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WORKSHOP T5
Tuesday, November 10
10:30 a.m.–noon
SURETY MARKET TRENDS AND DEVELOPMENTS
Presented by
Stan Halliday
Chief Underwriting Officer,
Construction Services,
National Accounts
Travelers Bond & Specialty
Insurance
Susan Hecker
Area Executive Vice President
and National Director—
Contract Surety
Arthur J. Gallagher & Co.
Tim Mikolajewski
Executive Vice President,
Global Specialty
President, Liberty Mutual
Surety
A panel of surety executives representing three of the largest underwriters of
construction bonds will address hot topics in surety, including public private
partnerships (P3s), contractor margins, risk-shifting trends within construction
contracts, subcontractor defaults, skilled labor shortages, demand for talent, and
overall market conditions. Attendees will leave with a better understanding of how
sureties evaluate contractor risks, as well as a better perspective on issues affecting the
industry.
To print on both sides of the page, set your printer for duplex printing.
Rick Ciullo
Chief Operating
Officer
Chubb Surety
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Rick Ciullo
Chief Operating Officer
Chubb Surety
Mr. Ciullo, who was named chief operating officer of Chubb Surety in 2008, has 32 years of
experi-ence in the insurance industry. He started as a Chubb surety trainee in 1981 and spent 10 years as
a surety underwriter and manager in various Chubb offices. In 1991, he was appointed marketing
manager for the Chubb Group of Insurance Companies' commercial and personal lines business
and spent 6 years as branch manager for Chubb’s Louisville and Kansas City offices. Mr. Ciullo was
appointed chief marketing officer for Chubb Surety in 2005 and also assumed responsibilities as
surety field operations officer responsible for the performance of North American branches, as
well as home office functions of portfolio, pricing, and technology development.
Mr. Ciullo has a bachelor of arts degree in economics and history from Wesleyan University. He is a
director of the Surety and Fidelity Association of America and continues his executive-level
educa-tion today through Vistage.
Stan Halliday
Chief Underwriting Officer, Construction Services, National
Accounts
Travelers Bond & Specialty Insurance
Mr. Halliday began his bond career with Aetna Casualty & Surety, where he served in various
capacities with increased responsibility within Aetna’s Bond Department, including underwriting
director for Construction Services in the Minneapolis Hub and underwriting director and regional
underwriting officer in the Hartford-based Construction Services National Account Unit. Mr.
Halli-day has significant experience underwriting large complex contractors and projects, including
underwriting most of the major infrastructure and building projects in North America over the
last 10 years. He is currently the chief underwriting officer for Travelers Bond & Specialty
Insur-ance, Construction Services, National Accounts, in Hartford, Connecticut.
Mr. Halliday graduated summa cum laude from Old Dominion University, Norfolk, Virginia, in
1987.
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Susan Hecker, CPCU
Area Executive Vice President and National Director—
Contract Surety
Arthur J. Gallagher & Co.
In addition to her account executive and management roles within Arthur J. Gallagher & Co., Ms.
Hecker is responsible for facilitating surety nationally, including mergers and acquisitions, and
maintaining national surety relationships.
Prior to joining Gallagher, where she is area executive vice president and national
director—Con-tract Surety for its Construction Practice and is based in San Francisco, Ms. Hecker spent 20 years
with a top 10 surety operation, departing as the Surety Center manager for the company’s regional
flagship surety operation. She attained her Chartered Property Casualty Underwriter (CPCU)
des-ignation in 1989. She was a charter member of the Construction Financial Management
Associa-tion (CFMA) and served as president of the Surety AssociaAssocia-tion of Tennessee. She is currently a
member of the Beavers, is a Producer Advisory Board member for Liberty Mutual Surety, and is
president of the National Association of Surety Bond Producers (NASBP). Ms. Hecker has written
several articles and is a frequent speaker and panelist on construction surety topics.
Timothy A. Mikolajewski
Executive Vice President, Global Specialty
President, Liberty Mutual Surety
As executive vice president, Global Specialty, and president, Liberty Mutual Surety, Mr.
Mikolajew-ski oversees all Liberty Mutual Surety US operations and also has responsibility over global surety
business.
Mr. Mikolajewski joined Safeco Surety (now Liberty Mutual Surety) in 1984 as a surety
represen-tative. Over the next 2 decades, he advanced through the company’s contract surety operations
and was named senior vice president in 2006. In 2008, Mr. Mikolajewski assumed the role of
exec-utive vice president, Agency Markets, and president, Liberty Mutual Surety.
