When a company makes an application for bonding support, they usually do so with the idea that they operate a strong company and would represent no risk to a surety company. It can be a frustrating and maddening thing for the owner to hear that some person called an underwriter, working for some unknown surety company, in some faraway state thinks differently, and either has rejected the bond application or is requiring a lot of supplemental information to support the bond request. Understanding the surety underwriter and the underwriting process may help take some of the frustration out of this process
The frustration and anger clients feel when applying for a surety bond is understandable, especially if the company has a strong history of prompt payment and timely performance on prior projects. However, a good understanding of the underwriter’s perspective on new bond applications can help explain most of the rejections that occur and may lead to better initial submissions for surety support.
To that end, over the next several blog posts, we will be discussing an underwriter’s perspective on new submissions. What an underwriter might ask regarding the company and its submission for surety support, and why the underwriter needs to know the information requested.
The Starting Point. The first thing an applicant needs to understand about surety is that it is a credit facility, not insurance.
Surety companies consider bonding as a zero-risk proposition. It is not like automobile insurance, where even bad drivers can obtain insurance if they can afford the higher premiums charged on such policies. Most surety companies will not issue a surety bond to any company they view as a risk, regardless of what kind of premium the applicant is willing to pay.
For the most part, surety companies consider bond applications the same way banks would consider a loan application. When a bank considers loaning you $100,000 to use in your business, the bank does not do so on the idea that you might default on the loan. The bank assumes that you are going to repay that loan in full and when due. If the loan committee seriously thinks you pose a risk of default, the bank simply will reject the loan. Your willingness to pay a higher rate of interest probably would not even be enough to induce the bank to loan you the money.
Similarly, surety companies write bonds only for companies they consider to represent a zero risk of experiencing claims. The premiums these companies charge for their bonds simply do not support the idea that they would take a risk on a project where the claims easily could exceed the value of the contract.
Once you understand that the surety companies’ underwriters are trained to avoid risk entirely, you can begin to understand what elements of a bond application might suggest risk to the underwriting. Over the next several blog posts, we will discuss some of these elements to help you with understanding the surety underwriter.