January 2003

IMPORTANT MESSAGE: 

Bonds, Powers Of Attorney, And The Federal Government 

The ongoing issue of submitting bid bonds and powers of attorney with bids for government projects has reached a new level of confusion.  The following outline documents the events leading up to the present situation. Because this situation is ongoing with new developments rapidly occurring, NASBP encourages its members and affiliates to check the “What’s New?” sector of the Association’s Web site, www.NASBP.org, for ongoing developments.  The contents of this report are based on information known to NASBP as of close of business, January 17, 2003.

1. Background information
2. Under federal rules governing bids and contracts, a proper, enforceable bid guarantee is a matter of bid responsiveness—the bid of a contractor must include a valid bid bond at the moment of opening.
3. If the government cannot determine definitely from the documents submitted with the bid, i.e., bid bond and power of attorney (POA), that the surety would be bound to accept its responsibilities, the bid must be rejected as nonresponsive.
4. When the Problem Began
5. In 2000, two offices (Omaha, Jacksonville) of the Army Corps of Engineers rejected the bid bonds and declared the bid submissions nonresponsive
6. Reasons for rejecting these bids were similar: POAs accompanying the bidders’ bid guarantees were faxed or photocopied documents.
7.  General Accounting Office (GAO) upheld the Corps’ decisions declaring that the facsimiled or photocopied POAs accompanying otherwise valid bid bonds were insufficient to demonstrate the intent on the part of the sureties to be bound by the bonds.  Language in these decisions was very broad and created a perception that “wet” or original signatures were required to ensure that the government would accept a POA
8.  Burden of such a requirement on the sureties would have been enormous, and the Corps almost immediately “clarified” its position to make wet signatures unnecessary and agreed to accept pre-printed POAs without original signatures as long as the following criteria were met  (The following is a combination of the criteria generated by the two Corps offices): 
9.  The power of attorney is: either an original, ink signature or a mechanically produced signature, which is generally established by the use of special paper and printing processes by the surety, but is NOT a photocopy or telecopy of signature;
10.  The raised seal of the surety is affixed to the power of attorney; and
11.  The board resolution recited in the power of attorney states that the surety is bound by the signature contained in it, or the power contains an unambiguous statement that the statement intends to be bound by the mechanically produced signature.      
12. SAA, AGC, and NASBP wrote letters to the Office of Federal Procurement Policy (OFPP) requesting that the Federal Acquisition Regulations be modified to clarify the confusion regarding the presentation of the POA and bid bond accompanying bids on federal projects.
13.  New Developments  
14. On December 6, 2002, General Accounting Office (GAO) upheld a decision handed down by a contracting officer (CO) of the Veteran’s Administration in the matter of All Seasons Construction.  The CO rejected All Season’s $3.3 million low bid because the POA accompanying the bid bond was found to be defective.
15. The CO faulted the POA for the following reasons:
16. The power of attorney was not crimped with the surety’s corporate seal;
17.    It contained a signature that apparently was printed on the document at the time the document was produced and
18.    It contained an effective date that appeared to have been added after the document had been “signed” – as if the POA was a form generated from a computer, to which the company adds the date when it prints the document out and the signature appears on the printed, dated document.
19. GAO upheld the CO’s decision and muddied the water about what constitutes an acceptable POA by stating in its opinion that no POA on a printed form in which the signatures were applied to the document at the time the document was produced would be acceptable.
20. All Seasons and its surety filed suit in the Court of Federal Claims contesting GAO’s ruling to uphold the CO’s decision.
21. The government responded with an argument not raised before the GAO that the protest should be dismissed because the POA submitted by All Seasons was a photocopy.
22.  SAA submitted Amicus Curiae requesting that the court not rule on the simpler issue of whether the POA was or was not a photocopy in this particular case (and ignore the issues raised by GAO in its decision), but that it rule on the broader issue of the merits of accepting photocopies of POAs because the bid bond is the legal instrument that binds the surety.
23.  On Tuesday, January 14, 2003 the Judge denied All Season’s protest not based on the reasons stated by GAO in its decision, but instead, based upon a subsequent finding by government investigators that the POA submitted by All Seasons was a photocopy.
24. There is a possibility that the Judge may include language in a written opinion that has not yet been issued raising concerns about the logic employed by the GAO decision.
25.  What Does This Mean?
26. GAO’s All Seasons opinion casts doubt on whether POAs on printed forms with printed signatures are viable.  The Judge’s written opinion could shed some light on this subject when issued.
27. A recent memorandum issued by counsel to the Corps of Engineers illustrates the risk of submitting POAs with signatures printed at the time the POA is produced.  The memo states that POAs accompanying bonds must “bear a signature that was clearly applied after the document’s creation.”  A copy of this memo is attached.  Applied literally, this rule excludes not only photocopies, but any printed POA forms in which the signature is produced with the document.
28. Unless or until there is some action taken to clarify GAO’s decision in All Season either through regulation or in the courts, there is a risk that a POA on a printed form on which the surety’s signature appears to have been reproduced on the document at the time it was printed could be rejected under the logic employed by GAO in All Seasons.
29. Resolving the Issue
30.  SAA, NASBP, and AGC are pressing the OFPP for a regulatory solution to the power of attorney/bid bond problem that is occurring with bid submissions for federal contracts considering other approaches to addressing the issue.
31. As of close of business on Friday, January 17, 2003, staff in the office of Angela B. Styles, Administrator for the OFPP, Office of Management and Budget, indicated that Ms. Styles was interested in meeting. No meeting has yet to be arranged as of the date of this report.

From NASBP’s General Counsel

Part 3.  Mold In Construction:  What’s The Industry To Do?

