NASBP wanted to reprint the information about the First Sealord Surety, Inc. liquidation that was sent to NASBP members, affiliates, and associates on February 16, 2012. That information is reprinted below.

The Commonwealth Court of Pennsylvania has issued an Order of Liquidation (Order) for First Sealord Surety, Inc. (FSSI), effective on February 8, 2012. Michel F. Consedine, Insurance Commissioner of the Commonwealth of Pennsylvania, was appointed the Statutory Liquidator and was ordered to take possession of FSSI’s property and to liquidate its business. The Order issued by the court was based on the written consent of the sole shareholder and the company’s board of directors. Under the court’s oversight, the liquidator is charged with gathering the company’s assets, converting them into cash, and distributing the cash to claimants against the company’s estate.

The Insurance Commissioner petitioned the Commonwealth Court for a liquidation order because FSSI was no longer able to meet its policyholder obligations or pay its debts as they became due. FSSI was founded in 1991 and is based in Villanova, Pennsylvania. The company was formerly known as The Mountbatten Surety Company, Inc. and changed its name to First Sealord Surety, Inc. in April 2003. The company operated as a mono-line surety company providing bonds on behalf of contractors and subcontractors. Until recently, when it stopped writing bonds, FSSI offered coverage in 39 states.

Star Insurance Company, a subsidiary of Meadowbrook Insurance Group, announced recently that it has entered into a renewal rights agreement with FSSI. According to the court’s Order, the PID, not Meadowbrook, will be responsible for claims on FSSI bonds.

Because surety bond producers are vitally interested in this matter, NASBP provides the following information to assist NASBP members in dealing with inquiries from obligees and principals on FSSI bonds. Much of the information below can be found in more detail at the Pennsylvania Insurance Department website at www.insurance.pa.gov.

1. Why is Pennsylvania in charge of the liquidation?

Pennsylvania is the state in which FSSI is domiciled. All aspects of the liquidation process are governed by the Insurance Department’s liquidation statute, 40 Pa. Cons. Stat. §§ 221.1-221.63.

2. Who or what has the responsibility of liquidating FSSI?

The Office of Liquidations, Rehabilitations and Special Funds of the Pennsylvania Insurance Department (PID) has been assigned the responsibility of liquidating FSSI. All questions concerning the liquidation of FSSI can be directed to the Statutory Liquidator for FSSI, Capitol Associates Building, 901 N. 7th Street, Harrisburg, PA 17102. Phone: 717-787-7823.

Pursuant to the Order of Liquidation, the liquidator is vested with title to all property, assets, contracts, and rights of action of FSSI, including jurisdiction over all assets of FSSI wherever they may be located, exclusive jurisdiction over all determinations as to whether assets belong to FSSI or another party, exclusive jurisdiction over all determinations of the validity and amounts of claims, and exclusive jurisdiction over the determination of the priority of all claims against FSSI.

Please note that the PID website provides that FSSI “bondholders and producers with questions should call 717-787-7823 or email the liquidator.”

3. What happens when a company becomes insolvent and is liquidated?

Liquidation is similar to a bankruptcy. When a company is liquidated, the Office of Liquidation, Rehabilitations and Special Funds gathers the company’s assets and determines what liabilities, such as bills and claim payments, it has. The Statutory Liquidator then develops a plan to distribute the company’s assets according to law and submits the plan to the court for approval. The liquidation process is complex and is expected to take several years.

4. What is now the status of any First Sealord surety bond?

Concerning termination of policies, the Order provides in Paragraph 14 as follows:

14. Any First Sealord surety bond, surety undertaking or policy still in force at the time of the Liquidation will continue only until the earlier of the following: (1) thirty (30) days after the entry of this order; (2) the expiration of the bond, undertaking or policy by its own terms; or (3) the date when the obligee or insured replaces the surety bond, surety undertaking or policy with equivalent coverage in another reinsurer or surety, or otherwise terminates the policy.

(Emphasis in original.) This provision of the Order means that a paid FSSI surety bond will terminate at its normal expiration, upon replacement of the bond, or on March 9, 2012 (30 days from the date of liquidation), whichever is soonest. This applies to all FSSI surety bonds.

