[Code of Federal Regulations]
[Title 13, Volume 1]
[Revised as of January 1, 2006]
From the U.S. Government Printing Office via GPO Access
[CITE: 13CFR115]
[Page 180-196]
TITLE 13--BUSINESS CREDIT AND ASSISTANCE
CHAPTER I--SMALL BUSINESS ADMINISTRATION
PART 115_SURETY BOND GUARANTEE
Sec.
115.1 Overview of regulations.
115.2 Savings clause.
Subpart A_Provisions for All Surety Bond Guarantees
115.10 Definitions.
115.11 Applying to participate in the Surety Bond Guarantee Program.
115.12 General program policies and provisions.
115.13 Eligibility of Principal.
115.14 Loss of Principal's eligibility for future assistance.
115.15 Underwriting and servicing standards.
115.16 Determination of Surety's Loss.
115.17 Minimization of Surety's Loss.
115.18 Refusal to issue further guarantees; suspension and termination
of PSB status.
115.19 Denial of liability.
115.20 Insolvency of Surety.
115.21 Audits and investigations.
Subpart B_Guarantees Subject to Prior Approval
115.30 Submission of Surety's guarantee application.
115.31 Guarantee percentage.
115.32 Fees and Premiums.
115.33 Surety bonding line.
115.34 Minimization of Surety's Loss.
115.35 Claims for reimbursement of Losses.
115.36 Indemnity settlements and reinstatement of Principal.
Subpart C_Preferred Surety Bond (PSB) Guarantees
115.60 Selection and admission of PSB Sureties.
115.61 Duration of PSB program.
115.62 Prohibition on participation in Prior Approval program.
115.63 Allotment of guarantee authority.
115.64 Timeliness requirement.
115.65 General PSB procedures.
115.66 Fees.
115.67 Changes in Contract or bond amount.
115.68 Guarantee percentage.
115.69 Imminent Breach.
115.70 Claims for reimbursement of Losses.
115.71 Denial of liability.
Authority: 5 U.S.C. app 3; 15 U.S.C. 687b, 687c, 694a, 694b; 694b
note, Pub. L. 106-554, 114 Stat. 2763A-653.
Source: 61 FR 3271, Jan. 31, 1996, unless otherwise noted.
Sec. 115.1 Overview of regulations.
The regulations in this part cover the SBA's Surety Bond Guarantee
Programs under Part B of Title IV of the Small Business Investment Act
of 1958, as amended. Subpart A of this part contains regulations common
to both the program requiring prior SBA approval of each bond guarantee
(the Prior Approval Program) and the program not requiring prior
approval (the PSB Program). Subpart B of this part contains the
regulations applicable only to the Prior Approval Program. Subpart C of
this part contains the regulations applicable only to the PSB Program.
Sec. 115.2 Savings clause.
Transactions affected by this part 115 are governed by the
regulations in effect at the time they occur.
Subpart A_Provisions for All Surety Bond Guarantees
Sec. 115.10 Definitions.
AA/SG means SBA's Associate Administrator for Surety Guarantees.
Affiliate is defined in part 121 of this chapter.
[[Page 181]]
Ancillary Bond means a bond incidental and essential to the
performance of a Contract for which there is a guaranteed Final Bond.
Bid Bond means a bond conditioned upon the bidder on a Contract
entering into the Contract, and furnishing the required Payment and
Performance Bonds. The term does not include a forfeiture bond unless it
is issued for a jurisdiction where statute or settled decisional law
requires forfeiture bonds for public works.
Contract means a written obligation of the Principal requiring the
furnishing of services, supplies, labor, materials, machinery,
equipment, or construction. A Contract must not prohibit a Surety from
performing the Contract upon default of the Principal. A Contract does
not include a permit, subdivision contract, lease, land contract,
evidence of debt, financial guarantee (e.g., a contract requiring any
payment by the Principal to the Obligee), warranty of performance or
efficiency, warranty of fidelity, or release of lien (other than for
claims under a guaranteed bond). It includes a maintenance agreement of
2 years or less which covers defective workmanship or materials only.
With SBA's written approval, it can also include a longer maintenance
agreement covering defective workmanship or materials, or a maintenance
agreement covering something other than defective workmanship or
materials. To qualify for such approval, the agreement must be ancillary
to the Contract for which SBA is guaranteeing a bond, must be required
to be performed by the same Principal, and must be customarily required
in the relevant trade or industry.
Execution means signing by a representative or agent of the Surety
with the authority and power to bind the Surety.
Final Bond means a Performance Bond and/or a Payment Bond.
Imminent Breach means a threat to the successful completion of a
bonded Contract which, unless remedied by the Surety, makes a default
under the bond appear to be inevitable.
Investment Act means the Small Business Investment Act of 1958 (15
U.S.C. 661 et seq.), as amended.
Loss has the meaning set forth in Sec. 115.16.
Obligee means:
(1)(i) In the case of a Bid Bond, the Person requesting bids for the
performance of a Contract; or
(ii) In the case of a Final Bond, the Person who has contracted with
a Principal for the completion of the Contract and to whom the primary
obligation of the Surety runs in the event of a breach by the Principal.
(2) In either case, no Person (other than a Federal department or
agency) may be named co-Obligee or Obligee on a bond or on a rider to
the bond unless that Person is bound by the Contract to the Principal
(or to the Surety, if the Surety has arranged completion of the
Contract) to the same extent as the original Obligee. In no event may
the addition of one or more co-Obligees increase the aggregate liability
of the Surety under the bond.
OSG means SBA's Office of Surety Guarantees.
Payment Bond means a bond which is conditioned upon the payment by
the Principal of money to persons who have a right of action against
such bond, including those who have furnished labor, materials,
equipment and supplies for use in the performance of the Contract. A
Payment Bond can not require the Surety to pay an amount which exceeds
the claimant's actual loss or damage.
Performance Bond means a bond conditioned upon the completion by the
Principal of a Contract in accordance with its terms.
Person means a natural person or a legal entity.
Premium means the amount charged by a Surety to issue bonds. The
Premium is determined by applying an approved rate (see Sec. Sec.
115.32(a) and 115.60(a)(2)) to the bond or contract amount. The Premium
does not include surcharges for extra services, whether or not
considered part of the ``premium'' under local law.
Principal means, in the case of a Bid Bond, the Person bidding for
the award of a Contract. In the case of Final Bonds and Ancillary Bonds,
Principal means the Person primarily liable to complete the Contract, or
to make Contract-related payments to other
[[Page 182]]
persons, and is the Person whose performance or payment is bonded by the
Surety. A Principal may be a prime contractor or a subcontractor.
Prior Approval Agreement means the Surety Bond Guarantee Agreement
(SBA Form 990) entered into between a Prior Approval Surety and SBA
under which SBA agrees to guarantee a specific bond.
Prior Approval Surety means a Surety which must obtain SBA's prior
approval on each guarantee and which has entered into one or more Prior
Approval Agreements with SBA.
PSB Agreement means the Preferred Surety Bond Guarantee Agreement
entered into between a PSB Surety and SBA.
PSB Surety means a Surety that has been admitted to the Preferred
Surety Bond (PSB) Program.
Surety means a company which:
(1)(i) Under the terms of a Bid Bond, agrees to pay a sum of money
to the Obligee if the Principal breaches the conditions of the bond;
(ii) Under the terms of a Performance Bond, agrees to pay a sum of
money or to incur the cost of fulfilling the terms of a Contract if the
Principal breaches the conditions of the Contract; and
(iii) Under the terms of a Payment or an Ancillary Bond, agrees to
make payment to all who have a right of action against such bond,
including those who have furnished labor, materials, equipment and
supplies in the performance of the Contract.