November and December’s Pipeline issues discussed the origin of the growing problem of mold in the construction industry and the response of the insurance and surety markets to the problem.  This final Part Three of the series discuses the risk management and risk sharing options that contractors, sureties, and insurers may employ in the coming years to better insulate themselves from potential liability from mold claims.  These options include design and construction modifications, new contract terms and conditions, and new laws/ regulations.  In addition to these options, insurers and sureties will play some role in how contractors, owners, and other industry players manage their risk. 

Design And Construction Modifications

The construction industry has already started to identify ways to minimize the risk of mold claims and litigation.  The Associated General Contractors (AGC) has appointed a task force to determine the best way for owners, design professionals and construction contractors to jointly approach the problem. The task force has identified the many decisions – from design, to materials, to schedule, to construction means and methods – that all bear on the risk of a mold problem.  AGC’s ultimate goal is to expand the currently shrinking market for mold insurance coverage.  Among the many things that all of the parties need to consider are (1) products that may be vulnerable to mold contamination; (2) protocols for the inspection of grading and drainage, and the building envelope; (3) HVAC designs; and (4) construction and maintenance schedules.

Scientists writing in the Construction Specifier have suggested other means to minimize mold growth, including the specification of mold- and moisture-resistant construction and finishing materials; the use of permeable wall finishes (such as paint) in place of impermeable wall finishes (such as vinyl wall covering) to avoid trapping moisture; and requiring temperature set points in HVAC systems to control humidity during unoccupied periods. The Association of Wall and Ceiling Industries (AWCI) announced in July 2002 that it would launch its new EIFSmart program.  The program will qualify and approve Exterior Insulation and Finish Systems contractors who demonstrate the ability to correctly install EIFS.  The goal of the program is to distinguish quality EIFS contracting companies to owners, architects and other interests such as insurers.  AWCI expects this accreditation to give participating contractors a competitive edge in bidding and insurance rates.

New Contract Terms And Conditions 

It is likely that future construction contract negotiations will include a specific discussion of indemnification against mold-related damage.  Parties may see changes in numerous contract clauses, which will impact how the risk of liability for mold-related claims is apportioned.

Hazardous conditions clauses, which historically have been very broadly written in industry form contracts, such as the AIA forms in the past, may be more narrowly drafted to specifically include or exclude responsibility for mold claims.  Indemnity clauses related to mold, which expressly require the defense and indemnification of one party for claims, might become more commonplace.  Contract insurance requirements will be drafted to specifically require mold claim coverage.  These contract clauses (and especially insurance requirement clauses) place contractors and subcontractors in a precarious position if they do not read their contracts carefully.  The risk is that they agree to provide something (like mold insurance) that they do not have and may not be able to get.

It is important to note that the indemnity, hazardous conditions clauses, and insurance provisions that have been used in the past may very well obligate a party to be responsible for mold-related damage even if it does not expressly identify “mold” in the contract.  The definition of “hazardous condition” in some contracts, for instance, is broad enough to include mold.  It is in the interest of any party negotiating a construction contract to put contract terms into place, which clearly apportion the risk of mold liability.  The alternative is an expensive lawsuit in which the court will decide whether the contract clauses obligate a party to pay for mold-related damages.

Public owners will likely include specific mold-related insurance requirements in their bid specifications. Because the insurance requirements on public contracts generally cannot be negotiated or varied, contractors submitting bids and their sureties need to understand that a bid on the project is a commitment to provide the insurance required.  If the low bidder cannot obtain the coverage, it could be disqualified, and its bid bond called upon.  We expect to see sureties more closely scrutinize contract insurance requirements before committing to issue bid and performance bonds.

New Laws /Regulations 

To date, no mold-related federal laws or regulations have been adopted.  Michigan Representative John Conyers, Jr. (D-14^th) introduced “The Toxic Mold Safety and Protection Act of 2002,” (HR 5040) into the 107^th Congress.  As introduced, the bill proposed to fund research; develop guidelines and establish standards for how much mold is too much mold; provide funds for mold remediation in public buildings; implement a national insurance program for homeowners; and direct HUD and the EPA to implement programs to certify mold inspectors and remediators.  This legislation was not voted on before the 107^th Congress adjourned.  Some states have enacted varying legislation pertaining to mold.  The primary goal of much of the state legislation has been to bridge the gap between taxpayers who want insurance that covers mold claims but at reasonable rates, and insurers who say they cannot afford to provide this coverage at current premium levels.  States that have enacted laws include California, Illinois, Indiana, Maine, Nevada, New Jersey, Texas, Washington and West Virginia.  Other states, such as Arizona, California, Connecticut, Illinois, Indiana, Maryland, Massachusetts, Minnesota, New Jersey, New York, Pennsylvania, Texas and Washington, have introduced but not passed such legislation.

As more is learned about the effect of mold exposure, it is reasonable to anticipate that at some point in the future the federal government and the states will provide exposure guidelines and abatement/remediation regulations.  Right now, however, the science and the legislatures are way behind the plaintiffs who are bringing claims for mold-related damages.

Conclusion  

Mold is going to be a problem for the construction industry for at least the next few years.  Insurance to cover claims will be expensive if at all possible to obtain.  Developers, contractors and suppliers, insurers and sureties will have to take aggressive steps to reduce and mange their risks to survive in the marketplace.  Eventually, as more is understood about the real risks associated with mold exposure and the manner in which mold may be remediated, legislation and regulation may be necessary to address the problem.

NASBP’s General Counsel is Susan McGreevy of Husch & Eppenberger LC, Kansas City, MO.

