1. MACDC Intercounty Drain Procedures Training
Surety Bonds and Insurance
John Brennan
Fahey Schultz Burzych Rhodes PLC
February 15, 2017
macdc.us

2. You: Learning about Security and Insurance
macdc.us

3. You: Discovering your contractor filed for bankruptcy in the middle of the project.
macdc.us

4. You: Trying to determine if the Board has coverage for this…
macdc.us

5. You: Discovering that there is no coverage.
macdc.us

6. Surety Bonds and Insurance
Your “Level 1” worry list for projects:
Are you hiring a responsible contractor?
Will the job be done on time?
Will the job be done as spec’d?
Will we get sued by subcontractors?
Will the job be accident free?
macdc.us

7. Limited Protection
Security and Insurance gives significant protection, but typically not for things like:
Contract disputes
Unexpected physical conditions
Weather delays
Landowner disputes
Property right disputes
Permit compliance issues
Regardless of the county in which work is being completed for a drainage project, all drainage board members have a fiduciary duty to limit the exposure of the drainage district to any sort of liability. Therefore, the board as a whole must decide on the proper security and insurance amounts for a given project, in addition to the suitable contractor. While security and insurance considerations may result in the inability to use contractors that one member might typically use on a similar intracounty project, it is essential that the board is fully informed and satisfied that the appropriate protection is in place before work commences
macdc.us

8. Whose Job is it, Anyway?
The person responsible for assuring that there is adequate protection is:
The engineering consultant?
MDARD?
A deputy drain commissioner?
An insurance broker/agent?
The contractor?
The lawyer?
Regardless of the county in which work is being completed for a drainage project, all drainage board members have a fiduciary duty to limit the exposure of the drainage district to any sort of liability. Therefore, the board as a whole must decide on the proper security and insurance amounts for a given project, in addition to the suitable contractor. While security and insurance considerations may result in the inability to use contractors that one member might typically use on a similar intracounty project, it is essential that the board is fully informed and satisfied that the appropriate protection is in place before work commences
macdc.us

9. Full-board responsibility
Obtaining proper protection is not a ministerial task -- it is a drainage board responsibility.
Fiduciary Duty – limit risk and protect public funds
Drain Code, Section 223 (certain protection mandatory for contracts in excess of $100,000; optional for less)
Regardless of the county in which work is being completed for a drainage project, all drainage board members have a fiduciary duty to limit the exposure of the drainage district to any sort of liability. Therefore, the board as a whole must decide on the proper security and insurance amounts for a given project, in addition to the suitable contractor. While security and insurance considerations may result in the inability to use contractors that one member might typically use on a similar intracounty project, it is essential that the board is fully informed and satisfied that the appropriate protection is in place before work commences
macdc.us

10. Drainage Board’s Discretion
Code provides for type of security and insurance but gives drainage board discretion regarding:
Amounts of security or limits of insurance
Type of security
Identity of bond or insurance company
Whether to insist on security or insurance for projects under $100,000
Regardless of the county in which work is being completed for a drainage project, all drainage board members have a fiduciary duty to limit the exposure of the drainage district to any sort of liability. Therefore, the board as a whole must decide on the proper security and insurance amounts for a given project, in addition to the suitable contractor. While security and insurance considerations may result in the inability to use contractors that one member might typically use on a similar intracounty project, it is essential that the board is fully informed and satisfied that the appropriate protection is in place before work commences
macdc.us

11. Drainage Board Action to Determine Security and Insurance
Full coverage to ensure:
Bid Security
Performance Security
Payment Security
Liability/Indemnity
Coverage
Prior to any type of work commencing, the drainage board should take certain measures to ensure that the proper mechanisms are in place to ensure full coverage in the event that a contractor fails to meet an obligation. The types of coverage that the board should consider are:
Bid Security
Performance Security
Payment Security
Insurance
Contract Term Approval
At the outset of a project, the board must first determine the scope of the necessary work, and then address the following, depending on the type of project
macdc.us

12. Bid Security
The drainage board must first determine whether competitive bids will be submitted or whether a negotiated contract will be signed with a specific contractor. In the case of competitive bids, the drainage board should consult with an engineer and any other appropriate consultants to determine whether bid security is necessary, and the proper amount. Bid security:
Helps ensure the legitimacy of the bid.
Is retained if the bidder fails to execute the necessary contracts or obtain the requisite security and insurances.
Is returned if contracts are signed and security and insurances obtained.
Is typically 5-10% of the bid amount.
A bid bond is most typical, but security may also be in the form of:
Cash (Not recommended)
Certified check
Escrow agreement
Letter of credit
Personal surety
If using a bid bond, it should include:
Contractor name and address;
Name of principal (corporation, partnership, or individual);
Surety name and address;
Bond amount ;
Description of the project;
The terms, including that the bond will be considered void if:
The bid is rejected; or
The bid is accepted and the principal executes and delivers a contract and furnishes necessary security and proof of insurance.
Signature(s) of the principal.
The drainage board should approve, at a minimum, the following terms either by motion or resolution:
Details of bid process (if bids to be used).
Whether bid security will be required, and if so, the form and amount.
macdc.us

