Claims and Recovery Program (September 23, 2016)

Summary

SBA Standard Operating Procedure SOP 50 46 2, Claims and Recovery Program, from the Office of Surety Guarantees, effective 9/23/2016 and authorized by Peter C .Gibbs, Acting Director. Its stated purpose is to establish written guidelines and procedures for surety bond guarantee claims reimbursement and recovery activity, and it cancels SOP 50 46 1. The table of contents covers a general overview of the Surety Bond Guarantee (SBG) program, claim reimbursement procedures, referrals to the Office of Inspector General (OIG), imminent breach requests, claim status codes and surety requests for reimbursement from SBA. Its closing section addresses correspondence about sureties that are defunct, in rehabilitation or liquidation.

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Full text

SBA SOP 50 46 2

_______________________________________
Claims and Recovery Program

Office of Surety Guarantees
SMALL BUSINESS ADMINISTRATION
STANDARD OPERATING PROCEDURE
National

SUBJECT: S.O.P. REV
Claims and Recovery Program SECTION NO.
50 46 2

INTRODUCTION
1. Purpose. To establish written guidelines and procedures for surety bond guarantee claims
reimbursement and recovery activity.

2. Personnel Concerned. Office of Surety Guarantees’ claims and recovery personnel.

3. Directives Canceled. SOP 50 46 1.

4. Originator. Office of Surety Guarantees.

AUTHORIZED BY: EFFECTIVE DATE
9/23/2016
Peter C .Gibbs PAGE
Acting Director 1
Office of Surety Guarantees
SBA Form 989 (5-90) Ref: SOP 00 23
Federal Recycling Program Printed on Recycled Paper

This form was electronically produced by Elite Federal Forms, Inc.
50 46 2

Table of Contents
PARAGRAPH PAGE

CHAPTER 1. GENERAL OVERVIEW OF THE SURETY BOND GUARANTEE
(SBG) PROGRAM

1.1. General Scope and Purpose of this SOP 5
1.2. Program Statutory Basis 5
1.3. Program Objectives 5
1.4. Program Authority 5
a. Headquarters Office 5
b. Surety Companies 6

CHAPTER 2. CLAIM FOR REIMBURSEMENT PROCEDURES

2.1. Rumble 7
2.2. Surety Notification of a Claim Situation 7
2.3. Loss and Eligibility for Further SBA Bond Guarantees 7
2.4. Office of Inspector General (OIG) Referral 7
a. Matters that Should be Referred to the OIG 8
b. Referral Process 8
c. Mailing Referral to the OIG 9
2.5. Imminent Breach 9
2.6. Processing Imminent Breach Requests 9
2.7. Review of Contractor File 9
2.8. Surety Status Reports on Claim and Recovery Activity 10
2.9. Claim Status Codes 10
a. Claim Status “1” 10
b. Claim Status “2” 10
c. Claim Status “3” 10
d. Claim Status “4” 10
e. Claim Status “5” 10
2.10. Analysis of the Contractor File 11
2.11. Steps Take When a Bid Bond Default Occurs 13
2.12. Surety Request for Reimbursement from SBA 14
2.13. Processing Claims for Reimbursement 14
a. Initial Payment 14
b. Subsequent Payment 16
c. Approval of SBA Form 994H 17
2.14. Avoiding Delays in Reimbursement to Sureties 17
2.15. Tracking Missing Payments 17
2.16. Release of Case File Information 18

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PARAGRAPH PAGE

CHAPTER 3. SUBROGATION AND RECOVERY PROCEDURES FOR PRIOR
APPROVAL PROGRAM

3.1. Subrogation and Recovery Activities 19
a. Conditions Necessary to Transfer a Bond to
Subrogation/Recovery Status 19
b. Status Reports 19
c. Sources of Recovery and Related Documentation 19
1. GIA 19
2. Investigative Reports 20
3. Financial Statement and Reports 20
a. Corporate Assets 20
b. Personal Assets 20
4. Letters of Credit 20
5. Discharge in Bankruptcy 20
6. Judgment 20
7. Accounting of Contract Funds 20
3.2. Funds Due SBA 20
a. Incoming Payment (s) Procedures for Due SBA Accounts 21
b. Due SBA Check(s) Procedures 22
c. Recovery Not Received by SBA 22
d. Recovery Applied to an Incorrect SBG Number 22
e. Refund of Recovery Money 22
3.3. Procedures for Placing a File in “Closed Final” Status 23
a. File Review 23
b. Closing Process 23
c. Disposition of a Closed-Final File 23
3.4 Indemnity Settlements 24
a. Definition of a Settlement 24
b. Types of Settlements 24
c. Policy Guidelines for Settlements 24
d. Procedures Used to Review a Settlement Proposal 25
3.5. Reinstatement of the Contractor 26
a. Circumstances Permitting Reinstatement 26
b. Impact of Surety Company Financial Status on
Reinstatement 26
1. Settlement Effected Prior to the Surety Company’s
Status Change 27
2. Settlement Effected After the Surety Company’s
Status Change 27
c. Reinstatement Procedures 27

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PARAGRAPH PAGE

CHAPTER 4. PROCEDURES FOR SURETIES THAT ARE DEFUNCT, IN
REHABILITATION OR IN LIQUIDATION

4.1. Definitions 28
a. Defunct Surety 28
b. Surety in Rehabilitation 28
c. Surety in Liquidation 28
4.2. Claims Handling Procedures for Sureties that are Defunct, in Rehabilitation,
or in Liquidation 28

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Chapter 1. General Overview of Surety Bond Guarantee Program

1.1. The General Scope and Purpose of this SOP

This Standard Operating Procedure (SOP) describes policy and procedures for handling
defaults, claims, and recoveries resulting from surety bonds issued by participating sureties and
guaranteed by SBA.