(2) The term Surety includes an agent, independent agent,
underwriter, or any other company or individual empowered to act on
behalf of the Surety.
[61 FR 3271, Jan. 31, 1996; 61 FR 7985, Mar. 1, 1996]
Sec. 115.11 Applying to participate in the Surety Bond Guarantee
Program.
Sureties interested in participating as Prior Approval Sureties or
PSB Sureties should apply in writing to the AA/SG at 409 3rd Street,
SW., Washington, DC 20416. OSG will determine the eligibility of the
applicant considering its standards and procedures for underwriting,
administration, claims and recovery. Each applicant must be a
corporation listed by the U.S. Treasury as eligible to issue bonds in
connection with Federal procurement contracts.
Sec. 115.12 General program policies and provisions.
(a) Description of Surety Bond Guarantee Programs. SBA guarantees
Sureties participating in the Surety Bond Guarantee Programs against a
portion of their Losses incurred and paid as a result of a Principal's
breach of the terms of a Bid Bond, Final Bond or Ancillary Bond, on any
eligible Contract. In the Prior Approval Program, the Surety must obtain
SBA's approval before a guaranteed bond can be issued. In the PSB
Program, selected Sureties may issue, monitor, and service SBA
guaranteed bonds without further SBA approval.
(b) Eligibility of bonds. Bid Bonds and Final Bonds are eligible for
an SBA guarantee if they are executed in connection with an eligible
Contract and are of a type listed in the ``Contract Bonds'' section of
the current Manual of Rules, Procedures and Classifications of the
Surety Association of America (100 Wood Avenue South, Iselin, New Jersey
08830). Ancillary Bonds may also be eligible for SBA's guarantee. A
Performance Bond must not prohibit a Surety from performing the Contract
upon default of the Principal.
(c) Expiration of Bid Bond Guarantee. A Bid Bond guarantee expires
120 days after Execution of the Bid Bond, unless the Surety notifies SBA
in writing before the 120th day that a later expiration date is
required. The notification must include the new expiration date.
(d) Guarantee agreement. The terms and conditions of SBA's bond
guarantee agreements, including the guarantee percentage, may vary from
Surety to Surety, depending on past experience with SBA. If the
guarantee percentage is not fixed by the Investment Act, it is
determined by OSG after considering, among other things, the rating or
ranking assigned to the Surety by recognized authority, and the Surety's
Loss rate, average Contract amount, average bond penalty per guaranteed
bond, and ratio of Bid Bonds to Final Bonds, all in comparison with
other Sureties participating
[[Page 183]]
in the same SBA Surety Bond Guarantee Program (Prior Approval or PSB) to
a comparable degree. Any guarantee agreement under this part is made
exclusively for the benefit of SBA and the Surety, and does not confer
any rights (such as a right of action against SBA) or benefits on any
other party.
(e) Amount of Contract--(1) Statutory ceiling. The amount of the
Contract to be bonded must not exceed $2,000,000 in face value at the
time of the bond's Execution.
(2) Aggregation of Contract amounts. The amounts of two or more
Contracts for a ``single project'' are aggregated to determine the
Contract amount unless the Contracts are to be performed in phases and
the prior bond is released before the beginning of each succeeding
phase. A bond may be considered released even if the warranty period it
is covering has not yet expired. For purposes of this paragraph, a
``single project'' means one represented by two or more Contracts of one
Principal or its Affiliates with one Obligee or its Affiliates for
performance at the same location, regardless of job title or nature of
the work to be performed.
(3) Service and supply contracts. A service or supply Contract
covering more than a 1 year period is eligible for an SBA guaranteed
bond if neither the annual Contract amount nor the penal sum of the bond
exceeds $2,000,000 at any time.
(f) Transfers or sales by Surety. Sureties must not sell or
otherwise transfer their files or accounts, whether before or after a
default by the Principal has occurred, without the prior written
approval of SBA. A violation of this provision is grounds for
termination from participation in the program. This provision does not
apply to the sale of an entire business division, subsidiary or
operation of the Surety.
[61 FR 3271, Jan. 31, 1996, as amended at 66 FR 30804, June 8, 2001]
Sec. 115.13 Eligibility of Principal.
(a) General eligibility. In order to be eligible for a bond
guaranteed by SBA, the Principal must comply with the following
requirements:
(1) Size. Together with its Affiliates, it must qualify as a small
business under part 121 of this title.
(2) Character. It must possess good character and reputation. A
Principal meets this standard if each owner of 20% or more of its
equity, and each of its officers, directors, or general partners,
possesses good character and reputation. A Person's good character and
reputation is presumed absent when:
(i) The Person is under indictment for, or has been convicted of a
felony, or a final civil judgment has been entered stating that such
Person has committed a breach of trust or has violated a law or
regulation protecting the integrity of business transactions or business
relationships; or
(ii) A regulatory authority has revoked, canceled, or suspended a
license of the Person which is necessary to perform the Contract; or
(iii) The Person has obtained a bond guarantee by fraud or material
misrepresentation (as described in Sec. 115.19(b)), or has failed to
keep the Surety informed of unbonded contracts or of a contract bonded
by another Surety, as required by a bonding line commitment under Sec.
115.33.
(3) Need for bond. It must certify that a bond is expressly required
by the bid solicitation or the original Contract in order to bid on the
Contract or to serve as a prime contractor or subcontractor.
(4) Availability of bond. It must certify that a bond is not
obtainable on reasonable terms and conditions without SBA's guarantee.
(5) Partial subcontract. It must certify the percentage of work
under the Contract to be subcontracted. SBA will not guarantee bonds for
Principals who are primarily brokers or who have effectively transferred
control over the project to one or more subcontractors.
(6) Debarment. It must certify that the Principal is not presently
debarred, suspended, proposed for debarment, declared ineligible, or
voluntarily excluded from transactions with any Federal department or
agency, under governmentwide debarment and suspension rules.
(b) Conflict of interest. A Principal is not eligible for an SBA-
guaranteed bond issued by a particular Surety if that Surety, or an
Affiliate of that Surety, or a close relative or member of the household
of that Surety or Affiliate owns, directly or indirectly, 10%
[[Page 184]]
or more of the Principal. This prohibition also applies to ownership
interests in any of the Principal's Affiliates.
Sec. 115.14 Loss of Principal's eligibility for future assistance.
(a) Ineligibility. A Principal and its Affiliates lose eligibility
for further SBA bond guarantees if any of the following occurs under an
SBA-guaranteed bond issued on behalf of the Principal:
(1) Legal action under the guaranteed bond has been initiated.
(2) The Obligee has declared the Principal to be in default under
the Contract.
(3) The Surety has established a claim reserve for the bond of at
least $1000.
(4) The Surety has requested reimbursement for Losses incurred under
the bond.
(5) The guarantee fee has not been paid by the Principal.
(6) The Principal committed fraud or material misrepresentation in
obtaining the guaranteed bond.
(b) Reinstatement of Principal's eligibility. Prior Approval
Sureties should refer to Sec. 115.36(b) for provisions on reinstatement
of the Principal's eligibility. A PSB Surety may reinstate a Principal's
eligibility upon the Surety's determination that reinstatement is
appropriate.