Mr. Mikolajewski currently represents Liberty Mutual Surety as a board member of the Surety and
Fidelity Association of America and is on the Policy Board of the Surety Information Office. He is a
past chair of the Surety Association of America (SAA) Contract Bonds Advisory Committee and has
been actively involved in the Associated General Contractors of America (AGC) Surety Bond
Com-mittee.
Mr. Mikolajewski holds a BA in finance and marketing from the University of Cincinnati and an
MBA from Xavier University.
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Panelists:
Rick Ciullo
Chief Operating Officer Chubb Surety
Stan Halliday
Chief Underwriting Officer Travelers Bond & Specialty Insurance
Timothy Mikolajewski
President Liberty Mutual Surety
Moderator:
Susan Hecker
National Director, Contract Surety Arthur J. Gallagher & Co.
T5. Surety Market Trends
and Developments
#IRMI2015
Making Sense of the North America
Surety Market
November 10, 2015
Rick Ciullo
Chief Operating Officer
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But What About Risk?
Polling Questions….
—
Revenue Backlog
—
Margin Backlog
—
Contractual Risk
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Today’s surety market
Plenty of capacity
• Per project & in aggregate
Weakened underwriting
• Light security
• Compromise on T&C’s
Many choices
• New players
• Shared sureties
Low ROE
• Thinning margins
Increased embedded risk
• Rising construction volume with still
thin margins
• Tougher contractual T&C’s
Growth pressure
• Due to P&C slump
Buyer’s perspective
Seller’s perspective
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Action items for you and me
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#IRMI2015
P3 Performance Security Alternatives
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United States Contracting
Environment
• Traditional North American contractors disadvantaged by LOC requirements
• Agree that the risk of project delay is material and should be mitigated.
• The standard European method of securing delay damages with LOCs places many North
American Contractors at a competitive disadvantage.
• North American Contractors’ capacity to execute P3s currently exceeds their capacity to
provide LOCs.
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Observations
Alternative methods of securing delay and other damages should be considered, taking into account
the following:
1.
The timing of when damages are incurred and the need for funds
2.
Unpaid Contract balances = additional cash
3.
Value of excess cash >= value of LOC
4.
Other forms of performance security and services from highly rated issuers
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Sample P3 Bond Form
• Accelerated claims handling and resolution with time certainty
• Bond specifically covers liquidated damages
• Claims contact information
• Expedited Dispute Resolution by JAMS if Surety disputes its liability
• Surety must abide by JAMS Decision
• Issued by highly rated carrier
• Available with limits up to 100% of contract value, along with a 100%
payment bond
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P3 Bond Form*
THE CONDITION OF THE FOREGOING OBLIGATION IS SUCH THAT:
1. If the Principal shall in all things stand to and abide by and well and truly keep, perform and complete all covenants, conditions, agreements, and obligations under the Agreement, including any and all amendments, supplements, and alterations made to the Agreement as therein provided, on the Principal's part to be kept and performed at the time and in the manner therein specified, if the Principal shall indemnify and save harmless the Obligee, its directors, officers, employees and agents, as therein stipulated, and if the Principal shall reimburse upon demand of the Obligee any sums paid the Principal which exceed the final payment determined to be due upon completion of the Project, then these presents shall become null and void;otherwise they shall remain in full force and effect unconditionally, irrevocably and shall be non-cancellable; provided, however, that this Bond shall be released one year after Final Acceptance of the Project by the Obligee.
2. The obligations covered by this Bond specifically includeliability for liquidated damages and warranties as specified in the Agreement,but in no event shall the Surety’s aggregate liability exceed the penal sum of this Bond.
*Source: Expedited Disputed Resolution Bond—P3 Form (for this and next nine slides)
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P3 Bond Form – Para.4
(Waiver of Defenses)
4. The Surety agrees thatno fraud practiced by any person other than the Obligee(s)seeking to recover on this Bond, as well as no change, extension of time, alterations, additions, omissions or other modifications of the terms of the following shall in any way affect Surety’s obligations on this Bond, and it does hereby waive notice of such changes, extensions of time, alterations, additions, omissions or other modifications:
a) the Agreement, or
b) in the Work to be performed with respect to the Project, or
c) in the specifications or plans, or any change or modification of any terms of payment or extension of time for any payment pertaining or relating to the Agreement, or
d) any conditions precedent or subsequent in this Bond attempting to limit the right of recovery of Obligee(s) otherwise entitled to recover under this Bond.
