Although agents work hard to avoid facing errors & omissions claims, many are not aware of potential issues that can arise when handling bonds.
Here are some of the most common surety-related missteps that can create E&O exposures—and how to avoid them.
Failure to advise proper rate. Agents often feel compelled to provide a client with a rate before the underwriting is complete. If a client pressures you for a rate, provide a range that includes a low and high estimate, like 1-5%. And be sure to communicate that you cannot provide an exact rate without all underwriting information.
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 "nonresponsive." To avoid this outcome, take the following steps:
- Establish a checklist for bond preparation.
- Verify the bond form.
- Verify the bid bond amount or 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.
- Perform an independent review of bid bond to insure accuracy.
Failure to deliver bid bonds in a timely manner or to a proper address. Bid bonds sent via regular mail or to an incorrect address run the risk of late delivery. Ensure that you confirm the delivery address ahead of time, and use a reliable overnight delivery service.
Failure to give proper advice regarding bid security. A bid bond assures that a performance bond will be put in place by the authorizing surety while using a cashier's check, as bid security does not. Remember: Never advise using a cashier's check as bid security in lieu of a bid bond, and always urge clients to request a bond as soon as they are aware one is required. If a bid bond cannot be secured in time, a cashier's check should only serve as a replacement when the surety provides written approval stating they will support the performance bond.
Failure to receive approval from the surety. By improperly issuing a bond without prior surety approval, the surety will seek recourse from the agent if the unauthorized bond goes into claim. If the client's bond program is disrupted as a result of an agent's actions, the client might have recourse for lost financial opportunity.
To protect your agency, establish a written policy with guidelines regarding what constitutes authorization from the surety, along with a documentation policy. Associates who issue bonds must be aware of this policy and adhere to all requirements.
Failure to adhere to conditions and exclusions of line of authority. Where a surety has extended a line of authority to an agent and the agent has issued a bond that falls outside the line of authority, the agent will be held accountable for any loss a surety experiences as a result of the agency mishandling the line of authority. Therefore, you should:
- Train associates on criteria granted by bond lines of authority.
- Not focus solely on single bond size and aggregate limits authorized under the line.
- Know and understand other conditions and exclusions before a bond is issued.
Failure to provide timely information to the surety. An agent is responsible for communicating all relevant information to the surety. Create a policy that calls for providing all known information which may impact the surety’s decision for both bond approval and handling a claim.
The relationship between a client and an agent is vital to successfully securing bonds. By staying aware of the possible pitfalls that can lead to E&O claims, you will be able to provide bond services to your clients without interruption—and mitigate serious E&O exposures for your agency.
Jack Anderson is president of Goldleaf Surety Services, LLC.