No Indemnity Agreement Doesn’t Mean No Liability

Recently, there’s been a trend where surety companies are no longer requiring an indemnity agreement.  These agreements spell out the obligations of both your surety company and whomever signs it.  In its simplest form, it governs the relationship between you, your company, and the surety company.  You can learn more about indemnity agreements here but let’s discuss some common misconceptions below.

My agent said I have no liability because I don’t have a signed indemnity agreement

Nothing can be further from the truth.  If your agent tells you this, he or she has no business providing surety bonds in the first place.  The indemnity agreement provides a very one-sided way of dealing with relationship between the surety company and the bond principal.  The agreement typically benefits the surety company since they’re the one providing you with surety credit.  It can be similar to a loan agreement and outlines the rights of each party.  For example: If a bond claim occurs, the agreement spells out the surety’s available options and, in most cases, your rights as well.  These rights aren’t clearly defined when an agreement doesn’t exist.  However, a surety company can and most definitely will exhaust every legal avenue to be reimbursed when a claim occurs.

How can I benefit by not having a signed indemnity agreement?

It depends.  Each surety company’s indemnity agreement is different.  While all serve mainly the same purpose, they’re different as to form.  Some agreements ask the principal to waive certain rights such as homestead.  Other agreements don’t specifically state these waivers but imply them.  However, you can benefit from not having an agreement because your rights, along with the surety’s rights, aren’t defined.  This leaves any legal action by you or your surety subject to each state’s statutes and law.  You may find that a specific state is more friendly to corporations and creditors while another is more friendly to you as the bond principal.  Regardless, you’re exchanging predetermined rights and legal remedies for a decision ultimately made by the court system.  Again, you may find that not having a signed agreement can benefit you as it can limit the surety company’s right to demand collateral, funds-in-place, and other terms.

Final thoughts about not having an indemnity agreement

No indemnity agreement doesn’t mean no liability for you or your company.  I cannot stress this enough because many insurance agents are simply giving bad information at best while others are intentionally being dishonest.  Regardless, if you’re concerned about your liability, please talk to an attorney about your likelihood of success of not being held liable for your actions.

How to determine company ownership

Each day surety companies issue numerous surety bonds on behalf of their agents.  In most cases, they require what’s called corporate indemnity as a condition to issue a bond on their paper.  You can learn more about indemnity agreements here but they’re basically a promise to reimburse your surety company if they pay claims on your behalf.  Additionally, most sureties will require the owners to sign personally.  This makes it especially important for a surety company to know the exact ownership structure of your company.  We’ll discuss of few of the ways they do this in the following paragraphs.

State Corporation Websites

For this method, we’ll use the State of Florida’s corporation website called Sunbiz.org.  Surety companies often review this website to determine the ownership structure of your company.  However, it often gives little information about the actual ownership.  For example: Sunbiz attaches a copy of the articles of organization, incorporation, etc. when your company initially files with the state.  In the case of a corporation, the articles usually list the President, Secretary, and other important positions.  Unfortunately, these positions often require 0% ownership by the individual listed.  Meaning, you can be the President of a company and have absolutely no ownership of it.

While state corporation websites are often a good starting point, they shouldn’t be used to find actual ownership.  They usually don’t contain the information needed to make a correct determination.  Admittedly, some state websites do a better job than others and this section focuses on the Sunbiz website only.

Client Statement/Application

This method involves taking the client’s word for it.  It appears most frequently when a client is applying for a small amount of credit.  The application includes a section where the client fills in the ownership percentages of his or her company.  It’s very convenient for the client but very unreliable.

Operating Agreement or Corporate Bylaws

This is perhaps the best way to determine ownership of a company.  Operating agreements usually state each person or entity’s ownership percentage.  In most cases, it also spells out voting rights, each persons role in the company, and other helpful information.  However, the original operating agreement does not account for any amendments which have occurred since its issuance.  Amendments to the operating agreement are the result of changing it in one way or another.  These changes include purchase and sale agreements among other things which impact the business’ operations.

