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
in Chief, SmartMoney
Avenue of the Americas
York, NY 10036
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.
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.
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.
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 www.sba.gov. 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.
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.
contact me for more information or if you have any questions.