 

  Three Months And Counting to Nasbp’s 2003 Annual Meeting & Expo  

Spring is just around the corner, and it’s time to make your hotel reservations for NASBP’s 2003 Annual Meeting & Expo, which will take place on April 12 – 16, at the beautiful La Quinta Resort & Club!   To make reservations, contact the La Quinta reservations department by phone: (800) 598.3828/(760) 564-4111 or Email: resinquiry@kslmail.com.  The hotel room reservation cut-off is March 13, 2003 so hurry and make your reservations soon!

Accommodation Information

The NASBP daily room rate is as follows:

• Superior Room – $228 single/double

• Deluxe Room – $276 single/double

There is a $4.75 per person, per night service fee.  The service fee covers round trip porter age, daily housekeeping gratuities, in-room coffee and tea service, local phone calls and access to the fitness center.

First and Last night’s room rate deposit is required to confirm reservations.  Deposits are refundable if the resort receives cancellation notice 72 hours prior to the scheduled arrival date.  A $50.00 fee will result if you depart prior to the established date.

Travel To La Quinta

La Quinta Resort & Club, nestled at the base of the majestic Santa Rosa Mountains, is located 19 miles southeast of Palm Springs and 120 miles east of Los Angeles. The Palm Springs International Airport is just 30 minutes from the resort and major gateways include Ontario International Airport (90 minutes), Los Angeles International Airport (2 hours, 15 minutes) and San Diego’s Lindbergh Field (2 hours, 15 minutes), and Orange County’s John Wayne Airport (2 hours).

Airlines serving Palm Springs International Airport

Alaska Airlines (800) 426-0333

America West Express (800) 235-9292

American Airlines (800) 433-7300

American Eagle (800) 433-7300

United Express (800) 241-6522

108^th Congress Convenes With GOP in Control

NASBP Urges Membership to Meet and Greet New Legislators

Republicans officially took control of the Congress on January 7, 2003.  The new Congress began by swearing in new leaders. The new Senate majority leader is Bill Frist (R-TN).  Tom Daschle (D-SD) continues his job as minority leader.  Democrats in the House of Representatives made history as they swore in Rep. Nancy Pelosi (D-8^th CA), the first woman to head a party in either house. The House also elected Dennis Hastert (R-14^th IL) to a third term as speaker.  In all, 11 new Senators and 55 new House members took office.

Connie Lynch, Director, Government Relations and Colin Chiles, Government Relations Coordinator took the opportunity on January 7^th to visit the offices of the new Senators and House members to deliver packets of surety information and introduce themselves to the new congressional staffers.  NASBP staff also visited the offices of the Senators and House members who received SuretyPAC contributions during the last election cycle.  The swearing in ceremonies provided NASBP with a festive atmosphere and an opportunity to begin building new relationships for the upcoming session of the 108^th Congress.

All NASBP members and affiliates, and especially Government Affairs Representatives, are encouraged to introduce themselves to the new Members of Congress and their staffs in the local districts.  You can schedule meetings in the district offices with the Member and their staff during one of the district work periods listed below.  While the Senate schedule for 2003 has not been finalized, the Senate is usually in recess for at least one week near either the end or near the beginning of each month.

The new Members are currently establishing their district offices and providing their local contact information on their websites as it becomes available.  To visit their websites, please click below on the name of the Member whose information you’d like to access.  To obtain packets of NASBP materials for any meeting you may schedule with an elected official, please contact Colin Chiles at cchiles@nasbp.org or 202-686-3700.

House District Work Periods

February 17 – 21
April 14 – 25
May 26 – 30
June 30 – July 4
July 28 – September 2

New Senators

Lamar Alexander (R-TN)
Saxby Chambliss (R-GA)
Norm Coleman (R-MN)
John Cornyn (R-TX)
Elizabeth Dole (R-NC)
Lindsey Graham (R-SC)
Frank Lautenberg (D-NJ)
Lisa Murkowski (R-AK)
Mark Pryor (D-AR)
John Sununu (R-NH)
Jim Talent (R-MO)

New House Members

Rodney Alexander (D-5^th LA)
Frank Ballance (D-1^st NC)
Gresham Barrett (R-3^rd SC)
Bob Beauprez (R-7^th CO)
Chris Bell (D-25^th TX)
Rob Bishop (R-1^st UT)
Tim Bishop (D-1^st NY)
Marsha Blackburn (R-7^th TN)
Jo Bonner (R-1^st AL)
Madeleine Bordallo (D-At Large GU)
Jeb Bradley (R-1^st NH)
Ginny Brown-Waite (R-5^th FL)
Michael Burgess (R-26^th TX)
Max Burns (R-12^th GA)
Dennis Cardoza (D-18^th CA)
John Carter (R-31^st TX)
Ed Case (D-2^nd HI)
Chris Chocola (R-2^nd IN)
Tom Cole (R-4^th OK)
Jim Cooper (D-5^th TN)
Artur Davis (D-7^th AL)
Lincoln Davis (D-4^th TN)
Mario Diaz-Balart (R-25^th FL)
Rahm Emanuel (D-5^th IL)
Tom Feeney (R-24^th FL)
Trent Franks (R-2^nd AZ)
James Gerlach (R-6^th PA)
Phil Gingrey (R-11^th GA)
Raúl Grijalva (D-7^th AZ)
Katherine Harris (R-13^th FL)
Jeb Hensarling (R-5^th TX)
William J. Janklow (R-At Large SD)
Steve King (R-5^th IA)
John Kline (R-2^nd MN)
Denise Majette (D-4^th GA)
Jim Marshall (D-3^rd GA)
Thaddeus McCotter (R-11^th MI)
Kendrick Meek (D-17^th FL)
Mike Michaud (D-2^nd ME)
Brad Miller (D-13^th NC)
Candice Miller (R-10^th MI)
Tim Murphy (R-18^th PA)
Marilyn Musgrave (R-4^th CO)
Devin Nunes (R-21^st CA)
Steve Pearce (R-2^nd NM)
Jon Porter (R-3^rd NV)
Rick Renzi (R-1^st AZ)
Mike Rogers (R-3^rd AL)
C.A. Ruppersberger (D-2^nd MD)
Tim Ryan (D-17^th OH)
Linda Sanchez (D-39^th CA)
David Scott (D-13^th GA)
Mike Turner (R-3rd OH)
Chris Van Hollen (D-8^th MD)