1.2. The Program's Statutory Basis

The Small Business Investment Act of 1958, as amended, empowers SBA to reimburse a Surety
participating in the Surety Bond Guarantee (SBG) Program up to a specified percentage of its
losses incurred and paid as a result of the contractor’s default of a bonded contract. Contracts or
total work orders eligible for SBA’s guarantee cannot exceed the applicable statutory limit at
the time of bond execution. As of January 3, 2013, this limit is $6.5 million, which may be
adjusted for inflation in accordance with 41 U.S.C. 1908, and SBA may also approve a
guarantee not to exceed $10 million if a contracting officer of a Federal agency certifies that
such a guarantee is necessary. . Chapter 13, Part 115 of the Code of Federal Regulations (13
CFR Part 115) provides regulatory guidelines and provisions for the SBG Program.

1.3. Program Objectives

The primary objective of the bond guarantee is to enable small contractors to obtain bonds for
contracts which they could not obtain in the traditional surety market without an SBA
guarantee. The program helps qualified small and emerging contractors grow their businesses
and compete in the marketplace.

1.4. Program Authority

a. Headquarters Office

The Office of Surety Guarantees (OSG) is responsible for the oversight and control of
SBG-related activities. Its primary claims function is to minimize SBA’s losses and
maximize recoveries by:

(1) Reviewing and approving, or denying claims for reimbursement under the
guarantee;

(2) Establishing SBA loss reserves;

(3) Determining whether cancellation or denial of SBA liability in whole or in part is
warranted under the guarantee;

(4) Establishing procedures for ensuring that SBA receives its share of any surety
recovery in a timely manner.

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b. Surety Companies

Participating sureties are required to take all reasonable actions necessary to minimize
loss and pursue recovery on any defaulted bond for which the Surety seeks
reimbursement of its losses and/or expenses. A surety must have salaried staff that is
employed directly with the surety to perform all claims and recovery functions other
than specialized services the costs of which may be reimburseable. Final settlement
authority for claims and recovery must be vested only in the surety’s salaried claims
staff.

SBA’s only contractual relationship is with the participating surety company, and not
with the individual contractor.

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Chapter 2. Claim Reimbursement Procedures for the Prior Approval Program

2.1. Rumble

A Surety must notify OSG’s Claims and Recovery Division (CRD) in writing (by regular mail
or email), within 30 days of the date the Surety acquires knowledge, or should have acquired
knowledge, that a claim has been made against the bond, but may indicate that the Contractor
either intends to satisfy the claim or that the claim is being disputed. Generally, the Surety sets
a small reserve in these cases. Based on the reserve amount and if SBA anticipates that there
will be no loss (i.e., collateral is posted, or claim paid), CRD will not consider the contractor as
having defaulted. This type of possible claim situation is referred to as a “rumble” and CRD
will notify the respective area office immediately upon receipt. (CRD or the respective area
offices will in turn notify responsible SBA district offices on “rumble” cases pertaining to 8(a)
contractors and contractors that have SBA loans.)

2.2. Surety Notification of a Claim Situation

A Surety must notify CRD in writing (by regular mail or email) at the earlier of the time the
Surety applies for a guarantee on behalf of an affected Contractor, or within 30 days of the date
the Surety acquires knowledge, or should have acquired knowledge of any of the following
events:

a. Legal action is initiated under the bond,

b. The Obligee declares the Contractor to be in default under the Contract,

c. The Surety establishes a claim reserve for the bond, or

d. The Surety receives any adverse information concerning the Contractor’s financial
condition or possible inability to complete the project or to pay laborers, subcontractor, or
suppliers.

2.3. Loss of Elibility for Further SBA Bond Guarantees

The Contractor and its Affiliates are ineligible for further SBA bond guarantees under any of
the following conditions:

a. Legal action under the bond has been initiated;

b. The Obligee has declared the Contractor to be in default under the Contract;

c. The Surety has established a claim reserve for the bond of at least $1,000;

d. The Contractor, or any of its Affiliates, has defaulted on an SBA-guaranteed bond resulting
in a Loss that has not been fully reimbursed to SBA, or SBA has not been fully reimbursed
for any Imminent Breach payments;

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e. The guarantee fee has not been paid by the Contractor; and

f. The Contractor committed fraud or material misrepresentation in obtaining the bond
guarantee.

Upon receipt by CRD of any of the events listed above, the CRD will enter in SBA’s Capital
Access Login System (CLS) that the Contractor has been placed in a default status, under
which the Contractor is ineligible for further SBA bond guarantees. If any of the above events
occurs on a different contract involving the same Contractor, CRD will check CLS to ensure
that the Contractor has already been placed in a default status. Ineligible Contractors may be
reinstated in accordance with the provisions of paragraph 3.5.

2.4 Office of Inspector General (OIG) Referrals

a. Matters That Should be Referred to the OIG

All SBA officials, Sureties and other program participants should be on the lookout for fraud,
and must report any known or suspected irregularities involving SBA programs, program
participants, or personnel to the OIG. (13 CFR § 120.197) Whether acting alone or in collusion
with others, surety bond guarantee applicants, Sureties or other Obligors may intentionally
provide false information to SBA. Examples of irregularities that must be referred include:

a. Overstating income;
b. Understating or failing to disclose liabilities and debts;
c. Overvaluing collateral;
d. Failing to disclose criminal record;
e. Making false claims of U.S. citizenship.
f. Failing to disclose true ownership of the business;
g. Using false Social Security numbers to conceal poor credit history;
h. Submitting altered tax returns;
i. Creating false work histories’;
j. Actions by corrupt Surety agents who orchestrate, facilitate or otherwise support any of the
illegal acts committed by SBG applicants; or
k. Misconduct by a Surety, Surety agent or representative, or SBA official such as the
solicitation, offer or acceptance of a bribe to approve a surety bond guarantee.

b. Referral Process

A referral to the OIG can be made by:

a. Calling the toll –free OIG Hotline at 1-800-767-0385;
b. Completing the on-line OIG Complaint Submission Form at
http://web.sba.gov/oigcss/client/dsp_welcome.cfm and submitting the referral via the
Internet; or

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c. Mailing the referral to:
U.S. Small Business Administration
Office of Inspector General
Investigations Division, Mail Code 4113
409 Third Street, SW
Washington, DC 20416

2.5. Imminent Breach

Imminent Breach is a threat to the successful completion of a bonded contract that, unless
remedied by the Surety, makes a default under the bond inevitable. Subject to the conditions
set forth below, SBA will share, to the same extent that it would share in any other loss, a loss
arising out of a Contractor’s failure to repay in full funds advanced to it by the Surety in order
to avoid, or attempt to avoid, an imminent breach of contract. To qualify for such
reimbursement, a Prior Approval Surety must first request in writing SBA approval for such
advances not to exceed in total 10% of the contract price (unless the Administrator determines
that advances in excess of 10% are necessary and reasonable). The Surety must demonstrate
that the circumstances make default imminent and describe the basis for the Surety’s belief that
the Contractor can successfully complete the contract if the advances are made. In no event
shall SBA pay a Surety an amount exceeding the guaranteed share of the bond. (See §
411(b)(3) of the Small Business Investment Act).

