Surety Bond Assistance Fuels Growth
Federal and state laws mandate that a certain portion of most public works projects be given to small, minority-owned or female-owned contractors. There is little argument that such rules have a great benefit, both in supporting bootstrap businesses, and also in bringing increased talent and competition to contract bidding.
Federal and local laws also mandate that contractors post surety bonds, often to the full value of the contract. The intention is to protect taxpayer dollars and public infrastructure against shoddy work. Often, the two mandates conflict with each other, because even healthy small firms have cash flow constrictions that make posting a bond prohibitive.
While legislative solutions are sought, the interim solution is bond assistance, or subsidy. A few local brokerages around the country, notably one on each coast, have specialized in this field. Most recently, the San Francisco regional Bay Area Rapid Transit (BART) retained Merriwether & Williams, a pioneer in this niche market, to assist in a new round of contracts and bonding.
A completely separate firm, Surety Bond Associates of Bala Cynwyd, Pa., is active on the East Coast, and has been working with the Philadelphia Industrial Development Corp. for more than a year on an emerging-business capital assistance program.
“We are making final adjustments to the program, and hope to launch it in the second quarter,” said Ellen Neylan, president of Surety Bond Associates.
The national brokerages are not active in the business because it involves a lot of time and effort for a relatively modest return. The big firms laud the efforts, and are content to leave the business to the dedicated regional brokers.
“The bonding requirement is a huge hurdle for small and minority businesses,” said James E. Bridgeman, department manager of insurance for BART. He said that while the heavy burden on bidders’ cash flow and capital is the biggest challenge for them, there are others. “There is a formal bonding statement, accounting standards, and other requirements,” he said. Government entities and large contractors have the personnel and expertise to handle those on their own, but small businesses do not.
Bridgeman added that in meeting the inclusion goals of the contractor distribution laws, BART and other authorities also gain community involvement in local and regional public works. “Merriwether & Williams have held roundtables where prime contractors and subcontractors can sit down, get to know each other and the projects.”
“In these programs, our default is 0.2 percent, which is one-hundredth of the surety industry average of 20 percent.”
– Ingrid Merriwether, president and CEO, Merriwether & Williams
Question of Default
One major concern, especially with a bond assistance or subsidy program, could be default. But he noted the default percentage for contractors in such programs is quite small. “There is a real engagement by the brokerage, a real passion for this underwriting and assistance. They try to make default very difficult. Beyond underwriting guidance, they provide third-party fund administration and other support as part of their process, even beyond our contractor supervision,” said Bridgeman.
The BART commission comes 17 years after the first effort in bond assistance by Merriwether & Williams, said President and CEO Ingrid Merriwether. “We were handling OCIP for the San Francisco Airport Authority [SFO] when they asked us to help them with a $3 billion capital expansion project. They were having trouble meeting their Miller Act obligations. That is the federal law requiring a portion of the work be done by small, female- and minority-owned contractors. California and most states have similar laws.”
She said that SFO realized it would have to approach the problem in a new way, because this was a systemic challenge. The authority was willing to provide bonding subsidies to help otherwise capable contractors to qualify, but the process was complex. “Bonding is often an artificial barrier,” said Merriwether. “What is commonly called a subsidy or assistance is actually an investment. There are direct and quantifiable cost savings from having more bidders on a job, especially smaller contactors with less overhead.”
There is a symmetry to the concept. The idea of the bond is that the contractor puts capital at risk but once the job is done, that capital is returned and the contract paid. Similarly, in the surety assistance, the authority provides a subsidy, and gets it back when the bond is returned. The net gain is the lower cost of the project.
“We never arrange for more than 40 percent assistance,” said Merriwether, “that means the contractor is still responsible for 60 percent. The surety is enduring.” For the Miller Act, the federal threshold is $100,000, so that covers just about any public work. “After the SFO project,” she said, “the mayor of San Francisco realized bonding was a major issue throughout the city and county, and within two years there was a citywide bond assistance program.”
The BART commission represents the eighth such project for M&W in the past 17 years. According to Merriwether, “in that time, we have enabled $699.3 million in transactions, of which $207 million have been successful bidders.” The more important ratio is the default rate. “In these programs, our default is 0.2 percent which is one-hundredth of the surety industry average of 20 percent. That is testimonial proof that bonding is an artificial barrier,” she said.