Conclusion

In the end, determining a company’s ownership structure at any given time can be difficult.  You may find that it’s completely appropriate to take someone at their word if the risk of doing so is small.  If not, you may want to dig a little deeper and request the operating agreement which spells out the ownership structure.  However, it’s very hard to overcome someone who tries to conceal or hide this information.  Most state websites don’t provide enough information, client statements are based entirely on trust, and operating agreements/bylaws can always be amended.

Florida Travel Agency Bonds – Updated Forms

Florida’s Seller of Travel Division of the Department of Agriculture and Consumer Services recently began rejecting older versions of their Seller of Travel Surety Bond.  Until recently, they would accept their older Florida Travel Agency Bond form originally issued in 2010.  However, they’re now only accepting their most recent revision made in 2015.

How does the new travel agency bond form differ from the old form?

The changes are primarily centered around wording on page 2 of the Florida Travel Agency Bond form.  In the first paragraph on page 2, they added the word “which” at the beginning of the paragraph.  They removed “herein referred to as surety” and replaced it with “is authorized to do business and issue surety bonds in the state of Florida”.  The term “hereinafter referred to as Obligee” was replaced with “Obligee”.  Towards the end of the first paragraph, the words “Florida Statutes” were replaced with “F.S” and adds the following language: “and shall not injure a consumer by fraud, misrepresentation, breach of contract, financial failure or violation of the Florida Sellers of Travel Act by the Principal,”.  Lastly, in item 3, the “s” is removed from the second instance of the word “days”.

Do I need to replace my old Florida Travel Agency Bond with the new form?

No, you do not need to replace your current Florida Travel Agency Bond form with the new form.  However, if you let your current bond expire, you will need to replace it with the new version.  Please note that your bond can usually be reinstated if the surety company is notified within 30 days of it being cancelled.

Where can I find a copy of the new Florida Travel Agency Bond form?

You can find a copy of the bond form on the Department of Agriculture’s website or in your seller of travel application.  The form will consist of the last two pages of the application packet.

How to get a Nashville Building Permit

If you’re a contractor looking to work in the city, you’ll need a Nashville building permit.  They’re required by the city and Davidson County prior to performing work on a new or existing structure.  Permits are normally issued in the name of your company unless a homeowner pulls the permit in their name.

To pull the permit, you must visit the Metro Government of Nashville and Davidson County Metro office building.  The Department of Codes Administration will ask for the property owner’s name and address.  You’ll then meet with the Zoning Examiner who will review your plans.  If in compliance with code, your permit will be issued.  Most permits are issued on your first visit unless they need approval from another department.  You can find a detailed brochure of how to get a Nashville Building permit here.

Who needs a Nashville Building Permit?

All construction activities, both residential and commercial, require proper permitting.  The exception to this rule is normal maintenance or repairs performed to an existing structure.  It’s best to check with the Nashville & Davidson County Codes Department to make sure a permit is not needed prior to starting the project.  What may seem like a simple repair can require a permit.  If you fail to get the permit, it could cost you as you’ll read below.

Who can pull a Nashville or Davidson County Building Permit?

Only two parties can pull a permit.  The first is a residential homeowner who occupies or will occupy a single family residence.  The second is a licensed and bonded contractor with the Metro Codes Department.  The contractor must meet several requirements and provide a $10,000 or $40,000 permit bond to the Metropolitan Government of Nashville and Davidson County, TN.

How much does a Nashville Building Permit cost?

The cost of permit in Davidson county depends on the your permit type.  Residential building permits begin at $28.25 and increase based on the total project value.  On other hand, commercial building permits start at $40.39 and increase based on your contract value.  In addition to your permit fees, zoning and plan examination fees may apply.

What if I don’t get a permit and get caught?

In most cases, you’ll be issued a stop work order by the Codes Department.  You then have to apply for the permit and pay three times the amount it would have cost you to apply in the first place.  Additionally, you could be required to tear out, modify, and replace work which was performed prior to the permit’s issuance.  This is likely to cause a delay in the project’s completion and unnecessary additional costs which can’t be billed back to the project owner.

