Risk Managers, How Will You Run into the Surety World?

By: Rick Morgan | March 7, 2022

Rick Morgan is the vice president of contract surety at Philadelphia Insurance Companies. He can be reached at [email protected].

As a risk manager, you have many responsibilities when it comes to protecting your company. There are many types of insurance you are most likely well-versed in and understand completely.

You know the limits you need. You know the exclusions that exist. You understand what types of insurance you need for your company and for your employees.

And lastly, you probably already have an experienced insurance agent you have worked with for years who can guide you through any of your insurance needs. In short, you have an incredibly important job to protect your firm, but you have the experience, the tools and the outside professionals to help your cause.

But what happens when you run into the surety world?

Do you know what a bond is? Do you know if and when you should require a bond of those with whom you do business? How do you obtain a bond and what information do you need to provide? What guarantees will need to be provided to the surety, and just what is ‘indemnity’ anyways?

The following will help you answer all these questions and get you started protecting your company by understanding the surety world.

What Is a Surety Bond?

A surety is a person or organization that assumes responsibility of putting up money in case a debtor defaults.

Contract surety bonds are issued by the surety to guarantee the performance of a contractor (debtor) for the completion of a construction contract, in this case through a performance bond.

The surety can also guarantee that the subcontractors and suppliers associated with a project are paid through a payment bond. The payment bond protects the project owner from an unpaid subcontractor or supplier filing liens on the project’s property.

Commercial surety bonds are required by governmental entities.

The surety guarantees your business conforms to local, state and federal regulations at risk of financial penalty. These bonds exist for almost every industry and run to municipalities all over the country.

A Risk Manager Needs a Bond for Protection—What Are the Next Steps?

As a risk manager, you can request a bond of anybody with whom you enter a contract.

Ultimately, the bond provides you the protection of the contract being completed. It also provides you with an extra prequalification process performed by an independent third party (the surety).

Before you even start to negotiate a contract with your business partner, you can ask them to provide a prequalification letter from their surety. This letter will state the surety believes the contractor can perform a contract of the type and size you require.

While given relatively freely by sureties, this letter can be a critical step in eliminating a truly unqualified contractor bidding on your project and wasting your time and resources.

Check the AM Best rating of the surety providing the letter.
Check the surety’s Treasury listing.
Check the SFAA Rankings as to the size of the surety.
Ask your insurance professional what they know about the surety company providing the letter.
Verify the authenticity of any bond you receive by checking with the surety that it was properly approved and issued.

Your Company Needs to Provide a Bond—What Are the Next Steps?

Find a knowledgeable agent that can place your bond.

Does your insurance agency have a bond specialist? If not, you need to find one!
Look at the National Association of Surety Bond Producers (NASBP).
Look at the local Surety Association of America (SAA).
A simple search for surety bond professional agents in your area will provide several leads to call.
Not all agents handle all types of bonds or have the right surety market for you. Don’t hesitate to approach more than one until you find the right agent for your bond.

Be Prepared to Provide the Following Information

Reason for the bond
Type and amount of the bond
Bond form required. Is it an owner or a statute requiring the bond?
Your relative experience as compared to the bond need
Location of the bond need
Who within your company has the authority to sign the bond/indemnity?
Financial statements (fiscal year end and current)
Ownership and management structure of your company
The personal financials of the owners of your company depending on the financial strength of your company as compared size of the bond need

Understand your obligations regardless of which side of the surety transaction you find yourself.

If Your Company Is Requiring the Bond of Others

Follow the provisions of the contract exactly.

If you do not, you may provide the principal (contractor) and the surety defenses not to honor the bond.

If Your Company Is Providing the Bond

You must complete your end of the contract according to the specifications of the project. The following apply:

You must pay any subcontractor or supplier that provides services for your project
You must follow all the provisions of the contract.
You must document every change or dispute in the contract
You must follow the regulations and codes that are attached to the bond requirement.

Be prepared to indemnify the surety for any loss caused by your company.

It is important to understand that the surety providing a bond for your company will require the company and any private owners to sign an indemnity agreement. This agreement states that you (the principal of the bond) will reimburse the surety for any loss caused by your company that must be paid in the process of settling a claim on the bond.

And Finally, What About an Irrevocable Letter of Credit?

If your company has posted any other sort of collateral as financial security for an obligation, like an irrevocable letter of credit (ILOC) or cash collateral, then ask the requiring party if they would accept a bond instead. The advantages are:

A bond does not tie up your liquid capital
You gain a partner (the surety) in defending yourself from an illegitimate claim on the bond
The bond may be cancellable where you can control that process as opposed to the owner of the ILOC releasing it
The bond may even be cheaper

Choosing the Right Surety Provider

There are several factors to consider when choosing a surety provider, from financials to size to service.

The surety’s AM Best rating indicates financial strength. Like insurance, surety bonds are a promise, so it’s important to work with a company that you can trust will meet its financial obligations.

The Treasury listing and SFAA Ranking indicate the surety’s size. Larger companies will be able to write bonds for larger projects.

Service is also important to consider, because it can save you valuable time. A customer-focused company will offer quick and easy access to surety experts to answer your questions when needed.

