Be Sure of Your Surety Bond!
June 2000
When choosing to guaranty a contract with
a surety bond, be sure that the bond is a valid bond from a qualified and financially
secure surety. While surety bond fraud is fairly rare, it can be costly, and
an ounce of prevention is worth a pound of cure.
by Lynn
M. Schubert
The Surety Association
of America
A surety bond ensures that someone (the principal) who has entered into an
agreement with another company (the obligee), such as a contract to construct
a building, will perform. The guaranty of the surety company is valuable because
the surety examines the principal’s capability to perform the contract and then
guarantees this performance. When you choose to guaranty a contract with a surety
bond, however, you want to be sure that the bond you receive is a valid bond
from a qualified and financially secure surety. While surety bond fraud is fairly
rare, when it happens it can be costly. As always, an ounce of prevention is
worth a pound of cure.
There are many ways to authenticate a surety bond and review the financial
wherewithal of the surety. This article gives you some of the basic information
you need and provides access to a list of surety company contacts to assist
you in verifying the authenticity of your bond. The list should not be relied
upon as an indication of the solvency or financial strength of any of the surety
companies listed. Users that are interested in determining solvency or financial
strength should consult other resources such as state insurance departments,
the insurer rating organizations, insurance agents and brokers, or other sources
of such information.
Authenticating Your Surety Bond
The most reliable way to authenticate a surety bond is to contact the issuing
surety company directly. The effort to authenticate a bond should be made immediately
after the bond is presented. However, when making any inquiry it is important
to recognize that it may take a few days for the surety to respond. Surety bonds
frequently are executed by agents or in field offices of the company. Often
it takes a few days before a newly executed bond is entered into the data processing
network or is reported to the supervising office. However, if an inquiry is
not answered within two weeks, a follow-up is suggested.
Recognizing how difficult it can be to determine how to contact a surety,
The Surety Association of America has produced a list of surety companies with
contact information for purposes of authenticating a bond. Since participation
in this program is voluntary, not every Surety Association member is listed.
The list is available on the Surety Association's
Web site.
Several of the surety companies on the list are members of a group of companies
that have common ownership. If all inquiries for companies in the group go to
one particular company, the listing will refer you to the appropriate related
company to which the inquiry should be directed.
If a company is not listed, you might want to consider other information
sources. The last section of this article provides guidance in this area. The
sources also are useful in analyzing the financial strength of a surety.
Information Needed
When making an inquiry to authenticate a bond, at least the following information
should be provided. (The best way to supply this information is to enclose a
photocopy of the bond with your inquiry.)
- Bond number (if any)
- Name and address of principal (including all names of the parties if
the principal is a joint venture)
- Name and address of obligee
- Amount of bid bond
- Amount of performance bond
- Amount of payment bond
- Date bond executed
- Name of person signing bond for the surety
- Brief description of project
- Contract price
- Directions as to whom the confirmation should be sent
In lieu of submitting a photocopy of the bond, the following format can be
used.
| BOND AUTHENTICITY
INQUIRY To: (NAME AND ADDRESS
OF SURETY)
The bond or bonds described below have
been presented to us. Please acknowledge that these bonds have been
provided by your company.
BOND NUMBER (IF ANY): _______________________
NAME AND ADDRESS OF PRINCIPAL ON THE
BOND (IF PRINCIPAL IS A JOINT VENTURE, INCLUDE NAMES OF ALL PARTIES):
_______________________
_______________________
_______________________
NAME AND ADDRESS OF OBLIGEE:
_______________________
_______________________
_______________________
AMOUNT OF BID BOND: ________
AMOUNT OF PERFORMANCE BOND: ________
AMOUNT OF PAYMENT BOND: ________
DATE BOND EXECUTED: ________
NAME OF PERSON SIGNING BOND FOR SURETY:
_______________________
BRIEF DESCRIPTION OF THE PROJECT:
PLEASE SEND CONFIRMATION TO: (NAME AND ADDRESS)
_______________________
_______________________
_______________________
VALIDITY CONFIRMED: _______________________
COMPANY NAME: _______________________
SIGNED BY: _______________________
|
When making an inquiry, the best result should be obtained by using the No.
