NASBP Focal Point - February 18, 2020

Currently, forty-four state legislatures are in session: Alabama, Alaska, Arizona, California, Colorado, Connecticut, Delaware, District of Columbia, Federal, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.

Territories: Guam, Puerto Rico, and Virgin Islands

*Click here for a complete 2020 calendar of the state’s legislative session dates.

In This Issue

Federal Report
Proposed FAR Rule on Individual Sureties
State Report
Alternate Delivery
Bad Faith Legislation
Bond Threshold Increase
Bond Waivers
Performance Bonds
Public-Private Partnerships

Federal Report:

Proposed FAR Rule on Individual Sureties

Last week, the Federal Acquisition Regulation (FAR) Council, comprised of the Department of Defense, the General Services Administration, and the National Aeronautics and Space Administration,
announced that it is proposing to implement a section of the National Defense Authorization Act for Fiscal Year 2016 that would amend the FAR to change the types of assets that individual sureties must pledge as security for their bonds. The proposed rule limits the security to eligible obligations, i.e. U.S. government-backed securities as described under 31 U.S.C. 9303. Individual sureties will no longer be able to use real property as a form of security to secure their bond obligations. As you recall, legislation was introduced by former congressman and construction contractor Richard Hanna (R-NY-22 ^nd), which would require unregulated, non-corporate sureties to pledge specific and secure assets and place them in the care and custody of the federal government. This was a concerted advocacy effort by NASBP, in partnership with other surety and trade organizations, to foreclose abuses allowed under existing federal regulations by unscrupulous persons who place worthless surety bonds on federal construction contracts, which have cost taxpayers and businesses millions of dollars over the last three decades.

The FAR Council seeks answers to several questions from the contracting community concerning its proposed rule, such as:

1. For subcontractors and suppliers on federal construction and other projects that require prime contractors to obtain sureties:

What positive or negative impacts do you anticipate the new rules will have on your work?
To what extent might SBA’s SBG Program provide an alternative option to individual sureties?
Do you agree that subcontractors may see reduced burden because they will not need to take the same level of precaution to protect against fraud and abuse by individual sureties when individual sureties are used? If not, why not?

2. For prime contractors that currently rely on individual sureties:

Do you anticipate greater difficulty obtaining necessary surety bonds? If so, why?
Have you experienced challenges with individual sureties? If so, what was the nature of the challenges?
Do you expect fees charged by individual sureties to be impacted under the new rule?
To what extent might SBA’s SBG Program provide an alternative option to individual sureties?

NASBP plans to alert our network of subcontractor and general contractor organizations to encourage them to issue comment letters in support of the proposed FAR rule. For subcontractors, the FAR change will provide certainty to subcontractors working on federal construction contracts that the payment bonds are legitimate and of value and will lessen their respective burdens to perform due diligence on payment bonds issued by individual sureties. For general contractors, there will be greater certainty over the assets of individual sureties, which means that bid competitors are complying with procurement rules and utilizing real – not illusory – bonds in their bids to win awards, upholding the integrity of the federal procurement system.

Comments are due on April 13 and may be submitted electronically through the federal regulations portal here in response to FAR Case 2017-003. NASBP plans to begin drafting a comment letter and may seek assistance from its members.

State Report

Alternate Delivery

New Mexico House Bill 307

NM H.307 (Ruiloba)/S.228 (Sanchez) Amends the current procurement code to allow for a construction manager general contractor delivery method, which is defined as a project delivery method in which a contract for construction manager general contractor services is procured separately from a contract for project design services and a contract for independent cost estimate services. Requirements include: liability insurance, a proposal bond pursuant to Section 13-1-146 NMSA 1978, and performance and payment bonds pursuant to Section 13-4-18 NMSA 1978 (LMA). This legislation passed the House on February 14, 2020 and was referred to the Senate Committee on Judiciary.

Bad Faith Legislation

Maryland Senate Bill 801

MD S.801 (Reilly) Amends the Courts and Judicial Proceedings and Insurance Articles to allow obligees to recover against the surety for failing to act in good faith to pay and/or settle valid claims. Should the fact finder discover that the surety failed to act in good faith, the obligee may recover additional expenses, such as interest on actual damages and reasonable attorneys’ fees. SB 801 broadly defines the word “obligee” as “a person who is the recipient of an obligation under a surety insurance policy.” This legislation has a hearing scheduled in the Senate Committee on Finance on March 4, 2020.

Bond Threshold Increase

Pennsylvania Senate Bill 207

UPDATE (in bold) PA S.207 (DiSanto)/H.885 (Gaydos) In 2019, legislation was introduced to amend P.L.382 (No.164), known as the “Municipality Authorities Act of 1945,” to increase the bond threshold from $10,000 to $500,000 for local public contracts. The legislative intent was to eliminate the local contracting authority’s discretion to accept other financial securities (such as letters of credit and escrow arrangements) in lieu of performance and payment bonds in response to the City of Harrisburg’s failure to secure adequate security on the construction of a new incinerator. On February 5, the Committee on Local Government passed S. 207 as amended. While the bond threshold was lowered from $500,000 – as originally introduced – to $100,000, acceptable forms of security still include letters of credit and escrow arrangements as well as performance and payment bonds . S. 207 will be considered by the senate on March 16.

Bond Waivers

West Virginia House Bill 4130

WV H.4130 (Jeffries) Authorizes competitive bidding for government construction contracts arising out of declared states of emergency subject in accordance with special rules, and “the state agency responsible for overseeing the work may, in its discretion, choose not to require an entity to whom the contract is awarded to furnish payment or performance bonds by clearly indicating in the solicitation for bids that payment or performance bonds will not be required.” On February 5, 2020, this bill was signed by the governor and passed in to law.

Performance Bonds

Hawaii House Bill 2019

UPDATE (in bold) HI H.2019 (Matayoshi) Amends Hawaii’s Little Miller Act (HRS §103D-324) to add the term “post-performance bond.” The bill would require public contractors to post a post-performance bond to cover the state’s costs of curing construction defects discovered within 10 years after the contract’s completion. The bond would be in the amount of 100% of the contract price, and prior to the contract’s completion, the contractor would be required to provide proof satisfactory to the purchasing agency that the bond is paid in full for the 10 years following the contract’s completion. The bill was referred to the House Committee on Finance where a hearing was held earlier this month. Hearing witnesses all spoke in opposition. Subsequently, the committee decided to defer the bill. NASBP’s President, John Bustard, testified and sent a statement detailing his concerns with the legislation. NASBP will continue to keep you apprised of this legislation moving forward.

Public-Private Partnerships

Missouri House Bill 1963

MO H.1963 (Fitzwater) Amends the current MO P3 Law (Mo. Rev. Stat. §§ 227.600-227.669) to include projects for tube transportation. Under the current P3 law, bid bonds would not be required on the project, but the Missouri Highways and Transportation Commission may require a private partner to provide bonds for its protection, in any amount that it determines. The law provides that the Commission to require a payment bond for the total amount of the agreement unless it is documented that the amount is not practical, in which case the Commission may set the amount of the payment bond, but it may not be less than the amount of the performance bond. This legislation passed the House and was sent to the Senate on February 10, 2020.

*Click here for a state-by-state breakdown of P3 statutes.

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Focal Point is an e-bulletin sent to members and friends of the
National Association of Surety Bond Producers
when most state legislatures are in session and as needed thereafter. To obtain copies of Bills or other materials discussed above, contact
advocacy@nasbp.org
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