How do I contact the Codes Department?

You can contact the Codes Department by calling 615-862-6500 or visiting them in person at the following address:

Metro Office Building
800 2nd Ave S.
Nashville, TN 37219

Additionally, you may also visit them on the web at www.nashville.gov/codes.

Private Performance Bonds & Payment Bonds – What are they?

Before we discuss private performance bonds in particular, let’s first look at what a surety bond is in general.  A surety bond is, in its simplest form, a consumer protection product.  It promises to pay for covered financial harm caused when your business breaks a rule or violates a contract provision.  A private performance bond is one that protects a private entity such as a developer or bank from contractor default.

For example: A general contractor enters into a contract with a developer.  The GC then posts a performance bond as a guarantee that the project will be completed according to the contract.  Now let’s assume the company defaults on the contract.  What happens now?  The surety company is obligated to remedy the default in accordance with the contract and bond form.  The remedy can include replacing the GC, paying the damages owed according to the contract, or supporting the GC so it can finish the job.

Why should a bank require a Private Performance Bond & Payment Bond?

The better question is why shouldn’t a bank require performance bonds on private projects?  They’re lending money to a developer in order to construct a building, subdivision, or some other structure.  The money is loaned based on the financial strength of the developer and, ultimately, the underlying asset.  But, as we saw in the most recent recession, even the strongest developers and contractors can fail.  When failure occurs and the contractor has no bond, the lender may find itself paying out of pocket to complete the project.

In the paragraph above, we mentioned that a bank may be responsible for paying out of pocket to complete the project.  But why?  There are two main obligations met through performance and payment surety bonds.  The first was discussed previously and results when a contractor fails to perform the contract (i.e. defaults).  The second obligation involves payment of the contractor’s subs and suppliers.  A payment bond can help ensure that payment is made by the contractor to the subs and suppliers working for them.  Banks assume a large risk when it comes to payment.  This is because the developer can submit for a draw when a portion of the contract is completed.  However, that doesn’t ensure that the contractor has paid its subs and suppliers up to that point.  In most cases, banks only become aware of payment issues when mechanics liens are issued on the project.

The trickle down effect of contractor default on unbonded projects

At this point, you may be thinking that the negative impact to a bank from contractor default can be isolated to the GC and/or developer.  Unfortunately, that’s not the case.  When a GC defaults on a job, subcontractors and suppliers are often left unpaid in addition to the uncompleted project.  When subs and suppliers are left unpaid, those companies may default on other contracts which may leave their employees unpaid and out of work.  Those subs and suppliers and their employees may also be customers of the bank who provided funding to the GC’s project.  Now the bank not only has a partially completed project with outstanding liens but also subcontractors unable to pay for their loans and business lines of credit.  Additionally, they may be left with personal lines customers who worked for the GC, subcontractors, and suppliers who are now unable to make their mortgage payment.

How can a bank protect itself from contractor default?

The description above holds especially true for local and regional banks with smaller lending portfolios.  One big mistake can result in dire straights for the institution.  So how can they protect themselves?  The most obvious answer is to utilize private performance and payment bonds once a contract exceeds a certain amount.  You’re probably thinking to yourself that banks can’t benefit from the GC’s bond because it runs to the developer.  However, this is untrue.  Banks can require what’s called a dual obligee rider to the performance and payment bond.  The rider allows the bank to make claims on the bond and, in most cases, gives them the same rights as the developer to make a claim.  This is especially important if the developer also owns the GC performing the work.

How do I learn more about private performance bonds?

Please contact us if you’re a bank looking for more information on how to stop losses from occurring.  This article is only meant to give broad points regarding how contractor default can harm your company.  Each bank has their own lending guidelines and will need to tailor those practices to their organization.

Surety Bond Default – Signs Which May Lead to Failure

During a recent Florida Surety Association meeting, Gary Dunbar, President of Great American’s surety division, gave a presentation on what leads to surety bond default.  His presentation dealt mainly with the performance and payment bonds in the construction industry although some information may apply to commercial bonds.  We’ll discuss a few of these signs and some others in the paragraphs below.

