THE BOTTOM LINE

Atlantic Coverage Corp.

EXCELLENCE IN SURETY BONDS

Fall 2004 Volume 6, Issue 4

What Does Your Indemnity Really Mean? “Famous Quotes” “The right to be heard does not automatically include the right to be taken seriously.” -Herbert Humphrey “It is impossible to defeat an ignorant man in an argument.” -William Gibbs McAdoo “Anger is just one letter short of danger.” -Anonymous “The worse the news the more effort should go into communicating it.” -Andrew S. Grove “People may or may not say what they mean.  But they always say something designed to get what they want.” -David Mamet “Speech is a mirror of the soul; as a man speaks, so he is.” -Publilius Syrus            You have heard this before... Congratulations, you’ve been approved for a bond line with XYZ Surety! In order to provide the surety support you need, please review, sign, seal and date the following General Indemnity Agreement (GIA)...           The GIA is a necessity of suretyship. For contractors, it can be a source of consternation and irritation. Unfortunately, it is a must. Why the need for the GIA? This article will attempt to establish the basic reasons why a GIA is required and to highlight some of the more important items covered by the GIA. Whenever reviewing or questioning the contents of a GIA, you should consult with an attorney familiar with surety law.           The surety company uses the GIA to enforce its rights, to recover any losses and expenses incurred when a contractor faces a claim or default situation. Ideally the surety does not expect losses from the issuance of surety bonds. This is why contractors go through the underwriting process. However, we all know that bad things can happen to good contractors. When a claim or loss does occur the surety wants to avoid or minimize the loss. In any event they expect to be compensated for any expenses and losses it does incur. The GIA becomes the tool that provides the surety with more than just common law rights between itself and the indemnitors who signed the GIA Extent of Indemnitors Liability:           The GIA will define who is indemnifying the Surety. Normally, it is the entity receiving the bond, known as the principal, any affiliate or subsidiary companies, the officer/owners and their spouses. Their liability is joint, several and unlimited.            During the soft market, sureties were willing to negotiate who had to sign the agreement. It was not uncommon to waive the personal or spousal indemnity. In today’s market, however, the sureties have gone back to basics and require ‘full indemnity’ of all parties. Their position is that when they are asked to bond a corporation, they are being asked to not only endorse their financial competency and their performance ability, they are also being asked to endorse the character of the individuals running the company. Underwriters also feel that the owners will perform more strongly and with more caution when they know that their personal assets will be endangered if they become careless or over-ambitious.           In some cases, some sureties are willing to negotiate some things out of the agreement. These can include specific assets, i.e. homestead, spouses inheritance, etc. A separate Rider to the GIA will be issued specifying the assets that are excluded from the agreement. All parties will be required to sign the rider as well as the GIA. In Event of a Claim, When is the Contractor Expected To Pay           Depending on the language in each company’s indemnity agreement, a contractor is obligated and may be requested to provide funds to the surety at the following times: When a surety receives a claim against a bond they issued. The GIA may require the indemnitors to provide sufficient funds against claims to the surety even though no actual liability has yet to be established, or even if contractor and surety are actually liable. - Continued on page 2...

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THE BOTTOM LINE

“Famous Quotes” *** “What we think or what we believe is, in the end, of little consequence. The only thing of consequence is what we do.” -John Ruskin “When you cannot make up your mind which of two evenly balanced courses of action you should take - choose the bolder.” -W. J. Slim “The best way to escape from a problem is to solve it.” -Anonymous “All of us must become better informed. It is necessary for us to learn from others’ mistakes. You will not live long enough to make them all yourself.” -Hyman G. Rickover “The dollar bills the customer gets from the tellers in four banks are the same. What is different are the tellers.” - Stanley Marcus “Treat employees like partners, and they act like partners” -Fred Allen The Importance of Checking Your Credit Reports It’s more important than ever to check your personal and business credit reports regularly. By doing so, you may find discrepancies that might have an adverse effect on your company’s ability to grow. The three main credit-reporting agencies for personal credit are:   Experian 1-888-397-3742 www.experian.com   TransUnion 1-800-888-4213 www.transunion.com   Equifax 1-800-685-1111 www.equifax.com For business reporting the main agency that surety companies typically run is: Dun and Bradstreet 1-800-234-3867 www.dnb.com Every year, bonding companies will do an annual review of your file, which includes the running of the corporate credit and personal credit reports on all principals. Typically this is performed approximately three months after your fiscal year-end. So for those companies that have a December year-end now is the time that you should begin the process of reviewing your credit reports. We can discuss ad nauseam the merits of such underwriting and the accuracies of these reports. The fact is that credit decisions and certain assumptions are being made from the information contained in these reports. Bonding companies are not content with only seeing that certain items are satisfied as they once were. Now, most of the bonding companies want to know the specifics of what gave rise to the item in the first place. From this information, they are making certain assumptions about such things as a contractor’s character, its office procedures, its bookkeeping and its accounting functions. Many contractors have stated in the past that they do not provide information to D&B or that they do not subscribe to this credit agency. To this we have to argue, why not? Your banks, suppliers and other creditors are reporting activities with your firm on a regular basis. Don’t you think that D&B and other credit agencies should get your side of the story? While we do not advocate sending corporate financial statements on privately held firms for everyone to see, there should be some cooperation with this credit-reporting agencies. Typically information that financial institutions are most interested in are open liens and judgments, and the firm’s payment history. This information will identify to persons outside the firm if there are any financial problems with your company. You will want to make sure that they are getting a good sampling of vendors that you do business with. If they do not have a good sample to work from, one relatively small past due claim from one vendor can drastically affect a firm’s ‘Paydex” - the numerical number assigned to a firm that rates their bill paying habits. This number has become very important in the underwriting process of many companies. You might be asking yourself, what if there is a problem on my company or personal credit report? Since these reports are so important, any discrepancy can severely hurt you and your company. As such, if a discrepancy does appear on either report, you should contact the credit reporting agencies immediately and follow the procedures to correct the information. Accurate record keeping will play a key role in correcting any discrepancies that are shown on the report. It is our recommendation that you periodically check both your personal and corporate credit reports. The time spent now reviewing and correcting your personal and corporate credit will, in the long run, save you and your firm time, money and more importantly aggravation. Updating your Underwriter’s File Now that we’re in the fourth quarter of the year, the following information should be on file with your bond agent and underwriter: Interim financial statements with all supporting documentation if your six-month interim is July or earlier; Quarterly work in progress reports Did you renewal your insurance or bank line in the past three months? If so, don’t forget to forward a copy of pertinent documentation to your bond agent for inclusion in your underwriting file.

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