A Maryland Legislative Victory of Personal and National Significance 

Do you remember what you did on April 7, 2014? I certainly do. I was anxiously awaiting the end of the Maryland General Assembly’s 2014 Session. Without the intervention of the legislative equivalent of a Hail Mary pass before the clock struck midnight, the Maryland Individual Surety Law, which took effect in 2006, was destined to sunset. The two bills introduced to extend the sunset of the law had not made it out of the Maryland Senate, the chamber of their origin. NASBP had waged a considerable fight in the Maryland Senate to ensure that one bill, Senate 851, did not pass out of the Senate Finance Committee; and NASBP has been actively and vocally opposed to the second bill, Senate 377. Larry LeClair; Jack Andryszak, NASBP’s retained contract lobbyist and a partner of the law firm of Popham & Andryszak, P.A.; and I had made numerous treks to Annapolis and had made personal appeals to select Maryland senators with whom we had built relationships. We had garnered the support of the local chapters of the Associated Builders & Contractors and of the American Subcontractors Association to oppose both extender bills. NASBP also had testified in opposition to both measures in their respective hearings. The clock was ticking and time was running out for those interested in seeing the Maryland Individual Surety Law stay in existence. Without passage of Senate 851 or 377, the Individual Surety Law sunsets in September 2014, relegating that bad law to the historical dustbin where it belongs.

Why is this significant? On a personal level, my professional life at NASBP has been inextricably entwined in the issue of the Maryland Individual Surety Law. Prior to my arrival at NASBP, one of the chief proponents of the Maryland Individual Surety Law had initiated a lawsuit against NASBP, a lawsuit which NASBP steadfastly has maintained as being wholly without merit. When I was hired as the General Counsel in February 2006, I inherited the management of that lawsuit. My arrival also occurred a month or so after the introduction of and the subsequent hearing on the bill that would become the Maryland Individual Surety Law. I knew very little about the subject of individual surety before arriving at NASBP, but necessity made me a quick study on the subject.

On a policy level, the passage of the Individual Surety Law in 2006 made Maryland the bellwether on the issue of individual surety. Individual surety proponents attempted to introduce similar measures in other states, most notably Virginia and North Carolina; but the surety industry was able to repulse those efforts. The victory in Maryland was enough, however, for individual surety proponents to market across the country that, if individual surety bonds are good enough for the federal government and they are good enough for the State of Maryland, they should be good enough for everyone else—that is, for private owners, public owners, general contractors, etc. I am sure that quite a few businesses and contracting authorities were duped into accepting individual surety bonds on that basis alone.

Individual surety proponents smartly undertook their state legislative campaigns under the guise that an unregulated individual surety market would benefit small, emerging, and disadvantaged construction firms, which, it was argued, were shut out from the corporate surety market. Maryland legislators bought into that argument. The surety industry was caught flat-footed, choosing not to believe that state legislators would actually permit the existence of an unregulated surety market at the potential detriment of consumers and businesses. In this instance, however, politics trumped logic. It is almost axiomatic that few legislators have the time or patience to examine issues in great depth and that anything that is framed as beneficial to small businesses is likely to gain initial support without too much scrutiny. Individual surety proponents knew that and lobbied in Maryland on that basis. They also placed the industry in the difficult position of having to demonstrate the problems associated with individual surety activity when little data existed in 2006 on such activity other than anecdotal stories.

Since 2006, NASBP sought to convince Maryland legislators that the Individual Surety Law was deficient in serving its stated purpose of assisting small, emerging, and disadvantaged contractors to gain bonding opportunities to pursue public works contracts. Subsequent state reports to the General Assembly regarding the law indicated the law’s ineffectiveness, as no small business was reported to have used an individual surety bond to gain award of a state public works contract. Maryland legislators, however, in 2009 chose to extend the effective date of the law until 2014.

The extension of the Maryland Individual Surety Law in 2009 served as the catalyst for NASBP to assume a more proactive strategy to ensure that the Individual Surety Law would sunset in 2014.

Our proactive strategy helped us to defeat two measures by individual surety proponents in different legislative seasons to expand the Individual Surety Law to permit individual sureties to write surety bonds at the subcontract level. The approach also emboldened NASBP to introduce in 2012 legislation in Maryland to codify the types of behaviors undertaken by individual sureties that constitute fraud. That legislation was enacted into law and included a study requirement of individual and corporate surety behavior. Among the findings of the study report were that corporate sureties were engaged in a vibrant surety market in Maryland, that individual sureties had engaged in deceptive business practices, and that the Individual Surety Law should be permitted to sunset.

Unfortunately, unscrupulous individual sureties continue to operate around the country, proffering bid, payment, and performance bonds that are not worth the paper on which they are written. It is a rare month, in fact, when I do not receive at least several reports of such activity from members and others. The actions of unscrupulous individual sureties continue to blight our industry and to besmirch the public’s perception of surety bonding in general. The money reaped by individual surety actors must be so lucrative that some of the most notorious individual sureties have spent significant jail time for surety fraud and, upon release, have resumed their careers as individual sureties or as accessories to individual sureties.

The behaviors of individual sureties demonstrate that they seek all opportunities to exploit misperceptions, lack of knowledge, and the gaps and gray areas attendant in the complexities of insurance regulation to gain premiums. Few outside our industry understand surety regulations, let alone those that apply to individual sureties. I have even had one state insurance department specifically refer a person interested in acting as an individual surety to me for advice. The more that can be done to shine a spotlight on individual surety behavior as distinct from the behavior of regulated sureties and to eliminate or to modify laws and regulations that permit individual surety activity in the absence of real oversight, the better perceived we will be as an industry.

Maryland has been a long, difficult fight. Presence, determination, and the willingness to assume and maintain a proactive approach made the difference in Maryland. That same strategy is being used to push for federal legislation, H.R. 776, the Security in Bonding Act of 2013, which currently is before the House Judiciary Committee, and which would make meaningful reforms to the requirements surrounding the use of individual sureties on federal construction contracts. Larry LeClair and I have been making regular visits to Congressional offices to address the current pitfalls in the federal regulations governing the acceptance of individual surety bonds on federal construction contracts, and advancing H.R. 776 will again be a centerpiece of our Legislative Fly-in in June. Let’s hope we can enjoy the same success at the federal level as we have had in Maryland.