Surety Bond Authority Weblog

Despite a large spike in 2007 of state legislation for public private projects (PPPs), last year saw a significant decrease in the number of states that passed such permits. This is likely a result of the diminishing private funding for PPPs due to the current economic conditions within the United States. Additionally, recent reports from the U.S. House Transportation Committee on PPPs could have reflected negatively on them as well. However, international funding may still be an option seeing how PPPs were originally an overseas model. While many are concerned with the concept of PPPs in the United States, state officials should be able to protect public interest in PPPs with concession contracts, in which they have been able to provide oversight and address work force issues.

The only PPP-related enactment of 2008 was West Virginia’s House Bill 4476, which authorized public private projects for state transportation facilities. The new law requires payment bonds and performance bonds, both of which fall under the contract bond category of surety bonds, for qualifying transportation facilities in West Virginia. HB 4476 grants West Virginia’s Division of Highways the authority to determine the surety bond form and amount that is deemed satisfactory for the given circumstance.

Last year, a number of states passed legislation aimed at developing new technical assistance programs and surety bond guarantee programs, most of which were designed to aid small and emerging contractors (contract bonds), and other start-up companies, to include some minority business enterprises.

In the state of California, AB 2376 was enacted which crated the Small and Emerging Contractors Bonding Program, which followed a 2006 executive order from Governor Arnold Schwarzenegger. This newly enacted law tasks the Department of Transportation to work with California’s Officer of Small Business Advocate to create the Small and Emerging Contractor Technical Assistance Program no later than 1 June 2009. This program will provide necessary training and technical support for small business owners and contractors in order to assist such companies in obtaining liability insurance and/or any surety bonds required for them to qualify for public works construction projects. Specific information that the training must require is outlined in the new law. Another objective of the law is to aid the small businesses in qualifying for surety bond guarantees from the U.S. Small Business Administration.

On the other side of the country, in Connecticut, House Bill 5800 was recently enacted. With this enactment the Metropolitan District Commission for Hartford County must establish a new program that helps minority business enterprises in Hartford County acquire necessary performance bonds.

In Florida, HB 889/SB 1734 was enacted, which expanded a pre-existing program, similar to the one in Connecticut’s Hartford County. The new law increases the number of projects that performance bonds , or payment bonds can be waived for emerging companies awarded construction contracts. Previous law allowed three projects, but HB 889/SB 1734 now allow a total of five projects that performance bonds can be waived. Currently in Florida, such bond requirements can only be waived on projects with a estimated value of $200,000-$500,000. Lastly, the new law extends the sunset date two years from 30 September 2009 until 30 September 2011.

Michigan’s “budget bill” for 2009, House Bill 5808, resumes it’s current Department of Transportation program that provides aid to small businesses in the state of Michigan owned by either minorities or women. This assistance is to include surety bonding support.

Not all such efforts were successful. For instance, efforts in West Virginia (House Bill 2510) to institute bond assistance programs for new companies in need of support failed this year. If successful, this bill would have created the Targeted Minority Economic Development Fund, which could be used to encourage smaller start-up companies to form and expand. Additionally, this fund could have provided much needed money to help minority vendors meet bid bond requirements.

If passed, Rhode Island Senate Bill (SB) 2323 and 2229 would have allowed anyone who is under a performance, payment or fiduciary bond (claimants, principals and obligees) to file claim against the surety bond company for a bad faith refusal to pay a claim, settle on a claim, or for failing to perform their obligations in a timely manner. The Senate Bill would have authorized claimants to go after both punitive and compensatory damages, and even attorney fees, and other costs associated with the lawsuit.

Senate Bill 2323 happens to be identical to a SB from last year that wasn’t passed either. Rhode Island House Bills (HB) 7766 and 7981 were SB 2323 and 2229 counterparts that went before the State’s House legislation, and these bills were defeated as well. Of note, AIA Surety, CNA Surety and members of The Surety & Fidelity Association of America (SFAA) all testified before both the Senate and House chambers in Rhode Island.

To understand surety bonds, and how they work, it is best to start off by breaking them down into larger groups or categories. There are two major categories of surety bonds: Contract and Commercial Bonds. In this article, I will briefly explain what each of the previously listed bond types guarantees, and will also provide you with a few examples of each.

The first category of bonds I will discuss are contract bonds. Contract Bonds are purchased by a contractor (or principal) from a surety at the request of a project owner (obligee), and essentially provide obligee with assurance that the principal will perform in accordance with the terms of the contract (i.e. complete the work, pay subcontractors, material suppliers, etc.).

Examples of Contract Bonds:
• Bid Bonds - Bonds that guarantee that a contractor will enter into a contract at the amount bid and post the appropriate performance bonds.
• Construction Bonds - These are bonds designed to guarantee the performance of obligations under a construction contract.
• Payment Bonds - These bonds guarantee payment of the contractor’s obligation under the contract for subcontractors, laborers and materials suppliers associated with the project.
• Performance Bonds - Guarantee performance of the terms of a contract by a contractor.
• Site Improvement Bonds - These bonds guarantee that any public property that was disturbed or altered during the conduct of a private project will be completely restored upom completion of the project.
• Subdivision Bonds - May be required by local government to ensure that landowners follow-through and complete mandatory public improvements made to their property by builders.

The next category of bonds we will cover are Commercial Bonds. There are dozens of different types of commercial bonds, which guarantee the obligee that the principal (purchaser of the bond) will perform per the terms listed on the bond.

Some examples of the many types of Commercial Bonds are:
• ARC Bonds - Required by the Airlines Report Commission.
• Auto Dealer Bonds - Bonds required by each state to ensure auto dealers abide by state regulations.
• Broker Bonds - The different types of Broker Bonds available are Freight Broker, Insurance Broker and Mortgage Broker Bonds.
• Cigarette Tax Bonds - Cigarette distributors may be required to obtain this type of bond to ensure payment of taxes.
• Collection Agency Bonds - Bonds required by a governing body to ensure collection agencies operate within rules and regulations.
• Freight Broker Bonds (BMC-84) - These federally-mandated bonds must be obtained by freight brokers to ensure delivery of brokered goods.
• License & Permit Bonds (not listed) - Due to the very high number of bonds nation-wide that fall under this category, this link will provide general information on license & permit bonds.
• Liquor Tax Bonds - Bonds required to guarantee the payment of taxes collected on liquor and other alcoholic beverage sales.
• Mortgage Broker Bonds - Bonds that are required by many states to ensure that mortgage brokers operate in accordance with all pertinent rules and regulations of that particular state.
• Sales Tax Bonds - Required by the government to ensure timely payment of sales tax by a company.
• Telemarketing Bonds - These types of bonds are required by the state to ensure that telemarketers, or phone solicitors, follow all rules and regulations set forth by that particular state in the conduct of their solicitation.

 
Contract and Commercial Bonds can also each be further broken-down into many more sub-categories (i.e. A License & Permit Bond is a sub-category of Commercial Bonds), and some of these sub-categories can have numerous different types themselves. Each and every sub-category of surety bond is underwritten differently by the surety bond companies, and there may also be different application requirements for each types as well.