Sign #1 – Divorce

Didn’t see this one coming did you?  Well neither did the husband and wife team who split the duties of their bonded construction company.  At first, everything was perfect.  One of spouses handled the inside accounting/office management while the other supervised work in the field.  As the construction company grew, so then did the stress in their marriage.  Eventually, the couple decides to get a divorce.  We all know divorces can often be contentious but they also distract from a person’s daily routine.  Job site supervision begins to decline as does management of the in-house duties like tracking job profitability and invoicing on time.  Additionally, the lawyers are trying to find a way to split the marital assets in the meantime.

The real threat, however, lies after the divorce has been settled.  The partner who supervised the field operations may now find themselves managing the office, taking care of payroll, and other accounting tasks.  On top of that, they’re still responsible for supervising each project.  Payroll may fall behind along with invoicing, timely financial reporting, and other tasks.  You can see how quickly a contractor’s fortune can change when they’re overwhelmed which brings us to our next sign.

Sign #2 – Inexperience

In this example let’s say you’re a contractor who performs contracts in the $200,000-$300,000 range.  Similar to the situation mentioned above, the in-house bookkeeper handles your accounting and you handle the job supervision.  Your bonding agent uses a Fast Track application which allows you to get bonds without a lot of financial information.  Now let’s say a large job comes up and you’re in need of a $1 million performance and payment bond.  You call in a CPA to perform a financial statement review, get the job, and find a surety company willing to provide the bond.  All is well right?  Well, maybe…

You get request from your surety for an internal balance sheet and income statement along with a WIP schedule.  Your in-house bookkeeper sends the financials and WIP to your agent who reviews them.  What does your bonding agent see?  Negative cash balances, receivables over 90 days, and a poorly put together WIP.  While negative cash balances can be explained (to a point), these factors often indicate your bookkeeper does not have the experience to handle jobs of this size.  Accounts receivable balances over 90 days are usually the result of improper invoicing or poor collection practices.  The inability to track job progress and profitability can show that job cost allocation is poor or a lack of understanding.  Either way, these are signs of inexperience and can often lead to contractor bond default.

Sign #3 – Working Capital, Cash Flow, and Debt

While this one is somewhat self-explanatory, let’s discuss it for the sake of the article.  Surety companies review your ability to pay your bills with a very close eye.  This involves examining your working capital (current assets less current liabilities), availability of your bank line of credit, and debt service.  They like to see that your company is able to pay its bills due within 12 months (current liabilities) with the amount of cash currently in the bank and accounts receivable (current assets).  They also like to see that you have a bank line of credit to handle any slow pays or up front job expenses.  Lastly, they look at your existing debt maturity to determine your cash needs in the coming years.  Does one of your loans have a balloon payment?  If so, have you began the process of restructuring that note or do you have the ability to pay it off?

Conclusion

There are many warning signs of contractor default and those mentioned above are only a few examples.  The point we’re trying to make is that many of these signs of default can be mitigated through proper preparation.  A prenuptial (and postnuptial) agreement can detail what happens if a divorce occurs.  Hiring qualified people and knowing your limitations can often prevent mishaps from occurring as a result of inexperience.  Proper cash flow and debt management can prevent financial crises in the future.  There isn’t a magic bullet that prevents surety bond default but it’s important to plan for the worst case scenario.

What are “Fast Track” Performance Surety Bond Applications?

Fast Track performance surety bond applications allow you to apply for a bond quickly and easily.  Almost every surety company has one and they’re also referred to as Fast Bond, Quick’n’Ez, Emerging, and Express applications.  Regardless of the name, they operate in the same manner for the most part.  They allow you and your company to apply for smaller contract bonds without requiring mountains of underwriting information.  In most cases, you only need to provide a signed application, copy of bond forms, and your contract if available.

Why should you use a “Fast Track” Performance Surety Bond Application?

