Surety Bond Quarterly - Fall 2017 - 15

in which a producer's relationship
with the principal and knowledge of
basic suretyship can aid the surety
as a claim arises, and then we will
examine specific instances when a
producer's relative level of knowledge
has been beneficial and detrimental,
respectively, to the surety.
General Instances of
the Producer's Ability
to Aid the Surety
Oftentimes, well before a surety
receives a performance bond claim,
the producer has knowledge of the
circumstances that led to the claim(s)
being made on the bond. Thus, a producer can be of great importance to
the surety as it endeavors to resolve
the performance bond claim in the
most efficient manner. Furthermore,
a good producer is intimately familiar
with his or her accounts, often being
friends with the individual indemnitors. This can be advantageous to
the surety because, if this is a principal's first time being faced with a
performance issue on one of its projects, the producer's ability to be the
friendly face in the room will ease
the principal's anxiety as the surety
takes a more active role in the project.
This is important because, during the
claims process, the ease with which a
resolution is reached is often directly
proportional to the cooperation of
the principal in the process. Stated
another way, the more cooperation
the surety has from its principal, the
more efficiently the claim is able to
be handled, which is generally better
for both the principal and the surety.
In the payment bond context, we
have seen instances where the producer's relationship with the principal allows the producer to explain to
the principal the practical effects of
a claim being filed on the bond (loss
of bonding capacity, indemnity, etc.).
Knowing the consequences of a claim
arising, the principal was able to put
aside the differences it had with the
claimant(s) and resolve the claim
prior to the surety's involvement. This
would not have occurred had it not
been for the producer's relationship
with the principal.

Lastly, the producer's relationship
with the principal can be helpful after
the proverbial smoke has cleared and
the surety is looking to the principal for indemnity. During this time,
the principal's relationship with the
underwriter and producer can aid in
an efficient resolution of the matter.
For instance, if the producer is able
to correctly explain the principal's
obligations to the surety pursuant to
the indemnity agreement, the principal may not see the need to litigate
the dispute with the surety, which it
may have otherwise done. In another
example, if the producer is able to,
in a sense, informally mediate the
indemnity dispute, the surety may
be willing to discount the indemnity
or enter into a payment plan with
the principal, which would not have
been an option if the principal had not
cooperated with the surety.
Specific Examples of the
Effect of the Producer's Role
in the Claims Process
The above examples illustrate the
general effect that a producer may
have when it becomes necessary for
the surety to intervene in its principal's business, but specific examples
of how the producer's actions proved
both beneficial and detrimental to
the surety are useful in showing how
important the relationship between
the producer and the principal can be
during the claims process.
This first example evidences how a
good producer can prove invaluable
in minimizing a surety's damages on a
multi-project default. After incurring
substantial losses on various bonded
and unbonded construction projects,
a large "union shop" electrical subcontractor made a request to the
surety for financial assistance, as it
was no longer able to manage losses
being incurred and cash flow continued operations using their line of
credit. At the time the surety became
aware of the account's financial concerns, the subcontractor had eleven
active bonded contracts with a corresponding bonded liability of approximately $42 million. Initial estimates
indicated a shortfall of approximately

$5 million on the bonded work, of
which approximately $1.4 million represented ongoing completion costs in
excess of remaining contract balance
receivables. In an effort to minimize
its exposure, the surety entered into
a comprehensive Underwriting, Loan
and Continuing Indemnity Agreement
whereby all of the subcontractor's
business and personal assets of relative value were pledged to the surety.
In total the surety was able to secure
approximately $4.5 million in collateral security comprised of deeds of
trust in an array of real properties,
brokerage accounts, and equipment.
Accordingly, the surety projected
that it was under-collateralized by
approximately $500,000.
During the course of the winddown of the bonded scope of work,
the producer was instrumental in
assisting the subcontractor's efforts
to convince the surety to go against
conventional thinking and issue an
additional $1.8 million in bonds for
two upcoming projects that involved
a narrow scope of work that was the
principal's expertise. As we all know,
in the midst of a performance bond
claim, it is almost unheard of for a
surety to issue bonds to the principal
for subsequent projects. However,
because of the producer's years of
experience in handling the account,
he was able to advise the surety and
its counsel as to the historical profitability of the subcontractor's prior
projects involving the same scope
of work with the same owner that
was seeking the subcontractor's
bid on the two proposed projects.
Ultimately, the producer's efforts
were successful, and the surety was
convinced to issue the additional
bonding. The results were highly
beneficial to both the subcontractor
and the surety, as the two projects followed the profitability trends of prior
jobs as presented by the producer
and produced pure profit in excess of
$600,000, bridging the gap between
the funds advanced by the surety
and the collateral security previously
obtained. The result left the surety
in an over-collateralized position,
which allowed the subcontractor to

