Surety Bond News

The surety companies who write the surety bonds for many to operate a legal business always have to meet some sort of state or federal requirements. These requirements are for the benefit of the obligee requiring the bond and the principal obtaining the bond; the requirements are meant to avoid financially questionable sureties writing bonds that can end up costing thousands of dollars.

A new Senate bill is proposing that all Texas debt management service providers are obliged to attain a $50,000 surety bond from a surety company who has an “A” rating with a nationally recognized rating service. The title of the bill is Bill 141 and would put in to action the Uniform Debt-Management Services Act of the National Conference of Commissioners on Uniform State Law (NCCUSL) which would activate this “A” rating requirement.

The Surety & Fidelity Association of America does not think this is a good solution.

“We support the intent of such proposals to assure that a financially sound surety company issues the bond guaranteeing the debt management services provider’s obligations. SFAA believes, however, that there are better ways to accomplish this than requiring the surety to be “A” rated by Best’s and that such eligibility requirements for a surety may unnecessarily limit the available market for the required bond”, said the SFAA.

The SFAA continued, “To issue a bond in any state, the surety must be licensed in the state and be subject to the regulation of the state insurance department, which includes minimum capital and surplus requirements, financial reporting and market conduct and financial exams, among many other types of regulation. The primary criteria for the surety company issuing a required state bond should be that it is licensed and in good standing with the state insurance department, which is the state agency that is charged by state law with regulatory oversight of the surety industry.”

One of the larger arguments against this bill is that it would prevent financially strong surety companies from writing bonds who may have a “B+” rating just because it doesn’t meet the proposed requirement. While the rating from a nationally recognized rating service such as A.M. Best should be taken into consideration, it shouldn’t be a deal breaker when it comes to the ability of writing surety bonds. As stated above, the surety must be licensed with the state and the state insurance department who helps in analyzing sureties’ financial strengths and weaknesses; they have regulations in place to determine who is financially sound. Being licensed with the state is the major requirement that must be met when a surety is writing any type of surety bond; and this requirement seems to be more fool proof.

“The state insurance department would be in the best position to know the financial standing of the surety, and it would be the most readily accessible source for any other state agency for questions about the surety’s licensing status and financial condition or complaints that the insurance department has received about the surety’s business practices in the state”, the SFAA commented.

Even though the “A” rating from a company like A.M. Best can be a good indication of a surety’s condition, it’s not bulletproof. A former surety company by the name of Amwest Insurance Company had an “A” rating with A.M. Best and looked to be in good shape; but in 2001 an order of liquidation was put on the company based on the Nebraska Director of Insurance findings that the company was insolvent; this all happened in roughly two months, an insufficient amount of time for a surety’s rating to be downgraded. As a result, approximately 40,000 bonds were terminated. While Amwest Insurance Company had an “A” rating it did not help foresee or prevent the company from crashing.

This article is not meant to convey that national rating services are meaningless. The ratings help give you an idea of the financial wellbeing of a surety company. Although, to enact this new bill seems like a waste of time and energy being that the rating is not always a sufficient method of determining a company’s condition. The letter rating requirements don’t guarantee any company, it is important to dig deeper than that.

The uses of a surety bond can be quite versatile. The general public usually associate surety bonds with the construction of buildings and various structures; but there are more purposes outside of construction jobs for surety bonds. The state of Texas actually did the opposite, utilizing surety bonds for deconstruction in favor of the environment.

In Texas, new environmentally friendly legislation has been passed regarding offshore oil rigs. The law is named AB 2503 and it authorizes the partial removal of offshore oil structures in the Gulf of Mexico. Since the BP oil spill last year, there are much stricter regulations being but in place for oil rigs. The bill requires operators of idled oil rigs to remove the rigs while providing financial assurance such as a surety bond. The surety bond guarantees that the operator will supply adequate funds for the removal of the rigs to the Ocean Protection Council, the Department of Fish and Game, the State Coastal Conservancy and the State Lands Commission; procedural steps include an environmental evaluation, a determination of the project’s net environmental benefit, establishing the project’s costs savings, preparation and application of a management plan and any other costs for satisfying the law’s requirements.

“After we saw events of the Macondo well begin to unfold, many of us began to realize we were going to live in a more regulated environment in the U.S. Gulf,” Superior Energy CEO David Dunlap told a Pritchard Capital conference last month.

Oil companies have commonly been unenthusiastic when it comes to plugging and removing of stagnant wells. Owners of oil rigs said the idle wells could potentially be used to assist other neighboring active wells. In the previous 5 years, about 100-150 platforms were deconstructed yearly in the U.S. Gulf, said James West at Barclays Capital; that number may double to around 200-350 platforms in 2011. As soon as the wells are taken apart, old platforms can offer useful artificial reefs which in turn would help preserve the marine ecosystem.

With the surety bond requirement in place, it will help guarantee the completion of the idle oil rigs removal. It is a safeguard in case the job does not get done. Instead of having a failed job, the surety company who is backing the bond will come in and finance the rest of the job; a claim will go out on the owner of the rig (principal) who would then have to reimburse the surety. The idle rigs pose a threat to all ocean life; even more so with an incomplete removal of a rig. The surety bond will help prevent a botched job from occurring.

This new legislation shows the array of uses for surety bonds. They can be used to aid many different types of companies and endeavors from opening up a car dealer ship to building a school. In this case, surety bonds come to the rescue for marine life and the environment as a whole.

