost securities bonds – …. that issued the duplicate is legally liable for any damages that result. They are easily sold if stolen, so even if a duplicate is issued, the issuer is liable for the original security as well. Entities which issue duplicate securities require parties that request them to post lost securities bonds.

47. Miscellaneous Bonds b) Hazardous Waste Removal bonds – laws require owners and operators of hazardous waste facilities to provide financial assurance of post- closure care and to file and carry out cleanup plans. Hazardous waste removal bonds are one option to ensure compliance.

48. Miscellaneous Bonds c) Credit Enhancement Fiduciary Guaranty bonds – issuers of municipal bonds (not surety, but debt instruments), can save substantial amounts of interest expense if they obtain this type of bond to guarantee that their investors would receive their interest payments as promised and receive their principal at maturity.

49. Agent’s Role in Contract Bonds

50. Agent’s Role / Contract Bonds Pre-qualifying a new client is the first step in writing the business. Based on: 1) Credit strength 2) Professional competence 3) Character 4) Capacity 5) Capital

51. Agent’s Role / Contract Bonds When it comes to field underwriting, producers have responsibilities in the following areas: 1) Financial documents 2) Background investigation 3) Surety selection (ins. co.) 4) Credit analysis 5) Presentation 6) Communications

52. Agent’s Role / Contract Bonds 1) Financial documents – liquidity is key --- Expenses and income in excess of billings --- Billings in excess of expenses and income --- Aging of accounts receivable and payable --- Earned income

53. Agent’s Role / Contract Bonds 1) Financial documents – liquidity is key --- Schedule of general and administrative expenses --- Gross profit or loss

54. Agent’s Role / Contract Bonds 2) Background investigation --- Suppliers, subcontractors, lawyers, CPAs, bankers … who have had a business, credit, or professional relationship with the contractor. Make contacts. --- Evaluate past obligations --- Fail this? Go no further ---

55. Agent’s Role / Contract Bonds 3) Surety (insurance co.) selection --- Desired risks --- Financial capacity --- Philosophy and operating plan --- Ability, resourcefulness, and responsiveness of the surety’s underwriters

56. Agent’s Role / Contract Bonds 3) Surety (insurance co.) selection --- Pricing and risk philosophies --- Financial condition --- Quality of relationship between the producer (agency) and the surety --- Volume and quality of other business the surety handles for the agency

57. Agent’s Role / Contract Bonds 4) Credit analysis --- Company history --- Organization --- Management --- Outside professionals of the contractor’s management team (accountant, lawyer, banker) --- Type of work --- Performance track record

58. Agent’s Role / Contract Bonds 4) Credit analysis --- Financial perform. & condition --- Five-year financial trend --- Bidding history --- Desired work program --- Future work prospects --- Trade and bank credit relationships

59. Agent’s Role / Contract Bonds 4) Credit analysis --- Financial perform. & condition --- Five-year financial trend --- Bidding history --- Desired work program --- Future work prospects --- Trade and bank credit relationships

60. Agent’s Role / Contract Bonds 5) Presentation -- submission package --- Cover letter --- Contractor questionnaire --- Financial statements (most recent year-end and prior) --- Contract status report (shows each of the current jobs – brief description, contract price, % completed to date)

61. Agent’s Role / Contract Bonds 5) Presentation -- submission package --- Additional information (to be determined by the underwriter – (bios of owner and key employees, business plan, largest completed projects, perpetuation plan, sub & supplier references, evidence of line of credit, etc.)

62. Agent’s Role / Contract Bonds 6) Communications – producer is responsible for maintaining open channels of communication. --- Status reports of work in progress --- Quarterly, semi-ann., or annual financial statements --- Annual business plans

63. Agent’s Role / Contract Bonds 6) Communications – producer is responsible for maintaining open channels of communication. --- Ongoing information (any developments which may affect the contractor’s ability to complete the work) --- Job site visits

64. Representing Unauthorized Entities

65. The state of Florida has taken a very strong position on the issue of unauthorized entities. An unauthorized entity is an insurance company that is not licensed by the Florida department of financial services. Agents and brokers have responsibility for conducting reasonable research to ensure that they are not writing policies or placing business with unauthorized entities. Lack of careful screening can result in significant financial loss to Florida residents due to unpaid claims and/or theft of premiums.

66. Agents may be held liable when representing these unauthorized entities. It is the agents and brokers responsibility to give fair and accurate information regarding the companies they represent. Any question about the authorized status of a company can be checked by calling the Florida department of financial services at 877-693-5236 or for out of state agents, 800-413- 3089.We urge all agents and brokers to adhere to this admonition.

67. For more information on unauthorized entities go to FAIA’s website at www.faia.com and under the Education section you will find a handout that you can download. www.faia.com

68. Florida Agents -- Important Per DFS requirements, you'll need to sign the Acknowledgement Form in order for us to process your CE credit. 1) Please fax the Form to 850-668-2852 OR mail it to PO Box 12129, Tallahassee, FL, 32317 OR scan it to a.pdf file and e-mail it to classroom@faia.com.classroom@faia.com 2) Be sure to complete all the required information and sign it below. The Acknowledgement Form is located on the FAIA website, www.faia.com, under “Education”.www.faia.com 3) You need to send this form to us within three (3) business days. 4) The quickest option is the Electronic Acknowledgement Form.

70. WEBCAST (2 hours) “Bonds: Shaken, Not Stirred” © Florida Association of Insurance Agents – 2010 © Florida Association of Insurance Agents – 2010 Florida Association of Insurance Agents Tom Ashley, AAI, AIAM, AIP Director of Education