September 2017

How Will Surety Bond Prices Change with New Credit Score Formulas

Nowadays credit scores are important in countless instances. Applying for a mortgage, getting insurance or obtaining a surety bond for your business are all instances where a higher credit score is beneficial. Which is why you will probably find the below information good news. After settling a lawsuit in 2015, the three big credit reporting companies – Equifax, Experian and TransUnion – have begun to phase out certain items from people’s credit reports that have been dragging their scores down. This change is expected to affect roughly about 6%-7% of people with credit scores and improve their scores, thus affecting all those things that are dependent on having good credit. Read on for an overview of the changes, and what all of this could mean for your surety bond rate. Why are credit scores improving? As of July 2017, the three big credit reporting companies have begun removing tax liens and civil judgments from credit reports that do not conform to newly accepted data standards requirements. As of July 1, in order for new tax liens or judgments to be part of a person’s credit report, the Social Security number or birth date of the person must also be available to the credit bureau. Since so many credit-related items end up on the wrong report or persist despite having been resolved long ago, this change is expected to improve the credit score of about 14 million Americans. The majority of these are expected to see an increase in their score between 1 to 19 points. A smaller group will see an increase between 20 and 39, and an even smaller group is expected to see as many as 40 to 60 points being added to their score. What else is changing about credit reports? Always report the original creditor name and classification code Exclude any debts that are not a result of a contract or agreement (court fines, traffic tickets and others) Issue full monthly reports Report accounts that need to be deleted due to currently being or having been covered by insurance Not report medical debts that are not yet 180 days old Finally, credit card issuers will now need to report the date of birth of their authorized users, whereas data furnishers will also need to provide birth dates, full name and address and Social Security numbers. What does this mean for businesses applying for a surety bond? For some people, particularly the ones who have an improvement of 20 or more points in their credit score, this change may make a big difference. Such a change may mean that you are moved into a higher credit tier. Surety bond rates are strongly influenced by credit scores. Any increase of 20 or more points in your score may mean you can qualify for a better rate if you are getting a new bond or renewing your old one. Some surety bonds (such as contract bonds for construction projects) are impossible to obtain with bad credit (650 or below), which means that an increase of a few points may make the difference between getting bonded or not. And if your score goes above 700 FICO this may qualify you for some of the lowest possible rates on bonds. While rates on bonds vary from one bond type to another, generally applicants with a high score can expect to have to a very small rate on their bond. For auto dealers, for example, this may result in a rate as low as 1%-3% on their auto dealer bond. Other businesses or individuals who are frequently required to get bonded, such as contractors, mortgage or freight brokers, can similarly expect an improvement in their rates. How to know if your score has improved? A large number of credit card issuers currently provide free access to the credit scores of their customers. If you knew your credit score previously, this is a way to quickly check if it has improved in any way. But you are also entitled to one free yearly copy of your credit report by any one of the three big credit reporting companies. If you haven’t requested one so far, now is the time to get it and see if any items that shouldn’t be in there have been removed. If you find any such items or other faults in your report, make use of the bureau’s credit dispute process to request that they be removed or fixed. Have you seen an increase in your credit score and gotten a better rate on your bond, insurance or something else as a result? Leave us a comment, we’d like to know! http://www.cpapracticeadvisor.com/news/12370494/how-will-surety-bond-prices-change-with-new-credit-score-formulas

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legislation

When Surety Bond Incorporates the Subcontract by Reference, Is the Subcontract’s Arbitration Clause Also Incorporated?