As mentioned above, these performance surety bond applications make it easier to get a bond.  They work great for one time bond needs or if your company needs smaller construction bonds under $500,000.  All you need to do is complete the application and the surety company can approve you in less than 24 hours.  However, in some cases, the surety company may require a business financial statement or tax return when your bond exceeds a certain dollar limit.  Some surety companies ask for this information for bonds over $350,000 in value.  Others require this information if your bond exceeds $250,000 in contract value.  Regardless, these applications are a great way to start a bonding relationship.  They’re also much easier than applying for a more formal surety bond line of credit.

Who should use a “Fast Track” application?

You should use these applications if your company doesn’t use bonds much or is just starting to bid on bonded jobs.  Again, each application has its own requirements but if most of your work falls under $350,000 then these applications are a great starting point.  Additionally, they’re a great way to begin a more formal bonding relationship with a surety company.  This helps when you look at larger bonds which can’t be approved using the less formal applications.

Why do I need a performance bond?

It depends.  In some cases, you’ll need a performance surety bond because it’s required by the Miller Act or a state’s Little Miller Act.  These acts establish a certain dollar value in which a contractor must provide a bond on a public construction project.  Prime contractors often require surety bonds from subcontractors before they begin working on a private project.  This is usually because they’re surety company is trying to spread their risk to other surety companies.  Lastly, the bank who is providing the financing for a project may ask a contractor to provide a bond.  This generally ensures a project will be completed so they can foreclose on the property if needed.

AZ Contractor License Bond Price Reduction

The cost of an AZ Contractor License Bond just got a whole lot cheaper recently.  Due to increased competition and a soft surety market, prices for these bonds have decreased dramatically.  This is great news if you’re a construction company who needs this bond.  Especially if you’ve been paying a high price due to your personal credit score.

AZ Contractor License Bond Cost

The old bond cost for contractors ranged from 1-2% of the bond amount needed.  For example: Let’s say your license requires a $15,000 surety bond.  You could have been paying between $150 and $300 until now.  The new cost of your new bond will most likely fall between $50 and $150 if your credit score qualifies.  However, your cost also depends on your license type in some cases.  The best way to get a firm quote is to apply for your bond online.

Is there a difference in price if I’m a residential contractor?

In some cases, yes, your bond might be more expensive depending on your license type.  Residential construction license bonds are still very inexpensive but cost more than commercial construction license bonds on average.  However, bond cost is almost always determine by your personal credit score.  So, a residential contractor with a great score could still qualify for a $50 bond premium.

How do I know if I qualify for a lower AZ contractor license bond cost?

In most cases, you will qualify for a price reduction.  This is the same for new bonds and those which are up for renewal.  Surety companies generally charge what’s known as a minimum premium.  This minimum premium usually ranges from $100-$150.  However, the minimum premium requirement for the AZ contractor license bond has been reduced to $50 for commercial and residential licenses.  Meaning, if you were paying $100 for a $2500 license bond, you may have been paying the minimum premium for that surety.  It’s possible that you could see your bond cost cut in half just by applying with a different surety company.  That being said, you’ll most likely still see a reduction even if your current bond cost is not subject to a surety company’s minimum premium requirements.

Where can I learn more about becoming a licensed Arizona contractor?

You can learn more about becoming a licensed Arizona contractor by clicking here.  We’ve provided a detailed description of the process so you don’t have search the internet for more information.  We can even assist you with your license if you don’t have the time.  Contact us today to learn more about how we can help!

When was the Oregon Construction License Application updated?

In January 2017, the Construction Contractors Board update the Oregon construction license application.  While few changes were made, all new construction license applicants must use the revised form.  Prior application versions may be declined which could delay the issuance of your license.

Where all the applications updated?

Yes, all new Oregon construction license applications were updated.  You can find the new applications listed below:

• Residential Application
• Commercial Application
• Dual Construction License Application

You cannot use these applications to renew your license.  However, you can renew your license by visiting the CCB’s website.

Are the surety bond forms the same?