For example, Philadelphia Insurance Companies checks the box on financials, size. and service. Check us out for yourself. &

The Qualities to Look for when Selecting a Financial Lines Carrier

Operating a business comes with its share of challenges, but having an insurance partner that strives to understand and align with your operations can make all the difference.

By: MSIG USA | October 31, 2024

Running a commercial business is no small feat. Leaders are often tasked with making difficult decisions — sometimes with limited data — and communicating these decisions with confidence while acknowledging their inherent uncertainty.

“Expectations are incredibly high in today’s current climate,” said David Guild, head of financial lines, MSIG USA. “Companies and their leaders must be thoughtful and controlled in their communications, conveying both competence and a clear vision on an ever-evolving world stage.

Nevertheless good leaders (whether they are in the C-suite or on the board of directors) consistently persevere and face the challenges of our evolving world, equipping themselves with the necessary tools and techniques to keep operations running.

For financial companies and commercial businesses looking to keep pace with today’s risks and better understand their own exposures, finding the right insurer need not feel like an added weight.

Below are several qualities to look for in a partner that has the experience and insights to help mitigate and navigate their insureds’ unique exposures, giving leaders the space to focus on their core operations.

Sustainability in All Markets

David Guild, Head of Financial Lines, MSIG USA

When looking for a financial lines insurance partner, sustainability should be top of mind. Knowing that an insurer can provide solutions in a hard market alongside the soft will not only provide peace of mind but also help build resilience.

“Leaders should have the room to concentrate on their vision for the company and what it can achieve — not be burdened by potential risks that keep them awake at night. “Your insurance partners should be able to understand the trials and tribulations of running a business, to respect that there is no single right answer to most challenges, and be prepared to assist wherever, whenever issues may arise,” Guild said.

Sustainability is proven in an insurer’s ability to come through on the promises it makes. For example, MSIG USA’s approach has earned it an A+ rating, proof that its team can back the promises it makes and see them through to completion. “We are confident in our ability to serve your insurance needs, on a global scale,” Guild added.

“Everything we speak of revolves around the credibility of our platform, which is reflected in our A+ rating, a 350-year legacy within our family of companies, and our experienced team here in the U.S.”

An Emphasis on Company and Culture

Successful partnerships are built on a solid relationship between insurer and client.

At MSIG USA, “we aim to be a stable and sustainable presence for our clients,” Guild said. “The value of long-term relationships is at the core of what MSIG USA is all about. Our underwriters deeply appreciate the importance of these connections.

“We believe that building and maintaining strong, long-lasting relationships with our customers is essential to navigating the inevitable fluctuations of the insurance market. We are confident in our abilities, and in yours.” he added.

Company culture, as Guild mentioned, is more than an internal commitment; it’s something that can also drive business relationships.

For insurance partners, analyzing and aligning with their clients’ culture helps to solidify partnerships, as well as open the lines of communication and understanding.

“Variables will change, oftentimes rapidly. From our view, what matters is the culture of that company when responding to change. It’s about trusting their character rather than just the policies and procedures in place,” Guild said.

A Source of Truth and Clear Communication

Effective communication goes a long way in clearly understanding an insured’s business and future potential. This allows for sustainable partners to develop coverage that fits and to work closely with their Claims team to understand the partnership in context.

With the amount of data available today, and the number of ways information can quickly be disseminated through different medium, a good insurance partner knows that companies must be the single source of truth for their stakeholders.

“Quarterly and annual earnings calls provide a platform to discuss financial results and respond to investor questions. Investor presentations offer a more comprehensive overview of the company’s strategy, performance and outlook,” Guild explained.

We will look at what analysts and other third parties think about the information provided to try to glean what the investor base will think and how they will act. But ultimately, it is what the company says, and the way they say it, that we will assist in defending, if need be, and so we make sure to listen and learn from the company leadership.

Bringing These Qualities Under One Roof

Leaders want to know that, at the end of the day, their business is a priority for their partners.

Clear communication, a strong relationship and emphasis on sustainability are just the start. Their insurance partners should strive to understand their business, identify areas of concern and craft coverage customized to meet their needs.

With an impressive 350-year legacy, MSIG USA is doing just that for its clients, utilizing its global presence to further its clients’ goals.

“The key elements of our approach are an intellectual pursuit of information, a well-honed practice of underwriting that identifies material aspects for risk assessment, and clear communication of our insights to our clients: brokers and buyers alike. We aim to provide a transparent and informed perspective on the risks we underwrite,” Guild said.

“We bring sustainable, predictable insurance capital and what we believe is best in class service philosophy, honed by working with some of the most sophisticated brokers and buyers of insurance in the world.”

To learn more, visit: https://www.msigusa.com/financial-lines/.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with MSIG USA. The editorial staff of Risk & Insurance had no role in its preparation.

MSIG North America is a member of MS&AD Insurance Group Holdings, Inc. which is the 8th largest non-life insurance group in the world by revenue. Based in Tokyo, Japan, we operate in 48 countries/regions and generated $46B in 2021 with approximately 40,000 employees globally. MSIG North America is the marketing name used to refer to MSIG Holdings (U.S.A.), Inc. (“MSIGH”), and its subsidiary companies.