In the third episode of the Quit Getting Screwed podcast, IBTX’s Vice President of Surety, Drew Addison, joins Karalynn to discuss the ever-confusing topic of bonds and surety for construction professionals. The subject is a little convoluted, to say the least, considering the amount of confusion and misconception that comes with it. Are bonds insurance for contractors? What purpose do they serve? Why should you seek out insurance professionals with experience working for contractors instead of the one that covers your house, car, or family?
Drew answers all Karalynn’s questions with the expertise you’d expect from someone with nearly a decade of experience in the industry, and then some. When asked what a bond is and how it works, Drew has this to say:
“That’s a lot of information, and I’ve sat through countless surety bond 101 lunch and learns, enough to know that they all say the same thing. So, I mean, I can go into the three Cs spiel and all that good stuff, but the main point of this is, there are a few different points of surety.”
According to Drew, this answer entails many points and listening to him explain his work clarifies why that is. Surety companies are a broker. They are the middleman between the contractors and the surety company. Drew heavily emphasizes the need for contractors to understand that if a bond is required on a project, the owner or general contractor wants to protect themselves, not the contractors.
“My job is to pre-qualify the contractors that have that bond requirement from a financial capacity level, you know, by their ability to be able to perform the work,” he says. This is integral because, while a bond and surety company can inform contractors of precisely what their bond entails, they have no power to do anything about the bond’s repercussions once one is required. For that reason, Drew pushes many times within the episode the necessity for contractors to build a team of professionals with industry experience, among them a skilled construction law attorney. An attorney is essential to negotiating and navigating the real-world applications of having a bond on a project, and Drew heavily insists one like Karalynn be a tool in every contractor’s back pocket.
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Many contractors mistake bonds for insurance, thinking that their subs will still be paid if they are shorted and cannot do so themselves. Drew warns against this misconception. Contrary to what some believe, if an owner or GC files on your bond, it isn’t simply paid and then forgotten. Drew emphasizes that, when contractors agree to a bonded project, “there is a significant amount of risk that these contractors are taking on, and I think that…there hasn’t been a very clear explanation of what kind of contract they’re entering when it comes to surety bonded work.” He explains that if you, as the contractor, sign a personal identification agreement, once the surety company pays what is needed, they will come back to you for the funds they are owed. First, they begin with your company’s finances. If you do not have the assets within your company, they will then go after you personally. It is worth noting that, depending on what state you reside in, what a surety company can pursue varies. For example, Texas is a homestead state, so your house and 401(k) are protected by the law, but everything else is on the table.
The points above are only a fragment of what Drew covers in the episode. The thorough, thoughtful approach to bonds, surety, insurance, and all that connect them is amazingly clear. It allows for the complicated issue to be easily understood by all those who might need to understand it. Drew Addison encourages listeners to reach out with questions by finding Andrew “Drew” Addison on LinkedIn or visiting ib-tx.com and reaching out to him there.
Tune in to Episode 3: Bonds & Surety (With Drew Addison) and get informed on one of the most complex elements of industry contracts. The Quit Getting Screwed podcast features exceptional industry-affiliated professionals with ample information and advice to help you run a better business. If you want more information about what we do or a full transcript of the episode, you can find us at subcontractorinstitute.com. We’re also on Facebook, LinkedIn, and Instagram, and the book is available on Amazon.
This article is intended as a general educational overview of the subject matter and is not intended to be a comprehensive survey of recent jurisprudence, nor a substitute for legal advice for a specific legal matter. If you have a legal issue, consult an attorney.