Another client of M&W is the City of Los Angeles, specifically several of its “proprietary” or autonomous departments. Curtis Kelley is senior risk manager for the city administrator’s office. “The mayor’s office received numerous calls regarding the difficulties that small contractors were having securing surety. I did some research and learned about the program that the City and County of San Francisco had established,” he said. “I called Ingrid and spoke at length with her as well as officials in San Francisco. We decided to establish a similar program here.”
LA started its program under the auspices of the sewer construction and maintenance authority, simply as a good fit with municipal process. Eventually the program grew to include transit and transportation, airports and ports, and central city government.
“For just the City of LA, we have assisted on $156 million in surety or contract value, of which $62 million in contracts were awarded. And we have never had a default.”
– Curtis Kelley, senior risk manager, Los Angeles city administrator’s office
“Merriwether & Williams have great contacts among prime and subcontractors,” said Kelley. “They go through their own underwriting process with the potential bidders on a contract. They determine which surety would be the best fit, then they go to the market with our guarantee. That is the smaller of either 40 percent of the value of the contract, or $250,000.”
Kelley stressed that the bonding underwriters still go through their own underwriting as they would if the contractors had come to them separately. The double underwriting seems to work: “For just the City of LA, we have assisted on $156 million in surety or contract value, of which $62 million in contracts were awarded. And we have never had a default. The savings came to $3 million. This approach has a real payback.”
Kelley expects the program to expand. “We have used the program for a new terminal at LAX, for wastewater projects, but the ports are probably going to be our biggest expansion in the program,” he said. “This is not just piddly little contracts; they have a huge impact for the city and for the people of LA.”
Merriwether also speaks in terms of “the double bottom line,” doing well by doing good. “We are a small, woman-owned firm, so this is our cohort. We can relate,” she said. “This is important work, and as far as I know we are the only firm in the State of California engaged in it. In the past few requests-for-proposal, we were told that we were the only firm to respond.”
Government officials agreed. “The biggest challenge in our latest program was not getting approvals, it was the lack of competition for the contract,” said BART’s Bridgeman. “We have worked with Merriwether & Williams before as operations broker and also as a team member on construction projects.”
Bridgeman added that the hope of the brokers and of the city is that some of the repeat contractors taking advantage of the bond assistance will be able to build a track record and grow to the point where they no longer need the program.
M&W has several offices around California, and there is plenty of business. Said Merriwether, “We have a big back yard.” She is hopeful about legislative solutions, and M&W has other lines of work, but she expects to be at this for many more years.
“There are constantly efforts around the country to change bonding requirements because this is a real problem for governments at all levels,” said Merriwether. “The availability, or lack, of surety credit has a very big impact on public works everywhere. Surety bonds don’t exist in an abstract public-policy realm. They affect city and county budgets, local and regional economic development and infrastructure.”
Making the Grade
Taking the time to match a tough job with a worker who can actually do it reduces the potential for costly workplace injuries, employers are now finding.
That concept is leading more employers to study their essential job functions and test the ability of job candidates, particularly when a job requires a new hire to perform functions known to cause injuries.
Increased nationwide hiring, the rising cost of treating workplace injuries and a less physically fit job applicant pool are driving more employers to employ the practice known as post-offer employment testing.
Post-offer employment testing, or POET, involves simulating the lifting, pushing, pulling and other physical activities that make up a job’s essential functions. Employers are increasingly making employment offers conditional upon a job applicant’s physical ability to perform those activities.
And in another recent trend, employers are expanding the strategy to help determine when to return an established employee to their duties following a workplace injury or a non-occupational disability leave.
“Pre-work screens are not a good strategy if your injuries are coming three years into employment.”
–Drew Bossen, founder, Atlas Ergonomics
At Cooper Standard, the Novi, Mich.-based automobile parts manufacturer, for example, workers desiring a strenuous job first participate in “simulated work.” That helps determine whether they are physically capable of performing the real job, said Patricia Hostine, the company’s global manager of workers’ compensation.
A job requiring continual force to press rubber hose into a mold that forms radiator hoses is desirable because it is one of the better paying tasks the auto parts manufacturer offers, Hostine added.
But it’s also one of the company’s most physically demanding roles.
“It’s very hard work,” Hostine said. “That is where a lot of our injuries are found.”
After performing the simulated work, more applicants decide against taking the job than the company disqualifies. That’s because the testing showed them they couldn’t do the job anyway.