2.6. Processing Imminent Breach Requests

a. Once SBA receives an Imminent Breach request, CRD will notify the appropriate Area
Office, or will request if needed, the Contractor file that may be stored, or review the
contractor’s electronic file. (Please note that the contractor is not in default.) CRD will
review the case file with emphasis on current work in progress; the contractor’s ability to
repay the Surety; the amount of potential claims; and the nature and extent of work to be
completed.

b. CRD will provide a brief summary of the case with recommendations on whether SBA
should reimburse the Surety for imminent breach payments to the Director of OSG
(D/OSG). If the D/OSG agrees to reimburse the Surety for imminent breach, CRD must
enter the imminent breach payments information into CLS. This will set-up a
computerized file so that SBA can reimburse the Surety and monitor repayment activity.

2.7. Review of Contractor File

Upon receiving notification under paragraph 2.2 above, CRD will review the electronic file
and/or will request, if needed, the Contractor’s paper file from the Area Office. For bond
guarantees approved before October 2007, CRD requests a hard copy of the contractor file by
contacting the Area Office via email. The documents contained in the contractors’ files for
bond guarantees approved after October 2007 are available electronically in CLS.

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2.8. Surety Status Reports on Claim and Recovery Activity

a. The CRD uses status reports from participating Surety companies to monitor a Surety’s
claims and recovery activity on defaulted bond guarantees. Status reports must include the
project’s completion status, remaining contract balances, performance and payment bond
activities, Surety’s indemnity efforts, and the Surety’s claim reserve. This information is
also used to adjust SBA’s loss reserves and to update the computer database. These
administrative updates may be submitted by the Surety either through the CLS or via email
using the SBA Form 994H “Default Report, Claim for Reimbursement and Record of
Recoveries”.

b. At the time of the initial status report, much of the information may not be available to the
Surety; therefore, SBA requires the Surety to submit semiannual status reports on each
claim beginning six months after the initial notice, and then every six months thereafter.
The Surety must notify SBA immediately of any substantial changes in the status of the
claim or the amount of loss reserves.

2.9. Claim Status Codes

Based on the status report(s), the Surety places the bond in one of the claim statuses listed
below in CLS if the Surety submits the claim electronically, and CRD performs this function if
the Surety submits the claim by mail.

The following is a list of the possible categories and descriptions.

a. Claim Status "1": This is an "Active" status used to establish the case in claims when the
Surety indicates that there is contingent liability and that the Surety will be submitting
claims for reimbursement.

b. Claim Status "2": This is a "Closed-No Loss" status used after SBA has received full
recovery from the Surety for its claims for reimbursement paid by SBA; or when no
payment was made by the Surety or SBA after contractor was placed in a claim status.

c. Claim Status "3": This is a "Closed-to-Subrogation" status used when the project has been
completed and all outstanding claims have been paid by the Surety and recovery is being
pursued from the indemnitor(s), and/or the obligee (contract retainage), and/or the
Contractor. See paragraph 3.1.

d. Claim Status "4": This is a "Closed-Final" status that is used only after the Surety has
exhausted all reasonable recovery efforts and has received SBA's approval to cease further
pursuit of recovery. See paragraph 3.3.

e. Claim Status "5": This is a "Settlement" status that is used when the Surety has executed
an agreement with the principal/indemnitor for less than the actual losses and/or expenses

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paid on behalf of the principal/indemnitor. The Surety must obtain SBA’s concurrence
before entering into any settlement agreement. See paragraph 3.4.

2.10. Analysis of the Contractor File

a. CRD examines the financial conditions, business, underwriting, and default/claim
information for bond guarantees in default to verify the Surety’s compliance with the
regulations and SOP provisions of the SBG Program.

b. A review of the financial, business, and underwriting information is the first step in
analyzing the claims file. The following underwriting forms are examined to determine that
the guarantee was executed in accordance with the regulations and SOP provisions of the
SBG program.

(1) SBA Form 912, "Statement of Personal History”. Review for character and reputation
eligibility requirements. See 13 CFR 115.13 to determine who is required to submit this
form.

(2) General Indemnity Agreement (GIA). Make certain this is signed by the principal(s) of
the Contractor and indemnitor(s), and notarized by an authorized person(s). The GIA
must indemnify the Surety that appears on the bonds and the SBA guarantee agreement.

(3) SBA Form 994, "Application for Surety Bond Guarantee Assistance". Review for
pertinent information about the company’s gross annual receipts, the project, its
location, starting and completion dates, contract amount, penalty clause, and the
Contractor's experience with other SBA programs. It also includes information on the
Contractor's minority status, which may affect the guarantee percentage.

(4) SBA Form 994F, “Schedule of Work in Process”. Review for a listing of all of the
uncompleted work (bonded and unbonded) of the contractor (and any of its
subcontractors) at the time the guarantee was issued.

(5) SBA Form 990, "Surety Bond Guarantee Agreement". This form is SBA's commitment
to guarantee bonds issued by the Surety. Verify both the Surety and SBA
representative signatures to ensure they were authorized to execute the SBA Form 990.
SOP 50 45 Chapter 1, “General Overview of the Surety Bond Guarantee Program,”
should be used to verify the delegated authority of the SBA signature on the SBA Form
990.