13. Bid Security Incomplete knowledge about contractors
If accepted low-bidder cannot sign contract:
Loss of bargain
Other bids no longer good
Other contractors may now be unavailable
May have to re-let the bids
Result: Delays, higher costs
The drainage board must first determine whether competitive bids will be submitted or whether a negotiated contract will be signed with a specific contractor. In the case of competitive bids, the drainage board should consult with an engineer and any other appropriate consultants to determine whether bid security is necessary, and the proper amount. Bid security:
Helps ensure the legitimacy of the bid.
Is retained if the bidder fails to execute the necessary contracts or obtain the requisite security and insurances.
Is returned if contracts are signed and security and insurances obtained.
Is typically 5-10% of the bid amount.
A bid bond is most typical, but security may also be in the form of:
Cash (Not recommended)
Certified check
Escrow agreement
Letter of credit
Personal surety
If using a bid bond, it should include:
Contractor name and address;
Name of principal (corporation, partnership, or individual);
Surety name and address;
Bond amount ;
Description of the project;
The terms, including that the bond will be considered void if:
The bid is rejected; or
The bid is accepted and the principal executes and delivers a contract and furnishes necessary security and proof of insurance.
Signature(s) of the principal.
The drainage board should approve, at a minimum, the following terms either by motion or resolution:
Details of bid process (if bids to be used).
Whether bid security will be required, and if so, the form and amount.
macdc.us

14. Bid Security Drain Code, Section 223(1)
Certified check or “its equivalent”
Bid bond is preferred
“Reasonable Amount” (5 – 10% typical)
Low bidder as 10-days from bid acceptance to:
Furnish required security and insurance
Execute contracts
Deposit/bond kept as liquidated damages
The drainage board must first determine whether competitive bids will be submitted or whether a negotiated contract will be signed with a specific contractor. In the case of competitive bids, the drainage board should consult with an engineer and any other appropriate consultants to determine whether bid security is necessary, and the proper amount. Bid security:
Helps ensure the legitimacy of the bid.
Is retained if the bidder fails to execute the necessary contracts or obtain the requisite security and insurances.
Is returned if contracts are signed and security and insurances obtained.
Is typically 5-10% of the bid amount.
A bid bond is most typical, but security may also be in the form of:
Cash (Not recommended)
Certified check
Escrow agreement
Letter of credit
Personal surety
If using a bid bond, it should include:
Contractor name and address;
Name of principal (corporation, partnership, or individual);
Surety name and address;
Bond amount ;
Description of the project;
The terms, including that the bond will be considered void if:
The bid is rejected; or
The bid is accepted and the principal executes and delivers a contract and furnishes necessary security and proof of insurance.
Signature(s) of the principal.
The drainage board should approve, at a minimum, the following terms either by motion or resolution:
Details of bid process (if bids to be used).
Whether bid security will be required, and if so, the form and amount.
macdc.us

15. Performance Security
Used in the event that a contract is either not completed, or not completed to the terms.
Performance Bond
Contractor name and address;
Name of principal (corporation, partnership, or individual);
Surety name and address;
Bond amount ;
Description of the project;
Description of the terms;
Guarantee performance of the contract;
Waiver of notice by the surety to term change, extension of time, term alteration, or term addition;
Agreement that the bond will be automatically increased to account for a contract change, up to 20%.
Signature(s) of the principal.
macdc.us

16. Performance Security -- Types
Drain Code, Section 223(2) gives the drainage board discretion regarding type of security
Cash, certified check, performance bond, escrow agreement, irrevocable letter of credit and even personal security
Performance Bond is recommended.
Cash & Personal Security are not recommended.
Performance Bond
Contractor name and address;
Name of principal (corporation, partnership, or individual);
Surety name and address;
Bond amount ;
Description of the project;
Description of the terms;
Guarantee performance of the contract;
Waiver of notice by the surety to term change, extension of time, term alteration, or term addition;
Agreement that the bond will be automatically increased to account for a contract change, up to 20%.
Signature(s) of the principal.
macdc.us

17. Performance Bond Provisions
Drain Code, Sec. 223(4): If a contract is not completed “in accordance with its written terms,” security shall be used to complete the project
Beware of conflicting provisions and conditions in Performance Bond
Waiver of notice re: changes in contract term
Automatic increase provision for change orders
Performance Bond
Contractor name and address;
Name of principal (corporation, partnership, or individual);
Surety name and address;
Bond amount ;
Description of the project;
Description of the terms;
Guarantee performance of the contract;
Waiver of notice by the surety to term change, extension of time, term alteration, or term addition;
Agreement that the bond will be automatically increased to account for a contract change, up to 20%.
Signature(s) of the principal.
macdc.us

