WHAT IS THE SIGNIFICANCE OF A SURETY BOND ON CONSTRUCTION PROJECTS?

John Bustard
President
National Association of Surety Bond Producers

Surety bonds translate to successful outcomes! NASBP firmly believes that when performance and payment bonds are in place, public and private owners can rely on projects finishing up successfully. When contractors and subcontractors choose professional bond agents who focus on providing strategic counseling and other services to develop and maintain solid surety programs, the result is the opportunity for construction businesses to participate in projects they will be proud of.

NASBP has undertaken a campaign to inform construction industry stakeholders about the tremendous value bonds provide, and as part of this, we have produced a series of short, informative and meaningful videos. Every project participant is invited to view them at the Be Guaranteed to Succeed site, nasbp.org/guaranteed.

A benefit to prime contractors and subcontractors aligning themselves with knowledgeable and proactive bond agents as part of their team is to obtain an edge over their competitors who might not be able to obtain bonds. Bonding helps general contractors gain access to working with their favorite owners, and in the case of subcontractors, the chance to align themselves with primes they prefer. This is part of ensuring the long-term success of a contracting business.

The stamp of approval coming from a strong bonding partnership translates to peace of mind for the beneficiaries of bonds because it is a signal that a contract is headed toward successful performance—a primary aim shared by the multitude of stakeholders on all building projects.

WHAT ARE THE TOP RULES YOU BELIEVE A CONSTRUCTION FIRM SHOULD LIVE BY TO PREVENT CONSTRUCTION INSURANCE LOSSES?

Jeffrey P. Deldin
Partner
World Insurance Associates, LLC

Construction firms should always emphasize safety first as their golden rule. Your most valuable asset are your employees, and in order for them to do their jobs productively and efficiently, they must understand that safety comes first before anything else.

There is no better way to institute this philosophy than by conducting an annual safety meeting with your entire staff. Annual staff safety meetings reinforce this concept to all your employees and what the true benefits are by practicing a variety of safety protocols in their every day work tasks. In addition, having your key job foreman conduct weekly on-the-job safety meetings with the workers provides an additional benefit to implement solid safety practices that will keep the job productive and free from accidents.

Finally, ownership should be open to working with their insurance carrier’s loss control representative to help assist and improve the company’s safety manual, policies and procedures. Many insurance carriers offer free OSHA training, a variety of safety seminars/webinars and insightful ideas on how to improve a firm’s commitment to overall job and operational safety.


Kevin Clary
Vice President of Risk Management
Amerisure

A great safety program starts with management and employee accountability. Making safety and loss prevention a top priority at your company can help measure activities and results. From the onset of employment, workers should be trained regularly—especially when they are performing a new job task. Keeping employees involved in the safety program after training will also keep them interested and invested.

Additionally, reward good behavior and correct bad behavior by providing realistic, personalized action items. You can present this feedback during daily jobsite meetings and inspections.

This is also a great time to complete a job hazard analysis for each job-related task. These may seem like small items, but being deliberate and consistent with your safety approach will be most effective in preventing construction losses.

HOW CAN CONSTRUCTION INSURANCE PROFESSIONALS HELP THEIR CLIENTS CREATE A BETTER RISK PROFILE FOR UNDERWRITERS?

Michael P. Cifone
Senior Vice President
Hudson Insurance Group

Insurance professionals add value to construction clients by clearly highlighting their client’s knowledge and appreciation of their own risks. A complete risk profile starts with conveying that the contractor’s focus is on identifying and monitoring their daily construction risks; the underwriter can then properly service the contractor by offering the right insurance and surety products that help mitigate their risks.

A better risk profile provides the underwriter with clear information regarding the macro industry in which the client works and related industry exposures, including factors like hazardous materials, labor and material shortages, and financing. With this background, the insurance professional can paint the picture of how their customer has navigated the environment.

Specific underwriting criteria like profitable operations, strong balance sheet and credit, and low historical loss severity are helpful in presenting a contractor that has a good track record. As important is a contractor that has prepared a long-term plan that identifies their operational risks and controls they have in place to mitigate those risks.

The risk profile helps to identify the common risks they could face and their plans to avoid or mitigate those risks. Contractors are confronted by risks associated with workforce issues, contract terms, weather, onerous insurance requirements, and unforeseen conditions. Understanding how owners stress the importance of safety procedures and controls also allows the underwriting the best opportunity to provide cost-effective insurance and surety tools.