Sec. 115.15 Underwriting and servicing standards.
(a) Underwriting. (1) Sureties must evaluate the credit, capacity,
and character of a Principal using standards generally accepted by the
surety industry and in accordance with SBA's Standard Operating
Procedures on underwriting and the Surety's principles and practices on
unguaranteed bonds. The Principal must satisfy the eligibility
requirements set forth in Sec. 115.13. The Surety must reasonably
expect that the Principal will successfully perform the Contract to be
bonded.
(2) The terms and conditions of the bond and the Contract must be
reasonable in light of the risks involved and the extent of the Surety's
participation. The bond must satisfy the eligibility requirements set
forth in Sec. 115.12(b). The Surety must be satisfied as to the
reasonableness of cost and the feasibility of successful completion of
the Contract.
(b) Servicing. The Surety must ensure that the Principal remains
viable and eligible for SBA's Surety Bond Guarantee Program, must
monitor the Principal's progress on bonded Contracts guaranteed by SBA,
and must request job status reports from Obligees of Final Bonds
guaranteed by SBA. Documentation of the job status requests must be
maintained by the Surety.
Sec. 115.16 Determination of Surety's Loss.
Loss is determined as follows:
(a) Loss under a Bid Bond is the lesser of the penal sum or the
amount which is the difference between the bonded bid and the next
higher responsive bid. In either case, the Loss is reduced by any
amounts the Surety recovers by reason of the Principal's defenses
against the Obligee's demand for performance by the Principal and any
sums the Surety recovers from indemnitors and other salvage.
(b) Loss under a Payment Bond is, at the Surety's option, the sum
necessary to pay all just and timely claims against the Principal for
the value of labor, materials, equipment and supplies furnished for use
in the performance of the bonded Contract and other covered debts, or
the penal sum of the Payment Bond. In either case, the Loss includes
interest (if any), but Loss is reduced by any amounts recovered (through
offset or otherwise) by reason of the Principal's claims against
laborers, materialmen, subcontractors, suppliers, or other rightful
claimants, and by any amounts recovered from indemnitors and other
salvage.
(c) Loss under a Performance Bond is, at the Surety's option, the
sum necessary to meet the cost of fulfilling the terms of a bonded
Contract or the penal sum of the bond. In either case, the Loss includes
interest (if any), but Loss is reduced by any amounts recovered (through
offset or otherwise) by reason of the Principal's defenses or causes of
action against the Obligee, and by any amounts recovered from
indemnitors and other salvage.
(d) Loss under an Ancillary Bond is the amount covered by such bond
which is
[[Page 185]]
attributable to the Contract for which guaranteed Final Bonds were
Executed.
(e) Loss includes the following expenses if they are itemized,
documented and attributable solely to the Loss under the guaranteed
bond:
(1) Amounts actually paid by the Surety which are specifically
allocable to the investigation, adjustment, negotiation, compromise,
settlement of, or resistance to a claim for Loss resulting from the
breach of the terms of the bonded Contract. Any cost allocation method
must be reasonable and must comply with generally accepted accounting
principles; and
(2) Amounts actually paid by the Surety for court costs and
reasonable attorney's fees incurred to mitigate any Loss under
paragraphs (a) through (e)(1) of this section including suits to obtain
sums due from Obligees, indemnitors, Principals and others.
(f) Loss does not include the following expenses:
(1) Any unallocated expenses, or any clear mark-up on expenses or
any overhead, of the Surety, its attorney, or any other party hired by
the Surety or the attorney;
(2) Expenses paid for any suits, cross-claims, or counterclaims
filed against the United States of America or any of its agencies,
officers, or employees unless the Surety has received, prior to filing
such suit or claim, written concurrence from SBA that the suit may be
filed;
(3) Attorney's fees and court costs incurred by the Surety in a suit
by or against SBA or its Administrator; and
(4) Fees, costs, or other payments, including tort damages, arising
from a successful tort suit or claim by a Principal or any other Person
against the Surety.
Sec. 115.17 Minimization of Surety's Loss.
(a) Indemnity agreements and collateral--(1) Requirements. The
Surety must take all reasonable action to minimize risk of Loss
including, but not limited to, obtaining from each Principal a written
indemnity agreement which covers actual Losses under the Contract and
Imminent Breach payments under Sec. 115.34(a) or Sec. 115.69. The
indemnity agreement must be secured by such collateral as the Surety or
SBA finds appropriate. Indemnity agreements from other Persons, secured
or unsecured, may also be required by the Surety or SBA.
(2) Prohibitions. No indemnity agreement may be obtained from the
Surety, its agent or any other representative of the Surety. The Surety
must not separately collateralize the portion of its bond which is not
guaranteed by SBA.
(b) Salvage and recovery--(1) General. The Surety must pursue all
possible sources of salvage and recovery. Salvage and recovery includes
all payments made in settlement of the Surety's claim, even though the
Surety has incurred other losses as a result of that Principal which are
not reimbursable by SBA.
(2) SBA's share. SBA is entitled to its guaranteed percentage of all
salvage and recovery from a defaulted Principal, its guarantors and
indemnitors, and any other party, received by the Surety in connection
with the guaranteed bond or any other bond issued by the Surety on
behalf of the Principal unless such recovery is unquestionably
identifiable as related solely to the non-guaranteed bond. The Surety
must reimburse or credit SBA (in the same proportion as SBA's share of
Loss) within 90 days of receipt of any recovery by the Surety.
(3) Multiple Sureties. In any dispute between two or more Sureties
concerning recovery under SBA guaranteed bonds, the dispute must first
be brought to the attention of OSG for an attempt at mediation and
settlement.
Sec. 115.18 Refusal to issue further guarantees; suspension and
termination of PSB status.
(a) Improper surety bond guarantee practices--(1) Imprudent
practices. SBA may refuse to issue further guarantees to a Prior
Approval Surety or may suspend the preferred status of a PSB Surety, by
written notice stating all reasons for such decision and the effective
date. Reasons for such a decision include, but are not limited to, a
determination that the Surety (in its underwriting, its efforts to
minimize Loss, its claims or recovery practices, or its documentation
related to SBA guaranteed bonds) has failed to adhere to prudent
standards or practices, including
[[Page 186]]
any standards or practices required by SBA, as compared to those of
other Sureties participating in the same SBA Surety Bond Guarantee
Program to a comparable degree.
(2) Regulatory violations, fraud. Acts of wrongdoing such as fraud,
material misrepresentation, breach of the Prior Approval or PSB
Agreement, or regulatory violations (as defined in Sec. Sec. 115.19(d)
and 115.19(h)) also constitute sufficient grounds for refusal to issue
further guarantees, or in the case of a PSB Surety, termination of
preferred status.
(3) Audit; records. The failure of a Surety to consent to SBA's
audit or to maintain and produce records constitutes grounds for SBA to
refuse to issue further guarantees for a Prior Approval Surety, to
suspend a PSB Surety from participation, and to refuse to honor claims
submitted by a Prior Approval or PSB Surety until the Surety consents to
the audit.
(4) Excessive Losses. If a Surety experiences excessive Losses on
SBA guaranteed bonds relative to those of other Sureties participating
in the same SBA Surety Bond Guarantee Program to a comparable degree,
SBA may also require the renegotiation of the guarantee percentage and/
or SBA's charge to the Surety for bonds executed thereafter.
