July Insurance Assurance Newsletter

"Bonded," is a term commonly thrown about when speaking of contractors. My wife used it the other day when talking about the painters I hired to paint our home. What's a surety bond?

First, a surety bond is not insurance.

Insurance provides protection to the policy holder. That protection can be against loss of property or a loss of assets due to liability from a negligent act. The risk of loss is transferred from the insurance buyer to the insurance company. There are two parties to the insurance transaction - insurance buyer and insurance company.

A surety bond is a financial guarantee involving three parties. The surety is bound with the person bonded (AKA the principal) to a third party known as the obligee.

The idea is simple: If the principal fails in some capacity, the obligee is guaranteed payment by the surety.

After payment by the surety to the obligee, the surety goes to the principal for repayment.

A construction bond is a good example. The owner of a property hires a builder to construct a building. The builder agrees to certain performance standards (time, cost, etc.). If the job is not completed, the property owner would be in trouble - he would have to hire another contractor, paying for the job twice.

A surety bond guarantees completion. If the contractor fails, the surety pays the obligee, who can use the money to complete the job.

The surety can then go to the contractor (the principal) for repayment.

In the insurance transaction, the insured is not required to repay the insurer after a loss. A surety bonding company expects (and is entitled to) repayment.

The principal is often required to post cash or property equal to the amount of the bond - so that repayment can be guaranteed. No such financial backup is required in an insurance transaction as risk is transferred from the insured to the insurance company.

See my latest video on my insurance coverage review service - http://www.scottsimmonds.com/videos/insurance-review

Employee Theft

I harp on this over and over. If you have employees, you have a risk that they will steal from you. Employee dishonesty insurance is not that expensive. Insurance of $100,000 of coverage is the absolute minimum that any employer should carry.

Then there are risk management steps... The employee who signs checks (or who has access to the check machine) should not be reconciling the bank accounts. All checks should be marked, "For Deposit Only," as soon as they are received. Everyone who handles money or merchandise should know that you guard the bank accounts and inventory. They should know that they will get caught. All employees should be subject to background checks at any time. All functions should be randomly audited. At uncertain intervals, pull a cashier from the line and count their drawer. Have your accountant call your bookkeeper and review the last 3 months of bank statements and cancelled checks. Randomly review your account payable list for dummy companies.

How I Help My Clients

I fix broken insurance. Uncertain coverage and painful premiums. Consulting on, but never selling, insurance.

How can I help you?

--Are you unsure of the coverage you have?

--Are you unsure about your premiums?

--Are your policies coming up for renewal and you want to investigate the marketplace?

--Are you unsure of the abilities and work of your insurance agent?

I can help. Call or email me now.

Insurance Agents

I occasionally work with insurance agents in the review of commercial accounts. You provide me with a copy of the current policies. We talk on the phone about the exposures and issues presented by the insured. I then compile a list of coverage and risk management considerations. We discuss that list in a phone conversation. You then have 3 weeks of unlimited email followup with me on the issues raised to further the value you receive from our work together.

You get:

-A second opinion of the work you have done.

-An unbiased extra set of eyes making coverage suggestions.

-The opinion of a long-time insurance expert with a broad range of experience.

Call or email me to discuss what you need and what you want.

Your comments and suggestions are always welcome.

Scott Simmonds, CPCU, ARM, CMC

Consulting On, But Never Selling, Insurance

Scott@ScottSimmonds.com

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