A large majority of the general population has never even heard of surety bond, so it is no surprise that those who have heard of them really don’t understand what they are. Surety bonds are considered a branch of the insurance industry but in reality, they are not insurance.

Surety professionals are the first to point out that surety is a three party relationship while insurance is a two party relationship. Most people would respond to that explanation with a long, blank stare.  Perhaps a good old fashioned Venn diagram will make it easier to visualize….
 

In essence, insurance is a contingency plan. If something goes wrong, someone will pay to fix it (that is, of course, after you pay the hefty deductible, prove that the water damage is from water from the sky and not the ground, and that you did buy coverage for acts of god). The policy is between the insurance company and the principal (policy holder). Insurance underwriters expect that there will be a loss. It’s built into the policy and you pay for that risk to be transferred to the Insurance Company.

Surety, on the other hand, is a guarantee that the Principal (person getting the bond) will do something: follow a rule/regulation/law; perform a contract; pay certain taxes; supply a certain item; etc. The bond is a guarantee from the Surety to the Obligee (the entity requiring the bond) that the Principal will meet their obligation set forth in the bond.  A surety bond protects the Obligee and not the principal.

Also, unlike Insurance, the surety company does NOT expect there to be a loss. They go to great lengths to ensure that the Principal can and will meet the obligation of the bond.  In this sense, Surety often acts as a prequalification tool.

So, what exactly are you paying for when you get a bond? You’re paying for the Surety’s backing. Basically if you obtain a bond, the Surety is “vouching” for you and you pay for that service.

Simple, right?

Environmental Contractors vs. “Regular” Contractors

The world of surety can be a confusing maze to most people—especially if you’re new to the industry. In very basic terms, surety is simply a guarantee. It is a guarantee that the person obtaining the surety bond will pay someone, complete something, follow a certain rule or regulation, etc. When it comes to contractors, the surety, for the most part, is offering a guarantee that the contractor will perform the work specified in the contract and pay their suppliers and subcontractors.

When a contractor applies for a surety bond (usually a bid or payment and performance bond), the Surety must analyze the risks involved and determine if the contractor can fulfill their obligation. When the project is a simple construction project, the formula can be pretty simple. If the contractor has acceptable working capital, net worth and experience the bond should be relatively easy to secure.

Things can get messy though when the project involves environmental risks such as asbestos, contaminated soil, hazardous waste or lead paint. Surety companies tend to shy away from environmental contractors because it is harder to determine whether or not the contractor will be able to execute the project and not default on the surety bond.

Since the risk factor with this type of work is so high, it can be very difficult for an environmental contractor to qualify for a surety bond. Environmental sites often have hidden problems and contractors have to have the experience to know exactly how to tackle a job and plan for unforeseen issues that might arise. The surety also has to make sure the contractor knows the federal, state or city regulations regarding the hazardous materials. In addition, the contractor needs to have a large working capital in order to financially manage the project.

Another hurdle environmental contractor’s face is the issue of Reinsurance. Many sureties have Reinsurers that specifically exclude them from bonding environmental contractors. This means the market of sureties willing to support an environmental contractor is somewhat small.

Environmental contractors face many more obstacles than the typical “sticks and bricks” contractors and will ultimately have to work harder to obtain a surety bond. This, of course, is not to say that they cannot find surety support; they just have to find a surety agent who understands their needs and can find them one (or two) of the handful of sureties willing to support this niche market.

Survival of Medicare Bond Provision in Health Care Reform Legislation a Win For Taxpayers 

March 24, 2010, Washington, DC – As the public begins to dissect the massive $938 billion health care reform bill that the President signed into law, what many may overlook is a little-known provision that will have big implications for taxpayers.  The provision maintains a surety bond requirement that protects taxpayers from fraud and waste in the Medicare and Medicaid programs.

