As the U.S. economy continues to improve in the wake of the 2008 financial recession, an increase in commercial and residential construction and infrastructure repair has also increased the market for various types of surety bonds (e.g. bid bonds, performance bonds, payment bonds, etc.). In the May 2014 issue of Best’s Review, Senior Associate Editor Kate Smith described how one 75-year-old Texas firm with over 550 employees, Ballenger Construction, was working on over twenty different highway construction projects in 2012. On one where it had bid for work on an underpass, it had been hit with a number of problems ranging from rapidly rising fuel costs to finding a nest of endangered spiders at the worksite that brought construction to a halt. By the end of the year the company went into bankruptcy, citing the required shutdown and costs as making the project more expensive than anticipated and leaving about $112 million worth of work left unfinished. This example underscores the importance of surety bonds in protecting governmental entities, even when such bonds are not required by state legislatures and project financers.
“The World Bank defines a public-private partnership as ‘an arrangement between the public and private sectors whereby part of the services or works that fall under the responsibilities of the public sector are provided by the private sector, with clear agreement on shared objectives for delivery of public infrastructure and/or public services,’” Smith quotes, adding, “While a long-standing piece of federal legislation known as the Miller Act requires bonding on federal construction projects over a certain amount, public-private partnerships fall into something of a gray area.” This is equally true for the state statutes, or so-called “Little Miller Acts”, passed by all 50 states as well as the District of Columbia and Puerto Rico. Often the question for contractors is whether bonds will be required on public-private partnership projects. While not all public-private contracts call for the protection a bond can provide, depending on the legislation that approved the project, Smith cites a Best’s Special Report stating, “Approaches and legislation relating to P3s [public-private partnerships] are playing out on a statewide basis and coming at a time when cash-strapped governments are contending with pressing infrastructure needs.”
The amount of public spending on infrastructure (ranging from highway, transit and utility pipelines) is not always constant, she notes. “The level of monthly public sector spending on an annualized basis declined to $363.8 billion in April, 2013, marking its lowest point since November, 2006, according to U.S. Census Bureau data on construction. ‘Public spending peaked in March of 2009 and then dropped,’” reported a bond specialist with Liberty Mutual Surety. If state and local infrastructure projects increase, then the need for various types of surety bonds should become evident, but whether it will or not depends on the project’s contract documents.
Suretyship is different from insurance in that there are three parties, the party that is obliged to perform some activity, the party or entity for which the activity is being performed, and the surety, which guarantees that the activity will be performed per the contract. In the case of a performance bond, if the performing party fails to meet the terms of the project contract, then the surety must act to see that the project is completed, either by paying the bonded party to do the work remaining, by finding someone else to do it, or by completing the project itself.
A thorough understanding of how bonds and suretyship affect claims is essential for their success. For adjusters looking to better prepare themselves for such instances, educational courses, such as those taught by Crawford Educational Services and found on KMC On Demand, are an invaluable resource. To learn more, visit www.crawfordeducationalservices.com andwww.kmcondemand.com.