The insurance professional is best equipped to help a contractor develop the best insurance program for their future success.


Henry W. Nozko, Jr.
President
ACSTAR Insurance Company

A professional surety agent or broker has the experience and knowledge to guide and assist contractor clients in compiling a strong risk profile for presentment to surety underwriters for contractors seeking surety credit.

A full complete questionnaire, with answers provided to all questions, is far superior to a short, half-page express form. The presentation should be short but complete and concise.

A portfolio of photos of completed projects is unnecessary and makes the presentation too bulky. A one-page list of three or four of the largest completed projects including contract amount, project location and contacts for reference is sufficient.

Financial information should be neat and orderly with no more than the last three year-end financial statements and one current personal financial statement for each principal.

One or two insurance certificates listing all current enforce coverage will suffice for the initial presentation. Providing copies of policies is unnecessary overloading.

If a specific bond is required, include a copy of the contract and bid documents and a completed Bond Request Form—but as a separate attachment. If the completed presentation is more than two inches deep, that is too much and could be distracting.

Surety underwriting is a subjective process, and underwriters are actually looking for ways to help. All underwriting presentations are not equal. A presentation can absolutely enhance or hinder underwriting evaluations. A short, clean, complete presentation could actually tilt the scale for a questionable case to become approved and for a strong case, the presentation could improve terms and increase limits.


Thomas Frossard
Product Owner Surety and Bonding
Tinubu Square

Surety bonds are strange animals. They are underwritten on a zero loss basis, contemplating the famous 3 Cs:

• Character: What is the contractor's standing and reputation in the market?
• Capacity: Does the contractor (principal) have the necessary skills, knowledge, manpower and ability to complete the project?
• Capital: Does the principal have financial stability?

Capital underwriting of surety bonding applications can be, to a large extent, facilitated by the underwriter’s IT systems, thanks to standardized financial statements data entries and decision engines automating underwriting policies where applicable.

Construction insurance professionals could promote standards to give their customers larger access to bonding capacity and quicker answers. Yet, their value-added could be much higher on the two other Cs of the surety underwriting discipline.

In a country as large as the United States, local culture and social knowledge are key to assess a contractor’s character. Construction insurance professionals, by being on the ground, can add significant value to the economic analysis of the contractor, especially in providing insights on its relationships with its subcontractors and raw material suppliers. AI can do a lot to contribute to detect small signals, yet it requires permanent training, and surety bond producers are very legitimate to do this.

Capacity underwriting requires expertise in the construction industry and the ability to assess a given project specificity. In public-private partnerships, surety underwriting contemplates both project feasibility and output estimation reliability. Construction insurance professionals can bring invaluable inputs to underwriters on the technical challenges of the construction and the local appetite for it.

Overall, they enable capital underwriting to be global, and character and capacity underwriting to be local, and hence to improve a carrier’s agility in managing its balance sheet.


Brady Mayer
AVP Underwriting
Old Republic Surety Company

Educate your client on the products and underwriting process, promote open communication and ensure quality, timely financial information.

Clearly understanding the underlying insurance product, including coverage, obligations of all parties and the current state of the marketplace will streamline the underwriting process.

Our goal as a surety partner is to help our clients capitalize on opportunities and drive growth; therefore, open, consistent communication is also critical. This allows us to better understand operational changes, the business plan and financial capacity, and ultimately to respond quickly.

Mike Bond
Head of Surety, North America
Euler Hermes

Construction insurance and surety professionals can help their clients create a better risk profile through better communication.

Better communication is the obvious answer, but in my experience, often the underwriters and clients do not communicate on the most important issues impacting their business relationship. For example, an underwriter sometimes does not clearly lay out the underwriting criteria that are applying when evaluating a client. Think of how much value there would be in a detailed discussion of the positive (or negative) factors which are impacting the perception of the client’s risk profile.

Now these discussions can be difficult—the professional has to be clear in their delivery and feel comfortable in providing a “glimpse behind the curtain” of the underwriting process. The underwriter has to have the right bedside manner when delivering the information. It is not a stick to beat the client; it is an opportunity for a constructive dialogue.

Think of this discussion like a performance review (something few people like, most have endured, and that is often unsatisfactory for both parties), where you have an opportunity for clear feedback which could help the recipient to perform better. But like a performance review, you have to be prepared with the facts, be able to communicate those facts in a constructive manner and listen to the response.

