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SFAA Responds to SmartMoney's Misleading Article on Surety Bonds

Thursday, April 19, 2012  

The Surety & Fidelity Association of America

1101 CONNECTICUT AVENUE, NW, SUITE 800, WASHINGTON, DC 20036 TEL: (202) 463-0600 – FAX: (202) 463-0606



April 19, 2012

Mr. Jonathan Dahl
Editor in Chief, SmartMoney
1211 Avenue of the Americas
New York, NY 10036

Dear Mr. Dahl:

The Surety & Fidelity Association of America (SFAA), a trade association of more than 450 insurance companies that write the vast majority of surety and fidelity bonds in the U.S., has major concerns about SmartMoney’s April 9 article "Obscure Insurance That Hurts Small Businesses.” We feel that this article misrepresents the surety industry and the ways surety bonds actually benefit small businesses and protect taxpayers.

Aside from it being unbalanced, Ms. Machan’s article contains factual inaccuracies. Sureties typically are part of larger insurance companies and not "specialty businesses that do pretty much nothing else,” as Ms. Machan claims. There is a valid reason surety bonds are required on public projects. Sureties perform a thorough prequalification of a contracting firm to ensure that it is in the position to perform the obligation being guaranteed. If bonds were not required on public projects and if contractors were not vetted through the prequalification process, any contractor—regardless of his or her financial standing, experience, knowledge of the project, etc.—could bid and be awarded a contract, then default and leave the government and taxpayers with an unfinished project. If the government chose to complete the project, even more taxpayers’ dollars likely would be spent. Surety bonds are in place to make sure that this does not happen.

Ms. Machan defines surety bonds as insurance that protects the government. She neglected to mention, though, that bonds ultimately safeguard taxpayers from contractors who may be inexperienced and/or lack the knowledge or capacity to complete the project. In the unlikely event that the bonded contractor defaults, the bond guarantees the owner that the project will be completed. Furthermore, surety bonds protect subcontractors or material suppliers, many of which are small businesses, guaranteeing that they will receive payment should the contractor fail to pay them.

The article also contains figures on bond costs that are completely wrong. Surety bonds typically cost 0.75%-1.25% of the project’s value, regardless of the business’ size, not "2 to 3 percent of a project’s value if you’re a well-established Monolith Inc,” as Ms. Machan states. These rates are publically filed in each state, so there is no reason why she could not have accessed and/or confirmed the correct rates. In fact, she could have done so when she spoke to Lenore Marema, SFAA’s vice president of government affairs, several times before the article was published. Furthermore, no legitimate surety charges 4-10% of the job for a bond. Securing a bond is not always an easy process, nor should it be given what is at stake—up to millions, if not billions, of taxpayers’ dollars; however, several programs are in place to educate small contractors on the bonding process and assist them with qualifying for bonding. One of them is the Small Business Administration’s Bond Guarantee Program, which guarantees small and emerging contractors bid, performance, and payment bonds for contracts of $2 million or less. For more details, please visit SFAA also has the Model Contractor Development Program® (MCDP®), which assists small, minority-owned, and women-owned contractors obtain bonding. Modeled after SFAA’s MCDP®, the U.S. DOT’s Bonding Education Program, supported by members of the SFAA and the National Association of Surety Bond Producers (NASBP), also helps small businesses become bond ready. In the last few years alone, over $200 million in bonding credit has been provided to small businesses through these programs.

I hope that with this information, SmartMoney will consider running a balanced article on the subject of surety bonding, or at the very least, print a follow-up article that corrects the misinformation in this one.

Please contact me for more information or if you have any questions.



Lynn M. Schubert

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