5 minute read
Insurance Perspective
David Byrne, Sr. Starkweather & Shepley Insurance Brokerage Inc.
Construction and COVID-19 Surety Considerations
For the past 13 years the surety industry has produced profitable results. During this time frame the industry has experienced the entrance of a number of new surety companies creating an abundance of capacity and a liberalization of underwriting standards. Be prepared as changes are coming and surety credit will be more difficult to obtain for many contractors. Early surety results in 2020 already reveal an uptick in losses and this is before the impact of the COVID-19 disruption that did not commence until the end of the first quarter.
Please be certain to consider the following when surety is being sought: 1. Is your company currently operating at a profit? If not, why not? Corporate sureties are not risk takers but rather “pre-qualifiers” who underwrite on the premise of never having a loss. A detailed explanation of current results is critical to obtain surety support. 2. Is your company’s bank line in place and is there available credit if needed? Bank lines are typically demand obligations that can be closed at the bank’s discretion. This pandemic has created schedule, labor and supply chain interruptions that can have a negative impact on cash flow. The need to remain liquid and have additional or emergency funding in place is critically important to a surety. 3. Are your bonding requests typical in nature to the type of work usually sought, the size of the contract desired and geographically consistent with your normal place of operations?
These are key underwriting considerations. 4.
Surety support will be difficult to obtain if the company is pushing their single project size or aggregate limit. Further, if a project is different in construction design or physical location, underwriters will be very reluctant to approve atypical requests. The COVID-19 virus has new concerns as underwriters attempt to deal with both the unprecedented and unknown. Contract terms specifically directed to the responsibilities of both parties to the contract should be clearly outlined should a project be stopped by a governmental agency or uncontinued on page 49
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5. foreseen labor or material interruption. Further, a contractor should be able to elaborate on the precautions taken to make sure that they are in compliance with all health and safety requirements outlined by local, state and federal regulators. Is record keeping a priority to make sure that there is proper documentation of any occurrences or disruptions in the workplace that could result in litigation? In addition, many sureties are inquisitive regarding the acceptance of PPP loans. How much has been received and have the funds been placed is a separate account distinguished from the general operating account? Will there be a need for repayment? Have the owner(s) and chief operating officers of the company been seeking outside counsel for operating in the Coronavirus world? Is the company attorney being retained to review contracts with specific attention to COVID-19 language? Are you in con-
On-site, not on-call
tact with your banker to make sure that credit lines are available and communication is clear regarding the company’s financial position? Have contacts been made with your insurance broker to review coverages along with equipment and property insurance limits. Is your workers compensation being properly reviewed to minimize any negative changes in modifications? Does your surety broker understand your current financial condition along with your overall business plan such that it is being properly communicated to the bonding company? Is there a backup plan in place should one be needed? Are you in conversation with your accountant to make sure that financial statements are prepared on a timely basis and tax payments are current? Fearing the unknown is understandable. However, with thoughtful planning, practice of basic surety principles and reliance on trusted advisors a surety relationship does not need to be adversarial and can become a valuable asset to any construction company. n
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