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P3 Bond Form – Para.6
(Surety’s 15 Day Period)
6. Whenever the Principal shall be, and is declared by Obligee to be in default under the Agreement, there being no Project Company Event of Default under the Agreement,the Surety shall within fifteen (15) days of receipt of a letter from Obligeein the form set forth in Schedule A:a) remedy such default, or
b) complete the design and construction work covered by this Bond in accordance with the terms and conditions of the Agreement then in effect, or
c) select a contractor or contractors to complete all design and construction work covered by this Bond in accordance with the terms and conditions of the Agreement then in effect, using a contractor or contractors approved by the Obligee as required by the Agreement (provided, that the Surety may not select the Principal or any affiliate of the Principal to complete the Work for and on behalf of the Surety without Obligee's express written consent), arrange for a contract meeting the requirements of the Agreement between such contractor or contractors and Obligee, and make available as design and construction work progresses (even though there should be a default or a succession of defaults under such contract or contracts of completion arranged under this paragraph) sufficient funds to pay the cost of completion less the unpaid balance of the contract price; but not exceeding, including other costs and damages for which Surety is liable hereunder, the bonded sum; or
d) waive the Surety’s right to perform and complete, arrange for completion, or obtain a new contractor and with reasonable promptness under the circumstances after investigation, determine the amount for which it may be liable to the Obligee and, promptly make payment to the Obligee.
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P3 Bond Form – Para.7
(Surety Disputes Liability)
7. In the event that the Surety disputes its liability pursuant to this Bond,which includes any allegations of fraud, such dispute shall be determined in the first instance in accordance with the dispute resolution process (“DRP”) attached hereto as Schedule B.A Decision, as defined in Schedule B, shall be rendered within thirty (30) days of the Adjudication Commencement Date, or as otherwise extended pursuant to the DRP. The Decision shall be binding on the Surety, the Principal and the Obligee but subject to each party’s right to a de novo appeal of the Decision to a court of competent jurisdiction.Unless or until such time as a court of competent jurisdiction issues an order or ruling that conflicts with the Decision, either in whole or in part, all parties shall perform in accordance with the Decision and Paragraph 6 of this Bond.In the event the Surety fails to make an election within the fifteen (15) days set forth in Paragraph 6 of this Bond, the claim shall be deemed to be in dispute for the purposes of this paragraph.
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P3 Bond Form – Para.8
(Claims Contact Info)
8. [Use in case of multiple or co-sureties] The Co-Sureties agree to empower a single representative with authority to act on behalf of all of the Co-Sureties with respect to this Bond, so that the Obligee(s) will have no obligation to deal with multiple sureties hereunder.
All correspondence from the Obligee(s) to the Co-Sureties and all claims under this Bond shall be sent to such designated representative. The designated representative may be changed only by delivery of written notice (by personal delivery or by certified mail, return receipt requested) to the Obligee designating a single new representative, signed by all of the Co-Sureties. The initial representative shall be
, whose contact information is __ .
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P3 Bond Form – Schedule A
(Demand Letter)
Dear Sir:
Pursuant to the Bond the Obligee hereby certifies that:
1. the Principal is and continues to be in default of the Principal’s obligations under the Agreement; 2. the Obligee has issued a notice of default to the Principal in accordance with the provisions of the Agreement; and
3. the Obligee has honored and will continue to honor and perform in all material respects its obligations under the Agreement.
We hereby demand that the Surety honor its obligations under the Bond forthwith.
The Obligee acknowledges that if the Surety intends to dispute its liability pursuant to the Bond, then the parties shall proceed immediately with the DRP
set forth in Schedule B. Yours truly,
Obligee
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P3 Bond Form – Sch.B
(JAMS Dispute Resolution)
Given the on default nature of the Bond, the Principal, the Surety and the Obligeeacknowledge that they may not agree whether the Surety is liable to make payment pursuant to the Bond. In order to ensure that such disputes are determined quickly so as to allow for the orderly and timely completion of the Agreement, the Principal, the Surety and the Obligee agree to submit such disputes to the dispute resolution process set out below. Terms not defined herein shall have the meaning ascribed to them in the body of the Bond. The parties acknowledge that any decision rendered in the DRP (an “Award”) will be binding during the completion of the Contract, but subject to appeal de novo by any party at any time to a court of competent jurisdiction.
1. “Dispute” means a disagreement as to the Surety’s liability pursuant to the Bond following the Obligee’s Demand.
2. Disputes arising prior to the date of Substantial Completion of the Contract shall be submitted for binding resolution to adjudication (the “Adjudication”) administered by JAMS – The Resolution Experts! (“JAMS”) in accordance with the procedure set out below.
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P3 Bond Form – Sch.B
(JAMS Dispute Resolution)
3. The Surety or the Obligee shall demand Adjudication by filing an Adjudication statement electronically with JAMS, and serving electronic copies by email upon the Principal and the Obligee, utilizing the electronic forms and filing directions provided by JAMS on its website at
www.jamsadr.com. The Adjudication statement shall set forth in detail the factual and legal issues submitted for Adjudication and shall be sent no later than 10 days following the Obligee’s Demand.