Pharmacies had sought and exemption from the $50,000 surety bond required of providers of durable medical equipment (DME) to Medicare and Medical patients.  “This important insurance issue in the health care debate never made any headlines, even though it has significant implications for taxpayers,” said Lynn M. Schubert, President of The Surety & Fidelity Association of America (SFAA).

"With the passage of the care reform legislation,” said Thomas Kunkel, Chair of the SFAA Board of Directors, “Congress recognized the value of the surety bond in ensuring that these providers are legitimate and have the financial and other capacity to perform as expected before they can start billing the federal government for their products.  The bond will help protect taxpayers from fraud and overpayment in the Medicare and Medicaid systems.”

Through the surety bond, the surety company gives the Centers for Medicare and Medicaid Services (CMS) the benefit of an independent third-party evaluation of the qualifications of the provider. In the event that the pharmacy fails to pay and overpayment, fine or penalty assessed by CMS, the surety bond provides the necessary financial protection up the bond amount.

 “With bonding, there is a greater assurance that all providers that submit claims to Medicare and Medicaid are legitimate and that overpayments, fines and penalties assessed by CMS are paid” Kunkel added.

Both sureties and pharmacies were concerned that the requirements of a $50,000 bond for each billing number for pharmacies could hurt small pharmacies.  The new law addresses that concern by permitting the Secretary of Health and Human Services to set a bond amount that is commensurate with the volume of business of the supplier.

“SFAA presented Congress with better options than a broad exemption for pharmacies from the surety bonding requirement,” Schubert said.  “We understand the needs of small businesses and the burdens placed on them in compliance with federal regulations. Allowing HHS to set an appropriate bond amount based on the supplier’s volume of business is a much better approach than exempting all pharmacies, many of which are giant operations such as chains or megastores.”

Waiving the bond for pharmacies would have exempted the largest class of providers that would have been required to obtain this bond. According to the CMS regulations that implement the bond requirement, there are about 113,000 providers of durable equipment, and about 55,000 of them are pharmacies.  If pharmacies had been exempted, about half of the providers of durable medical equipment would not have been required to provide CMS with this critical anti-fraud and financial protection device.   “Abandoning financial protection on such large scale,” Schubert added, “would have been a serious mistake.”  -Presented by permission of The Surety & Fidelity Association of America

If you have ever dealt with a bout of insomnia then you have seen the commercials for the motorized wheelchairs that, evidently, are perfect for visiting the Grand Canyon. As I’m not in a position to endorse any products, I won’t mention the exact name but, apparently, these wheelchairs are so fantastic you can use them to hike a mountain or participate in a high speed chase. The commercial even states that Medicare will finance this awesome piece of machinery.

Like most people glued to the television at 3am, I can probably be talked into just about anything. You tell me that this product is going to change my life, I’ll believe it. Everything looks better in the dark of night. But what happens to those poor souls who actually purchase these things only to find out it’s a big scam? Luckily, there are laws in place regarding the sale of durable medical equipment. So while you might not want to try your luck with the spray-on hair, rest assured you’ll get that wheelchair—especially if Medicare pays for it.

In October 2009, the Federal Government mandated that all Durable Medical Equipment (DME) Providers must post a surety bond to guarantee that they adhere to all rules and regulations set forth regarding the sale of durable medical equipment and Medicare/Medicaid billing. Since then, many states have followed in the Government’s footstep and are now requiring DME to post a bond to the state as well.

In fact, the State of Alabama has just passed a law that will require all DME providers to obtain a $50,000 AL DME Surety Bond in addition to the federal bond. Any DME provider based out of Alabama or who does business within the state of Alabama must have their bond in place by October 1, 2010.

The Surety Group Agency, LLC has a special program in place for the $50,000 AL DME Surety Bond. AL DME providers can get their bonds at deeply discounted rates in as little as 24 hours.

So the next time you are sleep deprived and thinking you might like a wheelchair to take you across the United States Forest Gump style, you won’t have to worry that it won’t live up to the hype…well maybe you do, but at least you’ll know they can’t take your money and run.