Developers Sur. & Indem. Co. v. Carothers Constr., Inc., 2017 U.S. Dist. LEXIS 111021 (D.S.C. July 18, 2017); Developers Sur. & Indem. Co. v. Carothers Constr., Inc., 2017 U.S. Dist. LEXIS 135948 (D. Kan. Aug. 24, 2017) Two recent decisions from United States District Courts for the District of South Carolina and the District of Kansas, respectively, reached opposite conclusions when presented with the same issue: Is a surety bound to arbitrate claims against it when the surety’s bond incorporates its principal’s contract by reference, and the principal’s contract contains an agreement to arbitrate disputes. The District of South Carolina, applying South Carolina law, held that a surety is bound by the arbitration agreement in the incorporated contract, while the District of Kansas held that a surety is not so bound. These cases both arise from an arbitration demand filed by the general contractor, Carothers Construction, Inc. (“Carothers”) against the surety, Developers Surety and Indemnity Company (“DSI”). DSI issued performance and payment bonds on behalf of subcontractors Liberty Enterprises Specialty Contractor (“Liberty”) and Seven Hills Construction, LLC (“Seven Hills”) in favor of Carothers for their work on Projects located in South Carolina and Kansas, respectively. Each subcontractor defaulted on its contractual obligations. Carothers initiated arbitration against DSI regarding both Projects. According to Carothers, the bonds incorporated by reference the subcontracts’ mandatory arbitration clauses and thus, DSI was subject to binding arbitration. In declaratory judgment actions before Federal District Courts in South Carolina and Kansas, DSI asked the courts to declare that the arbitration clause did not bind it to arbitrate Carothers’ claims. Each court reached the directly opposite conclusion. This article discusses the decision reached by each court in turn. In this action, DSI sought a declaration from the District Court in South Carolina that the arbitration clause in the subcontract between Carothers and Liberty did not bind it to arbitrate Carothers’ claim. DSI argued that the arbitration clause had no application to the claim between it and Carothers because, by its own terms, the clause applied only to claims “between the Contractor and the Subcontractor,” and DSI, as surety, was neither. It similarly argued that Carothers’ claims fell beyond the scope of the arbitration clause, as the claims arose out of the bond, whereas the arbitration clause expressly applied only to claims arising from or relating to the Carothers – Liberty subcontract. Applying South Carolina law, the court held that the subcontract’s arbitration clause bound DSI to arbitrate. The court found that South Carolina cases had previously concluded that a subcontract may incorporate an arbitration agreement in the prime contract by reference, and that the same result should obtain in the case of a bond. The court further found that DSI had guaranteed the performance of all of Liberty’s obligations under the subcontract and had incorporated all of the subcontract’s terms, including the agreement to arbitrate disputes. Reasoning that a bond is to be construed together with the agreement it incorporates in order to ascertain the parties’ intent, and that a surety obligates itself under a bond to the same liability as its principal, the court concluded that the parties intended to submit disputes against DSI under the bond to arbitration. The District Court in Kansas reached the exact opposite result, finding that DSI did not consent to arbitration of Carothers’ claims on the bonds. The court accepted the argument unsuccessfully advanced by DSI in the District Court in South Carolina – that the arbitration agreement expressly applied only to disputes between contractor and subcontractor, and DSI, as surety, was neither. In so finding, the court cited other provisions within the subcontract that supported its interpretation that the subcontract did not intend for “surety” and “subcontractor” to mean the same thing. Thus, the court held that the arbitration clause’s reference to disputes with subcontractor must not have been intended to include disputes with the surety. The court also reasoned that, although the bonds incorporated the subcontract (and its mandatory arbitration provision) by reference, DSI did not agree in the bonds to assume “any or all obligations” of subcontractor. Rather, it only agreed to undertake “certain” obligations in the event of subcontractor’s default. The court said that it “respectfully disagreed” with the decision reached by the District Court in South Carolina, noting that that court had relied on the general principle of South Carolina law that “the liability of a surety is measured precisely by the liability of the principal.” The court noted that Kansas courts have not adopted such a rule. The court further found that even though a surety’s liability may be coextensive with that of the principle as a general rule, DSI’s liability in this case was defined by the terms of the bonds. Reading the plain language of the arbitration provision, other language in the subcontract, and the language in the bonds, the District Court in Kansas elected to disagree with the District Court in South Carolina’s conclusion that the parties clearly intended to submit disputes to binding arbitration. https://www.lexology.com/library/detail.aspx?g=27162bc5-be73-4329-9e4f-c2669812846f

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sba

SBA Makes Changes to its Surety Bond Program

The U.S. Small Business Administration announced today two important changes to its Surety Bond Guarantee (SBG) Program that will increase contract opportunities for small contractors, supporting them to grow their business operations. The changes will become effective on September 20, 2017. The SBA will increase the guarantee percentage in the Preferred Surety Bond Program from no more than 70 percent to no more than 90 percent. The SBA’s guarantee will be 90 percent if the original contract amount is $100,000 or less, or if the bond is issued to a small business that is owned and controlled by socially or economically disadvantaged individuals, veterans, service disabled veterans, or certified HUBZone and 8(a) businesses. All other guarantees will be 80 percent. The eligible contract amount for the Quick Bond Application (Quick Bond) will increase to $400,000 from $250,000. The Quick Bond is a streamlined application process, with reduced paperwork requirements, that is used in the Prior Approval Program for smaller contract amounts. SBA’s review and approval requires minimal time, allowing small businesses to bid on and compete for contracting opportunities without delay. Through its SBG Program, consisting of the Prior Approval and the Preferred Surety Bond Programs, the SBA guarantees bid, payment and performance bonds for contracts that do not exceed $6.5 million, and up to $10 million with a federal contracting officer’s certification. The SBA’s guarantee encourages the surety company to issue a bond that it would not otherwise provide for a small business. https://www.constructionequipment.com/sba-makes-changes-its-surety-bond-program