Reminder:  NASBP’s Marketing Materials Still Available 

• Building Relationships, Building Confidence, Building Trust is an 8-panel brochure that describes the role and value of NASBP members as the “go to” people for surety bonds.  It is directed to the construction industry, primarily contractors, and contains a section suggesting what to look for in a surety professional. The last panel of the brochure can be personalized with member agency contact information. THE BROCHURE IS AVAILABLE AT NO COST TO NASBP MEMBERS AND AFFILIATES.  NASBP requests that orders be limited to lots of 25, not to exceed 100 brochures.

• Marketing Kit consists of four advertisements that focus on the valuable services NASBP members provide.  Each ad comes in both color and black-and-white, and in four different sizes so members can tailor their personal marketing campaign to local circumstances and their own budgets.  Members can personalize the ads with their own name, logo, and contact information.  The Kit, which also includes step-by-step instructions on how to place ads in local and regional trade media, may be ordered for $75 to cover NASBP’s costs for shipping, handling, and reproduction.  Designed to save members the expense of having quality ads such as these designed and developed, the kit is a real bargain for NASBP members!

• NASBP’s New Logo Slicks – Black and white slicks are available free of change to members who want to reproduce NASBP’s logo on their letterhead and other materials.  They are available to NASBP members upon request. To order some or all of these materials, please click on the photograph contained in this article or email your request to info@nasbp.org.  Contact Connie Lynch at 202/686-3700 or clynch@nasbp.org if you have questions.
• These materials are available exclusively to NASBP members and affiliates and are designed to promote the specialized services NASBP members bring to the surety and construction industries and their current and potential customers.

Call For Nominations: NASBP’s Excellence In Advocacy Award 

NASBP is soliciting nominations for its Excellence in Advocacy Award. This award recognizes members and affiliates who have made significant contributions to the Association and the surety industry by influencing decisions favorable to surety in the public policy arena.  The award will be presented at the NASBP Annual Meeting in April and has the following requirements:

Nomination

Employees of NASBP member agencies or surety company affiliates who spearheaded a particular advocacy effort may self-nominate their initiative for consideration of this award.  Other members or affiliates not directly involved but knowledgeable about an initiative also may submit nominations.

Criteria

Individuals nominated for this award must have been involved in a collaborative effort of surety producers and surety company representatives as well as participants of other related industries.  Nominated efforts also must have included one or more of the following activities or similar activities not expressly listed below:

• Advocated on behalf of the surety industry before state or local policymakers or groups of policymakers;
• Sought legislation, regulations, or policies that promoted suretyship; or
• Championed the resolution of an issue or issues of particular concern to surety professionals.

A complete explanation of the criteria and an electronic nomination form is available on NASBP’s web site at  http://www.nasbp.org/advocacyaward.cfm.  The nominator and co-nominator must complete the electronic form no later than the close of business on March 1, 2003.  Questions or comments should be directed to Connie Lynch, Director, Government Relations, or Colin Chiles, Government Relations Coordinator, at clynch@nasbp.org or cchiles@nasbp.org, or at 202/686-3700.

Call For Nominations: NASBP’s Policymaker of the Year Award

NASBP is soliciting nominations for its Policymaker of the Year Award.  This award recognizes elected or appointed government officials who have been friends to surety bond producers and/or the surety industry.  The award will be presented at the NASBP Annual Meeting in April and has the following requirements:

Nomination

Public officials, elected or appointed, serving at any level of government, may be nominated.   Two recommendations must accompany each nomination. Employees of member agencies or affiliate surety companies are eligible to nominate a policymaker, but at least one of the two recommendations must come from a member agency.  Preferential consideration will be given to nominees recommended by both a member agency and an affiliate company.

Criteria

Nominees for this award must have engaged in one or more of the following activities or taken similar action not otherwise listed below:

• Advocated on behalf of the surety industry.

• Sponsored or co-sponsored legislation that promoted suretyship.

• Held public hearings regarding surety or surety-related issues.

• Provided support or counsel regarding proposed public policies advocated by the surety community.

• Championed the resolution of an issue(s) of particular concern to surety professionals.

A complete explanation of the criteria and an electronic nomination form is available on NASBP’s web site at http://www.nasbp.org/policymakeraward.cfm.  The nominator and co-nominator must complete the electronic form no later than the close of business on March 1, 2003.  Questions or comments should be directed to Connie Lynch, Director, Government Relations, or Colin Chiles, Government Relations Coordinator, at clynch@nasbp.org or cchiles@nasbp.org, or at 202/686-3700.

Briefly Noted 

  POSITION VACANCY

Old Republic Surety Company has two opportunities for strong, self-starting         marketing/underwriting persons as Field Underwriters for assigned territories from offices in Dallas or Salt Lake City.  Requires Contract & Misc. underwriting experience (3-5 years).  Travel is required 4-5 days/week.   Benefits include company car and bonus plans.  Call Janell Manson, H.R. Director at 262/797-2643, e-mail manson@orsurety.com or fax resume to 262/797-8874.  Visit www.orsurety.com for more company information.    EOE

NASBP Welcomes New Member and Affiliate  

NASBP welcomes the following new member and affiliate who have joined the Association since the last issue of Pipeline.  For more details on these new additions to  NASBP, go to NASBP’s online membership directory http://www.nasbp.org/bond.cfm.

