The Biden administration is advancing its commitment to extend internet access to rural areas through its $42 billion Broadband Equity and Access Development (BEAD) program – and insurers might just hold the key to its success.
The initiative is meant to prioritize investments in fiber-optic projects and broadband infrastructure deployment.
With Wisconsin’s application to the program recently approved and related broadband projects garnering over $2 billion in funding requests, the importance of reliable construction is more important than ever – and it’s here that surety bonds, guarantees issued from an insurer on behalf of a firm to guarantee a project’s completion or the supply of a good or service, are set to come into their own.
According to Dave Herman (pictured), president of General Indemnity Group, surety bonds will be instrumental in accelerating the realization of faster internet access.
“In construction, surety bonds are a critical piece. They’re there to offer a guarantee that the work someone signs up to do will get done.”
Herman emphasized that sureties are used in contracts in which one party’s financial holdings or well-being are in question and the other party wants a guarantor.
“Showing a bond is an assurance that you have a credible entity that has reviewed you,” he said.
“Often what happens in the construction industry is two bonds are required for a project, a performance bond (a type of surety bond) which guarantees that a contractor will complete performance, and a payment bond, which guarantees that all the subcontractors will also be paid,” he explained.
“It creates a system of trust, as ultimately, contractors do not want a claim on their bond as they’ll have to pay back the amount of the loss.”
Unlike regular insurance, performance bonds offer an extra layer of protection. Instead of just covering damages, they guarantee project completion, which Herman highlighted as a key benefit.
Surety bonds have a longstanding history in the United States, dating back to the 1935 Miller Act, which mandated contract surety bonds for federal construction projects.
While BEAD’s initial requirements demanded service providers to secure a letter of credit equivalent to 25% of their grant award, a recent policy shift by the National Telecommunications and Information Administration (NTIA) now permits the use of performance bonds.
Herman commended this decision, highlighting the restrictive nature of letters of credit.
“A letter of credit basically requires me to have my working capital locked away in a bank. That is an agreement where if that other party legitimately makes a claim, the bank will pay them out from my account,” he said.
Herman noted the shift towards surety bonds is particularly beneficial as it unlocks valuable capital, freeing up more providers to participate in the BEAD program.
“If you want assurance and a guarantee of someone’s diligent and good behavior, a surety bond is a perfect option. And many people are beginning to realize that across different industries,” said Herman.
He added that the change will foster a more diverse market, especially benefiting community-centric internet service providers.
“It allows for more participants, especially for smaller internet service providers who don’t have a ton of capital,” he said.
Removing access barriers through the provision of surety bonds also offers the potential to speed up construction processes. As more players get involved, infrastructure deployment projects can begin sooner.
Herman believes the rule change offers a prime opportunity for advisors to enter what is likely to become an even more lucrative market space. With thousands of unique surety products available in the US, they offer a way for advisors to diversify their revenue streams and strengthen client relationships.
