Note: This story is from one of Fireman’s Fund’s other agent/ broker E&O programs.

The client was a general contractor. The agency normally got bonds for the contractor from the same surety and typically had no problem securing approvals. Nevertheless, the agency did not have the authority to issue such bonds on its own; the surety’s consent was always required.

On a big construction job at a university, the first bid bond the client asked for was approved by the surety and prepared by the agency. However, the university rejected all of the bids which were submitted because they were too low. The reason was the bidders had left out something that was significant, and so the university’s specifications were clarified.

The contractor substantially increased its bid, but did not inform the agency about the new amount until a half hour before revised bids were due. The producer said he let the client know he would have to contact the surety for approval. But, the contractor submitted its increased bid to the university anyway. Apparently, this was done by changing the amount on the first bid bond.

After the revised bid had already been presented, the surety came back with a request for additional information. The next day, the surety refused to okay a bond on the new, higher amount. The producer tried other possibilities -- even referring the contractor to another agency which is a bond specialist -- but no surety would authorize the bond.

Withdrawing the Bid
At this point, the contractor could have withdrawn its revised bid, as the bids had not yet been opened. However, the client contractor waited until the bids were opened, learned it was the low bidder, and then withdrew its bid. The university imposed a 5% penalty, of nearly $1M, against the contractor for withdrawing the bid. Because the contractor placed the blame for incurring the penalty on the agency, the client demanded to be reimbursed.

The contractor and the producer disagreed about the specific conversations they had regarding this particular bond. For example, the client maintained the producers’ advice was to “go for it” (the higher bid), even without the proper bond. But, both agreed there was no written communication regarding the pre-approval necessary prior to the issuance of each bond.

A question arose about why the university accepted the revised bid without receiving a proper bond. This may have been due to the client’s bid being the only one that came in under the university’s budget.