NEW MEMBER

Kraus-Anderson Insurance
420 Gateway Boulevard
Burnsville, MN 55337-2790
Key Contact:  Mr. Mark N. Kampf

NEW AFFILIATE

Capitol Indemnity Corporation
4610 University Ave
PO Box 5900
Madison, WI 53705-5900
Key Contact:  Mr. J. Stephan Ryan

SIO –“The Information Source”

 What Happened Last Year?

In 2002, SIO revolutionized its means of educating private owners, public owners, design professionals, contractors, subcontractors, educators, students, bankers, and surety professionals on the value and benefits of contract surety bonds. As it drafted the 2002 Business Plan, SIO’s staff and Policy Board knew that, with a limited staff and budget, use of current technologies was an effective and efficient way to reach these target audiences. After introducing a redesigned Web site, 76,000 visitors logged on to www.sio.org. SIO has distributed over 8,400 CDs since they were introduced. The demand for printed materials continues to grow. In 2002, SIO distributed 96,241 pieces of information.

What’s in store for 2003?

Look for new publications and presentations, including a revision of the old favorite, Your First Bond; enhanced CDs; and more direct outreach to private owners and bankers. As always, SIO welcomes input on what surety professionals need to promote contract surety bonds effectively. If you haven’t contacted SIO lately, you don’t know what you are missing.

To learn more about SIO’s activities, including the Top 10 Most Requested Materials, number of requests per year, and the dynamic growth and impact of www.sio.org, click here.

SIO is supported by the National Association of Surety Bond Producers (NASBP) and The Surety Association of America (SAA). For more information visit www.sio.org, e-mail sio@sio.org, or call (202) 686-7463.

February 2003

 

NASBP’s President says, “Seize the Day!”

I began the year as President with the premise that the turbulence within our industry would provide surety professionals with great opportunity.  As 2003 begins, I believe that to be even more the case.

A hard market is the perfect stage for specialized professionals like us—it’s the true venue in which to prove our value in the surety equation. I may be wrong, but I think the surety business has seen its low point, and that ours will prove to be an industry of resilience and substance in the years ahead.  I also predict that NASBP members will continue to raise their profiles as the preferred providers in the business.

I couldn’t have been more impressed by the breadth of experience, energy, and commitment I witnessed in my travels across the country this year.  Singularly, it is why I am so confident in our combined ability to succeed. The quality of our members and affiliates, both regionally and nationally, is something in which all of us should take pride. That’s not to mean it should be taken for granted.  But don’t let a difficult market cause us to wring our hands in worry. We should be confident and sure-footed in a time of great opportunity.  To quote that renowned Latin scholar, Notre Dame grad, fellow Bostonian, and former NASBP President Jack Curtin: “Carpe Diem.”

Our Education Committee’s efforts provide one of NASBP’s greatest benefits to members and affiliates alike. I just recently returned from our Surety School in Houston where I was privileged to teach two groups of Level II students. Both classes were comprised of a mix of agents, brokers, and company personnel. The intellectual energy and interaction were more impressive than I could have imagined.  I also learned something about myself. Before my presentation, I would have preferred speaking to five hundred of my peers than to thirty students.  But afterward, I found the experience gave me an unanticipated high, a burst of adrenaline that was totally unexpected. Who knows how the critiques will read? But if they’ll have me back, I’d love to serve on the faculty again next year.

I said at the Homestead that I would not consider my term as President as a race to its finish. During this year I have tried to give our Association and its members the best that I’ve got. It has been a rewarding year for me–one from which I will take more insight and enjoyment than I could ever give in return.

It seems too soon to be approaching our Annual Meeting in warm, sunny La Quinta. But the time is right around the corner. We intend to challenge and inform–give you a chance to renew acquaintances and enjoy old friendships–all at a site where the amenities and weather are second to none.  As I write this with a raging blizzard outside my window, the time seems both too near and too far away.  But we promise a meeting to remember.

Tracy and I hope to see you there.

Brian R. Driscoll is president of J. Barry Driscoll Insurance Agency, Inc. in Norwell, MA. He can be reached by email at brian@driscollinsurance.com.  

State Budget Situations Not Improving

The worst budget crunch for the states since World War II has governors and legislators, many of whom are newly-elected, scrambling to weigh their options: cut spending and state programs or renege on campaign promises and raise taxes.  The February 2003 State Budget Update released by National Conference of State Legislatures (NCSL) reports that “two-thirds of the states must reduce their budgets by nearly $26 billion between now and June 30, which ends the current fiscal year in most states.”

The last NCSL report issued in November had projected a cumulative gap of only $17.5 billion.  The new report says, “Medicaid spending has been cut in 13 states, higher education in 12 and nine states have cut elementary and secondary education and corrections spending. Twenty-nine states have imposed across the board budget cuts.”  To view the NCSL press release that accompanied the release of the report, please visit http://www.ncsl.org/programs/press/2003/pr030204.htm.

In December, National Association of State Budget Officers (NASBO) issued a report titled “Budget Shortfalls: Strategies For Closing Spending and Revenue Gaps.”  The report provides a brief summary of the current fiscal crisis and a general outline of the many options states may pursue in their attempts to balance their budgets.  To view the NASBO report, please visit http://www.nasbo.org/Publications/PDFs/shortfallstrategies-3rd.pdf.  Also, for a recently published Associated Press summary of each states’ fiscal standing, please visit http://www.newstimes.com/cgi-bin/dbs.cgi?db=news&view_records=1&id=44796.  

2003 State Legislative Sessions Kick-Off With A Bang

What’s Happening in YOUR State?

