Rancho Mesa's Account Executive of the Surety Department Andy Roberts is joined by Ted Lee, Contract Bond Underwriter at Liberty Mutual Surety, to discuss what general contractors can do to limit their liability, with regard to their subcontractors.
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Director: Alyssa Burley
Host: Andy Roberts
Guest: Ted Lee
Producer/Editor: Megan Lockhart
Music: “Hiking” by Silent Partner, "Home" by JHS Pedals, “News Room News” by Spence
© Copyright 2023. Rancho Mesa Insurance Services, Inc. All rights reserved.
Transcript
Andy Roberts: Hello, everyone. Welcome back to StudioOne. Our Safety and Risk Management Network. I'm Andy Roberts. I'm an Account Executive here in the Surety Group with Rancho Mesa. And joining me is Ted Lee, who is a contract bond underwriter at Liberty Mutual Surety. Welcome to the show, Ted.
Ted Lee: Andy, thanks for having me today.
AR: Great to have you here. So today, we're going to be talking about a very important topic, discussing what general contractors can do to limit their liability with regard to their subcontractors. But before we get into that, let's take a little bit to get to know you. How did you get into the surety industry?
TL: I think like most people in the industry, I didn't really know what surety bonds were, when I first came in. Even insurance, you know, pretty much health insurance and car insurance, I thought all I really knew. Yeah. So with surety bonds, I originally started in private equity as my internship in college. And then when I came out, I was looking for a job. And you know, something I might be familiar with. I found a bond underwriting position, completely different kind of bond. But you know what? I'm happy I found it and seems to be treating me well.
AR: Yeah, I feel like that's kind of the majority of people fall into this. You know, like I started on the commercial insurance side and had no idea what a bond was and then kind of found a better industry to fall into.
TL: It's almost like a hidden little gem.
AR: It absolutely is. All right. So let's get into our topic. So limiting liability and risk mitigation is important for all our contractors. Before today's topic, we are going to look into two specific things, and that's the pre-qualification process and also the process of bonding back their subcontractors. Let's first talk about subcontractor pre-qualification. Can you explain what that process looks like?
TL: So I guess the way general contractors pre-qualified their subs is depends on how they acquire their subcontractors for a particular contract. They can send it out to bid just kind of openly or ask specific subcontractors that they usually work with to do the jobs. So if they are sending out the bid, there's obviously a lot of unknown there, which kind of increases the risk portion of it. But they might potentially get a lower price. But, you know, again, sometimes you get what you pay for there.
AR: Yeah, absolutely.
TL: Yeah. So with that additional risk, it might be a good idea for those general contractors to protect themselves a little bit more in those situations. So that way they don't have that additional risk of taking a loss. On the other hand, if contractors are kind of relying on their list of well-vetted subcontractors, then, you know, having that history in that working relationship and knowing how well you work together really goes a long way.
AR: No. Yeah, you're absolutely right. So those are all really good ideas. It's important to know your subcontractors and who you're kind of getting into bed with when you're doing business with them. From an underwriting perspective, when you're evaluating a bond request from a general contractor or putting together a bond program. Do you inquire about their pre-qualification process?
TL: You know, especially with general contractors that kind of subcontract out most, if not all, of their work, that's a really vital point to how we're going to see how much bonding we can give to a general contractor. So do they put it out into the wild and see what happens? Or are they kind of fostering those relationships with those subcontractors where they have ten, 15 year relationships and are solid? One thing that they can do with both new and existing subcontractors just to make sure that it had a good place, is ask for a bonding pre-qualification letter. Those should be free of cost for the subcontractor and the general contractor. Surety should be getting those out on a relatively quick basis and they'll give the general contractor a sense of, okay, if I need additional protection on this particular job, I can rely on these subcontractors to be able to bond to me. So that way I'm lowering my own risk.
AR: Okay. That's a that makes a lot of sense and is a perfect segway into our next strategy because we're going to discuss the GCs requiring performance and payment bonds from their subcontractors. What are some of the specific benefits that these bonds can provide to the GC?