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How Speed to Value Will Destroy Traditional Insurance

It will not be insurtech startups that destroy the traditional insurance industry. Rather, it will be a complete lack of urgency in regards to the insurance customer experience. There is no more important aspect to the insurance customer experience over the next five years than speed to value. How quickly can you deliver value to your customers? The answer to that question could be the difference between disrupting and being disrupted. Speed to Value Today we’re talking about giant slaying. We’re talking about David putting a grain of sand in his slingshot and taking down Goliath. Today we’re talking about killing the incumbent. There’s a simple reason why insurance industry disruptors are having any impact on our industry at all, and that has to do with speed to value. It has to do with them looking at our industry and finding ways in which they can provide our products and services to insurance consumers in a faster, cheaper, and easier manner. They’re getting the value of the product to the customer faster than the current incumbents are able to do. It’s that sole idea that even gives them a shot. It’s their foot in the door. Common Misconception of Speed to Value Today we’re going to talk about what a common misconception of speed to value is, how insurtech companies are using speed to value to win market share away from incumbents, the three layers of speed to value that most people understand, how we can use those in our business, in our traditional insurance model, and how we can make improvements to that model in order to deliver the value to customers faster and win the speed to value game. Most people confuse speed to value with the innovators’ curve, meaning they think whoever gets to market fastest is ultimately going to be the winner. In many cases, that’s true, but the innovators’ curve is a very different concept. What we are talking about in speed to value is how quickly you are able to deliver value to customers once they engage with your brand. It’s that simple idea that is allowing insurtech companies – in particular, companies with no history inside the industry – to ultimately penetrate and make waves> Now, some of that is just really, really good PR, as we’ve seen from the recent financial results that many of our insurtech darlings have had. But that doesn’t mean that the philosophy, the concepts, the strategy that they’re using isn’t valid. Speed to value is about getting what you do, what your customers want from you as a provider to them, as fast as you can. Speed to Value is Hard In the traditional sense, speed to value is actually a major problem for insurance providers. There’s no real, tangible item that they get to take home and put up on their wall or even really put in their desk since most policies are delivered electronically today. Now, once you have that promise, it’s just a hope. There’s nothing there. You don’t receive that value until you actually have a loss. The speed to value, the amount of time between purchase of product and when actually receive the value from that product, can be a long time. During that time between purchasing a policy and ultimately extracting the value from that policy, which is the claim reimbursement, the financial reimbursement, based on whatever product it is, that customer is deluged with marketing and branding and ideas, and they talk to friends. This is when the initial high of making a decision to choose you, whether it’s the agency or the carrier, as their insurance provider, all the – I’m not going to say euphoria – the positive vibes that they had in choosing to make that purchase with you starts to get a little fuzzy. They start to forget why they chose you because they’re getting pounded over the head with price and then they’re getting pounded over the head with commercials over here and then they see this person and they talk to their cousin and then they get a renewal and that renewal goes up 5% and they’re wondering, “Why, if I didn’t file a claim, is my price going up?” They still haven’t extracted any value from that policy. It’s that time period when those good, positive vibes that they had when they ultimately made the decision to go with you as their provider start to become neutral and then possibly start to swing over to being negative because all they’re really feeling like is they’re paying more for something that they never actually used. Speed to Value Solved This is the problem that we have to solve, my friends. We have to figure out ways that we can take the value that we provide and chop it up and deliver it throughout the course of the year. Now, what that means is our only value to customers cannot be a little bit of education on the front end sale and when we actually pay out a claim because there is so much other time in between those two moments where that customer can become disenfranchised with us – with us as their provider, with us as their agent, with us as their carrier. Then someone comes in with a slightly slicker message and new technology, and they can wedge their way in and buy those customers out from under us. This is the problem we have to solve. In the insurance industry, there are three primary moments when speed to value matter more than anything else that you can do. Read The Entire Article At: https://www.agencynation.com/how-speed-to-value-will-destroy-traditional-insurance

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