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.