(b) Lack of business integrity. A Surety's participation in the
Surety Bond Guarantee Programs may be denied, suspended, or terminated
upon the occurrence of any event in paragraphs (b) (1) through (5) of
this section involving any of the following Persons: The Surety or any
of its officers, directors, partners, or other individuals holding at
least 20% of the Surety's voting securities, and any agents,
underwriters, or any individual empowered to act on behalf of any of the
preceding Persons.
(1) If a State or other authority has revoked, canceled, or
suspended the license required of such Person to engage in the surety
business, the right of such Person to participate in the SBA Surety Bond
Guarantee Program may be denied, terminated, or suspended, as
applicable, in that jurisdiction or in other jurisdictions.
Ineligibility or suspension from the Surety Bond Guarantee Programs is
for at least the duration of the license suspension.
(2) If such Person has been indicted or otherwise formally charged
with a misdemeanor or felony bearing on such Person's fitness to
participate in the Surety Bond Guarantee Programs, the participation of
such Person may be suspended pending disposition of the charge. Upon
conviction, participation may be denied or terminated.
(3) If a final civil judgment is entered holding that such Person
has committed a breach of trust or violation of a law or regulation
protecting the integrity of business transactions or relationships,
participation may be denied or terminated.
(4) If such Person has made a material misrepresentation or
willfully false statement in the presentation of oral or written
information to SBA in connection with an application for a surety bond
guarantee or the presentation of a claim, or committed a material breach
of the Prior Approval or PSB Agreement or a material violation of the
regulations (all as described in Sec. 115.19), participation may be
denied or terminated.
(5) If such Person is debarred, suspended, voluntarily excluded
from, or declared ineligible for participation in Federal programs,
participation may be denied or terminated.
(c) Notification requirement. The Prior Approval or PSB Surety must
promptly notify SBA of the occurrence of any event in paragraphs (b) (1)
through (5) of this section, or if any of the Persons described in
paragraph (b) of this section does not, or ceases to, qualify as a
Surety. SBA may require submission of a Statement of Personal History
(SBA Form 912) from any of these Persons.
(d) SBA proceedings. Decisions to suspend, terminate, deny
participation in, or deny reinstatement in the Surety Bond Guarantee
program are made by the AA/SG. A Surety may file a petition for review
of suspensions and terminations with the SBA Office of Hearings and
Appeals (OHA) under part 134 of this chapter. SBA's Administrator may,
pending a decision pursuant to part 134 of this chapter, suspend the
participation of any Surety for any of the causes listed in paragraphs
(b) (1) through (5) of this section.
[[Page 187]]
(e) Effect on guarantee. A guarantee issued by SBA before a
suspension or termination under this section remains in effect, subject
to SBA's right to deny liability under the guarantee.
Sec. 115.19 Denial of liability.
In addition to equitable and legal defenses and remedies under
contract law, the Act and the regulations in this part, SBA is not
liable under a Prior Approval or PSB Agreement if any of the
circumstances in paragraphs (a) through (h) of this section exist.
(a) Excess Contract or bond amount. The total Contract amount at the
time of Execution of the bond exceeds $2,000,000 in face value (see
Sec. 115.12(e)), or the bond amount at any time exceeds the total
Contract amount.
(b) Misrepresentation or fraud. The Surety obtained the Prior
Approval or PSB Agreement, or applied for reimbursement for losses, by
fraud or material misrepresentation. Material misrepresentation includes
(but is not limited to) both the making of an untrue statement of
material fact and the omission of a statement of material fact necessary
to make a statement not misleading in light of the circumstances in
which it was made. Material misrepresentation also includes the adoption
by the Surety of a material misstatement made by others which the Surety
knew or under generally accepted underwriting standards should have
known to be false or misleading. The Surety's failure to disclose its
ownership (or the ownership by any owner of at least 20% of the Surety's
equity) of an interest in a Principal or an Obligee is considered the
omission of a statement of material fact.
(c) Material breach. The Surety has committed a material breach of
one or more terms or conditions of its Prior Approval or PSB Agreement.
A material breach is considered to have occurred if:
(1) Such breach (or such breaches in the aggregate) causes an
increase in the Contract amount or in the bond amount of at least 25% or
$50,000; or
(2) One of the conditions under Part B of Title IV of the Investment
Act is not met.
(d) Substantial regulatory violation. The Surety has committed a
``substantial violation'' of SBA regulations. For purposes of this
paragraph, a ``substantial violation'' is a violation which causes an
increase in the bond amount of at least 25% or $50,000 in the aggregate,
or is contrary to the purposes of the Surety Bond Guarantee Programs.
(e) Alteration. Without obtaining prior written approval from SBA
(which may be conditioned upon payment of additional fees), the Surety
agrees to or acquiesces in any material alteration in the terms,
conditions, or provisions of the bond, including but not limited to the
following acts:
(1) Naming as an Obligee or co-Obligee any Person that does not
qualify as an Obligee under Sec. 115.10; or
(2) In the case of a Prior Approval Surety, acquiescing in any
alteration to the bond which would increase the bond amount by at least
25% or $50,000.
(f) Timeliness. (1) Either:
(i) The bond was Executed prior to the date of SBA's guarantee; or
(ii) The bond was Executed (or approved, if the Surety is legally
bound by such approval) after the work under the Contract had begun,
unless SBA executes a ``Surety Bond Guarantee Agreement Addendum'' (SBA
Form 991) after receiving all of the following from the Surety:
(A) Satisfactory evidence, including a certified copy of the
Contract (or a sworn affidavit from the Principal), showing that the
bond requirement was contained in the original Contract, or other
documentation satisfactory to SBA, showing why a bond was not previously
obtained and is now being required;
(B) Certification by the Principal that all taxes and labor costs
are current, and listing all suppliers and subcontractors, indicating
that they are all paid to date, and attaching a waiver of lien from
each; or an explanation satisfactory to SBA why such documentation
cannot be produced; and
(C) Certification by the Obligee that all payments due under the
Contract to date have been made and that the job has been satisfactorily
completed to date.
(2)(i) For purposes of paragraph (f)(1)(ii) of this section, work
under a
[[Page 188]]
Contract is considered to have begun when a Principal takes any action
at the job site which would have exposed its Surety to liability under
applicable law had a bond been Executed (or approved, if the Surety is
legally bound by such approval) at the time.
(ii) For purposes of this paragraph (f), the Surety must maintain a
contemporaneous record of the Execution and approval of each bond.
(g) Principal fee. The Surety has not remitted to SBA the
Principal's payment for the full amount of the guarantee fee within the
time period required under Sec. 115.30(d) for Prior Approval Sureties
or Sec. 115.66 for PSB Sureties. SBA may reinstate the guarantee upon a
showing that the Contract is not in default and that a valid reason
exists why a timely submission was not made.
(h) Other regulatory violations. The occurrence of any of the
following:
(1) The Principal on the bonded Contract is not a small business;
(2) The bond was not required under the bid solicitation or the
original Contract;
(3) The bond was not eligible for guarantee by SBA because the
bonded contract was not a Contract as defined in Sec. 115.10;
(4) The loss occurred under a bond that was not guaranteed by SBA;
(5) The loss incurred by the Surety was not a Loss as determined
under Sec. 115.16; or
(6) The Surety's loss under a Performance Bond did not result from
the Principal's breach or Imminent Breach of the Contract.
[61 FR 3271, Jan. 31, 1996, as amended at 66 FR 30804, June 8, 2001]
Sec. 115.20 Insolvency of Surety.
