Certain sureties, including Allstar have access to industry tools that allow them to take on risk that may be a bit challenging. They have the ability to support contractor's that need to be nursed back to health. These companies utilize a specific set of tools to get the job done:
Collateral is a financial instrument (Irrevocable Letter of Credit, cash, cashier checks, or tangible items) that are held by the surety during the life of the bond and any warranty periods. The instrument can be used by the surety in the event of a financial loss or the need for allocated loss adjustment expenses, such as attorney fees spent to defend the surety. Typically, a surety will hold the collateral until the bond has been released of all present, past, and future liability. Collateral percentages vary by surety and also by the type of bond. For example, a surety might retain 10% collateral for a performance and payment bond for a painting contract but ask for 100% collateral for a subdivision bond or an appeal bond.
Funds Control (escrow)
Some surety companies have access to a funds control company. In certain cases where the surety feels that the contractor has cash flow challenges, a surety may offer an approval on the bond contingent on the use of escrow services. In this case, the funds control company acts as a liaison for the pay application process. The company will oversee the acceptance of payments made to the contractor as well as payments made to suppliers and laborers. This ensures that the cash flow related to the bonded job stays within that job, rather than being used for other jobs or creditors. While escrow services cost an additional fee on top of the bond premium, it is a beneficial tool to all parties involved in a case that might typically be declined.
Small Business Association (SBA)
The U.S. SBA is a governmental agency with a mission to promote economic growth through commerce and construction. The SBA provides multiple solutions for small businesses, including loans and training. The SBA also plays a detrimental role in the surety industry. Certain surety companies are licensed with the SBA to partner on cases that need risk mitigation. In a case where the surety seeks SBA support, the underwriter will submit the application, financials, WIP, etc. to the SBA for an individual review. If approved, the SBA will back 80-90% of the bond's risk. This is another tool that costs a premium in addition to the standard bond premium; however, it is an excellent tool for a surety who is presented with a case that they would normally have to decline.
There are many facets that make up a surety company’s underwriting philosophy, appetite, and their ability to take on certain risks. Allstar Surety has partnered with multiple surety carriers that are treasury listed and hold strong A.M. Best ratings. In addition, Allstar Surety has their own claims department, as well as a access to specialized funds control through National Escrow. This and Allstar's ability to accept collateral makes it easier to get your tough risk clients bonded.
For more information about Allstar, visit our website at: https://www.allstarsuretybonds.com/