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15


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Table of Contents for the Digital Edition of Surety Bond Quarterly - Fall 2017

NASBP Upcoming Meetings & Events
2017–2018 Executive Committee
From the CEO: Advice for the Advisor!
How Can Construction Contractors Expedite Payment on Federal Contracts?
The Growing Importance of the Bond Producer in the Efficient Resolution of Claims
Practical Tools to Help Jump-Start Your Company’s Cyber Plan
Bond Agency Owners: The Hardest Part is Letting Go
New Software Selection and Implementation is not a Weekend Project
Is Canada Soon to Have Its Version of the Miller Act?
2017 NASBP Resource Directory
Surety Bond Quarterly - Fall 2017 - Intro
Surety Bond Quarterly - Fall 2017 - cover1
Surety Bond Quarterly - Fall 2017 - cover2
Surety Bond Quarterly - Fall 2017 - 3
Surety Bond Quarterly - Fall 2017 - 4
Surety Bond Quarterly - Fall 2017 - 5
Surety Bond Quarterly - Fall 2017 - 6
Surety Bond Quarterly - Fall 2017 - 2017–2018 Executive Committee
Surety Bond Quarterly - Fall 2017 - 8
Surety Bond Quarterly - Fall 2017 - From the CEO: Advice for the Advisor!
Surety Bond Quarterly - Fall 2017 - How Can Construction Contractors Expedite Payment on Federal Contracts?
Surety Bond Quarterly - Fall 2017 - 11
Surety Bond Quarterly - Fall 2017 - 12
Surety Bond Quarterly - Fall 2017 - 13
Surety Bond Quarterly - Fall 2017 - The Growing Importance of the Bond Producer in the Efficient Resolution of Claims
Surety Bond Quarterly - Fall 2017 - 15
Surety Bond Quarterly - Fall 2017 - 16
Surety Bond Quarterly - Fall 2017 - 17
Surety Bond Quarterly - Fall 2017 - Practical Tools to Help Jump-Start Your Company’s Cyber Plan
Surety Bond Quarterly - Fall 2017 - 19
Surety Bond Quarterly - Fall 2017 - 20
Surety Bond Quarterly - Fall 2017 - Bond Agency Owners: The Hardest Part is Letting Go
Surety Bond Quarterly - Fall 2017 - 22
Surety Bond Quarterly - Fall 2017 - 23
Surety Bond Quarterly - Fall 2017 - 24
Surety Bond Quarterly - Fall 2017 - 25
Surety Bond Quarterly - Fall 2017 - New Software Selection and Implementation is not a Weekend Project
Surety Bond Quarterly - Fall 2017 - 27
Surety Bond Quarterly - Fall 2017 - 28
Surety Bond Quarterly - Fall 2017 - 29
Surety Bond Quarterly - Fall 2017 - Is Canada Soon to Have Its Version of the Miller Act?
Surety Bond Quarterly - Fall 2017 - 31
Surety Bond Quarterly - Fall 2017 - 32
Surety Bond Quarterly - Fall 2017 - 2017 NASBP Resource Directory
Surety Bond Quarterly - Fall 2017 - 34
Surety Bond Quarterly - Fall 2017 - 35
Surety Bond Quarterly - Fall 2017 - 36
Surety Bond Quarterly - Fall 2017 - 37
Surety Bond Quarterly - Fall 2017 - 38
Surety Bond Quarterly - Fall 2017 - 39
Surety Bond Quarterly - Fall 2017 - 40
Surety Bond Quarterly - Fall 2017 - 41
Surety Bond Quarterly - Fall 2017 - 42
Surety Bond Quarterly - Fall 2017 - 43
Surety Bond Quarterly - Fall 2017 - 44
Surety Bond Quarterly - Fall 2017 - 45
Surety Bond Quarterly - Fall 2017 - 46
Surety Bond Quarterly - Fall 2017 - cover3
Surety Bond Quarterly - Fall 2017 - cover4
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