Clients may not like what they hear. But if they are able to listen and take on board the discussion, it actually could improve their risk profile and maybe make their business better.

WHAT STEPS SHOULD CONTRACTORS TAKE TO NAVIGATE THE INSURANCE MARKET CHANGES THAT ARE CURRENTLY UNDERWAY?

Jack Gibson
President and CEO
International Risk Management Institute (IRMI)

The insurance marketplace has always been cyclical and, over the past 12 months or so, it has been shifting from what the industry calls a “soft market” to a “hard market” for virtually all lines except workers’ compensation. In a hard market, underwriters become much more cautious, increasing rates, reducing the limits they offer and restricting coverage terms. The bottom line: It is much more difficult to secure insurance.

When this happens, take steps to put yourself in the best position to secure the most favorable terms possible. Here are a few:

• Make sure you are using an agent or broker who truly understands construction and your business, and work carefully with him or her on your strategy.
• Start the renewal process early, at least four months out.
• Put together a complete package of underwriting data, anticipating all the questions your underwriters might have.
• Consider raising your deductibles to retain more risk in exchange for lower premiums.
• Review your claims data to assure that it correctly reflects the current status of all open and closed claims.
• Don’t just buy on price. Avoid accepting coverage restrictions that will later prove onerous.
• Continue to focus on safety and quality, making certain to communicate your efforts to your underwriters.

Your next insurance renewal is likely to be far more difficult than in recent years. Prepare by mapping out a renewal strategy and gathering the data you’ll need to present your company in the best light.

WHAT ARE THE TOP RULES YOU BELIEVE A CONSTRUCTION FIRM SHOULD LIVE BY TO PREVENT CONSTRUCTION INSURANCE LOSSES?

Josh Linsey
Vice President of Loss Control
Donegal Insurance Group

Construction firms face a myriad of risks. Leading companies will understand the importance of these three top rules: safety awareness, risk transfer and employee training.

Safety awareness is a top priority for the management team that understands the negative financial impact of losses on the organization’s bottom line. Implementing safety awareness in all phases of a project protects their employees, organizational liability and end users. Management must assess hazards and provide the direction and commitment needed to manage risk. Companies that do this well reduce both loss frequency and severity.

Risk transfer is a critical component to prevent construction insurance losses. Firms must effectively transfer risk where appropriate. Managing contracts and subcontractor selection is an important part of a well-rounded risk management program.

Construction firms will seek legal advice from qualified individuals on contract wording. State-specific decisions can impact contractual wording, and relying on general business contracts may not be protective enough. No contracts should be signed without a thorough review by an attorney to remove unneeded liability exposures.

Construction firms should have written standards for qualifying subcontractors hired. Standards must include subcontractor loss experience, safety programs, employee training and subcontractor insurance requirements.

Employee training needs to cover primary and potential loss exposures. This requires employers to assess hazards and routinely train employees to influence daily behavior for the sake of educating employees on hazards to work safely, preventing losses and controlling overall insurance costs.

LABOR-FORCE / COSTS INCREASES

Kevin McCann
Vice President of Surety
Philadelphia Insurance Companies

Too many times, we’ve heard customers say, “We can’t get people,” whether laborers, skilled craftspeople, project superintendents or other workers to properly staff their projects. These ongoing shortages are causing several issues in the construction economy and creating concern regarding maintaining a proper labor force on construction projects.

There are simply not enough skilled craftspeople being trained nowadays, and the construction labor force (like many industries) is lacking a supply of skilled workers as many of the experienced workers are deciding to retire. It is a problem that has been creeping up over the last few years, which creates a bigger and bigger void in the construction marketplace each year.

On top of this, another concern which is causing many sureties issues is being able to re-let work to takeover firms for pricing that is within the historical ranges surety claims divisions are accustomed to seeing.

Nowadays, takeover pricing is coming in double, sometimes more than double, the pricing of the original contract price of the project. This increase in completion pricing is being fueled by what replacement contractors are citing as “lack of labor to dedicate to these takeover projects.”

Simply put, if construction firms do not have the adequate supply of skilled labor for their normal backlog of work, having to take on surety completion work is creating an even larger hole with the lack of talented and trained workers who can properly do the work.

Bottom line: We need to start making a better effort in guiding our youth into vocations and not just sending them off to college. College is not the best option for everyone, and considering the ever-growing void of talented craftspeople in the workforce, we need to be more open in telling our children that working at a vocation is a very honorable career choice. Not to mention, it pays very well!