(6) SBA Form 990A, "Quick Bond Guarantee Application and Agreement". This form is
SBA's commitment to guarantee bonds which were issued by the Surety up to the
amount authorized by regulation. Verify both the Surety and SBA representative
signatures to ensure they were authorized to execute the SBA Form 990A. SOP 50 45
Chapter 1, “General Overview of the Surety Bond Guarantee Program,” should be used
to verify the delegated authority of the SBA signature on the SBA Form 990A.

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(7) SBA Form 991, “Surety Bond Guarantee Agreement Addendum”. This form is used
when work under the contract has started prior to the Surety receiving SBA’s
guarantee. It provides evidence from the Contractor that the Surety bond requirement
was contained in the original contract and sufficient documentation as to why the Surety
bond was not previously obtained. The SBA Form 991 also provides certification that
all subcontractors and suppliers were paid before the SBA Form 991 is approved is
correct, based on the contract amount and program regulations. It is important that the
percentage of guarantee on the SBA Forms 990 or990A.

(8) Financial/Business Data is reviewed to determine if principal met program eligibility
requirements for the SBG Program, at the time of the guarantee.

c. CRD will thoroughly review the applicable bond(s), bonded contract, bid solicitation, and
contract award letter to verify that the bonds were required, that the contract amount is the
same on the SBA Forms 990 or 990A, that the contract amount was within statutory limits,
that the contract itself fell within the regulatory definition of “Contract”, that any
notification and approval of increases or decreases in the Contract or bond amount was
provided as required by 13 CFR § 115.32(d), and that the project was eligible for the SBG
Program. (Refer to SOP 50 45, “Surety Bond Guarantee Program,” for more details.)

d. CRD will also review the default notification and current status reports to ascertain the
following information:

(1) A description of the claim(s) filed against the bond;

(2) The status of the project and completion arrangements;

(3) Remaining contract funds;

(4) Surety's plan for settling or defending the claim(s);

(5) The anticipated loss plus reserve amount;

(6) Liquidated damages asserted; and

(7) Other information pertinent to the claim.

e. CRD will request clarification from the Surety on any discrepancy or inconsistency in
information provided in the status reports and case files. Once the analysis is completed and
CRD determines that payment can be made under its guarantee, CRD places the contractor
in default status in the SBA CLS Application System. The SBG Specialist will prepare an
initial write-up with recommendation to process, deny, or request additional information on
the reimbursement request.

f. Denial of Liability.

The D/OSG may deny liability under SBA’s guarantee (in whole or in part within its

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discretion) in accordance with 13 CFR § 115.19. For any claim for reimbursement for
which there are grounds for denial, CRD will prepare and submit a written referral to the
D/OSG.

Listed below are examples of the circumstances that are grounds for denial of liability. See
also 13 CFR § 115.19:

a. Work began prior to obtaining SBA’s Guarantee;

b. Original contract amount exceeds statutory limit;

c. Ineligible type of Contract (e.g., Contracts for Financial Guarantees);

d. Surety’s failure to obtain a GIA;

e. Bond(s) amount exceeds contract amount

f. Surety did not notify SBA timely of possible default/claims

g. Surety’s negligence in handling losses

h. Surety’s material misrepresentation or omission of statement of material fact; and

i. Surety has committed a substantial violation of SBA regulations.

2.11. Steps Taken When a Bid Bond Default Occurs

a. A bid bond default occurs when the Surety declines to issue the final bond or when the
contractor refuses to enter the contract after notification of proposed award. To process
a claim under the bid bond, SBA must receive the following information:

(1) A copy of the demand letter from the obligee;

(2) A copy of the lawsuit (if applicable);

(3) A copy of the bid bond; and

(4) A copy of the contract.

b. For a bid bond guarantee executed under a bonding line, CRD should review the
bonding line in addition to the bid bond, lawsuit, or demand letter from the obligee
when no SBA Form 990 or SBA Form 990A exists. The Surety must prepare a SBA
Form 990 or SBA Form 990A, which must be signed by the area office Surety bond
guarantee personnel with the appropriate delegated authority. This action does not
constitute a new guarantee; it is used only to document a previous commitment under a
bonding line. Carefully review information pertaining to the bid bond default to see if

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the bid bond was issued after the contract was awarded and/or the job had started.

2.12. Surety Request for Reimbursement from SBA

The Surety may submit reimbursement requests either via regular mail or through CLS, except
that SBA Form 994H with the Surety’s original signature must be submitted by regular mail
for payment to be issued.

Under the Rule of Two, a request for reimbursement must be approved by the combined action
of two SBA employees who hold delegated or re-delegated authority. An SBA professional
staff member must recommend the action and the approval official must concur with the
recommendation. If the recommender and approval official disagree, the reimbursement
request will proceed through the chain of command until a final decision is made.
The following officials have the authority to approve a request for reimbursement under a
single bond up to the amounts set forth below:

Claims and Recovery Division Approval Authority

Position Dollar Amount (in the aggregate)
Director, OSG More than $2,000,000
Deputy Director, OSG More than $650,000 but not in excess
of $2,000,000
Director, Claims and Recovery Division Up to $650,000

2.13. Processing Claims for Reimbursement

In processing requests for claims reimbursement, CRD reviews the following items in detail:

a. Initial Payment

Review SBA Form 994H to ensure that the information corresponds with information
contained in the documents in CLS.

(1) Review the SBA Forms 990 or 990A, to determine the following.

(a) Approval signature of SBA official is within appropriate authority.

(b) The guarantee percentage is:

(i) 80 percent for contracts more than $100,000;

(ii) 90 percent for contracts up to and including $100,000. If the contract
amount increases more than $100,000 after execution of the bond, the
guarantee percentage decreases by 1 percentage point for each $5,000
increase or part thereof, but it does not decrease below 80 percent; and

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(iii) 90 percent for all contracts awarded to firms owned and controlled by
socially and economically disadvantaged individuals, by qualified
HUBZone businesses, or by veterans or service-disabled veterans.

