This article explores the roles and responsibilities of the principal or
client, the surety, and the agent/broker in procuring corporate surety bonds.
- The principal is the party who has
a legal and/or contractual obligation to perform.
- The obligee is the party who is
requiring the bond and who is the direct beneficiary of the bond.
- The corporate surety is the party
who, for a premium, is guaranteeing the performance of the principal in
favor of the obligee.
- The agent/broker operates in a dual
role: he/she is the party retained by the principal to market and service
the surety account and, as a licensed insurance/bond agent, is also an appointed
representative of one or more insurance/bonding companies.
Unbalanced Roles
Each of the parties in the process has a role with defined responsibilities
to one another. In effect, there can be three out-of-balance scenarios:
- The principal who believes it does not need an agent/broker and feels
it benefits most by dealing directly with the surety.
- The surety who wants to market directly to the principal and views the
agent more as an obstacle than a resource and facilitator.
- The agent/broker who places himself as the focal point and minimizes
the role of the surety or even the principal.
My experience has been that where any party overplays its role, in time the
process breaks down, and each of the parties loses something. Basically, when
any party oversteps its role and responsibility, it undermines the essential
rule of honesty and fair dealing that underlies the entire process.
The Surety Role
The surety as the guarantor of the principal's obligation is the ultimate
"risk taker" in the process. As such, the surety has a legitimate need to secure
full underwriting information on the principal and the obligations it is bonding.
This involves learning the background and experience about the principal
and its owners/officers and key personnel. It entails close examination of the
principal's financial statements to assess both the current financial condition
and the operations over time. It involves learning about any affiliated operations
or outside investments that could affect the principal's operations or financial
status.
The surety will want to learn about plans for the continuity of the business
in the event the owner and/or other key personnel were to leave or die. Since
no business is static, the surety has a need to receive periodic updates on
the principal's financial and operational status. The surety is also entitled
to be promptly informed when there is or may be a material change in the principal's
financial or operational condition. The need for a timely flow of forthright
information about the principal and its operations is essential.
Surety Communication
As the ultimate risk taker, the surety has the right to establish its underwriting
standards and requirements. Within the context of its rate filings with the
State insurance departments, the surety is free to select the premium it thinks
is appropriate for the guarantees it is providing. The surety has an obligation
to disclose its underwriting requirements/standards and premium charges so its
agents/brokers and clients know what to expect.
Just as the principal's operations are not static, neither are the surety's
operations. Therefore, it too has an obligation to communicate with its agents
and clients when there are changes in its financial or operational situation
that will affect future underwriting posture or rates.
Recently, one of the major surety writers informed its agents/brokers that
it was going to limit its contract surety writings to clients who had a net
worth in excess of $50 million. It provided 90-days' notice. For a client such
as a highway contractor who is heavily dependent on surety credit, such news
could have a material adverse impact on business. In my opinion, this was inadequate
notice considering the limited market for contractors of this size and the potential
effort to remarket accounts of that size and complexity.
Surety Interference
A few surety companies have a strong desire to supplant the agent/broker
and deal directly with the principal/client. While the surety's need for a timely
and forthright flow of information from the principal is without question, especially
on very large accounts where there may be hundreds of millions of dollars in
bonded exposure, the direct access to the client without the agent/broker's
involvement is not in the principal's best interest.
The surety obviously takes comfort that it receives information directly
from the principal and is able to strengthen its relationship with the client.
This does not necessarily work in the client's best long-term interests as it
is receiving only the view/opinion of that one surety. It is unlikely the surety
would give equal time to competitors and most likely would sell itself as doing
the very best job on the best possible terms for the client.
If the account were appropriately matched with the incumbent surety, then
it may well be the best surety for the principal at that point in time. However,
circumstances change, and what may have been a very good match at one time may
not be the best match at some future time. Therefore, the surety should not
interrupt the relationship between the agent/broker and the client by going
direct but instead should seek to arrange meetings with the client through the
agent/broker with a fully disclosed agenda.
Client Role
The principal or client is central to the entire process because without
the client, there would be no need for the surety or the agent/broker. The principal
is the primary risk taker and is the party who would have to exhaust its own
means and resources before the surety was called on to fulfill the guarantee.
Therefore, the surety and the agent/broker should first appreciate the principal's
stake and always give a fair hearing to any legitimate request or concern.
Having said this, it is also critically important that the principal understand
and appreciate the role of the surety as the ultimate guarantor of the bonded
obligation. If the principal understands the surety's role and exposure, and
appreciates that this is a partnership, then the principal will realize the
need for timely and forthright disclosure and understand why the surety has
to establish underwriting parameters for their account.
Given the surety's guarantor role, the principal is obligated and benefits
from seeking the surety's assistance well in advance of any default. Too often,
the principal—out of pride or ignorance—will not seek the surety's assistance
or share with the surety the circumstance that could require the surety's involvement.
This is an area where the principal's communication with the bonding agent can
facilitate timely and appropriate communication to the surety.
Communication Interference
The principal may feel flattered if the surety underwriter, especially someone
from the surety's home office, contacts them directly. Some principals think
they should initiate or encourage direct contact with their surety underwriters.
Obviously, it is mutually beneficial—especially for larger clients—if the principal
and the key decision makers at the surety know each other and have some rapport.
However, the principal would do well not to encourage direct contact with the
surety underwriters for some of the reasons cited earlier.
Such direct communication between home office surety underwriters and the
client without the agent/broker's knowledge or involvement can create communication
gaps. The local surety field office may not be aware of the content of such
communication, and the agent/broker would likewise be in the dark.
My experience has been that some of the biggest surety losses involved accounts
where the relationship was mostly between the surety's home office and the principal.
To suggest that the direct communication caused the surety loss would be an
exaggeration, but it probably would be fair to say that the direct relationship
may have caused the surety to lose some of its underwriting objectivity and
allowed the principal to go further than was prudent. While we may all want
to hear "Yes" to our requests, it is not always in our best interest. If the
surety says "Yes" when it should have said "No," both the principal and the
surety lose—in that order.
Agent/Broker Role
The agent/broker's role is primarily one of facilitator, communicator, and
counselor. The agent has the responsibility to develop the initial underwriting
information and to professionally present and sell the account to a surety that
provides a good match with the client. The match would require the agent/broker
to know the surety's appetite for a given client and to some extent a matching
of personalities at the surety and the principal.
Thereafter, the agent/broker has the responsibility to provide the surety
with the information required to provide ongoing suretyship, make it aware of
any significant events and facilitate face-to-face meetings between the surety
and principal as appropriate. The agent has the ability to filter comments made
by both the principal and the surety and to act as a sounding board for both.
The agent/broker should never deny the surety access to the client if the request
is reasonable and timely.
The agent/broker should not place itself as the focal point in the process
to the detriment of the surety or the client. Some agents/brokers have gone
so far that when the client is asked who their surety is, they will name the
agent/broker. As pointed out in the introduction, the agent/broker has a dual
role: it represents the interests of the client and the surety. In my view,
the agent/broker has a fiduciary role to both parties, and its effectiveness
over time relies on its credibility and reputation with both parties.
Conclusion
Given the nature of the bonding relationship, it must be collaborative between
all the parties. No one benefits if any party is carved out or minimized from
the process. Each party has a role to play, and as long as no one oversteps
their own role, the relationship will serve and benefit all the participants.