(a) Successor in interest. If a Surety becomes insolvent, all rights
or benefits conferred on the Surety under a valid and binding Prior
Approval or PSB Agreement will accrue only to the trustee or receiver of
the Surety. SBA will not be liable to the trustee or receiver of the
insolvent Surety except for the guaranteed portion of any Loss incurred
and actually paid by such Surety or its trustee or receiver under the
guaranteed bonds.
(b) Filing requirement. The trustee or receiver must submit to SBA
quarterly status reports accounting for all funds received and all
settlements being considered.
Sec. 115.21 Audits and investigations.
(a) Audits--(1) Scope of audit. SBA may audit in the office of a
Prior Approval or PSB Surety, the Surety's attorneys or consultants, or
the Principal or its subcontractors, all documents, files, books,
records, tapes, disks and other material relevant to SBA's guarantee,
commitments to guarantee a surety bond, or agreements to indemnify the
Prior Approval or PSB Surety. See Sec. 115.18(a)(3) for consequences of
failure to comply with this section.
(2) Frequency of PSB audits. Each PSB Surety is subject to audit at
least once each year by examiners selected and approved by SBA.
(b) Records. The Surety must maintain the records listed in this
paragraph (b) for the term of each bond, plus any additional time
required to settle any claims of the Surety for reimbursement from SBA
and to attempt salvage or other recovery, plus an additional 3 years. If
there are any unresolved audit findings in relation to a particular
bond, the Surety must maintain the related records until the findings
are resolved. The records to be maintained include the following:
(1) A copy of the bond;
(2) A copy of the bonded Contract;
(3) All documentation submitted by the Principal in applying for the
bond;
(4) All information gathered by the Surety in reviewing the
Principal's application;
(5) All documentation of any of the events set forth in Sec.
115.35(a) or Sec. 115.65(c)(2);
(6) All records of any transaction for which the Surety makes
payment under or in connection with the bond, including but not limited
to claims, bills (including lawyers' and consultants' bills), judgments,
settlement agreements and court or arbitration decisions, consultants'
reports, Contracts and receipts;
[[Page 189]]
(7) All documentation relating to efforts to mitigate Losses,
including documentation required by Sec. 115.34(a) or Sec. 115.69
concerning Imminent Breach;
(8) All records of any accounts into which fees and funds obtained
in mitigation of Losses were paid and from which payments were made
under the bond, and any other trust accounts, and any reconciliations of
such accounts;
(9) Job status reports received from Obligees and documentation of
each unanswered request for a job status report; and
(10) All documentation relating to any collateral held by or
available to the Surety.
(c) Purpose of audit. SBA's audit will determine, but not be limited
to:
(1) The adequacy and sufficiency of the Surety's underwriting and
credit analysis, its documentation of claims and claims settlement
procedures and activities, and its recovery procedures and practices;
(2) The Surety's minimization of Loss, including the exercise of
bond options upon Contract default; and
(3) The Surety's loss ratio in comparison with other Sureties
participating in the same SBA Surety Bond Guarantee Program to a
comparable degree.
(d) Investigations. SBA may conduct investigations to inquire into
the possible violation by any Person of the Small Business Act or the
Investment Act, or of any rule or regulation under those Acts, or of any
order issued under those Acts, or of any Federal law relating to
programs and operations of SBA.
Subpart B_Guarantees Subject to Prior Approval
Sec. 115.30 Submission of Surety's guarantee application.
(a) Legal effect of application. By submitting an application to SBA
for a bond guarantee, the Prior Approval Surety certifies that the
Principal meets the eligibility requirements set forth in Sec. 115.13
and that the underwriting standards set forth in Sec. 115.15 have been
met.
(b) SBA's determination. SBA's approval or decline of a guarantee
application is made in writing by an authorized SBA officer. The officer
may provide telephone notice before the Prior Approval Surety receives
SBA's guarantee approval form if the officer has already signed the
form. In the event of a conflict between the telephone notice and the
written form, the written form controls.
(c) Reconsideration-appeal of SBA determination. A Prior Approval
Surety may request reconsideration of a decline from the SBA officer who
made the decision. If the decision on reconsideration is negative, the
Surety may appeal to an individual designated by the AA/SG. If the
decision is again adverse, the Surety may appeal to the AA/SG, who will
make the final decision.
(d) Notice and payment to SBA. When the Surety has Executed a Final
Bond, including a Final Bond under a bonding line, the Surety must
complete the Prior Approval Agreement, and submit the form, together
with the Principal's payment for its guarantee fee (see Sec. 115.32(b))
to SBA within 45 days, or in the case of a bonding line, within 15
business days (see Sec. 115.33(d)(2)) after Execution of the bond.
Sec. 115.31 Guarantee percentage.
(a) Ninety percent. SBA reimburses a Prior Approval Surety for 90%
of the Loss incurred and paid if:
(1) The total amount of the Contract at the time of Execution of the
bond is $100,000 or less; or
(2) The bond was issued on behalf of a small business owned and
controlled by socially and economically disadvantaged individuals or on
behalf of a qualified HUBZone small business concern.
(b) Eighty percent. SBA reimburses a Prior Approval Surety in an
amount not to exceed 80% of the Loss incurred and paid on bonds for
Contracts in excess of $100,000 which are executed on behalf of non-
disadvantaged concerns.
(c) Contract increase to over $100,000. If the Contract amount
increases to more than $100,000 after Execution of the bond, the
guarantee percentage decreases by one percentage point for each $5,000
of increase or part thereof, but it does not decrease below 80%.
[[Page 190]]
This provision applies only to guarantees which qualify under paragraph
(a)(1) of this section.
(d) Contract increase to over $2,000,000. If the Contract amount
increases above the statutory limit of $2,000,000 after Execution of the
bond, SBA's share of the Loss is limited to that percentage of the
increased Contract amount which the statutory limit represents,
multiplied by the guarantee percentage approved by SBA. For example if a
Contract amount increases to $2,100,000, SBA's share of the Loss under
an 80% guarantee is limited to 76.1% [2,000,000 / 2,100,000 = 95.2% x
80% = 76.1%].
(e) Contract decrease to $100,000 or less. If the Contract amount
decreases to $100,000 or less after Execution of the bond, SBA's
guarantee percentage increases to 90% if the Surety provides SBA with
evidence supporting the decrease and any other information or documents
requested.
[61 FR 3271, Jan. 31, 1996, as amended at 64 FR 18324, Apr. 14, 1999; 66
FR 30804, June 8, 2001]
Sec. 115.32 Fees and Premiums.
(a) Surety's Premium. A Prior Approval Surety must not charge a
Principal an amount greater than that authorized by the appropriate
insurance department. The Surety must not require the Principal to
purchase casualty or other insurance or any other services from the
Surety or any Affiliate or agent of the Surety. The Surety must not
charge non-Premium fees to a Principal unless the Surety performs other
services for the Principal, the additional fee is permitted by State
law, and the Principal agrees to the fee.
(b) SBA charge to Principal. SBA does not charge Principals
application or Bid Bond guarantee fees. If SBA guarantees a Final Bond,
the Principal must pay a guarantee fee equal to a certain percentage of
the Contract amount. The percentage is determined by SBA and is
published in Notices in the Federal Register from time to time. The
Principal's fee is rounded to the nearest dollar and is to be remitted
to SBA by the Surety together with the form required under Sec.