(iv) Contract or Order increases exceed Applicable Statutory Limit. If the
Contract or Order amount is increased above the Applicable Statutory Limit
after Execution of the bond, SBA's share of the Loss is limited to that
percentage of the increased Contract or Order amount that the Applicable
Statutory Limit represents multiplied by the guarantee percentage approved
by SBA. For example, if a contract amount increases to $6,800,000, SBA's
share of the loss under an 80% guarantee is limited to 76.5%
[6,500,000/6,800,000 = 95.6% x 80% = 76.5%].

(c) Correct name of the Surety - When there are two sureties (co-sureties) named
on the SBA Forms 990 or 990A, the lead Surety is specified. All transactions
with SBA will be done through the lead Surety.

(d) Request and review current status reports with sufficient loss reserves (loss
reserves are estimated future liabilities that must be settled at a later date). If
the validity of the claim for reimbursement or justification for payment
appears to be questionable, refer the file to the supervisor for appropriate
action.

(2) Page two (2) of the SBA Form 994H provides a list of itemized disbursements by
date, draft number, payee, and amount, any recovery received and the loss summary.
Documentation to support the itemizations on all attorney and/or consultant fees must be
entered by the Surety in CLS. Once the information is entered, CLS will preliminarily
calculate the payment amount owed the Surety or the amount due to SBA by the Surety.

994H Reimbursement Request must be submitted within 90 days from the time of each
disbursement.

Example #1:

Loss Disbursements $ 4,000.00
Loss Disbursements Previously Reported $ -
Total Loss of Disbursements $ 4,000.00
Recovery $ -
Recovery Previously Reported $ -
Undisbursed Trust Account Balance $ -
Total Recovery $ -
Surety Net Loss $ 4,000.00
Less Deductible Amount $ -
Share of Surety Reimbursable Loss
(90%) $ 3,600.00
Prior Total SBA Payments $ -

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Balance Due Surety $ 3,600.00

CRD staff, with the appropriate delegated authority, must review and approve the SBA
Form 994H in CLS for payment to be issued.

(3) Reinsurance

If the Surety has an existing reinsurance treaty covering SBA guaranteed bonds,
any amounts that the Surety receives under this treaty is applied first to the Loss,
and SBA would reimburse Surety the guaranteed percentage of any part of the
Loss that is not covered by reinsurance. For example, the Surety has treaty
reinsurance that covers the first $100,000 in losses in excess of $50,000. A loss
of $75,000 occurs on an SBA guaranteed bond. The reinsurance is applied first
to the Loss before SBA’s guarantee as follows: (Assume no other salvage or
recovery is available).

Claims and Expenses Paid = $75,000
Reinsurance Recovered = $25,000
Loss to Surety (gross) = $50,000
SBA pays the Surety (80%) = $40,000*

* (80% guarantee of $50,000 = $40,000, 90% guarantee of $50,000 = $45,000)

b. Subsequent Payments
(1) The same procedures used for the initial payment are used for subsequent
payments. However, it is important that CRD review the itemizations closely for
any duplication of payment from prior requests. All items that have been
previously paid are considered duplicates and are disallowed from the itemized
total amount. Note disallowances(s) on the SBA Form 994H and notify the
Surety of the disallowance(s) and advise the Surety of the corrected amount that
is approved for payment.

(2) Request and review current status reports with sufficient loss reserves (loss
reserves are estimated future liabilities that must be settled at a later date). If the
validity of the claim for reimbursement or justification for payment appears to be
questionable, refer the file to the supervisor for appropriate action.

An example of how CLS will preliminarily calculate a subsequent payment is as
follows:

Example #2:

Loss Disbursements $ 5,500.00
Loss Disbursements Previously Reported $ 4,000.00
Total Loss of Disbursements $ 9,500.00
Recovery $ -

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Recovery Previously Reported $ -
Undisbursed Trust Account Balance $ -
Total Recovery $ -
Surety Net Loss $ 9,500.00
Less Deductible Amount $ -
Share of Surety Reimbursable Loss (90%) $ 8,550.00
Prior Total SBA Payments $ (3,600.00)
Balance Due Surety $ 4,950.00

c. Approval of SBA Form 994H

After the SBA Form 994H has been recommended for payment in CLS and the original SBA
Form 994H with the original signature has been received, it is sent to the approving official for
review/approval. CRD will scan and enter the original SBA Form 994H in CLS and file and
retain the original paper copy in accordance with SOP 41 2, Records Management Program.

2.14. Avoiding Delays in Reimbursements to Sureties

SBA will reimburse the Surety within 45 days of receipt of their payment request in
accordance with 13 CFR 115.35 provided that all necessary information is submitted. To help
expedite the payment process, CRD requires the sureties to provide the following items with
the initial claims for reimbursement:

(1) Initial Default Notification;

(2) Signed copy of the General Indemnity Agreement;

(3) Documentation for all fees and expenses;

(4) An original signature and date of execution of the 994H;

(5) A narrative status report that includes percentage of completion, contract balance, cost to
complete, appropriate reserve, and details regarding the claim situation; and

(6) A Copy of the Agent’s power of attorney.

When additional information is still needed on a claim payment, CRD can disallow the
questionable amount pending receipt of the information, unless the requested information
pertains to the entire claim. If the requested information pertains to the entire amount of the
claim, return the reimbursement request to the Surety with an explanation.

2.15. Tracking Missing Payments

If a Surety informs SBA that it has not received a check or electronic deposit, CRD should
contact SBA’s Denver Finance Center (DFC) in Denver, CO, for assistance. DFC will need
the SBG number, the Surety name, the payment amount, and the approval date.

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2.16. Release of Case File Information

a. Public access to information contained in SBA case files is governed by provisions
established by the Freedom of Information Act and Privacy Act. It is essential that you
recognize the importance of complying with the policies and procedures governing public
access to files, records, and documents of SBA. See SOP 40 03, “Dislcosure of
Information” and 13 CFR 102, “Record Disclosure and Privacy”.

b. Disclosure of information in an unofficial manner may compromise SBA's position and
increase vulnerability of the Agency, and may result in legal action against both SBA and
the employee responsible for the release of the material.

c. If SBA receives a subpoena and/or court order for a file in claims, you should notify the
D/OSG and the Office of General Counsel immediately. Under no circumstances should
you release a case file from OSG without notifying and consulting with the D/OSG and the
Office of General Counsel. Make sure that you complete a file release form and maintain a
copy of any documents released.

