Many insurance agents are not aware of special issues in the handling of surety bonds that could cause problems for their agency and their clients. If an insurance agent accepts the responsibility of placing a bond, the client automatically expects that the agent has adequate and authoritative knowledge. In addition, professionals are being held to higher standards of conduct and these dynamics combine to create an increased likelihood of Errors & Omissions claims.
Through Goldleaf’s extensive dealings with agents in placing bonds for their clients, we have observed many situations that could have resulted in E&O claims.
Over the next several weeks, I would like to address some of these more common situations.
Common Surety Handling Misstep No. 1:
Failure to Advise Proper Rate. Often times agents feel compelled to communicate a rate to a client. In many cases, that rate ends up being below what can actually be obtained.
Ways to Avoid Surety E&O Claim. Obtain specific rate approval from a surety. If a client pressures you for a rate, provide a range that includes a low and high estimate (e.g. 1% – 5%). Communicate that you cannot give an exact rate without knowing credit history and other underwriting information. By receiving a specific rate from a surety, a contractor will be able to include a more exact amount in his/her bid estimate, and the agent avoids providing inaccurate information.
Common Surety Handling Misstep No. 2:
Failure to Properly Execute Bid Bonds. If a bond is not prepared in strict accordance with the owner’s requirements, the client runs the risk of presenting a bid that may be determined “non-responsive” even if that client is the low bidder
Ways to Avoid Surety E&O Claim. Establish a checklist for bid bond preparation. Verify the bond form; verify the bid amount/percentage; attach a separate notary signature page for the contractor’s signature; attach a Power of Attorney showing the name of the person who signed the bond; have an independent review of the bid bond to ensure accuracy. By establishing a checklist you will help eliminate the possibility of a contractor’s bid being rejected as a result of bid bond mistakes, as well as eliminate your agency’s exposure to a claim involving a contractor’s lost profit and its ability to cover fixed overhead.