Construction projects in Alaska and elsewhere are often protected by a surety bond and are also often covered by more than one insurance policy. Although a bond and an insurance policy are two very different things, they are often confused with each other. This confusion is somewhat understandable. Both are essentially “emergency protection” in case the contractor encounters a major problem or cannot finish the project. Both are usually required by the owner before the start of work, as a way of making sure the job gets done. Very often the insurance company and the bonding company are the same large business entity.
Anyone who owns a car or gets health care is familiar with the concept of insurance. An insurance policy is a contract which obligates an insurance company to pay the policy-holder in the event of a loss. In construction projects, there are various layers of insurance purchased by the owner, the contractor, or both, before the project even begins. “Builder’s risk” insurance protects the insured from actual physical damage at the jobsite, such as fire or flood. “General liability” insurance covers the contractor for loss caused by serious and sometimes dangerous mistakes made in performance of the project, such as a collapsed scaffolding or electrical accident. Worker’s compensation insurance is required by Alaska state law, and covers the workers themselves in the event of injury or death. In every case, insurance is purchased through premiums and is paid out by the insurance carrier once the type and quantity of the loss is confirmed.
By comparison, a bond is essentially a line of credit. In the case of a performance bond, the contractor purchases the bond, and the bonding company agrees to guarantee the satisfactory performance of the project. If the contractor runs into a problem such as bankruptcy or legal liability, and can’t finish the project, the bonding company is obligated to spend whatever it takes, up to the amount of the bond, to get the project to completion.
Importantly, the builder is not off the hook once this bond coverage is triggered. If the bonding company spends one million dollars finishing the project, it will demand that the contractor pay back the million dollars once the project is complete, through a legal requirement called indemnity. In this way, the bond has acted as a sort of loan, with the bonding company loaning the money needed to finish the project, and then expecting to get paid back by the contractor. Of course, if the contractor is bankrupt or has other serious financial problems, this “loan” might never get repaid.
The confusion between insurance and bonds comes from the fact that both are utilized by an owner to make sure that the project is finished after something goes wrong. For example, if a worker makes a mistake and causes a fire which seriously damages the project, the first thing the owner and/or the contractor will do is contact the insurance company and see if the loss is covered. In this situation, the bond plays no role, because even though a loss has occurred there is no indication (yet) that the contractor will not be able to eventually finish the project.
Bond coverage, unlike insurance coverage, is often triggered by a “quiet problem” rather than a catastrophic loss. For example, an owner might believe that there is nothing wrong at all but then unexpectedly learns from a subcontractor or supplier that the contractor is having trouble paying its bills. Nonpayment to other parties is often a sign of a problem, and it may be that the contractor is in financial trouble and unable to finish the project on time and on budget.
After receiving notification of nonpayment, the owner will contact the bonding company. The owner will advise the bonding company that if the contractor is not going to be able to complete the project, then the bonding company will be expected to take over the job. Unlike in the example with fire and the insurance policy, this is not a situation in which the owner or contractor will be “made whole” following a loss. Instead, the contractor’s “line of credit” with the bonding company is essentially being tapped because the contractor does not have the financial means to proceed. The bonding company now has to pay to finish the project and must accept the fact that it may not recover what it has paid out from the troubled contractor. As one might imagine, the bonding company will be very focused on minimizing the cost of completion in this situation.
It is important for both contractors and owners (as well as architects, subcontractors, and suppliers) to understand both insurance and bonding before they get started on a project. All projects can take an unexpected turn. Unfortunately, cost overruns and mistakes on the jobsite are a common occurrence. Insurance and bonding will protect the owner in the event that things go wrong, but only within certain limits and under certain circumstances. Legal advice is almost always a good idea both before the project is underway and after something goes wrong.
In an article published in the most recent edition of The Bar Rag, the Alaska Bar Association’s quarterly journal, Birch Horton attorney Jason Brandeis writes about emerging legal issues and regulatory changes in Alaska’s marijuana industry.
In the piece, Brandeis discusses the expansion of the Alaska marijuana industry, which now includes over 100 licensed marijuana cultivators operating throughout the state and about forty retail stores open to the public. During the first half of 2017, the industry conducted $17 million in retail sales and generated over $1 million of state tax revenue.
The article also examines how regulators and businesses have responded to the industry’s growth. Regulators, for example, have been busy addressing the practical realities of managing a new industry in a state with unique geographic and supply chain concerns. Over the past few months, the State of Alaska’s Marijuana Control Board (MCB) and Alcohol & Marijuana Control Office (AMCO) have released a slate of new regulations intended to streamline and improve industry operations. Similarly, new marijuana businesses have similarly had to adjust on-the-fly. Having only recently navigated their way through complex local land use codes and a rigorous state licensing process, marijuana start-ups now find themselves having to quickly get up to speed on traditional business law practices such as corporate governance, tax collection, and employment law matters.
Finally, the article discusses how inconsistencies between state and federal law still pose problems for marijuana businesses in Alaska. The continued federal prohibition means that industry participants often do not have access to traditional banking services, requiring them to operate mostly in cash. Some of the challenges facing cash-only businesses were anticipated (such as security concerns and the inability to accept credit card payments), but others were not (such as the U.S. Postal Service’s refusal to mail a cultivator’s cash tax payments to the processing center in Anchorage).
The full article, “Federal rules complicate growing Alaska marijuana business,” explores these topics and other aspects of the Alaska marijuana industry in more detail. You can read the article here.
2017-10-23T18:57:16+00:00 October 23rd, 2017|
Big sister Molly checks Paige’s reflexive breathing.
Please welcome the newest member of the BHBC family, Paige Taylor Davies. Mom, associate Katie Davies, and dad Bryn, welcomed Paige into the world on September 28, 2017. Paige and her big sister, Molly, are excited to be two of the firm’s most junior associates!