Cooper Standard also requires a functional evaluation, conducted by physical therapists, for any worker who has been away from work either because of a workplace injury or a non-occupational disability.
That requires employees who normally form radiator hoses to show that they are once again physically capable of performing the work after returning from an absence.
Employers that have benefited from conducting POET evaluations for newly hired employees are increasingly adopting a similar worker evaluation as part of their return-to-work programs, several experts said.
“Historically, these [physical evaluations] have been used at the point of offer, at the point of employment,” said Drew Bossen, a physical therapist and founder of Atlas Ergonomics. “But in the last 12 months, we have clients formulating methodologies to use them for return to work as well.”
Data from an initial POET exam can also provide a measured baseline of an employee’s abilities that can be reviewed post injury to help determine when the worker has regained their ability to return to their original job, or whether they should take up other duties.
Using data that way can reduce return-to-work durations by providing support for a doctor’s determination to release their patient.
Most employers using a POET system, however, still use it only to test newly hired workers.
Evaluating whether potential new hires have the physical ability to perform certain tasks can substantially reduce a company’s injury rate because newer workers typically account for a greater number of injuries than their more-experienced counterparts, POET advocates said.
Data compiled by the National Council on Compensation Insurance Inc. showed that workers on the job less than a year in 2007 accounted for nearly 34 percent of injuries although they made up only 23 percent of the labor force.
“Pre-work screens are not a good strategy if your injuries are coming three years into employment,” Bossen said.
Now, as the U.S. Labor Department reports increased hiring across the country, vendors that provide physical ability testing programs said they are seeing increased demand, which had dropped off during the recession.
“We have seen a big uptick in companies interested in doing this across all industries,” including transportation, mining and health care, said Connie Vaughn-Miller, vice president of business development for BTE Technologies.
The testing may be more beneficial for the most strenuous types of work.
Hostine at Cooper Standard said, for example, that she does not see a cost/benefit advantage for testing workers engaged in light production jobs.
Most employers adopting a POET strategy do so for certain positions and many start with a pilot program, experts said. It’s best to decide which job categories to include in a pilot program by reviewing the company’s claims history to pinpoint where injury frequency and severity are problems. Or, they recommend starting with the company’s most physically demanding jobs, then add others if the pilot results warrant doing so.
“We can’t be a better place to work if we’re hiring people that are not able to perform the job. That’s bad for the company and the associate.”
–Libby Christman, vice president of risk management, Ahold USA.
Making Work Safer
“One of our company promises is to be a better place to work,” said Libby Christman, vice president of risk management at Ahold USA.
“We can’t be a better place to work if we’re hiring people that are not able to perform the job. That’s bad for the company and the associate.”
Ahold is a retailer with about 120,000 employees operating stores under the names of Stop & Shop, Giant Food Stores, Martin’s Food Markets, and Peapod, an online grocery ordering unit.
Late last year, Ahold launched a pilot program for Peapod delivery drivers and for certain strenuous jobs in two warehouses, Christman said. The warehouse jobs require pushing, pulling, bending and lifting.
Since September, Christman has found that about 25 percent of job applicants could not pass its physical demands test. Screening for an employee capable of doing the job, though, not only reduces injuries, but improves productivity.
“We know that obtaining an accurate assessment of an applicant’s physical abilities can help us place him or her in a suitable job, potentially eliminate injuries and ensure efficiency and performance on the job,” Christman said.
Stepped-up hiring is not the only factor driving employer demand for POET services, observers said.
Employers — continually pushing for more sophisticated safety measures in the face of an aging, more obese, and less physically fit U.S. workforce — are also driving the demand, BTE Technologies’ Vaughn-Miller said.
The Discrimination Question
Employers cannot discriminate when hiring, but they can legally ask a worker to demonstrate that they can meet the physical demands of a job’s essential functions, experts said.
That requires careful analysis, however, to clearly understand a job’s essential functions, so the designed test measures just those functions and does not go beyond evaluating a worker’s ability to perform those specific tasks.
Employers have run afoul of the Equal Employment Opportunity Commission when implementing POET programs that evaluated for abilities beyond those required by the job.
If employees must lift 75 pounds only once a year, and can use a mechanical lift assist to help them when they do so, then testing to see whether a worker can lift 75 pounds is not a fair test, advised Colleen M. Britz, managing director and ergonomics practice leader for Marsh Risk Consulting.
Employers may also face discrimination complaints if they do not require a POET evaluation of everyone seeking a specific job, experts warned.
