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Surety Bonds 101
Ryan Tash
Vice President
ryan@surety1.com
Office: 916-737-5723
3225 Monier Circle, Ste 100 ● Rancho Cordova, CA 95742 ● www.surety1.com ● 916-737-5723
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What We’ll Cover
• Principles of a surety bond
• Type of bonds you will likely see and what purpose
each serves
• How bonds are priced. How bonds are charged
• Real life scenarios of fraudulent bonds
• How to verify validity of a bond
• Closeout procedure for bonds
3225 Monier Circle, Ste 100 ● Rancho Cordova, CA 95742 ● www.surety1.com ● 916-737-5723
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What is a Surety Bond?
Principal
Contractor
Obligee
City/Agency
Surety
3225 Monier Circle, Ste 100 ● Rancho Cordova, CA 95742 ● www.surety1.com ● 916-737-5723
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Types of Bonds
• Bid Bond
– Guaranties to the obligee that the surety and contractor will
enter into contract at the bid price if awarded the contract
• Performance Bond
– Guaranties to the obligee that the contractor will perform
project to specifications of the project
• Payment Bond
– Guaranties to the obligee that all suppliers and subcontractors
are paid in accordance with bid and state laws (prevailing wage)
• Guaranty Bond (Maintenance Bond)
– Guaranties to the obligee that any repairs covered under
the warranty are covered under the terms of the contract
3225 Monier Circle, Ste 100 ● Rancho Cordova, CA 95742 ● www.surety1.com ● 916-737-5723
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Cost of Surety Bonds
Bid Bond
No charge
½ - 3% of contract
Performance Bond
price
Payment Bond
Price included with
performance bond
• Cost and Qualifying is Based on Contract Amount Not Bond
Amount
• Why is This Important?
– Annual, JOCs, Task Order, IDIQ
– Contracts where bond percentage is less contract amount
– Return and Overrun Premium
3225 Monier Circle, Ste 100 ● Rancho Cordova, CA 95742 ● www.surety1.com ● 916-737-5723
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What Does It Prevent?
Hopefully this! – Unfinished work and unpaid subs
In Layman’s terms, a performance bond protects the public’s interest,
a payment bond protects the subcontractors and suppliers from nonpayment
3225 Monier Circle, Ste 100 ● Rancho Cordova, CA 95742 ● www.surety1.com ● 916-737-5723
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Fraudulent Bonds
Fraud can happen a number of different ways.
Some recent examples:
Example of contractor committing the fraud
In 2011, Advantage Demolition and Engineering President pleads
guilty to fraud for bogus bonds on $3.5 million worth of water meter
installation projects in 2009 for the City of Sacramento. City caught
wind of this after the contractor was having issues on the job. He
used counterfeit seals and signatures to make bonds appear
legitimate.
3225 Monier Circle, Ste 100 ● Rancho Cordova, CA 95742 ● www.surety1.com ● 916-737-5723
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More Fraudulent Bonds
Example of individual surety agent committing fraud
• In 2013, individual surety agents forged the signatures of
former Chubb Surety executive in bogus bonds. While this
deception could have been done by any agent, it stemmed
from an individual surety, who represents contractors that
could not get bonded in the corporate surety market – the
first red flag.
Example of agent committing fraud
• In 2009, Maryland agent sentenced for issuing $535 million
worth of bogus bonds through legitimate surety companies.
He issued bonds not approved, then pocketed $22.5 million
worth of premiums.
3225 Monier Circle, Ste 100 ● Rancho Cordova, CA 95742 ● www.surety1.com ● 916-737-5723
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How to Prevent
• Fraud is Impossible to Completely Prevent
• There have always been criminals out there
and there always will. Bonds are not
universally filed somewhere where you can
check validity.
• Implement an Internal Bond Verification
System
• Call Agent if Unsure.
3225 Monier Circle, Ste 100 ● Rancho Cordova, CA 95742 ● www.surety1.com ● 916-737-5723
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Steps To Verifying a Bond
• Read the bond first. Look for a bond number, surety name,
contractor name, date, contract amount, etc
• Match Power of Attorney paper with bond.
• Check notary acknowledgement and stamps
• Make sure bond is sealed with proper surety company seal.
• Verify company is treasury listed and licensed to do business
in your state
•
•
http://www.fiscal.treasury.gov/fsreports/ref/suretyBnd/c570_a-z.htm
Google ‘am best rating and surety company name’
• Do NOT accept bonds from ‘individual sureties’
• Call the agent to verify the bond number or…
• Call the surety company to verify bond number
3225 Monier Circle, Ste 100 ● Rancho Cordova, CA 95742 ● www.surety1.com ● 916-737-5723
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Bond Form
Sample Bond Form
• Bond number when you call to
agent/surety to verify bond
• Principal name is correct
• Verify surety company on treasury
list website.
• Bond amount is correct
• Verify it’s dated
• Verify it’s signed, sealed, and
notarized.
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Power of Attorney
Sample POA
•
•
•
•
Verify surety is correct
Verify agent is listed
Verify bond is within limits stated
Verify commission expiration date
of notary acknowledgement
• Verify it’s dated
• Verify it’s sealed if on copied
paper. Not all POA are on
watermarked paper.
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Verbally Verifying a Bond
Script to Verify a Bond
Call agent or surety
“Hello, my name is John Smith from the City of
Sacramento and calling to verify a bond. The bond
number is 2439876, contractor is Do It Right
Construction, and the project is Library Restroom
Remodel. Is this a valid bond?”
3225 Monier Circle, Ste 100 ● Rancho Cordova, CA 95742 ● www.surety1.com ● 916-737-5723
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Closing a Bond
Public Works Construction
• Performance and Payment bonds are generally noncancellable. It follows the contract and closed when the
obligations of the contractor are fulfilled.
• Surety Companies close bonds once obligee completes and
signs a status inquiry, verifying completion date, contract
price, and payment status.
Subdivision (grading, permit, off-site,etc.)
• Though these bonds have terms, they do not cancel either.
In place until work is complete
• Surety companies close bonds once obilgee provides a letter
of acceptance and releases.
3225 Monier Circle, Ste 100 ● Rancho Cordova, CA 95742 ● www.surety1.com ● 916-737-5723
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Questions?
Feel free to call or email me with any
questions about bonding as they arise
throughout the year
Ryan Tash
ryan@surety1.com
916-737-5723
3225 Monier Circle, Ste 100 ● Rancho Cordova, CA 95742 ● www.surety1.com ● 916-737-5723
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