[TheForge] PreFormust Bonds Longish reply

[Andy Vida]

SRiverF@aol.com wrote:
> 
> I have been asked to bid on a job where a performance bond may have to be
> posted. Does any one have any information on what something like this cost to
> obtain?
> 
> My insurance man ran out the back door when I ask how much something like
> this cost. Wouldn't even talk dollars>

	I don't know about "performance bonds" per se, but I know a
	small bit about insurance to cover "failures to perform" in
	software development, particularly in consulting.  It is so
	incredibly expensive as to be basically unaffordable.  One of
	the consulting firms I did work for had such a policy to cover
	my performance under a client contract.  They had some sort of
	"grandfathering" which allowed them to continue to afford the
	coverage.  When they asked if I had such coverage I just laughed
	into the phone and they instantly knew what that meant.

	It is expecially expensive in the software industry because of
	the incredibly loose nature of software specification.  It is
	so bad in this industry that no sane insurance company would
	be willing to provide such coverage without herniatingly high
	premiums. 

	Another form of this is "business interruption" insurance in 
	case their software systems bombed big time for losses.  When 
	I worked for Nautilus Group (marketers of Bowflex exercise
	equipment) I learned they had such a policy.  The premium
	was several millions per year, money thrown away.  At that
	time, and this may have changed in the last 18 months, not
	a single such policy had ever paid off anywhere on the planet.
	The reason this is so is because there are simply too many
	opportunities for human error in the building and operation
	of such systems that can be categorized as "user error" and
	falling into the category of non-covered contributing factors.

	Nautilus was insured for $1M in losses per day that their systems
	are on their asses.  They will NEVER see a penny of coverage but
	were apparently too incredibly stupid to see this.  Upon loss,
	the insurance company will require a system audit.  If logs are
	not kept properly, guess what?  Not covered.  ANY error on the
	part of the administrators or coders or the various methods and
	procedures used in the design, specification, implementation,
	testing and installation of the software, no matter how trivial
	can and would be used as justification to deny coverage.  The
	larger the loss, the more scrutinous the audit would be.  The
	coverage in this case was, as I recall, up to either 90 or 180
	days of consecutive loss per claim.  That's 90 to 180 million
	dollars the insurance company stands to have to pay out, and 
	believe you me they will not part with such sums unless they 
	absolutely have to... and even then.

	In your case, failure to perform should be easier to corner
	on paper, but that may not help much in terms of cost.  If you
	build a gangway and it fails, falling to the ground and injuring
	or killing someone, the insurance company would be in line for
	litigation because they insured your work, essentially.  This is
	so because ot the nature of scattergun and deep pockets litigation.
	
	But what I think the intent of such a bond is, is to protect the 
	customer in case you turn out to be a complete moron and fail to 
	produce the product as promised.  Again, the vagaries of 
	language make this a nightmare for insurance companies.  Basically 
	you are guaranteeing that you will provide precisely what the customer
	wants, at the agreed upon cost, in the agree upon time, under all 
	other conditions the customer may specify, but such specifications
	are inherently vague and who can tell what idiotic pretext a client
	will use to claim that you failed to deliver?  Aesthetics is a
	slippery animal and almost any pretext can be used to make a claim.
	Even if you delivered according to agreements, there is nothing to
	stop them from making a claim.  When the satisfaction of the letter
	of the law is waved in their faces, the clients can say that it was
	your responsibility as the "professional" to know that this wasn't
	going to work, yadda yadda...  Probably would not go anywhere, but
	litigation is a nonlinear process and one can never know what a jury
	will do.  These are all reasons that such things are so costly.

	Sorry to go on so much.

	-Andy