NASBP monitors state legislative activity in all 50 states.  With 47 states currently in session and all 50 states holding sessions this year, some interesting developments are taking place with legislation addressing such issues as anti-directed suretyship, reverse actions, and bond thresholds, to name a few.  Below is a sampling of some of the legislation that has surfaced so far this year.

NASBP’s Anti-Directed Surety Legislative Initiative

Legislation prohibiting directed surety is currently pending in 5 states.  Missouri H 314 has been voted out of committee and is expected to pass the full House shortly; no opposition is anticipated in the Senate.  The Montana bill, S 229, has already passed the Senate and been sent to the House for a vote.  New Mexico S 180 has passed the Senate and moved to the House for consideration.  West Virginia H 3150 was just introduced and assigned to the Judiciary Committee.  In New Jersey, A 2385 passed the General Assembly last year and is currently stalled while awaiting a Senate sponsor and a hearing before the NASBP is grateful to the trade associations that are assisting in the passage of these bills:  The Surety Association of America, the American Insurance Association, and the Associated General Contractors.

Claims

Colorado S 70 passed the Senate and was referred to the House Committee on Business Affairs and Labor.  The bill is backed by the Colorado Contractors Association and attempts to solve problems that occur when the state holds back funds if a subcontractor or supplier makes a claim, even when there is a bond on the project.  An example of what prompted this bill is the situation of a contractor who had over $400,000 withheld because a subcontractor made a claim on his approximately $25,000.  The bill addresses the situation by penalizing claimants who make excessive claims.

Payment Bond

In Massachusetts, S 1628 would amend the general laws to require that labor and materials be bonded at a level “equal to” the contract price instead of “not less than one-half of.”

Choice of Retainage or Bond

In Nevada, S 71 would allow original contractors to withhold money from subcontractors to cover labor or require subcontractors to provide a surety bond to guarantee payment for labor.

Retainage

A Maine bill, ME H 119, attempts to clarify the rights to retainage on public works projects.  The bill allows public owners to retain 5% of the money due contractors until “substantial completion” of the work.  At substantial completion, an inspection is to take place and a punch list prepared.  After the inspection, the owner may withhold for defective or incomplete work only those funds that are sufficient to account for 1.5 times the value of punch list work.  As the punch list work is completed, the retainage held by the owner must be correspondingly reduced.  In Indiana, H 1184 would reduce the amount of retainage withheld by state agencies for public works contacts.  The new retainage would be 5% until the public work is fifty percent complete, and nothing further after that; or 2.5% until the public work is substantially complete.

Reverse Auctions

Arizona H 2376 would require the State Board of Education (SBE) to adopt rules for procurement of goods, services, construction and information services using electronic bidding.  The bill also specifies that the adopted rules must include the use of reverse auctions.  The bill was amended removing the requirement that services and construction must be procured using electronic bidding and reverse auctions; however, the bill still retains the requirement that electronic bidding and reverse auctions must be used for the procurement of goods and information services.

Small, Minority Contractors

A Colorado bill, H 1052, which would have created a program to provide technical assistance to small businesses trying to obtain bonds, died in the House Committee on State, Veterans and Military Affairs.   Hawaii S 507 also attempts to create a program to provide technical assistance, but allows the state to contract with insurance companies, surety companies, producers, or brokers to implement the program. It has been referred to two Senate Committees.  In Mississippi, S 2715 sought to authorize state agencies to set aside up to 20% of their anticipated annual expenditures for purchase from minority contractors, but the bill died in committee.

Increased Bond Thresholds

In Florida, H 259 and S 1332, seek to raise bond thresholds for state contracts.  Although there is a history of inaction on these bills in past sessions, it is important to remain vigilant in the fight to maintain thresholds.  The House version of the bill has been assigned to four different committees, while the Senate version has yet to be assigned to committee.  Tennessee S 142 intends to allow the state to adjust the $100,000 threshold for bid bonds on public works projects each year based on the change in the previous year’s consumer price index.  Similar legislation in California, A 229, raises the bid bond threshold for public school construction projects from $15,000 to $50,000 and requires the Superintendent of Public Instruction to annually adjust the threshold to reflect the percentage change in the annual average value of the Implicit Price Deflator for State and Local Government Purchases of Goods and Services for the United States, as published by the United States Department of Commerce for the 12-month period ending in the prior fiscal year.

NASBP members and affiliates can access updates on current legislative activity by visiting the “Member and Affiliates Only” section of the NASBP Web site at http://www.nasbp.org/membersonly_files/memlogin.cfm.  Login and click on “Government Relations” and then on “Bill Tracking 2002.”  When asked for your User ID and Password, simply enter the same information used to access the “Member and Affiliates Only” section.  Instructions on how to use the service are provided on the Web page.

February 2003 Surety School: A Unique Experience!

Distinguished faculty conducted interactive sessions during the 2003 Level I and II Wm. J. Angell Surety School in Houston on February 2-7.  An outstanding professional development program and a great networking opportunity, the Surety School continues to provide valuable experiences for surety professionals.

A full week of activities included a group luncheon with keynote speaker, Gerry Murphy, McCarthy Construction Company, and the selection by each level and team of an “Outstanding Student”.

This year’s “Outstanding Student” honors went to: Level I/Yellow Team–Jane Quinn (Como & Nicholson, Inc.); Level I/Red Team–Sharon Peltzie (St. Paul Companies); Level II/Blue Team–Brad Settgast (Armstrong Robitaille and Insurance Services); and Level II/Green Team–David Fortenberry (Stewart Sneed Hewes, Inc.).

View photos from the School at  http://www.nasbp.org/suretyschoolphotos.html  

At Press Time

Two of the biggest issues facing NASBP members today are the:

• Federal government’s policy regarding powers of attorney accompanying surety bonds for federal projects, and
• Implementation of the Transportation Risk Insurance Act (TRIA)

Keep an eye out for an update on these two issues, which will be sent to all Pipeline readers in the coming week.

