SOP 50 46 3: Claims and Recovery Program
Summary
SBA Standard Operating Procedure 50 46 3, Claims and Recovery Program, effective May 4, 2022 and authorized by Jennifer Vigil, Acting Director, Office of Surety Guarantees, sets the rules for surety bond guarantee claims and recoveries. Under the Small Business Investment Act of 1958, SBA reimburses a Surety for part of its losses on a bonded contract, up to a statutory limit of $6.5 million, or $10 million if a federal contracting officer certifies the need. A Principal is ineligible for further SBA bond guarantees once it is declared in default, sued under the bond or has an unreimbursed Loss. Sureties must report a default on SBA Form 994H within 30 days and file status reports every 6 months, and each bond carries a claim status from 1 (Active) to 5 (Settlement). Chapter 5 lists grounds for OIG referral, including false social security numbers, altered tax returns and bribes.
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50 46 3
SBA SOP 50 46 3
Claims and Recovery
Program
Office of Surety Guarantees
Office of Capital Access
U.S. Small Business Administration
Effective Date: 05/04/2022 1
50 46 3
Small Business Administration
Standard Operating Procedure
National
Subject: Claims and Recovery Program
S.O.P. Number: 50 46 3
Revision Number: Not Applicable
Purpose: To establish written guidelines and procedures for surety bond guarantee claims
reimbursement and recovery activity.
Personnel Concerned: All SBA employees and Surety Partners
SOP Canceled: Not Applicable
Originator: Office of Surety Guarantees
Authorized By: Jennifer Vigil, Acting Director, Office of Surety Guarantees
Effective Date: May 4, 2022
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Table of Contents
Chapter 1. General Overview of the Surety Bond Guarantee (SBG) Program ................................... 4
1. The General Scope and Purpose of this SOP ....................................................................... 4
2. The Program's Statutory Basis ............................................................................................. 4
3. Program Objectives ............................................................................................................... 5
4. General Description of Roles and Responsibilities .............................................................. 5
Chapter 2. General Requirements for the Prior Approval Program and Claims Procedures ........... 7
1. Loss of Eligibility for Further SBA Bond Guarantees............................................................ 7
2. Surety Notification of a Claim Situation ............................................................................... 8
3. Review of Contractor File ...................................................................................................... 9
4. Surety Status Reports on Claim and Recovery Activity ....................................................... 9
5. Claim Status Code ............................................................................................................... 10
6. Procedures for Placing a File in “Closed-Final” Status ...................................................... 11
7. Analysis of the Contractor File ............................................................................................ 11
8. Surety Request for Reimbursement from SBA................................................................... 15
9. Reimbursements to Sureties .............................................................................................. 16
10. Tracking Missing Payments .............................................................................................. 16
11. Processing Claims for Reimbursement ............................................................................ 17
12. Steps Taken When a Bid Bond Default Occurs ................................................................ 21
13. Imminent Breach ............................................................................................................... 22
14. Processing Imminent Breach Requests ........................................................................... 23
Chapter 3. Subrogation and Recovery Procedures for Prior Approval Program ............................ 24
1. Subrogation and Recovery Activities.................................................................................. 24
2. Funds Due SBA ..................................................................................................................... 27
3. Indemnity Settlements........................................................................................................ 29
4. Reinstatement of the Contractor ........................................................................................ 31
Chapter 4. Procedures for Sureties that are Defunct, in Rehabilitation, or in Liquidation, for Prior
Approval Program............................................................................................................................... 34
1. Definitions ............................................................................................................................ 34
2. Claims Handling Procedures for Sureties that are Defunct, in Rehabilitation, or in
Liquidation .................................................................................................................... 34
Chapter 5. Procedures Relating to Office of Inspector General Referrals and Freedom of
Information Act Requests ................................................................................................................... 36
1. Office of Inspector General (OIG) Referrals ........................................................................ 36
2. Freedom of Information Act Requests and Release of Case File Information ................. 37
Chapter 6. PROCESS MAPS ................................................................................................................. 38
1. Defaults and Notifications................................................................................................... 38
2. Claims for Reimbursement ................................................................................................. 39
3. Recoveries and Settlements ............................................................................................... 40
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Chapter 1. General Overview of the Surety Bond Guarantee (SBG) Program
1. The General Scope and Purpose of this SOP
This Standard Operating Procedure (SOP) describes the policy and procedures for the
administration and handling of defaults, claims, and recoveries resulting from surety bonds
issued by Prior Approval Sureties and guaranteed by SBA. For the purposes of this SOP, the
terms “Contractor” and “Principal” are used interchangeably.
