Unlike insurance, where the insurance buyer exchanges their premium for a transfer of their risk to the insurance market, in the Surety world, there is no transfer of risk. When/if a surety loss occurs, the surety, via the indemnification agreement that was signed prior to bond issuance, is repaid for any loss paid on behalf of their bonded principal.
In much the same way that suretyship is different than insurance, surety underwriters behave differently than their insurance underwriting counterparts. Surety underwriters are primarily concerned with making sure that their bonded principal has sufficient net worth to repay any losses the Surety may incur. With every underwriting decision, surety underwriters are constantly looking at the downside risk of their extension of surety credit and they are looking to verify the net worth/liquidity of their principal. If the surety underwriter can not verify/rely on the net worth of their principal, they will simply decline to extend surety credit.
Since the contractor’s financial statements are the surety underwriter’s primary underwriting tool when it comes to measuring net worth/financial resources of their principal, the surety usually demands that the contractor supply them with CPA prepared financial statements. Depending on the size of the work program required by the contractor, the surety may request either compiled, reviewed, or audited financial statements.
Financial statements which are prepared directly by the contractor or by the contractor’s accounting system are referred to as “internal” financial statements and they are generally unacceptable to most surety underwriters. The reason for this is that internal financial statements do not provide the surety with the necessary independent third party valuation contained in CPA reviewed or audited financial statements. (CPA prepared compiled financial statements are generally equated with “internal” financial statements since, in a compiled set of financial statements, the CPA firm simply recreates the statements given to them by the contractor without verifying/checking balances.)
The importance of CPA prepared financial statements is not limited to the surety underwriter’s analysis and verification of net worth. In addition to this, a good CPA prepared set of financials will include a Work In Progress, or “WIP”, schedule that ties in to the financial statements. The WIP schedule is very important to the surety underwriter as it allows them to track things such as underbillings, overbillings, profit fade/gain, and pure job borrow. The WIP gives the surety underwriter a predictive tool to analyze future performance, future gross margin, and cash flow in the contractor’s remaining uncompleted work.
To draw a mining analogy; if a contractor seeks surety credit in the same way that a miner seeks gold, the miner must use a pick and shovel to get to the gold and, in the same way, the contractor must use CPA prepared financial statements to get to his gold = surety credit.
Tim Hutton, CPCU, AFSB
timothyjhutton@gmail.com
703 220 7771 mobile
Showing posts with label commercial insurance. Show all posts
Showing posts with label commercial insurance. Show all posts
Sunday, December 13, 2009
Friday, September 25, 2009
Commercial Insurance and the H1N1 Flu
Commercial Insurance and the H1N1 Flu
The anticipated ‘outbreak’ of the H1N1 flu has certainly raised personal concerns for many people. However, business owners must also be concerned and prepared for the flu’s potential impact on their businesses and, working with their agent/broker, must examine the coverage that may or may not exist in their commercial insurance programs.
Since a true ‘outbreak’ would be a first time event, it makes the various coverage scenarios difficult to predict as there is no existing case law surrounding such an event. An ‘outbreak’ of the H1N1 flu could have an impact on any or all of the commercial insurance policies below (along with others):
>Workers’ Compensation (A “disease” acquired as a result of one’s work is generally covered under most WC policies, but, how would an employee prove they contracted the flu at work/as a result of their work?)
>Business Interruption - Business interruption coverage protects a business from losses due to unavoidable interruptions in their business operations, however, this is a property policy and the required coverage ‘trigger’ is physical damage. Since an outbreak of flu would not be considered “physical damage”, coverage may not apply.
>General Liability – This policy includes coverage for third party claims for bodily injury (such as a ‘slip and fall’ injury). However, the flu may not meet the GL policy’s definition of ‘bodily injury” and the GL policy may include exclusions that limit or deny coverage for bodily injury related to infectious disease and/or “organic pathogens”.
To respond to the potential gaps in coverage, some insurance carriers are offering new policies providing extra expense coverage for a suspension of operations by a public health official. Since these policies are new, careful attention must be paid to the terms and limitations contained therein. (These policies are generally written on a ‘non-admitted’ basis, have limited coverage per location, have strict exclusions, and can be very expensive.)
Given the exposures outlined above, a careful review of one’s current commercial insurance program with a qualified insurance agent/broker is certainly warranted.
Timothy J. Hutton, CPCU, AFSB
timothyjhutton@gmail.com
LinkedIn Profile: http://www.linkedin.com/pub/0/190/12b
The anticipated ‘outbreak’ of the H1N1 flu has certainly raised personal concerns for many people. However, business owners must also be concerned and prepared for the flu’s potential impact on their businesses and, working with their agent/broker, must examine the coverage that may or may not exist in their commercial insurance programs.
Since a true ‘outbreak’ would be a first time event, it makes the various coverage scenarios difficult to predict as there is no existing case law surrounding such an event. An ‘outbreak’ of the H1N1 flu could have an impact on any or all of the commercial insurance policies below (along with others):
>Workers’ Compensation (A “disease” acquired as a result of one’s work is generally covered under most WC policies, but, how would an employee prove they contracted the flu at work/as a result of their work?)
>Business Interruption - Business interruption coverage protects a business from losses due to unavoidable interruptions in their business operations, however, this is a property policy and the required coverage ‘trigger’ is physical damage. Since an outbreak of flu would not be considered “physical damage”, coverage may not apply.
>General Liability – This policy includes coverage for third party claims for bodily injury (such as a ‘slip and fall’ injury). However, the flu may not meet the GL policy’s definition of ‘bodily injury” and the GL policy may include exclusions that limit or deny coverage for bodily injury related to infectious disease and/or “organic pathogens”.
To respond to the potential gaps in coverage, some insurance carriers are offering new policies providing extra expense coverage for a suspension of operations by a public health official. Since these policies are new, careful attention must be paid to the terms and limitations contained therein. (These policies are generally written on a ‘non-admitted’ basis, have limited coverage per location, have strict exclusions, and can be very expensive.)
Given the exposures outlined above, a careful review of one’s current commercial insurance program with a qualified insurance agent/broker is certainly warranted.
Timothy J. Hutton, CPCU, AFSB
timothyjhutton@gmail.com
LinkedIn Profile: http://www.linkedin.com/pub/0/190/12b
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