1 preferred inquiry method specified by the particular company to which the
inquiry is being directed. When a method of preference is indicated, the primary
preferred method is shown as No. 1, the secondary preferred method is shown
as No. 2, etc.
Be Sure To Check the Name Carefully
The name of the surety company appearing on the surety bond should be identical
to the name of the surety company appearing in the list. If there is any discrepancy,
that fact should be called to the attention of the surety company when making
an inquiry.
Other Sources of Information about Your Surety
Once you know you have a valid bond, you might want to find out something
about the surety itself. Most large property and casualty insurance companies
have surety departments. In addition, there are some companies for which surety
bonds make up all or most of their business.
In either case, in order for a company to write a surety bond in the United
States, it must be licensed by the insurance department of one or more states.
While there are some exceptions, a surety company generally is required to be
licensed by the insurance department for the state in which it conducts business
or the state where the obligation guaranteed by the bond is being performed.
Since companies that write surety bonds must be licensed by state insurance
departments, an obvious source of information is the insurance department itself.
The department of the state in which the surety company is domiciled usually
will have the most information about the surety, as it is responsible for performing
periodic examinations of the company. Insurance departments are located in the
state capital and, in some instances, have offices in other large cities of
the state. Insurance departments generally are responsive to consumer inquiries,
and any citizen may call the department and request to speak with someone who
can provide information on a particular surety company.
The U.S. Treasury Department maintains a list of surety companies that it
has qualified to write surety bonds required by the government. This list is
published in the Federal Register on July 1 annually and is available for viewing
on the Internet. The Treasury Department requires companies that desire to be included
on the list to file financial and other information. This data is analyzed by
the Treasury Department, which develops a dollar underwriting limitation for
the company, which is shown for each company included on the list.
This underwriting limitation applies only to bonds on which the federal government
is obligee. However, it is important to recognize that a surety may provide
a single bond with a dollar limit that exceeds the limit appearing in the Treasury
List. When the underwriting limitation is exceeded, the surety must be protected
in accordance with the following rule, which appears as note (b) in Treasury
Circular 570:
(b) The Underwriting Limitations published herein are on a per bond basis.
Treasury requirements do not limit the penal sum (face amount) of bonds
which surety companies may provide. However, when the penal sum exceeds
a company’s Underwriting Limitation, the excess must be protected by co-insurance,
reinsurance, or other methods in accordance with Treasury Circular 297,
Revised September 1, 1978 (31 CFR Section 223.10, Section 223.11). Treasury
refers to a bond of this type as an Excess Risk. When Excess Risks on bonds
in favor of the United States are protected by reinsurance, such reinsurance
is to be effected by use of a Federal reinsurance form to be filed with
the bond or within 45 days thereafter. In protecting such excess risks,
the underwriting limitation in force on the day in which the bond was provided
will govern absolutely.
Of course, you will want to use a financially stable surety company. A number
of private companies analyze and rate the financial strength of insurance companies
and sureties. Among them are A.M. Best, Standard & Poor’s, Duff & Phelps Credit
Rating Company, and Moody’s Investor’s Services.
Most surety bonds are issued through insurance agents and brokers who in
many instances can provide much information regarding a specific surety company.
Professional agents or brokers specializing in providing surety bonds will be
familiar with and have access to the information sources discussed above. In
addition, they may be able to assist in reviewing surety bonds for proper execution.
Names of agencies specializing in surety bonds may be obtained from the National
Association of Surety Bond Producers.
This list of information sources is not intended to be all-inclusive, but
it does provide some commonly accepted sources of information. For additional
information, please contact The Surety Association
of America or the National Association
of Surety Bond Producers.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author's employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.