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 contract denial or 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. The statutory limit is $6.5 million (as adjusted for
inflation in accordance with 41 U.S.C. 1908 and published in the Federal Register from time to
time), 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.
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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.
4. General Description of Roles and Responsibilities
a. Headquarters Office
The Office of Surety Guarantees (OSG) is responsible for the oversight and control of SBG-related
activities. With respect to claims, OSG’s 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; and
(4) Establishing procedures for ensuring that SBA receives its share of any surety
recovery in a timely manner.
b. Surety Companies
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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 by the Surety (not
an agent or entity under contract with the Surety) to perform all claims and recovery functions
other than specialized services the costs of which may be reimbursable under 13 CFR 115.16(e).
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 responsible for completing the bonded contract.
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Chapter 2. General Requirements for the Prior Approval Program and Claims
Procedures
1. Loss of Eligibility for Further SBA Bond Guarantees
The Principal and its Affiliates are ineligible for further SBA bond guarantees under any of the
following conditions
a. Legal action against the Principal and/or the Surety 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 in the amount established
under 13 CFR 115.14 ;
d. The Principal, 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;
e. The guarantee fee has not been paid by the Principal; and
f. The Principal committed fraud or material misrepresentation in obtaining the bond
guarantee.
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Upon receipt by the Claims and Recovery Division (CRD) of any of the events listed above, the
CRD will make an entry in the Capital Access Financial System (CAFS) 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 occur in connection with a contract, and the same
Principal has other contracts, the other contracts will also be placed in a default status. Ineligible
Principals may be reinstated in accordance with 13 CFR 115.14(b).
2. Surety Notification of a Claim Situation
A Surety must notify CRD of any of the following events by submitting SBA Form 994H (with
supporting documentation) through CAFS 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:
a. Legal action is initiated under the bond;
b. The Obligee declares the Contractor to be in default under the Contract;
c. The Surety established 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 (e.g., a rumble).
e. Notice of Default, Investigation Period, and Status Updates
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Upon receiving notification from the Surety that the Principal is in default of the Contract, the
CRD will make an entry in CAFS that the Principal has been placed in a default status, The claims
Investigation period starts when the Surety initially advises CRD of a default through CAFS (SBA
Form 994H). Once the Claims Investigation period is initiated, the Surety must submit
semiannual status reports on each claim 6 months after the initial default notice and every 6
months by submitting SBA Form 994H. The Surety must also immediately notify SBA of any
substantial changes including, for example, if the Obligee has filed for bankruptcy, a request for
an “Offer and Compromise” has been made, or if the claims investigation is placed on hold.
3. Review of Contractor File
Upon receiving notification from the Surety that the Principal is in default of the Contract, CRD
will review the electronic file and/or will request additional information, if needed. The
documents contained in the contractors’ files for bond guarantees approved after October 2007
are available electronically in CAFS.
4. Surety Status Reports on Claim and Recovery Activity
a. The CRD uses status reports (SBA Form 994H and any supporting documentation)
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 must be submitted by the Surety through the CAFS.