5. What is the status now of FSSI’s T-Listing?

On February 10, 2012, the Financial Management Service of the U.S. Department of the Treasury issued the following update to the Department of Treasury’s Listing of Approved Sureties as of July 1, 2011, removing FSSI from Circular 570:

First Sealord Surety, Inc. (NAIC# 28519) under 31 U.S.C. [§] 9305 to qualify as an acceptable surety on Federal bonds has been terminated effective February 10, 2012.

6. What action can NASBP take to the liquidation of FSSI?

NASBP can take no action concerning the liquidation. The Pennsylvania Insurance Department acted in accordance with the law in petitioning the court for liquidation of FSSI.

NASBP’s first concern is to provide accurate and timely information to its members so that they can deal with principals and clients more knowledgeably and effectively.

7. Does the liquidation of FSSI mean that FSSI bonds have no worth?

No. Although FSSI is now in liquidation, the guaranty association in the state where you reside or where the loss occurred may be obligated to provide coverage under surety bonds issued by FSSI, subject to certain limitations. Any claim or portion of it that is not covered by a guaranty association becomes a claim against the FSSI estate. The amount deemed an allowed claim will be paid to the extent funds are available, on an equal basis with all other claims in the same category. These claims may be paid in full, in part, or not at all, depending on the available assets.

8. What is a guaranty fund/association?

A guaranty association is an association of licensed insurers in a state and is financed by funds directly from the insurance companies. Subject to statutory eligibility and claims payment limits, a guaranty association assumes the obligations of licensed insolvent insurers for certain claims filed in that state for residents or property insurance in that state.

9. Does guaranty fund/association protection exist for surety claims?

Yes. Guaranty fund coverage is provided for surety claims in a few states. Although FSSI was licensed to do business in 39 states, according to the PID, only six of those states have guaranty fund coverage: Arkansas, Kansas, Kentucky, Maryland, Michigan, and New York. A listing of those guaranty funds/associations, with contact information, is included below. In most states, however, surety companies do not pay into the state’s guaranty association. Thus, in those states, the fund neither extends to nor provides coverage for surety bonds. Those with claims should check with the insurance department in the state in which they are domiciled to determine if the guarantee fund in that state provides protection.

Arkansas
Arkansas Property & Casualty Guaranty Fund
1023 West Capitol Avenue, Suite 2
Little Rock, AR 72201
Phone: 501-371-2776
Fax: 501-371-2774

Kansas
Western Guaranty Fund Services
1720 South Bellaire Street, Suite 408
Denver, CO 80222
Phone: 303-759-5066, Ext. 222
Fax: 303-759-0859

Kentucky
Kentucky Insurance Guaranty Association
10605 Shelbyville Road, Suite 101
Louisville, KY 40222
Phone: 502-327-0819
Fax: 502-327-0859

Maryland
Property & Casualty Insurance Guaranty Association
305 Washington Avenue, Suite 600
Towson, MD 21204
Phone: 410-296-1620
Fax: 410-296-1237

Michigan
Michigan Property & Casualty Guaranty Association
P.O. Box 531266
Livonia, MI 48153
Phone: 248-482-0381
Fax: 248-482-0388

New York
New York Liquidation Bureau
110 William Street, 15th Floor
New York, NY 10038
Phone: 212-341-6707
Fax: 212-341-6861

Contractors residing or having projects in these states can contact the respective state’s Department of Insurance to investigate the possibility of payment of a claim against a FSSI bond under that state’s guarantee fund.

10. How does a claimant or an obligee file a claim against a FSSI surety bond?

A bond claimant or an obligee can file a proof of claim with the Statutory Liquidator using the proof of claim form, which can be found on the PID website. Even if a claimant or obligee already has a claim pending with FSSI, the claimant or obligee must file a proof of claim with the liquidator.

A claim will not be considered unless a claimant or obligee files a proof of claim. Proofs of claim must be filed no later than October 5, 2012, 5:00 p.m. EST. The PID states on its website that, while the filing deadline is October 5, 2012, it will continue to accept any and claims filed on the prescribed proof of claim form after the filing deadline, but they will be considered late. Such failure to file a timely claim may result in denial of the claim or consideration of the claim at a lower priority level. A guaranty association may have an earlier deadline, so this should be checked in the relevant jurisdiction.

It may take several years before all of FSSI’s assets are collected and distribution amounts can be determined. To participate in a distribution, a party must file a proof of claim.

