What are the possible reasons why a surety bond company would drop my coverage?
If you are like many contractors, the answer to this question is important. Your business depends on getting paid for your work. If your surety bond company drops you, you’re out of business. So why would a surety bond company drop your coverage?
There could be any number of reasons why a surety company may drop your coverage. Any of these could be a reason for your company:
- Fraud, theft, or embezzlement by an employee. In this case, you will need to file a claim under the bond with the surety that issued it.
- Incorrect information when filing your application with the Department of Industrial Relations (DIR) website. If you fill out the wrong application due to incorrect information provided in a letter from a DIR-retained consultant, you may have to wait 30 days before having coverage reinstated because in general, if there is incorrect information on an application, it’s considered a “no show.” A no-show is not being insured when you were supposed to be insured. This can get costly and can get very touchy quickly.
- Fraud by an individual other than an employee, such as a customer. This is becoming more and more common with the ease of electronic transfers. If you are not insured for this type of risk, then who is?
- Your company has filed bankruptcy or has gone out of business.
- Your performance with the surety that issued your bond has been unsatisfactory. Be aware that if there is any missed payment on your contract with DIR under Industrial Code 8302, your surety may drop you without warning to cover its own liabilities first. Expect it to happen quickly.
Can I get a refund if the surety bond company drops my coverage?
No. You are responsible to find new coverage within 30 days of your surety dropping your coverage before you can be insured again with the same surety company.
If I have more than one job, do I need more than one bond?
Let’s say you have three jobs coming up and the first two are with ABC Contractor. If so, you will need to have two bonds created. The first is for ABC Corp. covers both contracts together totaling $500,000. Then a second bond is issued by the DIR-retained consultant for ABC Corp.’s work on Industrial Code 8302 that totals $100,000 – this is required because it represents its own contract between itself DIR. Once your first bond is done, you can ask the surety that issued it to issue another bond for your remaining two jobs with XYZ Corporation and 123 Corporation. As we said before, each contract is considered its own risk unless all three contracts total $500,000 or more and they all come from the same contracting entity (ABC Corp).
Is there anything else I should know about my bond?
You should know that while a bond will protect you in case of non-payment by a customer under an Industrial Code 8302 contract, it does not cover general business bad debts. A bad debt starts when a company owes you money or property for services rendered or delivered yet cannot pay.
It applies even if you are owed money after the job was completed because of damage or underestimation or change order after the fact. Bad debts are covered under the DIR-retained consultant’s Contractor’s Bond #1.
Will my surety bond credit pull affect my scores?
If your surety bond company drops you, they will report this to the credit bureaus. A drop can affect your scores and it is recommended that you monitor your credit after a drop. Also, if one of your jobs has gone into arbitration or arbitration is pending, then the contractor’s bond will not be reported as paid by DIR until the case is resolved. This may affect some companies’ ability to get bonding for new contracts but does not affect those who had already established their credit with the same surety prior to filing for arbitration.
The best thing you can do is ask questions before signing anything. Ask why coverage was dropped in addition to when it was dropped. Have an answer ready in case you are asked when you applied for DIR coverage.
“As a contractor DIR-retained consultant, I understand there are many reasons why a surety may drop a client from their bond portfolio. Most importantly, an understanding of the laws that govern surety bonding is key to our ability to work successfully with you.”
What will I do if a surety bond company drops my coverage?
The bond will still cover you but might require higher premiums because of your credit pull if it was done recently by the surety that dropped you. You are responsible to find new coverage within 30 days of the surety dropping your coverage before you can be insured again with the same surety company.
If your scores affect your ability to get bonding for new contracts, then you will have to build your credit back up with that surety before being able to get bonding again.