Secret 95: PLASTER – Not The Solution To Bond Problems
In construction there are physical problems that can be solved with a plaster. In the world of surety, management, massage, hedging (plastering) is sometimes carried out to deal with negative events or situations that hinder the issuance of bonds.
All bond underwriters are aware of the great seriousness with which bid and performance bonds are requested.
“We need a bid bond because we need the project to obtain the necessary income to meet our obligations and have a successful year.”
The pressure is on! Sometimes that high level of motivation leads people to take extreme measures … Where do you draw the line?
Let’s talk about some real life examples and you decide (our opinion to follow):
Joe, the founder / owner of ABC Company has an unavoidable problem with poor results. It could be the bankruptcy of his biggest client, forcing ABC to file for bankruptcy. It could be an accident that results in a lawsuit and a devastating lawsuit against the company. As a result, a new company is formed with Joe’s son as owner and president. Joe is not an officer and officially works as a consultant to the company, even though he actually runs the show. Is this legit?
Smith Co. is unable to obtain the linking ability it needs due to poorly or improperly prepared financial statements from its accountant. They decide, starting next fiscal year, to hire a Certified Public Accountant with experience in construction clients. Is this appropriate?
For Ajax Inc., the first half of the year fell short of expectations, but the year as a whole should be fine. When the surety company requests your 6-month financial results, the company makes up an excuse saying it has a software problem and cannot produce the statement. The plan is to hinder the insurer and only provide the end of the fiscal year. Does this really hurt anyone since the 6 month statement is relatively less important?
Before deciding on these specific circumstances, let’s look at the big picture. What is the nature of the relationship between the contractor and the surety?
The surety is paid to take a risk on behalf of the contractor, it becomes the guarantor for him. It is a true partnership in the sense that they succeed or fail together. Everyone loses if the contractor doesn’t deliver on a project.
The surety bases its underwriting decisions on the information provided by the applicant, and is dependent on its being “forthcoming.” To put it bluntly, intentionally Section Bonds misrepresenting or concealing relevant facts can be considered fraudulent. Then there is the gray area.
In our three examples, did you find the number 1 objectionable? This situation occurs and we appreciate the motivation. The insurer may choose to accept it on the condition that the consultant grants personal compensation, even if he is not a shareholder.
# two? This seems like a logical and timely response to the problem. It’s fine!
# 3? The sin that is committed is the breach of trust with the surety. If there is a real association, it will proceed based on full disclosure, knowing all the good and bad. Even if the information that is withheld is irrelevant, it is inappropriate for one of the parties to intentionally withhold it for their perceived benefit.