1 February 7, 2012 Bond Approved – Is Your Responsibility Satisfied? Lack of follow-up puts agent and surety in difficult situations. Presented by: Timothy D. Martin Ward, Hocker & Thornton, PLLC 9300 Shelbyville Road, Suite 700 Louisville, Kentucky Telephone: (502)

2 February 7, PRESENTER BIOGRAPHY Tim Martin is a member of the firm Ward Hocker & Thornton in its Louisville, KY office. He is a 1984 graduate of the University of Louisville, School of Law. He holds an undergraduate degree in accounting from the University of Louisville. From 1979 through 1984 he was employed as a bond underwriter with Reliance Insurance Company. His responsibilities included underwriting contract and miscellaneous surety accounts, fidelity, and financial institution bonds. Following graduation from law school he served 4 years as a prosecutor and since 1989 has concentrated his practice in the representation of surety/fidelity carriers, insurance carriers, and financial institutions.

3 February 7, SCENARIO NO. 1 Homebuilder contractor decides wants to exit the homebuilding business and go into commercial public construction. Agent had been writing the homebuilder’s insurance for a number of years, and is an experienced surety agent. Gives guidance to principal about suretyship and what a surety generally requires from the standpoint of the 3C’s.

Principal is told by agent, based upon the requested surety line, that surety required a minimum of $200K of capital. Year-end compilation financial statement reveals capital of $2K with additional paid-in-capital of $495K.Principal is told by agent, based upon the requested surety line, that surety required a minimum of $200K of capital. Year-end compilation financial statement reveals capital of $2K with additional paid-in-capital of $495K. Surety writes a number of bid and final bonds for principal.Surety writes a number of bid and final bonds for principal. February 7,

Surety requests an interim financial statement.Surety requests an interim financial statement. October of the following year presented an interim financial statement which states the APC had been distributed during the year to principal.October of the following year presented an interim financial statement which states the APC had been distributed during the year to principal. Surety demands that APC be put back into principal before any final bonds approved.Surety demands that APC be put back into principal before any final bonds approved. December, principal needs a final bond for $1.3MMDecember, principal needs a final bond for $1.3MM February 7,

Surety instructs agent to verify that $500K had been put back into corporation before issuance of final bond. Agent confirms to surety that such accomplished and issues final bonds.Surety instructs agent to verify that $500K had been put back into corporation before issuance of final bond. Agent confirms to surety that such accomplished and issues final bonds. What did the agent do to confirm - simply asked the principal if it had done so.What did the agent do to confirm - simply asked the principal if it had done so. No verification from the CPA, no verification from bank records, no other written proof.No verification from the CPA, no verification from bank records, no other written proof. February 7,

Agent, Principal, and CPA meet with surety u/w in early December after final bonds written, discuss surety needs for subsequent year. U/W tells all present that principal would need working capital position of at least $1MM to support requested L/C, and needs review or better financial statements.Agent, Principal, and CPA meet with surety u/w in early December after final bonds written, discuss surety needs for subsequent year. U/W tells all present that principal would need working capital position of at least $1MM to support requested L/C, and needs review or better financial statements. CPA audit comes out in late January and shows working capital position in excess of $1MM.CPA audit comes out in late January and shows working capital position in excess of $1MM. It was all a sham!It was all a sham! February 7,

SCENARIO NO. 2 New construction venture, which concentrated in building assisted living facilities and express type hotels, and all of which required bonds.New construction venture, which concentrated in building assisted living facilities and express type hotels, and all of which required bonds. The ownership of the principal consisted of an LLC owned by an attorney with no actual construction experience, and a former political figure who had left office under a cloud of ethical violations.The ownership of the principal consisted of an LLC owned by an attorney with no actual construction experience, and a former political figure who had left office under a cloud of ethical violations. Agent never told surety of either of these facts.Agent never told surety of either of these facts. February 7,

Surety wrote a number of bonds based on the financial condition of the principal alone. After receipt of the first year-end f/s, surety required the principal to be capitalized for an additional $1MM based on the requested surety line of credit.Surety wrote a number of bonds based on the financial condition of the principal alone. After receipt of the first year-end f/s, surety required the principal to be capitalized for an additional $1MM based on the requested surety line of credit. The agent confirmed that the requested $1MM capitalization had occurred by obtaining, from a non-indemnitor, a copy of certificate of deposit which had been issued in the name of the principal in the amount of $1MM.The agent confirmed that the requested $1MM capitalization had occurred by obtaining, from a non-indemnitor, a copy of certificate of deposit which had been issued in the name of the principal in the amount of $1MM. February 7,