The tests themselves, however, vary substantially, depending on the vendor or employer providing them.
Some resemble gym equipment with electronic systems for measuring a worker’s strength and agility. Those results can then be compared to computerized measurements of a task. Other tests may be as simple as requiring a worker to lift bags of sand.
“I do consider it a best practice to have a well-designed post-offer employment test that truly is measuring an employee’s capacity to meet physical demands,” Britz said. “It’s a matter, from my perspective, of whether some of the methodologies are truly testing that.”
The wide variation in testing methodology has hampered the collection of data on POET’s impact on overall employee injury rates across industries or multiple employers, experts said.
But individual employers have experienced success, Britz said.
“I don’t know of any company that has stopped doing POET after starting — because they are seeing a positive return on investment,” she added.
A physical abilities test helped Prince William County in Virginia mitigate a double loss driven by candidates seeking to become firefighters.
The county was losing tens of thousands of dollars on hiring and training costs each time a job candidate washed out of a 26-week training course simply because they could not perform the physical challenges firefighters face in the line of duty, said Tim Keen, assistant chief for the county’s Department of Fire and Rescue.
Because firefighting is a tough job, a lack of physical capability also contributed to recruit training injuries.
“Not only is it a hard job, but when you add all the gear they wear, their air packs, as well as the functional movements that it takes to accomplish certain tasks, it puts strains on the body,” Keen said.
Those strains became costly workers’ compensation claims when recruits could not return to an existing job as would occur after an established firefighter suffered an injury, added Lori Gray, the county’s risk management division chief. That forced the county to continue paying workers’ compensation benefits to recruits who did not have a job to return to.
So in 2003, the risk management and fire department helped the county establish its own facility where applicants wanting to become firefighters must first participate in a standardized Candidate Physical Ability Test.
The International Association of Fire Fighters and the International Association of Fire Chiefs developed the CPAT test the county licenses.
The test used by fire departments across the country requires candidates to climb stairs while wearing weight vests, drag hoses and simulated bodies, simulate forcing their way into a building, and conduct other physical feats within a certain time period.
“There are a variety of firefighting tasks they must go through in this course,” Keen said. The course tests their aerobic capabilities, their flexibility, core strength, and upper and lower body fitness.
The test’s standardization ensures it is true to the firefighter’s actual work role and that is legal and fair to all candidates, he added.
“Regardless of age or gender the course is the same for everybody,” he said.
“The test is appropriate so you are not losing people due to injuries, especially early in their careers, Keen said. “It’s the right thing to do, making sure they are physically capable of doing the job.”
The screenings have resulted in fewer recruits lost due to a lack of physical ability.
“We have also seen a huge reduction in the number of injuries that were occurring because recruits are coming in more physically fit to do the job,” Keen said.
POET advocates said the screening results have other applications as well.
In some cases, post-offer physical test results provide employers with a defense in permanent disability cases, Britz said.
In states allowing employers to apportion responsibility for permanent disability claims, for example, the baseline results from the initial post-offer exam can limit an employer’s liability by showing that a worker lost only a certain portion of their functional ability during their employment tenure.
Britz added that she expects to see more large, sophisticated employers counter rising claims severity driven by factors such as aging and obesity by integrating their ergonomics, wellness intervention and physical ability testing programs.
For example, an employee returning from a leave might undergo a fitness for duty exam to evaluate their ability to perform the job without injuring themselves.
Simultaneously, the employee could be referred to the employer’s wellness program to address health-related issues such as high body mass index or to learn exercises that would strengthen certain body parts, such as their shoulders, if frequently used in their daily work routines.
“That is the evolution of post-offer employment testing into fitness-for-duty programs,” she said.
“Not so they lose the job, but to recognize that this person needs to work on shoulder strength. So we create an opportunity to increase shoulder strength. I think that is going to be the wave of the future.”
A Modern Claims Philosophy: Proactive and Integrated
According to some experts, “The best claim is the one that never happens.”
But is that even remotely realistic?
Experienced risk professionals know that in the real world, claims and losses are inevitable. After all, it’s called Risk Management, not Risk Avoidance.
And while no one likes losses, there are rich lessons to be gleaned from the claims management process. Through careful tracking and analysis of losses, risk professionals spot gaps in their risk control programs and identify new or emerging risks.