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Chapter 3. Subrogation and Recovery Procedures for Prior Approval Program

3.1. Subrogation and Recovery Activities

a. Conditions Necessary to Transfer a Bond to Subrogation/Recovery Status

CRD will place the defaulted bond into a “Closed-to-Subrogation” status (Claim Status
“3”) in the CLS when the Surety advises SBA that the project has been completed, all
claim payments have been made, no further contingent liability remains, and recovery is
being actively pursued from the Contractor, the principal(s), indemnitors, and obligee.
CRD then monitors Surety’s recovery efforts through regular status reports.

b. Status Reports

(1) CRD uses status reports from sureties to monitor recovery and to check the expenses
anticipated relative to recovery efforts. In accordance with 13 CFR § 115.35(d), the
Surety must submit these reports semi-annually; however, the Surety must notify
SBA immediately of any substantial changes in the status of the claim or the amounts
of Loss reserves. CRD can also request additional information at any time, if
necessary. CRD compares information contained in the current status report to that in
previous status reports, as well as to other information on file to check for
consistency, accuracy, and to verify that the Surety is taking all steps necessary to
minimize the loss and is pursuing all possible sources of recovery.

(2) As part of a status report, a Surety must include an update, if applicable, of the
approved repayment plan for a defaulted contractor. CRD will review and monitor
the repayment plan to ensure receipt of SBA’s share of monies received by the
Surety.

(3) CRD also monitors actual and anticipated legal fees and costs associated with the
Surety's subrogation and recovery efforts, and refers any abnormalities or apparent
non-compliance with the terms and conditions of the SBA Forms 990 or 990A in
writing to the D/OSG, through the appropriate supervisor, with a recommendation for
appropriate action.

c. Sources of Recovery and Related Documentation

The following is a list of documentation required for SBA’s review of the Surety’s
recovery activities:

(1) GIA: This is an agreement signed by an individual or entity holding the Surety
harmless from any loss or exposure incurred on a bond that it issues. The signatures
on this form determine who the Surety holds liable and what assets may be pursued
by the Surety.

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(2) Investigative Reports: Two of the most common investigative reports are obtained
from Equifax and Dun and Bradstreet. Both are used to locate the indemnitors and
ascertain what assets are available for indemnity pursuit.

(3) Financial Statements and Reports: These reports include the assets and liabilities of
the individual indemnitors or the Contractor at a given point in time. Current
financial statements should be compared to those that were submitted with the
underwriting package. Question any discrepancies. Examples of the types of assets
that would be included in these reports are:

(a) Corporate Assets
(i) Real Estate
(ii) Machinery and Equipment
(iii) Accounts Receivable
(iv) Supplies and Materials
(v) Bank Accounts
(vi) Insurance Policies

(b) Personal Assets
(i) Residence (In some states, subject to Homestead Acts)
(ii) Land and Real Estate
(iii) Bank Accounts/Stocks and Bonds
(iv) Insurance Policies
(v) Luxury Items (Jewelry, automobile, boats, etc., check with the Department of
Motor Vehicles for registration)

(4) Letters of Credit: Issued by banks, these are sometimes required by the Surety as
collateral at the time that the bond was underwritten. If a default occurs, this can
be pursued as recovery.

(5) Discharge in Bankruptcy: This may be requested from the Surety as documentation
of the actual parties to the bankruptcy and the date of discharge, as well as the
type of bankruptcy.

(6) Judgment: A copy of the judgment against the Contractor and/or Indemnitors is
requested from the Surety to clarify the details of the judgment.

(7) Accounting of Contract Funds: Since the contract funds remaining on a defaulted
project may represent a substantial amount of recovery, a complete accounting of the
remaining funds is conducted by CRD.

3.2. Funds Due SBA

A “Due SBA” account occurs when the Surety’s reimbursable loss amount is less than SBA’s
paid amount. SBA is entitled to its guaranteed percentage of all salvage and recovery
obtained by the Surety. The Surety must reimburse or credit SBA its guaranteed share within
45 days of receipt of any recovery by the Surety. A “Due SBA” account can also occur when

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a refund is due SBA because an overpayment was made to the Surety as the result of over
billing or otherwise.

For Active (currently participating) Sureties, all recovery and refund payment are sent through
Pay.gov For a Non-Active (not currently participating) or Defunct Surety, the check should
be sent to SBA at the following address:

Director
Claims and Recovery Division
Office of Surety Guarantees
U.S. Small Business Administration
409 Third Street, S.W.
Washington, DC 20416

The following procedures are to be used with respect to “Due SBA” accounts:

a. Incoming Payment Procedures for Due SBA Accounts
Due SBA account can be submitted through Pay.gov. Pay.gov is a financial management
transaction portal that is managed by the U.S. Treasury’s Financial Management Service
that enables the public to electronically remit payment to Federal agencies 7 days a week,
24 hours a day.

(1) Date stamp all incoming related correspondence, if payment is made via check.

(2) Check the case file for the appropriate SBG number.

(3) Prepare letter with SBG Number, Bond Number, and Amount of Payment with a
copy of 994H(s) on all correspondence. If the payment pertains to several SBG
numbers, itemize under each SBG number the proportionate amount to each bond.

(4) If applicable, make two copies of the check and the related correspondence and
distribute as follows: a copy with the 994H to be uploaded into CLS and a copy
for the surety file. Inactive, defunct, insolvent i.e., sureties submitting payment
monies to be sent no longer have ACH accounts.

(5) Place the check(s) and applicable documents in an envelope addressed to DFC and
put it in the Denver overnight box in the Office of the Chief Financial Officer
(CFO).

(6) Monitor the file for at least 30 days to see if payment is submitted. At that time,
follow the “Due SBA” procedures described in the next section.

b. Due SBA Procedures

The "Due SBA" amount is submitted by the Surety on SBA Form 994H, "Claim for
Reimbursement." CRD uses the following steps to process a "Due SBA."

