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The Construction Industry Bonding & Insurance Case Study

Bonding & Insurance Miller Construction is a corporation that has been in business for 50 years and enjoys a good reputation. The majority of the company's business is in road works, and Miller Construction has been steadily profitable. The company was built by the elder Miller, who passed away a few years ago. Since that time, the business has been run by his son, Jacob. In two weeks, Jacob's brother Kenneth will be returning from military duty with the intention of joining the family business.

Since taking over from his father two years ago, Jacob has come to the realization that he is not as savvy at running a business as his father was. In particular, Jacob is weak with financial management. Jacob had accumulated personal debt, and to manage this he borrowed against the company's payables. Jacob also has some personal issues. He once filed a false insurance claim on stolen company equipment for $350,000. This is in the final stages of investigation, and the outcome could affect the business, in particular its ability to acquire insurance in the future. Jacob is also known to have a drinking problem, and has been arrested for DUIs three times. Jacob's financial issues are partially the result of his drinking but also partially the result of him not having much business education -- he dropped out of community college in his freshman year.

Kenneth, the other Miller brother, is currently processing out of the military honorably. He has some cash and investments saved. Upon completion of his service, Kenneth intends to return home and join the family business. While he has no formal education, Kenneth has made some contacts through the military and these contacts are interested in doing business with Kenneth, to the point where Kenneth believes that he has lined up a few potential contracts for Miller Construction. For his current and future contributions to the business, Kenneth now has 51%, or controlling interest, in Miller Construction.

The current state of the business is challenging. While it is profitable and enjoys a good reputation, it also faces some issues. Safeway Milling Company did some...

As a result, Safeway placed a mechanical lien on Miller Construction in the amount of $118,000 for non-payment of services rendered, and this was on both properties. At this point, Kenneth is only just becoming aware of Jacob's problems.
One of Kenneth's friends has come through with a contract worth $560,000 and Kenneth will want to get started immediately when he returns home. Jacob's whereabouts are unknown, which is distressing to Kenneth, but he needs to focus on the immediate issue, which is to become bonded and insured so that he can start work on the new contract as quickly as possible. Performance of this contract will be essential to ending the lien on both the company office and on Jacob's personal property under Alabama law, so Kenneth has a distinct sense of urgency with respect to the bonding and insurance issues.

The bid bond is required to guarantee to the project owner that the contractor (Miller) has the financial means to accept the job and perform for the price quoted. Under Alabama law for bid bonds, Miller Construction needs to file with the bid a cashier's check drawn on an Alabama bank payable to the awarding authority for an amount not less than five percent of the contractor's bid, but no more than $10,000. Five percent of the bid is $28,000, so Miller Construction would need to provide to the project owner a cashier's check in the amount of the maximum $10,000. Moreover, Kenneth needs to determine if the company has the assets required to actually perform the contract -- given his brother's financial ineptitude, this is no sure thing.

Insurance is a necessary requirement for construction work. Insurance coverage provides for property damage, removal of debris, professional fees, mitigation expenses, principal materials and more. There are several other add-ons to the traditional construction insurance policies. Insurance policies are provided through insurance partnerships or corporations that are licensed to provide insurance services in the state of Alabama. Insurance companies typically…

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