Construction firms are being hit with the double-whammy of a hardening surety market along with the pain already being doled out by insurers. And the well-publicized bankruptcies of Enron and K-Mart are adding to the pain of sureties and their customers as bonding firms overhaul their book of business.
The problem on the contract side of the surety business started appearing in a big way in 2000 when "there was an overheating of the economy" and an uptick in failures by subcontractors that had taken on too much work, says Robert J. Lamendola, president and CEO of the Surety and Construction Group of the St. Paul Cos., St. Paul Minn., the nation's largest construction surety. This produced $600 million in losses for sureties, $400 million of which was shipped off to reinsurers, causing big problems for them.