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b. The Surety is required to submit semiannual status reports on each claim beginning
six months after the initial notice of default, and then every six months thereafter. The
Surety must notify SBA immediately of any substantial changes (e.g., in the status of
the claim or the amount of loss reserves.) (See Chapter 6.1 Defaults and Notifications)
5. Claim Status Code
Based on the information that is provided in the status report(s), the bond is placed in one of the
claim statuses listed below in CAFS. The Surety is responsible for performing this function if the
Surety submits the claim electronically, and CRD will perform this function if the Surety submits
the status reports by mail if CAFS is unavailable.
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.
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.
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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 paid on behalf of the principal/indemnitor. The Surety must obtain
SBA’s concurrence before entering into any settlement agreement.
6. Procedures for Placing a File in “Closed-Final” Status
A surety must obtain SBA’s written consent to discontinue recovery efforts when further
indemnity pursuit is considered economically impractical or when the indemnitor has been
discharged in bankruptcy. In requesting SBA’s consent, Surety must submit the following
documentation to CRD:
(1) A summary of the Surety’s subrogation and recovery attempts on each defaulted
project;
(2) Financial background information on each respective indemnitor (individuals and
entities) to verify that it is no longer practical to continue indemnity pursuit.;
(3) If the indemnitor(s) have been discharged in bankruptcy, a copy of the Bankruptcy
Discharge. Each indemnitor listed on the GIA must be listed on the Discharge.; and
(4) Verification that there are no outstanding reimbursement payments due to the
Surety and all claims are settled (including, but not limited to, Settlement
Agreements and Releases). In the case a claim for reimbursement request is
submitted with the Surety’s request to close, the file will remain in “Close to
Subrogation” status until the final billing is closed.
(5) Upon receiving authorization to close the file, the Surety must update the claim file in
CAFS by changing the file stated to “Close-Final”.
7. Analysis of the Contractor File
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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. CRD examines the following documents to determine that
the guarantee was approved in accordance with the regulations and SOP provisions
of the SBG program and to determine the validity of the claim.
(1) 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.
(2) 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. In addition, review and confirm
that the Contractor satisfies the character and reputation eligibility requirements.
(3) SBA Form 994F, “Schedule of Work in Process”. Review for a listing of all
uncompleted work (bonded and unbonded) of the Contractor (and any of its
subcontractors) at the time the guarantee was issued.
(4) 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.
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(5) 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.
(6) 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
or 990A.
(7) Financial/Business Data is reviewed to determine if the Contractor met program
eligibility requirements for the SBG Program at the time that the guarantee was
approved.
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.)
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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 the SBA guarantee,
CRD places the Contractor in default status in the SBA CLS Application System. The
SBG Specialist will prepare an initial write-up with his or her recommendation to
approve, deny, or request additional information on the reimbursement request.
f. Denial of Liability
(1) The Director of the Office of Surety Bonds (D/OSG) may deny liability under SBA’s
guarantee (in whole or in part within its 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.
(2) Listed below are examples of the circumstances that are grounds for denial of
liability:
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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.
8. Surety Request for Reimbursement from SBA
The Surety must submit reimbursement requests by submitting SBA Form 994H through CAFS
(except if CAFS is unavailable, the Surety may submit a paper copy via regular mail).
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.
Claims and Recovery Division Approval Authority:
Position Dollar Amount (in the aggregate)
Director, OSG More than $4,000,000
Supervisor, Claims and Recovery Division Up to $4,000,000
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9. Reimbursements to Sureties
SBA will reimburse the Surety within 45 days of receipt of its payment request in accordance
with 13 CFR 115.35 provided that all necessary information is submitted (and subject to the
offset provisions of 13 CFR 140). 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 needed to review a reimbursement request, CRD may 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, CRD will return the reimbursement request to the Surety with an explanation.
10. Tracking Missing Payments
If a Surety informs SBA that it has not received a check or electronic deposit, the Surety must
provide CRD with the SBG number, the payment amount, and the approval date.