115.30(d). See paragraph (d) of this section for additional requirements
when the Contract amount changes.
(c) SBA charge to Surety. SBA does not charge Sureties application
or Bid Bond guarantee fees. Subject to Sec. 115.18(a)(4), the Surety
must pay SBA a guarantee fee on each guaranteed bond (other than a Bid
Bond) in the ordinary course of business. The fee is a certain
percentage of the bond Premium, determined by SBA and published in
Notices in the Federal Register from time to time. The fee is rounded to
the nearest dollar. SBA does not receive any portion of a Surety's non-
Premium charges. See paragraph (d) of this section for additional
requirements when the bond amount or the Contract amount changes.
(d) Contract or bond increases/decreases--(1) Notification and
approval. The Prior Approval Surety must notify SBA of any increases or
decreases in the Contract or bond amount that aggregate 25% or $50,000,
as soon as the Surety acquires knowledge of the change. Whenever the
original bond amount increases as a result of a single change order of
at least 25% or $50,000, the prior written approval of such increase by
SBA is required on a supplemental Prior Approval Agreement (Supplemental
Form 990) and is conditioned upon payment by the Surety of the increase
in the Principal's guarantee fee as set forth in paragraph (d)(2) of
this section.
(2) Increases; fees. Notification of increases in the Contract or
bond amount under this paragraph (d) must be accompanied by payment of
the increase in the Principal's guarantee fee computed on the increase
in the Contract amount. If the increase in the Principal's fee is less
than $40, such increase is not due until all unpaid increases in the
Principal's fee aggregate at least $40. The Surety's check for payment
of the increase in the Surety's guarantee fee, computed on the increase
in the bond Premium, may be submitted in the ordinary course of
business. Increases in the Surety's fee are not due until they aggregate
at least $40.
(3) Decreases; refunds. Whenever SBA is notified of a decrease in
the Contract or bond amount, SBA will refund to the Principal a
proportionate amount of
[[Page 191]]
the Principal's guarantee fee and rebate to the Surety a proportionate
amount of SBA's Premium share in the ordinary course of business. If the
amount to be refunded or rebated is less than $40, such refund or rebate
will not be made until the amounts to be refunded or rebated,
respectively, aggregate at least $40. Upon receipt of the refund, the
Surety must promptly pay a proportionate amount of its Premium to the
Principal.
Sec. 115.33 Surety bonding line.
A surety bonding line is a written commitment by SBA to a Prior
Approval Surety which provides for the Surety's Execution of multiple
bonds for a specified small business strictly within pre-approved terms,
conditions and limitations. In applying for a bonding line, the Surety
must provide SBA with information on the applicant as requested. In
addition to the other limitations and provisions set forth in this part
115, the following conditions apply to each surety bonding line:
(a) Underwriting. A bonding line may be issued by SBA for a
Principal only if the underwriting evaluation is satisfactory. The Prior
Approval Surety must require the Principal to keep it informed of all
its contracts, whether bonded by the same or another surety or unbonded,
during the term of the bonding line.
(b) Bonding line conditions. The bonding line contains limitations
on the following:
(1) The term of the bonding line, not to exceed 1 year subject to
renewal in writing;
(2) The total dollar amount of the Principal's bonded and unbonded
work on hand at any time, including outstanding bids, during the term of
the bonding line;
(3) The number of such bonded and unbonded contracts outstanding at
any time during the term of the bonding line;
(4) The maximum dollar amount of any single guaranteed bonded
Contract;
(5) The timing of Execution of bonds under the bonding line--bonds
must be dated and Executed before the work on the underlying Contract
has begun, or the Surety must submit to SBA the documentation required
under Sec. 115.19(f)(1)(ii); and
(6) Any other limitation related to type, specialty of work,
geographical area, or credit.
(c) Excess bonding. If, after a bonding line is issued, the
Principal desires a bond and the Surety desires a guarantee exceeding a
limitation of the bonding line, the Surety must submit an application to
SBA under regular procedures.
(d) Submission of forms to SBA--(1) Bid Bonds. Within 15 business
days after the Execution of any Bid Bonds under a bonding line, the
Surety must submit a ``Surety Bond Guarantee Underwriting Review'' (SBA
Form 994B) to SBA for approval. If that form is already on file with SBA
and no new financial statements are required or have been received from
the Principal, a ``Surety Bond Guarantee Review Update'' (SBA Form 994C)
may be submitted instead. If the Surety fails to submit either form
within this time period, SBA's guarantee of the bond will be void from
its inception unless SBA determines otherwise upon a showing that a
valid reason exists why the timely submission was not made.
(2) Final Bonds. Within 15 business days after the Execution of any
Final Bonds under a bonding line, the Surety must submit a signed Prior
Approval Agreement and a ``Surety Bond Guarantee Underwriting Review''
(SBA Form 994B) to SBA for approval. If that form is already on file
with SBA and no new financial statements are required or have been
received from the Principal, a ``Surety Bond Guarantee Review Update''
(SBA Form 994C) may be submitted instead. If the Surety fails to submit
these forms together with the Principal's payment for its guarantee fee
within this time period, SBA's guarantee of the bond will be void from
its inception unless SBA determines otherwise upon a showing that the
Contract is not in default and a valid reason exists why the timely
submission was not made.
(3) Additional information. The Surety must submit any other data
SBA requests.
(e) Cancellation of bonding line--(1) Optional cancellation. Either
SBA or the Surety may cancel a bonding line at
[[Page 192]]
any time, with or without cause, upon written notice to the other party.
Upon the receipt of any adverse information concerning the Principal,
the Surety must promptly notify SBA, and SBA may cancel the bonding
line.
(2) Mandatory cancellation. Upon the occurrence of a default by the
Principal, whether under a contract bonded by the same or another surety
or an unbonded contract, the Surety must immediately cancel the bonding
line.
(3) Effect of cancellation. Cancellation of a bonding line by SBA is
effective upon receipt of written notice by the Surety. Bonds issued
before the effective date of cancellation remain guaranteed by SBA. Upon
cancellation by SBA or the Surety, the Surety must promptly notify the
Principal in writing.
Sec. 115.34 Minimization of Surety's Loss.
(a) Imminent Breach--(1) Prior approval requirement. SBA will
reimburse its guaranteed share of payments made by a Surety to avoid or
attempt to avoid an Imminent Breach of the terms of a Contract covered
by an SBA guaranteed bond only if the payments were made with the prior
approval of OSG. OSG's prior approval will be given only if the Surety
demonstrates to SBA's satisfaction that a breach is imminent and that
there is no other recourse to prevent such breach.
(2) Amount of reimbursement. The aggregate of the payments by SBA to
avoid Imminent Breach cannot exceed 10% of the Contract amount, unless
the Administrator finds that a greater payment (not to exceed the
guaranteed share of the bond penalty) is necessary and reasonable. In no
event will SBA make any duplicate payment pursuant to this or any other
provision of this part 115.
(3) Recordkeeping requirement. The Surety must keep records of
payments made to avoid Imminent Breach.
(b) Salvage and recovery. A Prior Approval Surety must pursue all
possible sources of salvage and recovery until SBA concurs with the
Surety's recommendation for a discontinuance or for a settlement. The
Surety must certify that continued pursuit of salvage and recovery would
be neither economically feasible nor a viable strategy in maximizing
recovery. See also Sec. 115.17(b).
Sec. 115.35 Claims for reimbursement of Losses.