Many custom surety bonds have written on “pointless paper” relating to the Bureau of Customs (BOC) and their imports/exports. Allegedly, the Mexican government lost billions of pesos in the past several years due to having unstable surety companies guarantee the required bonds. The committee on ways and means in the House of Representatives has chosen to initiate an investigation on the surety bonds from BOC.

“There will be a “motu proprio” investigation considering the gravity of the situation as confirmed by the BOC Deputy Commissioner and an Insurance Commissioner,” stated Batangas Rep. Hermilando Mandanas, who chairs the House Committee on Ways and Means.

The Insurance Commissioner John Apatan confirmed that the BOC was unable to collect surety bond claims valued in the millions because many of the surety companies who were backing the bonds shut down. According to Hermilando Mandanas’s testimony, the BOC authorized the release of goods when importers submitted surety bonds in lieu of payment of duties and taxes. Since several sureties closed up, the surety bonds used were uncollectible which caused the government to lose hundreds of millions of pesos in uncollected revenues.

This predicament that the BOC and Mexican government is in could have been avoided by making more educated decisions when selecting surety companies by weighing out their financial strength and credibility; after all, they are the ones backing the surety bonds. The questionable surety companies chosen to write the bonds is what led to this dilemma.

Mandanas also said that this investigation is vital because the government is in urgent need of funds to maintain its numerous programs.

Both the BOC and government must deal with the consequences of the irresponsible choices in surety companies. This huge government deficit is a great example of how vital it is to research and fully understand the strength of the surety companies guaranteeing your surety bonds.

The Department of Revenue is looking to make some changes to medical marijuana patient privacy in Colorado which is making both patients and the Cannabis Therapy Institute uneasy.

According to the Cannabis Therapy Institute’s Laura Kriho, “We’re concerned that the Department of Revenue is getting ready to replace the confidential medical marijuana registry with a non-confidential database and surveillance system they’re setting up.”

This non-confidential system allows outside agencies to access the medical marijuana patient database at any time.

CTI’s Laura Kriho suggests that the Colorado Department of Public Health and Environment staff who have admittance to the information “meet the same requirements that medical marijuana center applicants are required to meet — specifically that they must have a surety bond of $5,000, be a resident of Colorado for the past two years, not convicted of a felony for the past five years and a current set of fingerprints on file with the Colorado Bureau of Investigations. We see the security of the registry as really the only function the CDPHE needs to uphold, and keeping track of who’s accessing it is just as important to us as it is for them to have medical marijuana center applicants comply with their standards.”

This proposal including the surety bond requirement is a step in the right direction for medical marijuana patients, but is it enough to cover any affected by misused or breached personal information?

Should a Department of Public Health employee leak or abuse patient information, the patient is only protected by a $5,000 surety bond in Krilho’s proposal. The patient must prove in court that their information was illegally used which in its self can cost thousands in legal fees; once they are awarded up to $5,000 they still have to deal with the potential of losing their job or health insurance for the simple fact they are medical marijuana users being that medical marijuana is still illegal under federal law.

Even if the Cannabis Therapy Institute’s proposal does pass, it still doesn’t seem the surety requirement is potent enough to protect any patients at risk. Krilho stated, “It’s of the utmost importance to preserve the confidential nature of the registry, in order to preserve the program at all. People have lost their jobs, lost their children, lost their health insurance because it was found out they were medical marijuana users. We just can’t have that.”

Virginia State legislators seem to be rather lax when it comes to public funds within their state. They recently proposed a new law that will heavily affect both the construction industry and taxpayer’s alike. The potential new law, which is named HB 1951 Public Procurement Act, boosts the minimum contract amount required for bid, performance, or payment bonds from $100,000 to $500,000. This means jobs that fall under $500,000 are not required to obtain a surety bond to guarantee their work; it’s risky business for both contractors and taxpayer’s.

When it comes to trying to rationalize the proposed bill, it does give previously unqualified contractor’s more opportunities to work on bigger jobs that formerly required a surety bond. But whose interest does that serve? Just because some contractors may not have been able to qualify for Performance Surety bonds doesn’t mean it’s a clever idea to raise the minimum contract amount so they have more chances to work on larger projects. There are reasons why certain contractors that weren’t underwritten by a bonding company didn’t qualify to attain a surety bond. I will agree that surety underwriting is rather conservative these days, but that only lends to an environment of financially sound contractors getting good public work.

HB 1951 is essentially lowering the bar to put contractors who have contracts under $500,000 free of having to post a surety bond; the bond as you might know, would guarantee the completion of the job while protecting public funds should a contractor default. Let’s remember, we as Americans pay taxes that run to the State and Federal level who end up paying these contractors on public jobs. The whole point of the bond is to guarantee the work being done on any given job. Let’s say a contractor does default on a project that was protected with a surety bond, the surety company backing the bond would pay out for the remainder of the uncompleted work so no one is stuck with a half completed building, stadium, parking garage, etc. This new enactment prevents the pay out from happening on contracts up to $499,999 simply by raising the minimum contract amount that requires a surety bond; that’s a large amount of taxpayer cash being gambled with.

Plain and simple, the point of a surety bond is to guarantee something. In this case, it’s to guarantee the success of a construction contract. The HB 1951 Public Procurement Act that changes the surety bond requirements threatens taxpayer’s dollars and future construction projects.