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(1) Check the trade name and the SBG number on the "Due SBA" to make sure that the
name and number corresponds to the correct contractor file, and to bond and claim
number(s) on previous correspondence.

(2) Check the figures on the SBA Form 994H using the same procedures described in
Chapter 2, “Claim for Reimbursement Procedures.” The SBA Form 994H may
indicate that the Surety’s recovery was offset by the loss paid.

(3) If the Surety's calculation and the amount due to SBA are incorrect, notify the
Surety of the discrepancies and monitor the file for follow-up.

(4) Check the “Accounting Transactions” screen in the CLS for the appropriate SBG
number to determine if SBA has received its share of the recovery funds.

c. Recovery Not Received by SBA

If a period of 45 calendar days has passed since the receipt of the "Due SBA" and there is
no indication that the recovery monies have been credited to the appropriate bond, CRD
will proceed as follows.

(1) Contact the Surety to verify that the monies were sent. If the monies have not been
sent, request remittance from the Surety in writing.

(2) Monitor the file for approximately two weeks and follow-up at that time.

(3) A Surety's failure to remit recovery monies to SBA within 45 days should be
reported in writing to the Director of Claims for further action.

(4) Director prepares demand letter with the assistance of OGC.

d. Recovery Applied to an Incorrect SBG Number

If recovery monies have been applied to an incorrect bond, the CLS database records must
be adjusted. Contact SBA’s DFC in Denver, CO and the Director, Office of Performance
and Systems Management in Headquarters with the correct information for assistance.

e. Refund of Recovery Money

Request a Form 994H from the Surety to process a refund due the Surety for overpayments
of SBA's share of the recovery. Once CRD receives the information and agrees with the
refund, send letter to DFC and instruct how to code the monies recovered.

3.3. Procedures for Placing a File in “Closed-Final” Status

A Surety must obtain SBA’s written consent to discontinue recovery efforts when further

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indemnity pursuit is considered economically impractical or when the indemnitor(s) have
been discharged in bankruptcy. CRD must take the following steps to complete the closing
process.

a. File Review

(1) CRD reviews the case file for each defaulted bond guarantee listed in the Surety’s
request. Request the financial background information on each respective
indemnitor to verify that it is no longer practical to continue indemnity pursuit.
Make sure that final reimbursement to the Surety has been made.

(2) If the indemnitor(s) have been discharged in bankruptcy, the file must contain a
copy of the Bankruptcy Discharge. Make sure that the indemnitor(s) listed on the
GIA are listed on the Discharge.

b. Closing Process

(1) Usually the final request for reimbursement is submitted with the Surety’s request
to close. If it is not, CRD maintains the file in the "Closed to Subrogation" status
until the final billing is received. Any disbursement by the Surety that occurs more
than 90 days after the Surety’s request to close must be accompanied by supporting
documentation. Once the final payment request and any applicable documentation
have been received, place the specific bond guarantee into a “Closed Final” status
in the CLS.

(2) Complete a "Closing Summary Sheet" when the file is being closed. Include a
brief summary of the Surety's subrogation and recovery attempts on each defaulted
project in the closing request, reasons for closing the file, and CRD’s
recommendations concerning the Surety's request to discontinue subrogation and
recovery efforts. Submit this summary to the supervisor for approval to close the
file. Once approval is received, prepare a letter to the Surety for the supervisor’s
signature.

(3) Update the CLS with the closing information.

c. Disposition of a Closed-Final File

(1) Notate the file and update the computer file tracking system that the file is “Closed-
Final.”

(2) Forward the file to the warehouse for storage if applicable.

(3) A listing of the closed-final files are accessible in CLS.

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3.4. Indemnity Settlements

a. Definition of a Settlement

A settlement occurs when a defaulted contractor and its Surety agree upon an amount
less than the total loss amount that will satisfy the contractor's indebtedness to the
Surety. SBA must concur, in writing, to a Surety’s recommendations regarding the
settlement offer before the settlement can be finalized. Once the settlement has been
executed, the Surety must submit SBA’s guaranteed share of such amount within 45
days of receipt. (For details on submitting payments to SBA, see paragraph 3.2 “Funds
Due SBA.”)

b. Types of Settlements. CRD will identify in CLS the type of settlement approved as
follows:

(1) Settlement (Immediate Payment of SBA's Pro Rata Share of Recovery). The Surety
settled its claim with the indemnitor(s) for an amount less than the Surety's total loss
with terms accepted by OSG.

(2) Settlement (Delayed Payment of Settlement Adequately Assured). The contractor
has paid the Surety a portion of the settlement amount and the Surety has taken firm
collateral from the contractor for the balance of the settlement amount. CRD must
obtain a copy of the collateral document and SBA's share of the partial payment
from the Surety.

(3) Contested Claim (Scheduled Court Appearance). The contractor has been presented
with a claim which it contests in court. The contractor posts collateral with the
Surety in the amount of the possible loss from the claim, including legal and
administrative fees reimbursed to the Surety by SBA. The Surety sends SBA a copy
of the draft, money order, or collateral document plus confirmation that there are no
other claims outstanding on this or any other SBA-guaranteed bond involving this
contractor.

c. Policy Guidelines for Settlements

Under the terms and conditions of SBA Forms 990 or 990A, the authority to act upon
proposed settlement offers in connection with defaulted Surety bonds lies with the Surety
and not SBA; however, the Surety must obtain SBA’s written concurrence with the terms
negotiated by the Surety before the Surety may enter into a settlement agreement. The
contractor's contractual relationship is with the Surety company, not SBA; therefore, all
matters pertaining to settlement and reinstatement must be arranged with and through the
Surety. SBA will not negotiate or discuss with the contractor any amount owed to the
Surety by the contractor or settlement of such debts.

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d. Procedures Used to Review a Settlement Proposal

CRD takes the following steps to review a Surety’s recommendation for indemnity
settlement.

(1) Checks SBA’s payment amount for all defaulted projects (including projects with
other sureties) to determine SBA’s total net loss on all projects.

(2) Determines which defaulted projects are involved in the settlement proposal.