TL: So there's two general types of bonds. There's a performance bond and a payment bond. A performance bond from a subcontractor is going to protect the general contractor from, well, as the name suggests, their performance. Are they're going to do the job right, finish on time, make sure, you know, the work is up to a specific quality level that they need. The payment bond, on the other hand, kind of protects the general from everyone below that subcontractor that they might, you know, sub out other specific portions of the job or their suppliers. They need to make sure that they all get paid on time. And if they don't, they're going to put a lien or a stop notice on that project, and that's going to create all kinds of headaches for the general contractor. That payment bond is going to kind of protect them on that side.
AR: That makes a lot of sense. Those are really great points. And, you know, I think in this industry I'm seeing on my side more and more companies that are valuing bond requirements and are requiring bonds from their subcontractors. I know some of them, a lot of the GCs out there already have automatic bond requirements written in their contracts, whether that be $250,000 minimum or $150,000 minimum, which I think is a really good practice for them to do. You know, but for those that don't, on your end from the bond company side, would you ever step in and require GC to bond back a sub when you're evaluating a bond request?
TL: We look at each bond request fairly independently. However, when that account is kind of stretching their overall program or their they may be taking on a slightly new type of project, or if there are some hazardous materials on there that could be of a higher risk, we might go in and say, hey, we want this additional protection and they're both for you and for us. So that way everyone's a little bit more protected.
AR: Yeah, no, definitely. And that's kind of like what we see a lot on our end too. You know, when we have our subs come in with us for the job that's stretching their limits, one of my first question to them is like, who are your guys in subs? And like, would we be able to bond them back? So it makes sense that we're seeing that from the GCs as well.
TL: At some point when the contractors get to a particular size, it gets from, you know, just managing the job to risk mitigation. They really have to be able to juggle both items.
AR: Yeah. And, you know, I mean, on construction projects, GCs have liability exposures on a daily basis. It's important that company owners are aware of the steps they can take to help limit their liability. So one last question I have for you, Ted. For the GCs out there that want to get working on a pre-qualification process or possibly have questions about bonding back their subcontractors, what would you recommend for like a first step for them?
TL: Well, the first step is, I guess, ask for those letter of bodability, just to see which of your subs are bondable. And, you know, and any new ones highly recommend bonding that because you don't have that relationship yet. However, a really good second step is to find yourself a good bonding agent. Because bonding and insurance tends to be a very separate things, like Rancho Mesa has an excellent program with you here. And so I highly recommend that because that's all you do, right?
AR: Yeah, that's I mean, that's what I do 100%, I'm surety specific. And I think there's a lot of value, kind of like you mentioned, to just focusing 100% on my little niche here and providing this value to my clients.
TL: Yeah, having a surety bond agent that is knowledgeable about the product as well as has good relationships with the markets is really key because they're going to know where your account is going to fit best and where you're going to get the most out of the surety product.
AR: Yeah, you're definitely right there. And that's usually like when I'm meeting with a new account. One of the first things I kind of ask them, I was like, What bond company are you with? And like, Who is your agent? And it's usually not a red flag, but when I hear that they're not working with a surety specific agent, are they like, my insurance agent helps me out. That's usually a sign that like, you're probably not placed with the right company. That's right for businesses needs and providing you the limits that you're looking for or need for your business in order to grow it how you want to. So.
TL: Big difference in value added that the bonding agent can give is when you pre-qualify your subcontractors and when you get those letters of bonadbility, they can interpret what that letter really means as opposed to just flat numbers.
AR: Absolutely. Well, this is all really great information, and we've really enjoyed such a great working relationship with Liberty Surety and we just really appreciate your guys the support and everything you guys do for us and the industry and our contractors.
TL: Oh, thank you so much. We really appreciate working with you guys. Working with local bond agents is key to our success.
AR: Well, thank you so very much for joining us here today to discuss these important topics.
TL: Yeah, my pleasure. Thanks for having me.
Alyssa Burley: This is Alyssa Burley with Rancho Mesa. Thanks for tuning into our latest episode produced by StudioOne. For more information, visit us at ranchomesa.com and subscribe to our weekly newsletter.