(a) Notification requirements--(1) Events requiring notification. A
Prior Approval Surety must notify OSG of the occurrence of any of the
following:
(i) Legal action under the bond has been initiated.
(ii) The Obligee has declared the Principal to be in default under
the Contract.
(iii) The Surety has established a claim reserve for the bond.
(iv) The Surety has received any adverse information concerning the
Principal's financial condition or possible inability to complete the
project or to pay laborers or suppliers.
(2) Timing of notification. Notification must be made in writing at
the earlier of the time the Surety applies for a guarantee on behalf of
an affected Principal, or within 30 days of the date the Surety acquires
knowledge, or should have acquired knowledge, of any of the listed
events.
(b) Surety action. The Surety must take all necessary steps to
mitigate Losses resulting from any of the events in paragraph (a) of
this section, including the disposal at fair market value of any
collateral held by or available to the Surety. Unless SBA notifies the
Surety otherwise, the Surety must take charge of all claims or suits
arising from a defaulted bond, and compromise, settle and defend such
suits. The Surety must handle and process all claims under the bond and
all settlements and recoveries as it does on non-guaranteed bonds.
(c) Claim reimbursement requests. (1) Claims for reimbursement for
Losses which the Surety has paid must be submitted (together with a copy
of the bond, the bonded Contract, and any indemnity agreements) with the
initial claim to OSG on a ``Default Report, Claim for Reimbursement and
Record of Administrative Action'' (SBA Form 994H), within 1 year from
the time of each disbursement. Claims submitted after 1 year must be
accompanied by substantiation satisfactory to SBA. The date of the claim
for reimbursement is the date of receipt of the claim
[[Page 193]]
by SBA, or such later date as additional information requested by SBA is
received.
(2) The Surety must also submit evidence of the disposal of all
collateral at fair market value.
(3) SBA may request additional information prior to reimbursing the
Surety for its Loss.
(4) Subject to the offset provisions of part 140, SBA pays its share
of the Loss incurred and paid by the Surety within 90 days of receipt of
the requisite information.
(5) Claims for reimbursement and any additional information
submitted are subject to review and audit by SBA, including but not
limited to the Surety's compliance with SBA's regulations and forms.
(d) Status updates. The Surety must submit semiannual status reports
on each claim 6 months after the initial default notice, and then every
6 months. The Surety must notify SBA immediately of any substantial
changes in the status of the claim or the amounts of Loss reserves.
(e) Reservation of SBA rights. The payment by SBA of a Surety's
claim does not waive or invalidate any of the terms of the Prior
Approval Agreement, the regulations set forth in this part 115, or any
defense SBA may have against the Surety. Within 30 days of receipt of
notification that a claim or any portion of a claim should not have been
paid by SBA, the Surety must repay the specified amounts to SBA.
Sec. 115.36 Indemnity settlements and reinstatement of Principal.
(a) Indemnity settlements. (1) An indemnity settlement occurs when a
defaulted Principal and its Surety agree upon an amount, less than the
actual loss under the bond, which will satisfy the Principal's
indebtedness to the Surety. Sureties must not agree to any indemnity
settlement proposal or enter into any such agreement without SBA's
concurrence.
(2) Any settlement proposal submitted for SBA's consideration must
include current financial information, including financial statements,
tax returns, and credit reports, together with the Surety's written
recommendations. It should also indicate whether the Principal is
interested in further bonding.
(3) The Surety must pay SBA its pro rata share of the settlement
amount within 90 days of receipt. Prior to closing the file on a
Principal, the Surety must certify that SBA has received its pro rata
share of all indemnity recovery.
(b) Conditions for reinstatement. At any time after a Principal
becomes ineligible for further bond guarantees under Sec. 115.14(a),
the Surety may recommend that such Principal's eligibility be
reinstated. OSG may agree to reinstate the Principal and its Affiliates
if:
(1) The Principal's guarantee fee has been paid to SBA and SBA
receives evidence that the Principal has paid all delinquent amounts due
to the Surety (including amounts for Imminent Breach); or
(2) The Surety has settled its claim with the Principal for an
amount and on terms accepted by OSG; or
(3) The Principal contests a claim and provides collateral,
acceptable to the Surety and OSG, which has a liquidation value of at
least the amount of the claim including related expenses; or
(4) The Principal's indebtedness to the Surety is discharged by
operation of law (e.g., bankruptcy discharge); or
(5) OSG and the Surety determine that further bond guarantees are
appropriate.
(c) Underwriting after reinstatement. A guarantee application
submitted after reinstatement of the Principal's eligibility is subject
to a very stringent underwriting review.
Subpart C_Preferred Surety Bond (PSB) Guarantees
Sec. 115.60 Selection and admission of PSB Sureties.
(a) Selection of PSB Sureties. SBA's selection of PSB Sureties will
be guided by, but not limited to, these factors:
(1) An underwriting limitation of at least $2,000,000 on the U.S.
Treasury Department list of acceptable sureties;
(2) An agreement to charge Principals no more than the Surety
Association of America's advisory premium rates in effect on August 1,
1987;
[[Page 194]]
(3) Premium income from contract bonds guaranteed by any government
agency (Federal, State or local) of no more than one- quarter of the
total contract bond premium income of the Surety;
(4) The vesting of underwriting authority for SBA guaranteed bonds
only in employees of the Surety;
(5) The vesting of final settlement authority for claims and
recovery under the PSB program only in employees of the Surety's
permanent claims department; and
(6) The rating or ranking designations assigned to the Surety by
recognized authority.
(b) Admission of PSB Sureties. A Surety admitted to the PSB program
must execute a PSB Agreement before approving SBA guaranteed bonds. No
SBA guarantee attaches to bonds approved before the AA/SG or designee
has countersigned the Agreement.
[61 FR 3271, Jan. 31, 1996, as amended at 66 FR 30804, June 8, 2001]
Sec. 115.61 Duration of PSB program.
The PSB program terminates on September 30, 2003, unless extended by
legislation. SBA guarantees effective under this program on or before
September 30, 2003, will remain in effect after such date.
[61 FR 3271, Jan. 31, 1996, as amended at 63 FR 12605, Mar. 16, 1998; 66
FR 30804, June 8, 2001]
Sec. 115.62 Prohibition on participation in Prior Approval program.
Neither a PSB Surety nor any of its Affiliates is eligible to submit
applications under subpart B of this part.
Sec. 115.63 Allotment of guarantee authority.
(a) General. SBA allots to each PSB Surety a periodic maximum
guarantee authority. No SBA guarantee attaches to bonds approved by a
PSB Surety if the bonds exceed the allotted authority for the period in
which the bonds are approved. No reliance on future authority is
permitted. An allotment can be increased only by prior written
permission of SBA.
(b) Execution of Bid Bonds. When the PSB Surety Executes a Bid Bond,
SBA debits the Surety's allotment for an amount equal to the guarantee
percentage of the estimated penal sum of the Final Bond SBA would
guarantee if the Contract were awarded. If the Contract is then awarded
for an amount other than the bid amount, or if the bid is withdrawn or
the Bid Bond guarantee has expired (see Sec. 115.12(c)), SBA debits or
credits the Surety's allotment accordingly.
(c) Execution of Final Bonds. If the PSB Surety Executes a
guaranteed Final Bond, but not the related Bid Bond, SBA debits the
Surety's allotment for an amount equal to the guarantee percentage of
the penal sum of the Final Bond. SBA will debit the allotment for
increases, and credit the allotment for decreases, in the bond amount.