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11. Processing Claims for Reimbursement
In processing requests for claims reimbursement, CRD reviews the following items in detail:
a. For the Initial Payment:
(1) Review SBA Form 994H, “Surety Bond Guarantee Program- Default Report, Claim for
Reimbursement, and Report of Recoveries” to ensure that information corresponds
with information contained in the document in CAFS. The Surety must use the SBA
Form 994H to file an initial or updated default status report, file a claim for
reimbursement, report that it has established a claim reserve”, or report recoveries.
(See Chapter 6.2, Claims for Reimbursement)
(2) Review SBA Forms 990 or 990A, to determine the following:
a) The SBA Official who executed the form was duly authorized.
b) The guarantee percentage, which is:
i. 80 percent for contracts more than $100,000;
ii. 90 percent for contracts up to and including $100,000 at the time of
Execution of the bond. If the contract amount increases to 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; or
iii. 90 percent for all contracts awarded to firms owned and controlled by
socially and economically disadvantaged individuals, by qualified HUBZone small businesses,
or by veterans or service-disabled veterans.
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When 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) The correct name of the Surety - When there are two sureties named on the
SBA Forms 990 or 990A (Surety and co-Surety), the lead Surety is specified. All
transactions with SBA will be done through the lead Surety.
(3) Review current status reports, including the loss reserves established by the Surety
(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.
(4) Review the list of itemized disbursements provided by the Surety in SBA Form 994H
by date, draft number, payee, amount, 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 CAFS. Once the information is entered, CAFS will
calculate the payment amount owed the Surety or the amount due to SBA by the
Surety.
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Example #1:
Items Amount
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 $ -
Balance Due Surety $ 3,600.00
The Surety must make any reimbursement request by submitting SBA Form 994H to SBA within
90 days from the time of each disbursement. CRD staff, with the appropriate delegated
authority, will review and approve the SBA Form 994H in CAFS for payment to be issued.
(5) Reinsurance
Review any reinsurance treaty that to which the Surety is a party that covers 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, if the Surety has treaty reinsurance that covers the first
$100,000 in losses in excess of $50,000, and 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 (assuming no other
salvage or recovery is available):
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Items Amount
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. For Subsequent Payments:
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.
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 CAFS will preliminarily calculate a subsequent payment is as follows:
Example #2
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Items Amount
Loss Disbursements $ 5,500.00
Loss Disbursements Previously Reported $ 4,000.00
Total Loss of Disbursements $ 9,500.00
Recovery $ -
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. For Final Review and Approval of Initial and Subsequent Payments:
After the SBA Form 994H has been recommended for payment in CAFS and the original SBA
Form 994H with the original signature has been received, it is sent to the approving official for
final review and approval.
12. Steps Taken When a Bid Bond Default Occurs
a. A bid bond default occurs when the Surety declines to issue the final bond for any
reason 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.
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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 an 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 SBA’s approval of the bond guarantee under the bonding line, but is used
only to document the Surety’s commitment under the bonding line. CRS will carefully
review information pertaining to the bid bond default to determine if the bid bond
was issued after the contract was awarded and/or the job had started.
13. 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 appear to be 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 Principal’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 the terms of a Contract covered by an
SBA guaranteed bond. 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 a breach imminent and
that there is no other recourse to prevent such breach. The Surety’s request for approval must
also describe the basis for the Surety’s belief that the Principal 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).
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14. Processing Imminent Breach Requests
a. Once SBA receives an Imminent Breach request, CRD will review the Principal’s
electronic file. (CRD will review the case file with an emphasis on the current work in
progress; the Principal’s ability to repay the Surety; the number 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 will
enter the imminent breach payments information into CAFS. This entry will set-up a
computerized file so that SBA can reimburse the Surety and monitor repayment
activity. If the amount of reimbursement will exceed 10% of the Contract amount, the
D/OSG must seek the Administrator’s approval and provide a recommendation on
whether this greater amount is reasonable and necessary.
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Chapter 3. Subrogation and Recovery Procedures for Prior Approval Program
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 CAFS 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 (SBA Form 994H) 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 (e.g., additional claims are made against the
bond, contractor filed for bankruptcy). 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.