18. Performance bond provisions
Binding paragraph
Description of underlying obligation
The bond condition
Penal sum – no less than contract price
Trigger: “any breach” or “substantial breach”
Bond obligation term (at least until sub. compl.)
Time to bring suit (may not be as long as SOL)
Performance Bond
Contractor name and address;
Name of principal (corporation, partnership, or individual);
Surety name and address;
Bond amount ;
Description of the project;
Description of the terms;
Guarantee performance of the contract;
Waiver of notice by the surety to term change, extension of time, term alteration, or term addition;
Agreement that the bond will be automatically increased to account for a contract change, up to 20%.
Signature(s) of the principal.
macdc.us

19. Payment Security macdc.us Payment Security:
Guarantees payment of obligations of the contractor, such as labor and materials.
Covers subcontractors and laborers.
Amount varies depending on size of project
Payment Bond
Contractor name and address;
Name of principal (corporation, partnership, or individual);
Surety name and address;
Bond amount ;
Description of the project;
Description of the terms
Guarantee of payment by principal to all persons and entities furnishing materials and labor;
Limit “persons and entities” to subcontractors, and persons, firms, and corporations having direct contact with the principal or its subcontractors;
Waiver of notice by the surety to term change, extension of time, term alteration, or term addition;
Limitation on lawsuits.
The claimant must first provide 90-days’ notice to the principal, surety and drainage board before filing a claim; and
A claim cannot be filed after one year of completion of the contract.
Agreement that bond will be automatically increased to account for a contract change, up to 20%.
Signature(s) of the principal.
macdc.us

20. Payment Security
Unpaid contractors and suppliers may make claims on the owner
Protects against statutory liens
Permitted, but not required under the Drain Code
Payment Security:
Guarantees payment of obligations of the contractor, such as labor and materials.
Covers subcontractors and laborers.
Amount varies depending on size of project
Payment Bond
Contractor name and address;
Name of principal (corporation, partnership, or individual);
Surety name and address;
Bond amount ;
Description of the project;
Description of the terms
Guarantee of payment by principal to all persons and entities furnishing materials and labor;
Limit “persons and entities” to subcontractors, and persons, firms, and corporations having direct contact with the principal or its subcontractors;
Waiver of notice by the surety to term change, extension of time, term alteration, or term addition;
Limitation on lawsuits.
The claimant must first provide 90-days’ notice to the principal, surety and drainage board before filing a claim; and
A claim cannot be filed after one year of completion of the contract.
Agreement that bond will be automatically increased to account for a contract change, up to 20%.
Signature(s) of the principal.
macdc.us

21. Payment Bond Guarantees payment of obligations of contractor to
Subcontrators
Laborers
Suppliers
Amount is discretionary
Payment Security:
Guarantees payment of obligations of the contractor, such as labor and materials.
Covers subcontractors and laborers.
Amount varies depending on size of project
Payment Bond
Contractor name and address;
Name of principal (corporation, partnership, or individual);
Surety name and address;
Bond amount ;
Description of the project;
Description of the terms
Guarantee of payment by principal to all persons and entities furnishing materials and labor;
Limit “persons and entities” to subcontractors, and persons, firms, and corporations having direct contact with the principal or its subcontractors;
Waiver of notice by the surety to term change, extension of time, term alteration, or term addition;
Limitation on lawsuits.
The claimant must first provide 90-days’ notice to the principal, surety and drainage board before filing a claim; and
A claim cannot be filed after one year of completion of the contract.
Agreement that bond will be automatically increased to account for a contract change, up to 20%.
Signature(s) of the principal.
macdc.us

22. Payment bond terms May be conditioned on no owner default
Timely notice of claim
May be limited to pay claimants with direct contracts with contractor
Disputed amounts may be litigated between surety and claimants
Payment Security:
Guarantees payment of obligations of the contractor, such as labor and materials.
Covers subcontractors and laborers.
Amount varies depending on size of project
Payment Bond
Contractor name and address;
Name of principal (corporation, partnership, or individual);
Surety name and address;
Bond amount ;
Description of the project;
Description of the terms
Guarantee of payment by principal to all persons and entities furnishing materials and labor;
Limit “persons and entities” to subcontractors, and persons, firms, and corporations having direct contact with the principal or its subcontractors;
Waiver of notice by the surety to term change, extension of time, term alteration, or term addition;
Limitation on lawsuits.
The claimant must first provide 90-days’ notice to the principal, surety and drainage board before filing a claim; and
A claim cannot be filed after one year of completion of the contract.
Agreement that bond will be automatically increased to account for a contract change, up to 20%.
Signature(s) of the principal.
macdc.us