Yes, as of the date of this article, the last change to the Oregon contractor bond form was made on September 28, 2015.  Additionally, you still need to provide a power of attorney and your surety bond agent must sign it.  It’s also important that your name appears on the bond exactly as it does with the Corporate Division.  You must also submit the bond to the CCB within 60 days after it has been issued.  If not, we must issue another bond with a new effective date.  If you’re interested in a bond quote, please complete our online surety bond application.  We can issue most bonds the same you apply.

Can I still use the old Oregon Construction License Application if I applied before the revision date?

You can use the old application only if you sent it prior to January 1, 2017.  The Oregon CCB will only accept the new application after that date.  However, most of the information they need remains the same.  You are still required to provide proof of insurance, a surety bond, application fees, and information specific to your company.  Additionally, you must use blue or black ink to complete it.  Please contact us at 888-572-6637 if you would like help with your Oregon Contractor License Application.

Florida Dealer Bond Quotes – 2017 Renewals

Florida used car dealer bonds have a mandatory renewal date of May 1st of each year.  This means you’ve probably been getting several cold calls over the past few weeks regarding your bond.  Right now you’re probably being offered deals that no one else can match and experiencing all of the fun high pressure sales tactics that come out of low quality agencies.  It’s fun right?  Well, here’s a little more information about the Florida dealer bond market that can help you fend off those pesky calls.  Please note this article only applies to Florida dealer bond quotes not those auto dealer bonds for other states.

How do I apply for a dealer bond in Florida?

Applying for your car dealer bond is easy.  Choose your bond type from the drop down list below then click “Get Your Bond Quote”.

Florida Car Dealer Bond

Get Your Dealer Bond Quote!

Most quotes are approved as soon as your application is received.

How much will my dealer bond cost this year?

The answer depends on your credit score for the most part.  However, the dealer bond market is incredibly soft right now in terms of pricing.  This means that you’ll most likely pay less for your bond this year even if your credit is roughly the same.  We’re seeing bonds that went for $2250 last year being quoted for $225 this year.

What’s causing my dealer bond price to drop?

Competition.  Surety companies are becoming increasingly competitive for this bond type.  Generally, you’ll find that as one surety company lowers their rate others will soon follow.  Each surety company has their own underwriting requirements but we’re seeing some of those waived in order to win your business.  In fact, some surety companies don’t make you sign an indemnity agreement.  This let’s you get your bond immediately after paying your bond premium.

What’s a multiyear term and how can it save me money?

You’ve probably heard about a multiyear term from one of your recent cold calls.  A 2 or 3 year prepaid bond premium can save you up to 20% of your bond cost.  Surety companies will discount the second and third year bond costs if you’re willing to pay for the entire 2-3 year term up front.  What the other agents don’t tell you is that these bonds are still underwritten each year.  So what does that mean for you?  Let’s say you have an unfortunate event which lands you in the hospital.  Let’s also assume that you can’t afford to pay the medical bills and it lowers your credit score.  Your surety company actually raise your price at renewal even though you’ve already prepaid the term.  They also have the ability to cancel your bond upon renewal even if the second term has been prepaid.

Now, if your bond is non-renewed after prepaying for a multiyear term, the surety company will refund the second and/or third year’s prepaid premium.  You can use this refund and apply it to another quote or, if the bond is too expensive, you can keep the refund and give up your dealer license.  While it’s ultimately your choice, we don’t recommend prepaying a two or three year bond term unless your quote is $250 or less.

Why could it be a bad idea to prepay for a multiyear term?

In some cases, prepayment makes sense.  For example:  It makes sense to take advantage of the discount if you’re an existing dealership and are paying between $225 and $250 a year for your bond.  However, if you’re paying $450 or more per year, it probably doesn’t make sense to purchase a 2 or 3 year prepaid bond.  Why?  Well, what happens if your credit improves?  Your bond cost should decrease!  You’re in effect loaning the surety company about $400 and banking that your credit score won’t improve.  We’re not quite sure why you would bet that your credit score won’t improve but understand there are times when it may make sense.

Questions about your dealer bond?

Contact us today for a free competitive quote or general questions about the auto dealer bond market.