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(3) CRD also monitors actual and anticipated legal fees and costs associated with the
Surety's subrogation and recovery efforts.
(4) A detailed status report should include as much information as possible to reduce
any ambiguity. At a minimum, a status report must include the following
information:
a) How the default claim arose.
b) Current state of claim:
c) Current monetary claims against bond(s);
d) Contract completion percentage;
e) Remaining contract funds;
f) Investigative stage(s);
g) Project completion plan;
h) Attorney involvement; Litigation or Adjudication Rules (ADR); Monetary
Litigation or ADR Settlement (include information relied on to arrive at
settlement amount, and any other pertinent information, like comparisons of
jury verdicts, and/or similar claims)
i) Subrogation/Recovery/Indemnification (collection efforts) including all of the
information pertaining to collection efforts, and all the information relied on
to reach either the conclusion to settle and for how much, or the conclusion
to discontinue recovery efforts.
j) Sources of Recovery and Related Documentation
The following is a list of documentation required for SBA’s review of the Surety’s recovery
activities:
(5) GIA: This is an agreement signed by an individual or entity (jointly and severally,
accepting responsibility) to reimburse the Surety for any monetary 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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(6) Investigative Reports: These reports should locate the indemnitors and ascertain
what assets are available for indemnity pursuit. (Two of the most common
investigative reports are obtained from Equifax and Dun and Bradstreet.)
(7) 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 originally submitted
with the underwriting package (including the SBA Form 413 - Personal Financial
Statement) and reviewed for any discrepancies. Examples of the types of assets that
would be included in these reports are:
(8) Corporate Assets
a) Real Estate
b) Machinery and Equipment
c) Accounts Receivable
d) Supplies and Materials
e) Bank Accounts
f) Insurance Policies
g) Personal Assets
h) Residence (In some states, subject to Homestead Acts)
i) Land and Real Estate
j) Bank Accounts/Stocks and Bonds
k) Insurance Policies
l) Luxury Items (Jewelry, automobile, boats, etc., check with the Department of
Motor Vehicles for registration)
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(9) 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.
(10) 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.
(11) Judgment: A copy of the judgment against the Contractor and/or Indemnitors is
requested from the Surety to clarify the details of the judgment.
(12) 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.
2. Funds Due SBA
a. 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 a refund is due SBA because an over payment was made
to the Surety as the result of overbilling or otherwise.
b. The following procedures apply to “Due SBA” accounts:
(1) For Active (currently participating) and non-Active (Sureties who are not actively
submitting applications) or Defunct Sureties, all recovery and refund payments are
sent through www.Pay.gov.
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(2) The “Due SBA” amount is submitted by the Surety via CAFS on SBA Form 994H,
“Default Report, Claim for Reimbursement, Report of Recoveries and Record of
Administrative Action.” (See Chapter 6.3, Recoveries)
(3) If reimbursement is not received by SBA within 45 calendar days of receipt of any
recovery by the Surety, and there is no indication that the recovery monies have
been credited to the appropriate bond, CRD will notify the Surety that SBA has not
yet received reimbursement and request the Surety to either verify to CRD that
monies were sent or immediately remit the reimbursement to SBA. A Surety’s failure
to forward payment verification or to remit recovery monies to SBA within 14
calendar days of the remittance deadline will result in the D/OSG issuing of a
demand letter with the assistance of SBA’s Office of General Counsel. If the monies
have not been sent, CRD will postpone all future claims handling transactions
associated with the bond and refuse to issue further guarantees until payment
verification is submitted by the Surety. Additional measures may be considered if
there is a pattern of persistent disregard to remittance procedures including (but not
limited to) renegotiation of the guarantee percentage and/or SBA's charge to the
Surety for bonds. (13 CFR §115.18)
(4) If recovery monies have been applied to an incorrect bond, the Surety must
immediately contact CRD with the transaction information and request a reversal
and reimbursement application to the appropriate bond.