On October 13, 2017, the U.S. Supreme Court denied the Writ of Certiorari in the case of Rothe v. Department of Defense/U.S. Small Business Administration (SBA), letting stand a DC Circuit Court of Appeals decision finding that the SBA 8(a) Program constitutional because the Federal government has a legitimate interest in remedying the effects of discrimination in Federal contracting, and that the Program is rationally related to achieving that goal. This is a significant victory for qualifying individuals and businesses, including many Alaska Native Corporations, Tribal, and NHO communities that participate in the SBA 8(a) program, as well as Women Owned Small Businesses and Service Disabled Veteran Owned Businesses that have benefited by the business development assistance provided by the SBA including access to set-aside contracts in the Federal procurement system.
Contested for nearly a two decades, Rothe is the latest in a series of cases challenging the constitutionality of the SBA’s 8(a) Program, alleging that the Program’s contracting preferences for certain entities violate the Fifth Amendment’s equal protection clause. In 2015, the DC District Court upheld the Program, finding the Program to survive strict constitutional scrutiny as the government had a compelling state interest in remediating discriminatory treatment and that Program was narrowly tailored to that interest. The matter was appealed to DC Circuit Court of Appeals on the questions of whether the Program included an impermissible racial classification and provides race-based preferences in federal contracting, and whether the Program indeed met the constitutional standard of review under “strict scrutiny.”
In September 2016, the DC Circuit Court of Appeals subsequently held the Program to be facially constitutional, finding that Section 8(a) itself does not contain a racial classification, and there are no racial or ethnic presumptions built into the statute itself; rather, the statute focuses on socially and economically disadvantaged small businesses. In a significant departure from the lower court’s decision the Circuit Court found a lower constitutional standard applicable, the “rational basis test,” requiring only that the Program be “rationally related to a legitimate state interest.” Additionally notable, the Circuit Court focused on the fact that Rothe challenged the underlying federal statute and not the SBA regulations that actually implement the 8(a) Program, indicating that a challenge to the SBA regulations might have yielded a different analysis.
Petitioning for a hearing before the United States Supreme Court this past April, Rothe argued that the Court erred in applying the lower standard and questioned, (1) whether a statutory program that requires an agency to distribute benefits to “socially disadvantaged individuals,” and defines “socially disadvantaged” in terms of membership in certain racial minority groups, classifies on the basis of race and is thus subject to strict scrutiny; and (2) whether a statute that may not classify exclusively on the basis of race, but uses race as a factor in determining eligibility for benefits, is subject to strict scrutiny. In denying the Petition for Certiorari without comment, the Supreme Court leaves the current application of the 8(a) Program intact.
Birch Horton Bittner & Cherot Shareholder Jon DeVore was recently interviewed by Set-Aside Alert regarding the United States Small Business Administration’s (“SBA”) new Small Business Mentor-Protégé Program. A frequent speaker at national small business conventions and corporate trainings on the topic of the Federal procurement system, Mr. DeVore has also shared his expertise in assisting clients navigating the requirements of the long-established Minority Business Development 8(a) Program Mentor-Protégé Program.
Congress more recently directed the SBA to create the new mentor-protégé program specifically for small businesses, women-owned small businesses, HUBZone businesses, and Service Disabled Veteran Small Businesses. The new regulations for the all-small program went into effect late last year and the SBA has approved over 150 all-small mentor-protégé agreements, where the small business may team with large business as mentors providing a basis for them to compete for larger Federal contracts and quickly acquire past performance experience. This new program significantly broadens the competition for the SBA 8(a) Mentor-Protégé Program and provides Federal agencies more alternatives for procurements.
Real estate law has been the focus of my practice for many years. I have represented commercial real estate owners and developers of office buildings, medical buildings, hotels and retail stores, owners and developers of residential subdivisions, owners of mobile home parks, and nonprofit corporations that develop housing projects. The legal work has covered the entire gamut of drafting and negotiating documents for purchases, sales, leases and financing of a variety of real estate projects throughout Alaska. The organization and closing of these transactions with clients, lenders, and title companies are always interesting and each transaction presents its own unique issues.
Early in this practice, I did not anticipate an unexpected reward of real estate practice – seeing the completed construction of projects in the community.
Over 30 years ago, we assisted a small group of visionary residents of Seward, Alaska during the inception and development of the Alaska SeaLife Center. What was a dream of a small group of people became a reality. The project involved agreements with the Exxon Valdez Trustee’s Council, the State of Alaska, and the City of Seward. In spite of construction and early operational challenges, the SeaLife Center is now a wonderful and vibrant tourist destination and is renown for its environmental and scientific research of Alaska’s marine ecosystem and its species, and a learning center for children. When I visit Seward and the SeaLife Center, I experience a great sense of satisfaction knowing the role we played in making this happen.
I experience the same sense of satisfaction as I drive around Anchorage and see some of the commercial and real estate developments in which I played a small part but which have had a big impact on Anchorage families and businesses.
Low income tax credit housing projects are particularly rewarding. During the last ten years, I have had the opportunity to work with community-focused organizations such as Cook Inlet Housing Authority and RurAL CAP during the initial financing and investment stage through the closing of loan term financing. All of these owners and developers are dedicated to improving the neighborhoods where the projects are located. The projects help the elderly, disabled, and low income individuals who want to provide safe, clean, and well located housing for their families and children. The projects have transformed neighborhoods and improved the quality of life for hundreds of Alaskans.
The legal representation for all real estate work, and particularly for low income tax credit projects is technical, complex and demanding. However, the unexpected reward is seeing the tangible completed results.