23. Insurance macdc.us Liability/Indemnity
Maintained until the contract is terminated
Indemnifies the drainage board, the drainage district, and relevant counties and other municipalities as additional insureds.
Protects against claims for bodily injury, occupational sickness or disease, death, property damage, and damages and injuries relating to motor vehicle use.
Maintained in an amount required by law, or in a higher amount in the discretion of the drainage board.
Must have a separate policy specific to the drainage district, rather than a blanket policy, to ensure adequate coverage.
Workers’ Compensation and Similar Claims
Sufficient to address claims made under workers’ compensation, disability benefits, and other employee benefit acts.
Railroad Protective Liability Insurance
Required for work on or around railroad tracks, right-of-way, or owned railroad property.
May also be needed for other utilities.
macdc.us

24. Insurance Liability/Indemnity Workers’ Compensation and Similar Claims
Railroad Protective Liability Insurance
Liability/Indemnity
Maintained until the contract is terminated
Indemnifies the drainage board, the drainage district, and relevant counties and other municipalities as additional insureds.
Protects against claims for bodily injury, occupational sickness or disease, death, property damage, and damages and injuries relating to motor vehicle use.
Maintained in an amount required by law, or in a higher amount in the discretion of the drainage board.
Must have a separate policy specific to the drainage district, rather than a blanket policy, to ensure adequate coverage.
Workers’ Compensation and Similar Claims
Sufficient to address claims made under workers’ compensation, disability benefits, and other employee benefit acts.
Railroad Protective Liability Insurance
Required for work on or around railroad tracks, right-of-way, or owned railroad property.
May also be needed for other utilities.
macdc.us

25. Liability Insurance
Drain Code, Sec. 223(5) requires a “bond or indemnity insurance” for projects greater than $100,000
Must cover entire term of contract
Amount set by drainage board
Liability/Indemnity
Maintained until the contract is terminated
Indemnifies the drainage board, the drainage district, and relevant counties and other municipalities as additional insureds.
Protects against claims for bodily injury, occupational sickness or disease, death, property damage, and damages and injuries relating to motor vehicle use.
Maintained in an amount required by law, or in a higher amount in the discretion of the drainage board.
Must have a separate policy specific to the drainage district, rather than a blanket policy, to ensure adequate coverage.
Workers’ Compensation and Similar Claims
Sufficient to address claims made under workers’ compensation, disability benefits, and other employee benefit acts.
Railroad Protective Liability Insurance
Required for work on or around railroad tracks, right-of-way, or owned railroad property.
May also be needed for other utilities.
macdc.us

26. Liability Insurance Commercial General Liability Coverage
Needed Endorsements:
Additional Insured Endorsement
Designed Construction Project General Aggregate Limit Endorsement
Liability/Indemnity
Maintained until the contract is terminated
Indemnifies the drainage board, the drainage district, and relevant counties and other municipalities as additional insureds.
Protects against claims for bodily injury, occupational sickness or disease, death, property damage, and damages and injuries relating to motor vehicle use.
Maintained in an amount required by law, or in a higher amount in the discretion of the drainage board.
Must have a separate policy specific to the drainage district, rather than a blanket policy, to ensure adequate coverage.
Workers’ Compensation and Similar Claims
Sufficient to address claims made under workers’ compensation, disability benefits, and other employee benefit acts.
Railroad Protective Liability Insurance
Required for work on or around railroad tracks, right-of-way, or owned railroad property.
May also be needed for other utilities.
macdc.us

27. Certificates or Declaration Page?
Certificate of Liability Insurance on its own does not guarantee coverage
Obtain at least the endorsements
Copy of policy Declaration Page listing endorsements
Coverage is required as pre-condition of signing contract
Liability/Indemnity
Maintained until the contract is terminated
Indemnifies the drainage board, the drainage district, and relevant counties and other municipalities as additional insureds.
Protects against claims for bodily injury, occupational sickness or disease, death, property damage, and damages and injuries relating to motor vehicle use.
Maintained in an amount required by law, or in a higher amount in the discretion of the drainage board.
Must have a separate policy specific to the drainage district, rather than a blanket policy, to ensure adequate coverage.
Workers’ Compensation and Similar Claims
Sufficient to address claims made under workers’ compensation, disability benefits, and other employee benefit acts.
Railroad Protective Liability Insurance
Required for work on or around railroad tracks, right-of-way, or owned railroad property.
May also be needed for other utilities.
macdc.us

28. Questions?
John Brennan Fahey Schultz Burzych Rhodes PLC 4151 Okemos Road, Okemos, MI Tel: (517) Website:
macdc.us