(5) If a refund of recovery monies is warranted, the Surety must submit SBA Form 994H
and complete the line in paragraph G, “Total Due and Submitted to SBA”. The
Surety must also provide an adequate description of the request in Section C of SBA
Form 994H, including (but not limited to) the circumstance which resulted in the
overpayments of SBA’s share of the recovery. All refunds will be reviewed by CRD in
consultation with the D/OSG and evaluated based on the standing of the claim file.
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3. Indemnity Settlements
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.
a. Types of Settlements
CRD will identify in CAFS 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.
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b. Policy Guidelines for Settlements
Under the terms and conditions of SBA Forms 990 or 990A, the authority to take charge of all
suits or claims arising under the bond lies with the Surety and not SBA (unless SBA decides
otherwise and so notifies Surety); however, under 13 CFR 115.36(a), 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.
c. 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.
c) Investigative Reports (credit, asset reports, etc.) - Further evaluate the
financial status of the indemnitors.
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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.
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 ensure that the recovery monies have been received.
4. 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. See 13 CFR
115.14(b)(1).
a. Circumstances Permitting Reinstatement
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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
Chapter 2, paragraphs 3.a, b, c, e, and f.
Note: The Surety is the only party that may request reinstatement of a Contractor. The Surety
shall not direct or encourage a Contractor, the Contractor’s attorney, or the Contractor’s current
agent to contact SBA regarding the reinstatement of the Contractor. If this occurs, SBA
personnel will refer the party to the Surety of record.
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 in effect 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 settlement terms, a new settlement on a defaulted SBA- guaranteed
bond may be in effect 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 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) If 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
1. Definitions
Defunct Surety: A defunct Surety has ceased to function and no longer conducts business
operations.
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.
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.
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 to SBA quarterly status reports accounting for all
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claims paid, all funds received, and all settlements being considered. All correspondence
concerning sureties that are defunct, in rehabilitation, or liquidation will be referred to OSG’s
claims director 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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Chapter 5. Procedures Relating to Office of Inspector General Referrals and Freedom
of Information Act Requests
1. Office of Inspector General (OIG) Referrals
All SBA officials, Sureties and other program participants should be on the lookout for fraud and
report any known or suspected irregularities involving SBA programs, program participants, or
personnel to the OIG. Whether acting alone or in collusion with others, surety bond guarantee
applicants, Principals, Sureties, Obligees, or other individuals with an interest in the contract
may intentionally provide false information to SBA. Examples of irregularities that must be
referred include:
(1) Overstating income;
(2) Understating or failing to disclose liabilities and debts;
(3) Overvaluing collateral;
(4) Failing to disclose criminal record;
(5) Making false claims of U.S. citizenship;
(6) Failing to disclose true ownership of the business;
(7) Using false social security numbers to conceal poor credit history;
(8) Submitting altered tax returns;
(9) Creating false work histories;
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(10) Actions by corrupt surety agents who orchestrate, facilitate, or otherwise support
any of the illegal acts committed by SBG applicants; or
(11) 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.
A referral to the OIG can be made by:
Calling the toll –free OIG Hotline at 1-800-767-0385;
Completing the on-line OIG Complaint Submission Form at https://sbax.sba.gov/oigcss/ and
submitting the referral via the Internet; or
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. Freedom of Information Act Requests and 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. See 13 CFR 102,
“Record Disclosure and Privacy” and SOP 40 03 3, “Disclosure of Information” and
SOP 40 04 3, “Privacy Act Procedures”, (or their successor SOPs).
b. If SBA receives a subpoena and/or court order for a file in claims, CRD will notify the
D/OSG and the Office of General Counsel immediately. Under no circumstances
should CRD release a case file from OSG without notifying and consulting with the
D/OSG and the Office of General Counsel.
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Chapter 6. PROCESS MAPS
1. Defaults and Notifications
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2. Claims for Reimbursement
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3. Recoveries and Settlements
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