4. Within three (3) business daysafter the Adjudication statement is filed and
served, the parties shall appoint an adjudicator (the “Adjudicator”) who shall be a panelist on the JAMS Global Engineering & Construction Panel (“JAMS GEC Panel”) of dispute adjudicators. JAMS shall appoint an Adjudicator administratively from the JAMS GEC Panel if the Adjudicating Parties fail to appoint an Adjudicator within the three day
period…
5. The Adjudication shall commence on the date that JAMS receives the Adjudication statement and initial deposit of funds, and confirms the appointment of the Adjudicator (the “Adjudication Commencement Date”)…
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P3 Bond Form – Sch.B
(JAMS Dispute Resolution
)
6. Upon commencement of the Adjudication, the Adjudicator is empowered to take the initiative in ascertaining the facts and the law, and to exercise sole discretion in managing the Adjudication process. Among other things, the Adjudicator may require the parties to make additional factual submissions such as sworn witness statements and business documents, may interview important witnesses after notice to the parties and affording opportunity to attend, may request and consider expert reports and may call for memoranda on legal issues. Notwithstanding the foregoing,the Adjudicator must decide the following questions:
a. Is the Principal in default of the Principal’s Obligations?
b. Has the Obligee complied in all material respects with its obligations in good faith pursuant to the Design Build Agreement?
c. Is the Surety liable to perform in accordance with Paragraph 6 of the Bond?
7. The Adjudicator shall issue a written decision (the “Decision”) which shall be binding upon and enforceable by the parties through the completion of the Principal’s Obligations.The Decision shall be issued through JAMS as soon as practicable but in no event later than thirty (30) calendar days of the Adjudication Commencement Date or within any later time agreed upon by the parties. This 30 day period also may be extended by the Adjudicator in its sole discretion for up to 14 days in the event that JAMS has requested any party to make an additional fee and expense deposit and funds have not been deposited as requested or advanced by another party.
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P3 Bond Form – Sch.B
(JAMS Dispute Resolution)
8….The parties shall comply with the Decision, unless and until subsequently vacated or modified, through Substantial Completion of the Design Build Agreement.
9. Upon any settlement by the parties of the dispute prior to issuance of a Decision, the parties shall jointly terminate the Adjudication. Such removal or termination shall not affect the parties’ continuing joint and several obligations for payment to JAMS of unpaid fees and expenses.
10. If the Decision is that the Surety is liable to perform in accordance with Paragraph 6 of the Bond, then notwithstanding the commencement of any appeal de novo of the Decision, the Surety shall perform in accordance with the terms of the Bond until the Principal’s Obligations are completed, but not to exceed the penal sum of the Bond.
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#IRMI2015Performance Security
Comparison
Feature Retainage + 100% P&P Bonds 5-10% LOCCash available on demand Irrevocable and unconditional Funds available for liquidated damages Funds can be used to remedy default Sufficient limits to complete the project Protection for subs and suppliers Political risk mitigation
Sufficient capacity available to support P3 development in the US.
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This presentation is for general informational purposes only. None of it constitutes legal advice. This material does not amend, or otherwise affect, the provisions or coverage of any insurance policy or bond issued by Travelers. It is not a representation that coverage does or does not exist for any particular claim or loss under any such policy or bond. Coverage depends on the facts and circumstances involved in the claim or loss, all applicable policy or bond provisions, and any applicable law. Availability of coverage referenced in this presentation can depend on underwriting qualifications and state regulations.
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Questions?
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#IRMI2015
2015 IRMI Construction Conference
Timothy Mikolajewski President Liberty Mutual Surety
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Competition for Capital is Global
Insurance Capital seeks best returns:
Health – Life – Personal – Commercial – Specialty Insurance returns attractive relative to other risks Waves of Investments
o New Entrants - Competition – Consolidation Capital seeks product lines with best returns Analytics drives efficient deployment of capital Analytics maximizes ROE
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Data Capture & Mining =
Prediction
Development of a “Data Culture”
Building a Data Model
Enter search request
Servers searches millions of options
Captures your “history” and preferences”
Models test output and refines answers
Gives you what you want….
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Evolution of Data in Insurance
“Big Data” driving better returns
Human Underwriting Judgment
Old Model
Computer based Analytics
New Model
Results
Personal Auto Underwriters PhD’s & modelers 10-15 Pt reduction in combined ratios
Commercial Lines Underwriters 75% Underwriters; 25% PhD’s & modelers
7-10 Pt reduction in combined ratios
Specialty Lines Underwriters Underwriters supported by PhD’s & modelers
5-10 Pt reductions in combined ratios
