One of the more common requests we get is from contractors contacting our office looking for “cheap contractor bonds” or “cheap bond companies.” It’s a request we can relate to because when it comes to making any purchase in life whether large or small, price is always an important consideration. Bond premiums can fluctuate greatly between sureties for many reasons and a fair question to ask is, for contractors evaluating license bond options between several sureties, should the bond premium be their only criteria in the selection process? In short, the answer is no and for reasons that may be surprising to some. Below are eight additional factors aside from the bond premium that should be carefully considered as part of any contractors license bond company selection process.
1. Does The Surety Automatically File Bonds With The CSLB On Behalf Of Contractors?
One of the more important features contractors should want from their surety is to have their bond automatically filed for them with the Contractors State License Board. Not only is having to manually file a license bond very inconvenient and time consuming, but, more importantly, it leaves open the possibility of a contractors license being suspended if it’s not applied properly or in a timely manner, which can be catastrophic. All of the sureties we work with automatically file bonds with the CSLB including Suretec, Wesco and HCC Surety (American Contractors Indemnity), though not all sureties necessarily provide this service. In our experience, if a surety does not automatically file with the CSLB, it’s not a surety we would like to work with for contractors license bonds.
2. Does The Surety Provide an Automated Purchase & Renewal Process For Bonds?
Time is money for contractors and the more work that is required for them to purchase a bond and have it renewed means a bond with a lower premium may actually be more costly when factoring in a customers valuable time. Some bonding procedures that can be less efficient include having to complete paper applications (vs. electronic applications) or having to complete a new finance agreement or other procedures that may be redundant upon renewal. For some sureties, trading a lower bond premium may mean more leg work for contractors and a higher level of frustration. In our experience, some sureties certainly do a much better job than others in designing bonding programs to be as simple and pain free as possible for all involved parties.
3. How Does The Surety Handle Bond Claims?
How a surety handles claims can be an important consideration for contractors. Some sureties may handle claims in house while others may outsource the process. Larger sureties that historically write more contractors license bonds will often have more experience in making sure claims are handled appropriately. There are very few things more frustrating than a sureties claims department siding with a contractors customer without performing a thorough and complete investigation from the contractors perspective. Contrary to popular belief, a surety does not like a bond claim any more than an affected contractor as these inevitably cost the surety money. The more experienced a surety is in handling claims the more it benefits all parties involved in reaching a fair resolution to any dispute.
4. Comparing Bond Indemnity Agreement’s Between Sureties
Each surety will have contractors sign an indemnity agreement as part of the bonding contract which outlines the responsibilities between the contractor and the surety with specifics pertaining to bond claims among other items. Each agreement will differ between sureties and it’s a good idea to understand what those differences are when making a bonding company choice.
5. What is The Sureties Bond Cancellation Policy?
Many sureties will have the first $100 of any bond premium be fully earned in the event of a cancellation request, while others may have less favorable cancellation policies. Some sureties make their bonds fully earned and non refundable which can impact contractors that plan on being in business only part of the year or plan on switching legal entities which will require a new bond. In situations such as these, what appears to be the cheaper bond may actually be more expensive. Contractors may want to inquire about a sureties cancellation policy in the event they need to cancel the bond mid term, even if it seems unlikely at the time of a bond purchase.
6. Does The Surety Offer Bond Financing & How Much Is It?
Many contractors choose to finance bonds that are significantly more than $100 per year on average. Some sureties will finance bonds in house, while others require it to be arranged from a third party premium finance company. Financing terms and availability can fluctuate widely between sureties and finance companies. Understanding how much a bond will cost after factoring in finance costs may lead what appears to be a less expensive contractors bonding option to actually cost more.
Other considerations with bond financing include how a bond is financed. Some financing companies are quite efficient and will set up an automatic debit from a contractors credit or debit card each month while others mail a coupon book out where a contractor must remember to mail out their bond payment when periodically due. From our experience, these arrangements lead to a significantly high rate of delinquencies resulting in bond cancellations and/or late fee’s. In our opinion, this is not an efficient form of financing.
7. Is The Surety Financially Stable?
Recently, several surety companies have joined the California contractors license bond industry that may have less experience with these particular types of bonds than others. The increased competition can be good for contractors if it drives down bonding costs. However, inexperienced sureties can potentially create problems for contractors for several less obvious reasons. If bonds are not appropriately priced for the long term, rates and the sureties financially rating could suffer leading to turnover and instability. Contractors may find they need a new surety on renewal, among other potential problems.
8. Is The Surety On The CSLB List of Approved Bonding Companies?
The CSLB requires any participating surety to be on its approved list for providing contractors license bonds. Most likely this is not an issue as there is a very good chance that if a surety is providing a bond quote, then they are on the approved list, though this is something to keep in mind, especially if the surety in question does not normally write many contractors license bonds.
Some Sureties Offer Both a Great Bonding Experience & Low Premiums
On a final note, from our experience some sureties consistently offer a very good bonding experience for contractors as well as consistently competitive bond premiums. Having a lower bond premium does not necessarily have to come at the cost of sacrificing the items mentioned above. However, it’s a good idea for contractors to look beyond the initial premium in deciding which bonding option provides the best value in terms of price and other associated benefits.
By Jeremy Schaedler