11. What must be in a Proof of Claim Form?

A proof of claim must be filed even if a claim was made against FSSI prior to the liquidation. Also, a separate proof of claim form must be filed for each claim. A proof of claim must include the following:

• Proof of claim form containing the original signature of the claimant
• Description of the claim and any security interest
• Whether collateral security or personal security is pledged in accordance with the terms of the surety bond
• Documentation of any payments made on the claim
• A statement that the amount is justly owed the claimant

If a claim is based on an “instrument in writing,” that document should be attached to the proof of claim form. If the document has been destroyed, a statement of the facts and circumstances of the loss must be filed, under oath, with the claim.

Proof of claim forms can be downloaded from the PID website at www.insurance.pa.gov.

12. What happens to legal disputes involving FSSI bonds?

The Order includes a stay of all pending or future litigation, including arbitration, mediation, judgment, attachment, garnishment, or lien against FSSI or the Statutory Liquidator. This stay of actions against FSSI or the Statutory Liquidator includes any action in the Commonwealth of Pennsylvania or elsewhere.

13. Because all FSSI bonds will be cancelled on March 9, 2012, what happens to bond collateral that has been deposited with FSSI?

An area of particular interest is the status of bond collateral deposited with FSSI. For that reason, the following is quoted directly from the PID website:

One of the primary responsibilities of the Statutory Liquidator is to become familiar with the workings of the company, including the various collateral/escrow accounts. As the issue of collateral is a top priority for everyone involved in a surety company liquidation, the Liquidator will work diligently to formulate a policy and procedure to address these issues.

Those bond producers and principals concerned about this issue should discuss the specific situation with their lawyers.

14. What about claims for producer commissions?

According to the PID website, FSSI producers with claims for earned commissions should complete a proof of claim form. Any documentation to support the claim, including the most recent statement, should be included with the proof of claim.

15. What about reinsurance companies?

FSSI’s reinsurers agreed to assume a portion of the bond risk undertaken by FSSI. Reinsurers have no obligation to a bond claimant or bond obligee and are not listed as a surety on the bond itself. The reinsurer only has an obligation to the surety (in this case, FSSI) to pay portions of FSSI’s losses in accordance with the specific reinsurance agreement. The Order provides that the “amount recoverable by the Liquidator from any reinsurer shall not be reduced as a result of this Order of Liquidation, regardless of any provision in a reinsurance contract or other agreement.”

Because the reinsurer does not have a direct relationship to the bond claimant or obligee, it is unlikely that the reinsurer has any legal obligation to either pay direct claims on FSSI’s bonds or maintain any of those bonds beyond FSSI’s insolvency.

16. What should contractors and subcontractors that gave FSSI bonds do now that those bonds are terminated?

There is no one general answer to this question. In the case of performance and payment bonds, because they have been terminated, this will depend upon project owners, who will have to decide if they want or require replacement bonds to cover the remainder of the projects. The only way to replace a cancelled bond is to replace the bond with a bond from another surety.

Because each project will be at a different phase of completion, each obligee will have its own set of governing laws; and each contract and bond will carry different terms and conditions. Depending on the contract language, it is certainly possible that, if a contractor/subcontractor does not, for whatever reason, obtain replacement bonds, this could constitute a material breach of its contract or subcontract.

17. Who pays for the premium for replacement bonds in those cases in which the owner requests them?

This question asks for a legal answer, and there is no single answer. NASBP members with questions about a specific situation are advised to discuss it with a lawyer familiar with the particular contract terms and conditions and the laws in the relevant jurisdiction.

18. What should NASBP members do?

All NASBP members are encouraged to discuss the situations of their FSSI bonds with their contractors and subcontractor clients—and attorneys—to determine what, if any, steps should be taken.

Whether or not an individual producer has issued FSSI surety bonds, all professional bond producers and surety company personnel have a vested interest in the reputation of the surety industry. The industry is sound and strong and continues to be committed to protecting consumers and the public interest through surety bonds. Producers and company personnel alike also are committed to making sure that the FSSI situation has as little impact as possible on the public’s perception of the ultimate value of surety bonds—financial security.

Surety companies and producers who have issued FSSI bonds have an opportunity to act quickly to replace FSSI bonds, where necessary, for principals and projects that meet normal underwriting criteria. Quick and responsible actions on the part of producers and surety companies will help minimize any adverse effect this could have on the industry’s reputation and allay any of the construction industry’s concerns about the overall financial strength and security provided by surety bonds.

19. Subsequent Information

As subsequent information becomes available to NASBP, NASBP will furnish that information to its members.