The C/D was provided to the agent just before year end in December.The C/D was provided to the agent just before year end in December. The agent did not disclose to the surety who provided the C/D copy other than to state it came from the principal. The agent did not disclose that the C/D was obtained from a potential new additional owner of the principal.The agent did not disclose to the surety who provided the C/D copy other than to state it came from the principal. The agent did not disclose that the C/D was obtained from a potential new additional owner of the principal. True facts regarding the C/D and the capitalization of the principal.True facts regarding the C/D and the capitalization of the principal. February 7,

SCENARIO NO. 3 Agent requested to obtain a subdivision bond for a developer whose construction manager was the husband of the agent CSR.Agent requested to obtain a subdivision bond for a developer whose construction manager was the husband of the agent CSR. Surety required agent to obtain indemnity from the principal and all owners-7 doctors and 1 CPA-prior to issuance of the bond.Surety required agent to obtain indemnity from the principal and all owners-7 doctors and 1 CPA-prior to issuance of the bond. Surety sent agent by , an application indemnity agreement form for execution.Surety sent agent by , an application indemnity agreement form for execution. February 7,

Agent executed bond and CSR gave to husband along with indemnity application for execution.Agent executed bond and CSR gave to husband along with indemnity application for execution. It took 6 months after the bond was written by agent to obtain all signatures, but when returned to surety it did not include the first page which contains the indemnity language.It took 6 months after the bond was written by agent to obtain all signatures, but when returned to surety it did not include the first page which contains the indemnity language. Surety requested the agent to have the indemnity application to be executed again with all pages together.Surety requested the agent to have the indemnity application to be executed again with all pages together. February 7,

Never completed and 6 years later a claim arose.Never completed and 6 years later a claim arose. During each year the bond remained in effect the agency was billed, yet it never collected the premium from the developer.During each year the bond remained in effect the agency was billed, yet it never collected the premium from the developer. The developer went out of business approximately 2 years after the bond was written, but the agent never advised the surety.The developer went out of business approximately 2 years after the bond was written, but the agent never advised the surety. The agent never advised the surety it did not have the fully completed indemnity application.The agent never advised the surety it did not have the fully completed indemnity application. February 7,

SCENARIO NO. 4 Agent writes a sole proprietorship contractor.Agent writes a sole proprietorship contractor. Surety requires the indemnity of husband and wife, and agent acts as notary of the signatures to indemnity agreement.Surety requires the indemnity of husband and wife, and agent acts as notary of the signatures to indemnity agreement. Husband proprietor dies and when surety seeks to enforce indemnity agreement wife claims she didn’t sign the indemnity agreement.Husband proprietor dies and when surety seeks to enforce indemnity agreement wife claims she didn’t sign the indemnity agreement. Agent/notary lacks recall as to indemnity execution.Agent/notary lacks recall as to indemnity execution. 14

AGENT RISKS RELATED TO EACH SCENARIO WHAT ARE THE AGENT’S DUTIES TO THE SURETY TO CONCLUDE UNDERWRITING REQUIREMENTS WHICH ARE CONDITIONS TO WRITING A BOND? WHAT ARE THE AGENT’S DUTIES TO THE SURETY TO CONCLUDE UNDERWRITING REQUIREMENTS WHICH ARE CONDITIONS TO WRITING A BOND? February 7,

WHAT RISKS EXIST FOR THE AGENT WHEN A SURETY PLACES UNDERWRITING REQUIRMENTS AS A CONDITION TO WRITING A BOND AND THE AGENT FAILS TO CONCLUDE THE SATISFACTION OF THOSE UNDERWRITING REQUIREMENTS?WHAT RISKS EXIST FOR THE AGENT WHEN A SURETY PLACES UNDERWRITING REQUIRMENTS AS A CONDITION TO WRITING A BOND AND THE AGENT FAILS TO CONCLUDE THE SATISFACTION OF THOSE UNDERWRITING REQUIREMENTS? DATE OF PRESENTATION 16

WHAT EFFECT MAY FAILURE TO CONCLUDE UNDERWRITING REQUIREMENTS BY AN AGENT HAVE ON THE SURETY’S RIGHTS IN THE EVENT OF A CLAIM OR BREACH?WHAT EFFECT MAY FAILURE TO CONCLUDE UNDERWRITING REQUIREMENTS BY AN AGENT HAVE ON THE SURETY’S RIGHTS IN THE EVENT OF A CLAIM OR BREACH? February 7,

WHO DOES THE AGENT REPRESENT- PRINCIPAL OR SURETY?WHO DOES THE AGENT REPRESENT- PRINCIPAL OR SURETY? February 7,

19 February 7, YOUR QUESTIONS? If you do not have the opportunity to have your question addressed during the Seminar, you may contact the presenter directly: Timothy D. Martin Ward, Hocker & Thornton, PLLC (502)