(3) Reviews the facts outlined in the settlement letter and any other correspondence.

(4) Reviews the following information in the file:

(a) GIA - Make sure that all of the indemnitors are accounted for in the Surety
settlement proposal. If not, request information regarding what recovery
actions have been taken against the indemnitor(s) in question.

(b) Status Reports, Financial Statements (including tax returns) - ascertain the
financial status of the indemnitors.

(d) If clarification of questionable items or supporting documentation is needed,
contact the Surety for additional information.

(e) Compare the total net loss figure with the total amount of the settlement being
offered. Consider whether the settlement offer is reasonable compared to the
total loss amount.

(f) Prepare a written summarization of the facts of the case, including any
pertinent recommendations concerning the settlement proposal. Explain any
agreement or disagreement with the settlement offer.

(g) Submit recommendations to the D/OSG through your supervisor.

(h) Advise the Surety of SBA's decision concerning the settlement offer. This
response may be in the form of a telephone call, email or a letter, depending
upon the urgency of the situation. If the response is by phone, prepare a letter
of confirmation no later than the next business day. The letter should outline
the settlement terms as submitted to SBA.

(i) If the settlement proposal is not satisfactory to SBA, CRD will advise the
Surety and request that it to re-negotiate the settlement terms.

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(j) Request a follow-up letter from the Surety representative outlining the
settlement terms and the final outcome. If the settlement is executed, CRD
must request a copy of the executed agreement and SBA’s share of monies
received.

(k) Upon receipt of this follow-up letter, monitor the file for an appropriate period
of time to be sure that the recovery monies have been received.

3.5. Reinstatement of the Contractor

A reinstatement occurs when the Contractor becomes eligible for further Surety bond
guarantee consideration and the SBA CLS Application System is updated accordingly.

a. Circumstances Permitting Reinstatement

At any time after a Contractor becomes ineligible for further bond guarantees, a Prior
Approval Surety may recommend that such Contractor’s eligibility be reinstated, and
OSG may agree to reinstate the Contractor if:

(1) The Surety has settled its claim with the Contractor, or any of its Affiliates, for
an amount that results in no Loss to SBA or in no amount owed for Imminent
Breach payments, or D/OSG finds good cause for reinstating the Contractor
notwithstanding the Loss to SBA or amount owed for Imminent Breach
payments. Good cause may exist, for example, if the loss was attributed
solely to the acts or omission of a co-owner who is no longer a part of the
business, or

(2) D/OSG and the Surety determine that further bond guarantees are appropriate
after the Contractor was deemed ineligible for further SBA bond guarantees
under paragraphs 2.3(a), (b), (c), (e), and (f).

Note: As a result of the contractual relationships established by SBA Forms 990 or 990A, the
Surety is the only party that may request reinstatement of a Contractor. Often, OSG and area
office staff are contacted by the Contractor, the Contractor's attorney, or the Contractor's
current agent regarding future bonding. In these instances, SBA personnel should refer the
party to the Surety and encourage repayment negotiations between the two parties. The Surety
must then notify OSG when the Contractor has resolved his/her claim obligations so that
reinstatement procedures can be initiated.

b. Impact of Surety Company Financial Status on Reinstatement

(1) Settlement Effected Prior to the Surety Company's Status Change: If a settlement
between the Contractor or Contractor's legal representative and the Surety
company was approved by SBA and was effected prior to the Surety company's
status change to defunct, rehabilitation, or liquidation, then the amount and the
terms of the settlement should stand as the duly renegotiated debt.

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(2) Settlement Effected After the Surety Company's Status Changed: Subject to SBA
approval of the settlements terms, a new settlement on a defaulted SBA-
guaranteed bond may be effected between a Contractor and a State Insurance
Department as liquidator, if the Contractor's Surety is defunct, in rehabilitation, or
in liquidation.

c. Reinstatement Procedures

CRD takes the following steps to reinstate a file.

(1) Review the file in the CLS.

(2) If the file was previously closed final and sent to storage, update the status in
the CLS.

(3) If a settlement has been approved, check the net loss figure, recovery total,
and default status, and review to ascertain that the terms of the settlement
have been satisfied.

(4) Update the CLS SBA CLS Application System database records to reflect the
reinstatement or closing status.

(5) Prepare a reinstatement letter and submit it to the supervisor for approval.

(6) After the reinstatement has been approved and the reinstatement letter signed,
the following steps should be taken to return the file, if applicable, to the area
office.

(a) The reinstatement letter and documentation that supports the
reinstatement are to be uploaded to the electronic file contained in the
SBA CLS Application System.

(b) Send notification of reinstatement to the appropriate area office via e-
mail or with the file by overnight mail.

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Chapter 4. Procedures for Sureties that are Defunct, in Rehabilitation, or in Liquidation,
for Prior Approval Program

4.1. Definitions

a. Defunct Surety: A defunct Surety has ceased to function and no longer conducts business
operations.

b. Surety in Rehabilitation: A Surety in rehabilitation is under corporate reorganization of
Chapter 11 of the Bankruptcy Code in an attempt to reinstate the Surety to its former condition
of successful operation and solvency.

c. Surety in Liquidation: A Surety in liquidation is in the process of settling its financial affairs
by reducing its assets to cash, discharging liabilities, and dividing surplus or loss. Liquidation
may precede or follow dissolution, which is the end of the legal existence of a corporation.

4.2. Claims Handling Procedures for Sureties that are Defunct, in Rehabilitation, or in
Liquidation

If a Surety becomes insolvent (i.e., defunct, in rehabilitation, or in liquidation), all rights or
benefits conferred on the Surety under a valid and binding Prior Approval 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. The State Insurance Department
where the Surety is located becomes responsible for settling claims and handling all claims
matters. The trustee or receiver must submit quarterly status reports accounting for all claims
paid, all funds received and all settlements being considered to SBA. All correspondence
concerning sureties that are defunct, in rehabilitation, or liquidation are referred to the supervisor
for action. Payment requests from insolvent sureties will be processed in accordance with Chapter
2, “Claim Reimbursement Procedures for the Prior Approval Program,” of this SOP.

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