Surety Bonds 'Invaluable': Active broker-surety relationship facilitates bonding and business growth.

• Author: Barbour, Tracy
• Position: INSURANCE

When Pete and Rachel Ridge started Diversified Construction in 2010, they owned a truck, a tool box, and just a few other assets. The couple, who previously worked for Watterson Construction, slowly built their assets and surety bonding capabilities. Now the commercial general contracting business has completed jobs all around Alaska, including a pharmacy classroom for University Alaska Anchorage, two fire stations in Willow, and a string of tenant-improvement projects.

Recently, Diversified Construction landed its largest job ever--a $1.6 million project with the Matanuska-Susitna Borough. This spring, the company will begin making improvements to the ice-skating rinks at the Willow and Talkeetna elementary schools. To win the contract, Diversified Construction had to submit several surety bonds. Having ongoing access to surety bonds has been vital to the success of the business, Rachel says. "As we've grown, our bonding capacity has grown," she says. "And it's solely because we've stayed in contact with our surety company and broker."

Essential for Business

Surety bonds are an indispensable part of doing business for many companies offering services in the public and private sectors. Primarily used in the public arena--and increasingly for private-sector projects--they're designed to ensure that projects are fulfilled according to the terms of a contract. More specifically, a surety bond is a three-party agreement in which a surety or bonding company promises to pay an obligee if a principal does not satisfy their obligation.

The state of Alaska requires surety bonds on all contracts that are sizeable in cost or long in duration, according to Scott Jordan, director of the Alaska Department of Administration's Division of Risk Management. He considers surety bonds to be an invaluable protective instrument. "Surety bonds guarantee a project will be completed or compensated for if the contractor in unable or unwilling to complete the project," he says.

Although surety bonds are often considered to be a type of insurance, they are distinctly different. Unlike insurance--which compensates the insured against unexpected adverse events--a bond is designed help the obligee or project owner manage risk by preventing loss. "If a project initially fails to be completed and the obligee submits a claim against the bond, the bonding company will work with the contractor to try and complete the project without paying out the bond," Jordan says. "If all efforts fail, the bonding agency will pay out the bond to the obligee; however, they have indemnification agreements with the principal regarding recovery from their assets."

Bonding serves an important function in contracting, especially with public projects, according to Christopher Pobieglo, CIC, CRIS, president of Business Insurance Associates. "The ultimate goal of all of this is to protect tax-payer dollars," says Anchorage-based Pobieglo. "When the government funds a road in your neighborhood, they are requiring bonds to make sure they get their value and they don't have contractors walking out on work."

Surety bonds fall into two basic categories: contract and commercial. Contract bonds--which represent the majority of the bonds being used in Alaska--are often referred to as...