Aspen Insurance embraces this philosophy by viewing the data and expertise of their claims operation as a valuable asset. Unlike more traditional carriers, Aspen Insurance integrates their claims professionals into all of their client work – from the initial risk assessment and underwriting process through ongoing risk management consulting and loss control.
This proactive and integrated approach results in meaningful reductions to the frequency and severity of client losses. But when the inevitable does happen, Aspen Insurance claims professionals utilize their established understanding of client risks and operations to produce some truly amazing solutions.
“I worked at several of the most well known and respected insurance companies in my many years as a claims executive. But few of them utilize an approach that is as innovative as Aspen Insurance,” said Stephen Perrella, senior vice president, casualty claims, at Aspen Insurance.
“We do a lot of trending and data analysis to provide as much information as possible to our clients. Our analytics can help clients improve upon their own risk management procedures.”
– Stephen Perrella, Senior Vice President, Casualty Claims, Aspen Insurance
Utilizing claims expertise to improve underwriting
Acting as adviser and advocate, Aspen integrates the entire process under a coverage coordinator who ensures that the underwriters, claims and insureds agree on consistent, clear definitions and protocols. With claims professionals involved in the initial account review and the development of form language, Aspen’s underwriters have a full sense of risks so they can provide more specific and meaningful coverage, and identify risks and exclusions that the underwriter might not consider during a routine underwriting process.
“Most insurers don’t ever want to talk about claims and underwriting in the same sentence,” said Perrella. “That archaic view can potentially hurt the insurance company as well as their business partners.”
Aspen Insurance considered a company working on a large bridge refurbishment project on the West Coast as a potential insured, posing the array of generally anticipated construction-related risks. During underwriting, its claims managers discovered there was a large oil storage facility underneath the bridge. If a worker didn’t properly tether his or her tools, or a piece of steel fell onto a tank and fractured it, the consequences would be severe. Shutting down a widely used waterway channel for an oil cleanup would be devastating. The business interruption claims alone would be astronomical.
“We narrowed the opportunity for possible claims that the underwriter was unaware existed at the outset,” said Perrella.
Risk management improved
Claims professionals help Aspen Insurance’s clients with their risk management programs. When data analysis reveals high numbers of claims in a particular area, Aspen readily shares that information with the client. The Aspen team then works with the client to determine if there are better ways to handle certain processes.
“We do a lot of trending and data analysis to provide as much information as possible to our clients,” said Perrella. “Our analytics can help clients improve upon their own risk management procedures.”
For a large restaurant-and-entertainment group with locations in New York and Las Vegas, Aspen’s consultative approach has been critical. After meeting with risk managers and using analytics to study trends in the client’s portfolio, Aspen learned that the sheer size and volume of customers at each location led to disparate profiles of patron injuries.
Specifically, the organization had a high number of glass-related incidents across its multiple venues. So Aspen’s claims and underwriting professionals helped the organization implement new reporting protocols and risk-prevention strategies that led to a significant drop in glass-related claims over the following two years. Where one location would experience a disproportionate level of security assault or slip & fall claims, the possible genesis for those claims was discussed with the insured and corrective steps explored in response. Aspen’s proactive management of the account and working relationship with its principals led the organization to make changes that not only lowered the company’s exposures, but also kept patrons safer.
World-class claims management
Despite expert planning and careful prevention, losses and claims are inevitable. With Aspen’s claims department involved from the earliest stages of risk assessment, the department has developed world-class claims-processing capability.
“When a claim does arrive, everyone knows exactly how to operate,” said Perrella. “By understanding the perspectives of both the underwriters and the actuaries, our claims folks have grown to be better business people.
“We have dramatically reduced the potential for any problematic communication breakdown between our claims team, broker and the client,” said Perrella.
A fire ripped through an office building rendering it unusable by its seven tenants. An investigation revealed that an employee of the client intentionally set the fire. The client had not purchased business interruption insurance, and instead only had coverage for the physical damage to the building.
The Aspen claims team researched a way to assist the client in filing a third-party claim through secondary insurance that covered the business interruption portion of the loss. The attention, knowledge and creativity of the claims team saved the client from possible insurmountable losses.
Modernize your carrier relationship
Aspen Insurance’s claims philosophy is a great example of how this carrier’s innovative perspective is redefining the underwriter-client relationship. Learn more about how Aspen Insurance can benefit your risk management program at http://www.aspen.co/insurance/.
Stephen Perrella, Senior Vice President, Casualty, can be reached at Stephen.email@example.com.