Insurance & Bonding for Contractors February 2, 2009 Presented by: David Hale Hale & Associates, Inc. Fairbanks, Alaska

Business Structure  When selecting your business structure – you should consult with your accountant or CPA to determine best choice for your business.  You entity type will determine the signatures required for your bonding agreement with a surety company.  For example;  Corporation: all officers & spouses must sign as indemnitiors  LLC – all members & spouses sign  Sole-proprietor – owner & spouse sign

General Liability  Provides coverage for Bodily Injury & Property Damage claims made against you – that you are legally liable for. Will provide defense coverage, usually outside the limit of liability  Is rated on the type of work you are performing and usually based on payroll. Some classifications based on gross sales. Policy is auditable. Rates are charged per $1,000. of payroll (or gross sales)  Review for exclusions. Most exclude Professional Liability, Pollution Liability, Employment Practices, Asbestos, Care, custody, control exclusion (property that you own, rent or occupy) and other specified exclusions – Most of these exclusions can be covered under separate policies or endorsement by request.

Workers Compensation1  Required for a firm who employees any workers. Also required on corporate officers that have not filed with the State of Alaska for an Executive officer Waiver.  Rates based on type of work performed. Construction workers that do several type of work can split their payroll between class codes if payroll records documenting work performed in each class are maintained.  “Scopes” are utilized by agent to determine proper classification  Rates are charged per $100. of payroll

Workers Compensation 2 Experience Modifications available after 2 years of policy history Based on individual company loss history  Rates are developed by Insurance Rating organization, using loss history per classification annually  Rates recommended to State of Alaska and reviewed by Division of Insurance, usually approved by November for the January 1 rating period  Workers Compensation rates have been decreasing for past few years  Projected overall rate decrease for 2009 – about 4%  Policies are auditable, either monthly, quarterly or annually )

Commercial Auto Liability  Coverage for business use of vehicles  Can obtain liability, physical damage, uninsured/underinsured motorists. Many contracts require you obtain hired & non-owned auto coverage.  Rated on use of vehicle, vehicle weight and radius of operations  Some insurance carriers surcharge for drivers (age, MV Record)

Inland Marine Coverage  Can cover scheduled equipment owned by contractor  Unscheduled equipment & employee tools (higher rate may apply)  May add coverage for equipment rented from others at a limit specified, rated on cost of rented equipment (auditable)  In order to cover equipment rented from others, need to have Inland Marine coverage in place

Builders Risk/Installation floater  Can purchase policy per project basis or annual policy for all projects  Is a property type coverage for the building/work/materials at site while under construction and until project is accepted by owner  Some policy enhancements include:____________________________________ _________________________________________  Watch for wording in contract to allow occupancy of building before final completion, make sure your policy will allow for this

Employment Practices,Professional, Pollution Coverage's  Employment practices liability-provides coverage for wrongful termination, harassment  Professional Liability – may be required on design/build projects where architects/engineers employed  Pollution Liability – provides coverage for either specific site or pollution that occurs due to your business operations  Most of these coverage's are purchased on separate policy through specialty markets

Contracts Review & Certificates of Insurance  Review project insurance specifications prior to bidding work to include any additional cost in bid  Identify Gaps between contract specifications and the coverage's in place. Some contract contain obsolete language that is difficult to comply with or place excessive burden on the subcontractor. (see attached example “Insurance Specification Review”)  In some cases additional coverage's/policies are required to comply with the contract  Contact the owner/general in writing to discuss the issues in the contract that you want to revise, most contracts are not executed without some changes.

Contract Review & Certificates of Insurance  Some insurance carriers provide “Blanket” Additional Insured and “Blanket” Waiver of Subrogation coverage and there is usually a charge built into the policy for this. Some insurance carriers will only offer by individual endorsement, and there is a charge, between $50. $250. depending on carrier  Designated Project Limits- endorsement that sets aside the limits of coverage for the specific project  Is Builders Risk coverage required? Review specs on required coverage prior to bidding.  Watch contract requirements that ask for specific limits or coverage's to apply for a 2 – 5 year period beyond contract completion – difficult to build in a cost for this so should be negotiated

Bonding  Surety Bonding for Contractors provide:  Monetary compensation to the Obligee(usually owner or General Contractor) for breach of contract  Assurance that the contractor will perform the work, pay the subcontractors, labor and material suppliers

Bonding Levels ($250,000 and under per project)  For projects under $250,000. and less than $500,000 aggregate bonded work there are programs available that do not require CPA financial information. Good credit standing is a requirement to qualify for these programs  Application forms fairly simple, between 1 – 3 pages, depending on project details.  Bid bonds & Final Bonds provided in this program

 Business Plan  Contractors Questionnaire  Bank Authorization Letter; or  Bank Letter of Credit  Resume of each owner, partner or officer  Schedule of work on hand  Financial Statements-review in house statements with agent to determine need for CPA prepared statements..  Reference letters on completed projects Bond Underwriting Requirements

Bond Underwriting Requirements Financial Statements  Current Business Financial  Year End Business Financial Statement – 3 years (CPA Financials are usually required unless bonding requested under the $250,000. range)  Personal Financial statement for each owner  Last Fiscal Year-end Statement for any other business in which an owner has 20% or more ownership interest

Bonding Basics  Capacity – Does the applicant have the skill and ability to perform the obligation?  Capital-Does the financial condition of the applicant justify approval of this particular bond?  Character- Does the applicant’s record show him/her to be of good character and likely to perform the obligation he or she assumes?  The bond underwriter may request to contact owners, general contractors or suppliers for references

Bond Underwriting Process  Information compiled and submitted to several markets, if available (depending on type of work performed)  Underwriter reviews financial and other information submitted and may request additional information  Underwriter will usually approve a line of bonding to start with and adjust the line as jobs are completed  Before bonds are issued, an Indemnity Agreement is signed by all owners & spouses; An Indemnity agreement is an agreement to repay the bonding company for any bond losses

Strengthening the Bond Case  Additional capitalization by owners  Subordinated debt; loans to the company by owners or others with a written agreement to repay the loan after surety obligations have been completed  Re-financing assets. Contractor may convert assets into capital if necessary  Collateral- should be used on a very limited basis as it may tie up necessary funds for the contractor  Additional Indemnity; a backer with financial strength willing to sign as an indemnitor  Bonded Subcontractors may increase bonding ability on a particular project

Bid Bonds  Bid Bond should be requested as soon as a contractor thinks they may want to bid a project  Job size can be estimated and adjusted  Provide a copy of the bond forms required, insurance and bonding specifications to the agent for review with Bid bond request  Provide Bid results to your agent

Performance Bonds  If you are low bidder, provide a copy of Notice of Award and Contract document to agent along with Bond forms required  Cost is usually between 1.5% to 3.5% of contract for Performance bonding

Outlook on Surety Bonding and Summary - Questions 