ALSO IN THIS ISSUE:

From NASBP’s General Counsel–Warranties:  What Are They And Why Should You Care?

In our law firm’s experience, warranties are one of the most misunderstood concepts in the construction industry.  In many cases, the misunderstanding is a result of poorly drafted contract documents that create multiple and inconsistent warranty obligations.

Confusion also arises when parties do not recognize the extent that warranties may be read into the agreement by a court even though the warranties are not written in the contract.  The confusion is important because it represents a failure of the parties to understand the risks they face (usually in the form of a lawsuit) in the performance of a contract.  This confusion and uncertainty may affect a contractor’s surety in the form of performance bond claims related to warranty obligations.  This article is designed to provide a primer on what warranties are, where they come from, and two areas in which warranty issues may impact sureties.

Simply, warranties are assurances given by one contracting party upon which another contracting party may rely.  Warranties may be expressed, i.e., written in the contract; implied by the common law; or statutory, i.e., set forth in a state’s statutes.

Examples of expressed warranties, which are routinely included in construction contracts, include warranties indicating that work will be performed in a good and workmanlike manner; materials will be new and of good quality; and work will conform to the requirements of the contract documents.

Warranties implied by the courts protect parties where there were no express warranties to do so.  The theory is that in some circumstances, public policy demands that a warranty apply even though the contract doesn’t expressly say so.  The warranty of habitability, which runs from residential homebuilders to the purchaser of the home, is an example of an implied warranty.

Statutory warranties are created by legislation and become part of some contracts by function of law.  The Uniform Commercial Code (or UCC), which has been enacted in some form in every state, creates statutory warranties that apply to the sale of goods.  In the construction context, purchase orders to material suppliers usually are governed by the UCC.  Further, if a subcontract is dominated by the purchase of goods more than labor, there is a chance a court will find that the subcontract primarily concerns the sale of goods such that the UCC will apply.  UCC statutory warranties include the warranty of fitness for a particular purpose, i.e., that the goods will serve the buyer’s intended use if the seller has reason to know of that intended use, and the warranty of merchantability, i.e., that the goods will be of at least average quality, conform to the promises made on any labels, and be fit for the ordinary purpose for which the goods may be used.

Understanding warranties in a contract or proposal is the first step in assessing the risks associated with that work.  Once it is understood what is being warranted, steps may be taken to meaningfully modify the contract to reduce or reallocate the risks included in those warranties.  For sureties, understanding the warranties its contractor is providing an owner on a given project should be an integral part of the underwriting process.

Performance Specifications as Warranties

Increasingly, owners are drafting contract specifications that require contractors to assume certain design responsibilities.  The contractor may be required to build a wastewater treatment plant that processes a minimum amount of sewage in a given amount of time or build an electrical power generation plant that produces a minimum amount of power per day.  Although these types of contracts may not be true design-build projects in that the owner hires its own engineers and/or architects, the contract documents leave some discretion to the contractor regarding how to achieve the specified results.  By accepting the contract to do the job, the contractor may have warranted that the project will do what the contract documents require when completed.  These performance specifications expose the surety to potential performance bond liability if the project fails to perform as specified.  As these types of specifications become more prominent and claims result, sureties will begin to pay more attention to warranty issues.

The “One Year Warranty” Issue

Construction contracts often include language such as the following:  “The Contractor will provide a one-year builder’s warranty.”  Contractors often interpret this language to mean the extent of their obligations on the project, which leads them to believe that they only are liable for correcting defects reported in the year after completion of the project.  In the majority of cases, this is not true.

In many contracts that contain a one-year “call back” warranty the drafters of the contracts have not made clear how the call back warranty was meant to be read in connection with the other more general warranties in the contract, such as the warranty of workmanlike performance.  Owners have argued that these call back warranties are only a part of the contractor’s warranty obligations.  In reading the contract as a whole, most courts have held that a callback warranty gives the contractor the right and obligation to return to correct work within a year.  Such a warranty, however, does not affect the contractor’s liability for the breach of any other warranty under the contract, which continues, along with the surety’s potential liability on its performance bond, through the applicable statute of limitations period.

Warranties are a part of every construction contract.  Those in the industry who take the time to understand how these warranties work will gain a competitive advantage over those who do not take the time to effectively manage risk in their projects.  Risks can only be knowingly assumed and allocated when a party to a contract understands how warranties work.  Paying attention to contract drafting as it applies to warranties can be an effective tool in managing risk and defining and limiting the remedies available under the contract.

NASBP’s General Counsel is Susan McGreevy of Husch & Eppenberger LC, Kansas City, MO.

LaQuinta Resort & Spa: Venue for 61^st Annual Meeting

March 13 Cut-Off Date for Discounted Room Rate

Be on the lookout for the 2003 Annual Meeting marketing brochure in your mailbox!  For more information on program schedules, hotel information, and social/optional activities please visit the NASBP Website at http://www.nasbp.org/2003amindex.cfm

March 13 is the hotel room cut-off date to receive the NASBP discounted room rate.  Call LaQuinta Resort & Spa at (760) 564-4111 and make your hotel reservations today!

Bush FY ‘04 Budget Increases Funding for Defense, Nat’l Security, But Traditional Construction Programs Take a Hit 

When President Bush announced his fiscal 2004 budget on February 3, 2003, it contained mixed messages for the construction and related industries.  The $2.2 trillion spending plan for the next fiscal year focused on waging the war against terrorism, strengthening national defense and constructing homeland security operations.  It also trimmed other more traditional federal programs to prevent the federal deficit from growing larger.

