Letter of Bondability – It Is Not The Prequalification Some Think It IsPosted by Darrel Lamb, CPCU, AFSB
You may refer to them as Good Guy Letters, Sunshine Letters or just a Contractor Letter of Bondability. These letters have been around a long time, and their popularity has seen an uptick in recent years.
What does a letter of bondability do?
This letter provides evidence that the contractor has a surety relationship. It might say how long that relationship has existed; give the financial rating and T-listing of the surety and give general parameters of the limits of what kind of bonding the contractor would be considered for.
What a letter of bondability doesn't do
A letter of bondability does NOT offer any kind of prequalification for a particular job or make any promise that the contractor would be able to get a bond for a particular job.
There's a shift in the wind
For most of the last 30 years I've been in the business, the agent would typically prepare this letter on their own letterhead when requested. In recent years past, however, something has changed. Perhaps it's the agent's enthusiasm and optimistic view of their client’s bondability. These overzealous opinions may have lead some to make representations in the letters that were beyond what the contractor could qualify for. Hence, the owners caught on and have shifted the burden of providing the letter from the agent to the surety by mandating the letter appear on the surety’s letterhead and be signed by a surety company representative. Some owners are even asking that the surety representative attach a power of attorney with their letter.
Subcontractor Default Insurance and it's impact on the letter
Since the creation of Subcontractor Default Insurance (SDI), we have seen a number of general contractors - who use an SDI product - require letters of bondability from all of their subs as part of their sub qualification process. Because the general contractor has an interest in underwriting their subcontractors in the SDI program, a number of new questions have begun to emerge in requests for letters of bondability. In addition to asking who the surety is and the surety rating, and the contractor’s general limits, we have seen requests for additional information to be addressed in our letter, questions such as:
- Provide the contractors surety rates.
- Has the surety had any claims with this contractor?
- Please state the amount of the largest bond you have written for this contractor and when.
- Please state the amount of the last bond you wrote for this contractor and when.
- Please acknowledge that you have read our project RFP and state that this contractor is well suited for this work.
This is just a sample of some of the additional information that owners are wanting. My position is this. If you want evidence that the contractor has a surety relationship, we will provide that in our standard letter. Some of the additional information requested is considered confidential by Old Republic Surety, and we would therefore not share it. Some requests simply fall outside the scope of our intent in providing these letters. If an owner wants to know if a subcontractor is qualified to do specific work, I suggest the owner ask for a bid bond. The job will be underwritten and contractor will be properly prequalified. The bid bond is the proper vehicle to prequalify a contractor.
The letter of bondability is purposely vague and written at the 50,000 foot level to give a high overview of the contractor’s bondability. The letter does not and should not offer any kind of prequalification for a particular job or make any promise that the contractor would get a bond for a particular job. At Old Republic Surety, we strive to serve the needs of our surety clients. Sureties as a whole should not allow themselves to be the underwriting department for a Subcontractor Default Insurance (SDI) product.
Sample Letter of Bondability
Here is a sample of a standard letter of bondability, and a copy you can download:
RE: Sample Contractor Bondability
To: Whom it may concern,
Old Republic Insurance Company (ORIC) and/or its affiliate, Old Republic Surety Company (ORSC), have provided surety credit to Sample Contractor for single projects up to $25,000,000 with an aggregate uncompleted backlog up to $40,000,000. ORIC/ORSC is rated “A” (Excellent) and has a US Treasury Limit exceeding $110 million.
If Sample Contractor is awarded a contract and requests that we provide the necessary performance and payment bonds, we will be prepared to execute the bonds subject to our acceptable review of the contract terms and conditions, bond forms, appropriate contract funding and any other underwriting considerations at the time of request.
Our consideration and issuance of bonds is a matter solely between Sample Contractor and ourselves, and we assume no liability to third parties or to you by the issuance of this letter.
The last two paragraphs are very important. We must clearly state that issuing bonds is subject to acceptable review of contract terms and conditions, bond forms, project funding, and other underwriting considerations. Finally, we must state that consideration for issuing bonds is between the contractor and the surety, and we assume no liability to third parties or to you by issuing this letter.
We welcome the opportunity to write these letters for our clients and continue to use our standard format. For owners who desire a deeper dive and need specific job prequalification, we encourage our agents to use this opportunity to sell the value of our surety product and solicit a bid bond.
Darrel Lamb is a Regional Vice President for Old Republic Surety in charge of Contract surety operations for Washington, Oregon, Montana, Idaho, Hawaii, Alaska, California, Northwest Nevada and Utah. Darrel has 28 years in the surety business.