(d) Release and non-issuance of Final Bonds. The release of Final
Bonds upon completion of the Contract does not restore the corresponding
allotment. If, however, a PSB Surety approves a Final Bond but never
issues the bond, SBA will credit the Surety's allotment for an amount
equal to the guarantee percentage of the penal sum of the bond. In that
event, the Surety must notify SBA as soon as possible, but in no event
later than 5 business days after the non-issuance has been determined.
Until the Surety has so notified SBA, it cannot rely on such credit.
Sec. 115.64 Timeliness requirement.
There must be no Execution or approval of a bond by a PSB Surety
after commencement of work under a Contract unless the Surety obtains
written approval from the AA/SG. To apply for such approval, the Surety
must submit a completed ``Surety Bond Guarantee Agreement Addendum''
(SBA Form 991), together with the evidence and certifications described
in Sec. 115.19(f)(1)(ii).
Sec. 115.65 General PSB procedures.
(a) Retention of information. A PSB Surety must comply with all
applicable SBA regulations and obtain from its applicants all the
information and certifications required by SBA. The PSB Surety must
document compliance with SBA regulations and retain such certifications
in its files, including a contemporaneous record of the
[[Page 195]]
date of approval and Execution of each bond. See also Sec. 115.19(f).
The certifications and other information must be made available for
inspection by SBA or its agents and must be available for submission to
SBA in connection with the Surety's claims for reimbursement. The PSB
Surety must retain the certifications and other information for the term
of the bond, plus such additional time as may be required to settle any
claims of the Surety for reimbursement from SBA and to attempt salvage
or other recovery, plus an additional 3 years. If there are any
unresolved audit findings in relation to a particular bond, the Surety
must maintain the related certifications and other information until the
findings are resolved.
(b) Usual staff and procedures. The approval, Execution and
administration by a PSB Surety of SBA guaranteed bonds must be handled
in the same manner and with the same staff as the Surety's activity
outside the PSB program. The Surety must request job status reports from
Obligees in accordance with its own procedures.
(c) Notification to SBA--(1) Approvals. A PSB Surety must notify SBA
by electronic transmission or monthly bordereau, as agreed between the
Surety and SBA, of all approved Bid and Final Bonds, and of the Surety's
approval of increases and decreases in the Contract or bond amount. The
notice must contain the information specified from time to time in
agreements between the Surety and SBA. SBA may deny liability with
respect to Final Bonds for which SBA has not received timely notice.
(2) Other events requiring notification. The PSB Surety must notify
SBA within 30 calendar days of the name and address of any Principal
against whom legal action on the bond has been instituted; whenever an
Obligee has declared a default; whenever the Surety has established or
added to a claim reserve; of the recovery of any amounts on the
guaranteed bond; and of any decision by the Surety to bond any such
Principal again.
Sec. 115.66 Fees.
The PSB Surety must pay SBA a certain percentage of the Premium it
charges on Final Bonds. The PSB Surety must also remit to SBA the
Principal's payment for its guarantee fee, equal to a certain percentage
of the Contract amount. The fee percentages are determined by SBA and
are published in Notices in the Federal Register from time to time. Each
fee is rounded to the nearest dollar. The Surety must remit SBA's
Premium share and the Principal's guarantee fee with the bordereau
listing the related Final Bond, as required in the PSB Agreement.
Sec. 115.67 Changes in Contract or bond amount.
(a) Increases. The PSB Surety must process Contract or bond amount
increases within its allotment in the same manner as initial guaranteed
bond issuances (see Sec. 115.65(c)(1)). The Surety must present checks
for additional fees due from the Principal and the Surety on increases
aggregating 25% of the contract or bond amount or $50,000, and attach
such payments to the respective monthly bordereau. If the additional
Principal's fee or Surety's fee is less than $40, such fee is not due
until all unpaid increases in such fee aggregate at least $40.
(b) Decreases. If the Contract or bond amount is decreased, SBA will
refund to the Principal a proportionate amount of the guarantee fee, and
adjust SBA's Premium share accordingly in the ordinary course of
business. No refund or adjustment will be made until the amounts to be
refunded or rebated, respectively, aggregate at least $40.
Sec. 115.68 Guarantee percentage.
SBA reimburses a PSB Surety in an amount not to exceed 70% of the
Loss incurred and paid. Where the Contract amount, after the Execution
of the bond, increases beyond the statutory limit of $2,000,000, SBA's
share of the Loss is limited to that percentage of the increased
Contract amount which the statutory limit represents, multiplied by the
guarantee percentage approved by SBA. For an example, see Sec.
115.31(d).
[61 FR 3271, Jan. 31, 1996, as amended at 66 FR 30804, June 8, 2001]
[[Page 196]]
Sec. 115.69 Imminent Breach.
(a) No prior approval requirement. SBA will reimburse a PSB Surety
for the guaranteed portion of payments the Surety makes to avoid or
attempt to avoid an Imminent Breach of the terms of a Contract covered
by an SBA guaranteed bond. The PSB Surety does not need SBA approval to
make Imminent Breach payments.
(b) Amount of reimbursement. The aggregate of the payments by SBA
under this section cannot exceed 10% of the Contract amount, unless the
Administrator finds that a greater payment (not to exceed the guaranteed
portion of the bond penalty) is necessary and reasonable. In no event
will SBA make any duplicate payment under any provision of these
regulations in this part.
(c) Recordkeeping requirement. The PSB Surety must keep records of
payments made to avoid Imminent Breach.
Sec. 115.70 Claims for reimbursement of Losses.
(a) How claims are submitted. A PSB Surety must submit claims for
reimbursement on a form approved by SBA no later than 1 year from the
date the Surety paid the amount. Loss is determined as of the date of
receipt by SBA of the claim for reimbursement, or as of such later date
as additional information requested by SBA is received. Subject to the
offset provisions of part 140, SBA pays its share of Loss within 90 days
of receipt of the requisite information. Claims for reimbursement and
any additional information submitted are subject to review and audit by
SBA.
(b) Surety responsibilities. The PSB Surety must take all necessary
steps to mitigate Losses when legal action against a bond has been
instituted, when the Obligee has declared a default, and when the Surety
has established a claim reserve. The Surety may dispose of collateral at
fair market value only. Unless SBA notifies the Surety otherwise, the
Surety must take charge of all claims or suits arising from a defaulted
bond, and compromise, settle or defend the suits. The Surety must handle
and process all claims under the bond and all settlements and recoveries
in the same manner as it does on non-guaranteed bonds.
(c) Reservation of SBA's rights. The payment by SBA of a PSB
Surety's claim does not waive or invalidate any of the terms of the PSB
Agreement, the regulations in this part 115, or any defense SBA may have
against the Surety. Within 30 days of receipt of notification that a
claim or any portion of a claim should not have been paid by SBA, the
Surety must repay the specified amounts to SBA.
Sec. 115.71 Denial of liability.
In addition to the grounds set forth in Sec. 115.19, SBA may deny
liability to a PSB Surety if:
(a) The PSB Surety's guaranteed bond was in an amount which,
together with all other guaranteed bonds, exceeded the allotment for the
period during which the bond was approved, and no prior SBA approval had
been obtained;
(b) The PSB Surety's loss was incurred under a bond which was not
listed on the bordereau for the period when it was approved; or
(c) The loss incurred by the PSB Surety is not attributable to the
particular Contract for which an SBA guaranteed bond was approved.