The Bush budget proposed more than $31 billion in federal support for the nation’s highways and an additional $7 billion for transit.  Unfortunately, the proposed budget contains a 20% decrease in Army Corps of Engineers’ construction, reductions in EPA Clean Water and Superfund monies, and no new funding for construction of federal courthouses or prisons.  If last year’s budget battle is any indication, Congress will undo at least some of the cuts.  For additional information on the President’s proposed budget, go to http://www.whitehouse.gov/omb/budget/fy2004/ to visit the Office of Management and Budget.

President Signs FY 2003 Funding Bill

President Bush signed the omnibus appropriations bill that funds all non-defense federal programs for FY 2003.  Under a compromise all programs were cut by 0.7%, meaning $31.6 billion for the highway program.  The Administration’s original FY 2003 budget proposal only called for $23.2 billion in highway funding.  Leadership in the House and Senate transportation, appropriations and budget committees worked hard to restore baseline funding to the Administration’s original proposal and prevent any major cuts in FY 2003 federal highway funding.  The increase is instrumental to this year’s congressional reauthorization of the highway program (TEA-21), because it establishes the baseline from which Congress will consider subsequent funding for the multi-year program.

Nomination Deadline Extended For NASBP’s 2003 Government Relations Awards

NASBP is extending the nominations deadline for its Excellence in Advocacy Award and Policymaker of the Year Award to Monday, March 10.  These awards recognize members and affiliates who have made significant contributions to the Association and the surety industry by influencing decisions favorable to surety in the public policy arena and elected or appointed government officials who have been friends to surety bond producers and/or the surety industry.  A complete explanation of the criteria and an electronic nomination forms are available on NASBP’s web site at  http://www.nasbp.org/advocacyaward.cfm and http://www.nasbp.org/policymakeraward.cfm.  The nominator and co-nominator must complete the electronic form no later than the close of business on March 10, 2003.  Questions or comments should be directed to Connie Lynch, Director, Government Relations, or Colin Chiles, Government Relations Coordinator, at clynch@nasbp.org or cchiles@nasbp.org, or at 202/686-3700.

Mark Your Calendars for the 2003 Regional Meetings!    

Click on the hotel Web sites for more information.

REGIONS 1, 2, 3: Hyatt Regency Lake Tahoe, Incline Village, NV; September 11-14

REGIONS 4, 5, 6, 7: Grand Geneva Resort & Spa, Lake Geneva, WI; August 14–17

REGIONS 8, 9, 10, 11: Grand Floridian Resort & Spa, Lake Buena Vista, FL; July 24–27

Briefly Noted:  Positions Available  

Insco/Dico, based in Southern California, has openings for Surety Bond Underwriters in the following locations:  Portland, OR; Irvine, CA; and Walnut Creek, CA.  Requirements:  Experienced professionals with minimum of 4-5 years in surety underwriting, e.g., commercial, contract, and subdivision; strong analytical, organizational, verbal and written communication skills.  A BA degree in finance/related field is preferred.  Responsibilities:  Reviewing, auditing, submission of accounts and analyzing bond risks to achieve underwriting objectives.  Please send resume w/salary requirement to: The Insco/Dico Group, HR Manager; P.O. Box 19725, Irvine, CA 92623; or fax to 949/833-3642; or e-mail to  HR@Inscodico.com.  For additional information, visit the company’s Web site at: www.inscodico.com.  EOE.

CNA Surety Corporation has branch office opportunities for experienced Production Underwriters in Birmingham, Columbus, Denver, Houston, Orlando, and San Antonio.  Home Office (Chicago) opportunities include Contract Underwriting and Claims.  Please e-mail resume and salary requirements to: Adrianne Baker, Human Resources Director, at atbaker@cnasurety.com or fax to 312/817-0847.  For additional information, visit the company’s Web site at www.cnasurety.com.  Equal Employment Opportunity Employer M/F/D/V committed to a diverse work culture.

SIO Update:  Reach Tomorrow’s Leaders

In January, the Surety Information Office (SIO) distributed “Surety Bonds for Educators” and “Surety Bonds for Students” CDs to its list of colleges and universities [link to www.sio.org/educator/universities.html] teaching construction management, architecture, and/or engineering courses. Several professors and department chairs have requested copies of these CDs for themselves and their students.

The interest and demand for information about contract surety bonds provides an excellent opportunity for surety professionals to educate up-and-coming contractors, architects, and engineers on the general principles of contract surety bonds. To find out how to become a guest lecturer at a local college or university, read about SIO’s “Professor for a Day” program [link to www.sio.org/educator/feducator1.html].

SIO is supported by the National Association of Surety Bond Producers (NASBP) and The Surety Association of America (SAA). For more information visit www.sio.org, e-mail sio@sio.org, or call (202) 686-7463.

Available Soon:  SAA’s Revised Binder of Standard Forms                   

A revised edition of the Standard Forms of The Surety Association of America (SAA), commonly referred to as the Binder of Standard Forms (Binder), soon will be available for purchase. The new edition contains the Crime Protection Policy forms as well as endorsements and riders filed by SAA since the 1997 edition of the Binder.

To ensure adequate inventory, SAA requests advance orders. The cost of the Binder is $100 for SAA member companies and $250 for non-members. Order forms are available on the SAA Web site (www.surety.org) under “What’s New” on the home page. Those without have Internet access should call SAA at 202-778-3626 to request an order form.

When the Binder is ready to ship, SAA will bill all advance orders and ship upon receipt of payment.

Pipeline is produced monthly by the National Association of Surety Bond Producers
1828 L Street, NW, Suite 720, Washington, DC 20036-5104-2014
Phone: 202/686-3700, Fax: 202/686-3656, Internet e-mail address: info@nasbp.org