“Voice of the Surety Industry”

Investing In the Future of Surety

A Brief Synopsis of CSF Accomplishments

The legislative process, for those who do not work within it on a day-to-day basis, can often appear to be disillusioning, unmanageable and not worth additional resources. However, when we look back on past CSF accomplishments a different picture emerges. It shows that the surety industry, when acting as a group, can impact the legislative process in assisting with the enactment of new beneficial laws affecting the industry and defeating or amending bad ones.

Listed below are just a few of the more important issues CSF has had a direct impact on that benefit your company on a daily basis.

• California Admitted Surety Standard: Without a doubt one of the more important legislative enactments CSF was able to accomplish many years ago is the requirement that public entities, both state and local, may not impose a bond standard greater than being “California admitted.” Without this provision in law, local agencies, especially school districts, would be attempting to impose arbitrary standards such as (Triple A) A.M. Best Ratings of A or A+, thinking that somehow the public agency will have greater protection from default.

CSF annually sends numerous letters out to public agencies informing them of this provision contained in Section 995.670 of the civil code. The surety industry has greatly benefited from this provision over the years and continues to benefit.

• Retention Restrictions on Private Works: Government has a never-ending ability to meddle into the affairs of private contracting. In 2005, CSF opposed and the Governor vetoed legislation that would have placed retention limitations on private construction contracts. CSF joined forces with general contractors arguing that the sanctity of private contracts between general contractors and their subcontractors should prevail.  The Governor agreed.

• Filed Powers of Attorney: CSF sponsored legislation to change the requirement in law that sureties had to file powers of attorney with every city, county and district in the state, by adding that they could instead simply attach a copy of their power of attorney to the bond. This allowed those companies, who wanted to continue to file their powers of attorney with the ability to do so, but relieved the majority of bond producers and sureties from the expensive and laborious requirement and prevented the situation of bid disqualification for failure to be filed with the obligee.

• Adequacy of the Bond: There are times when issues arise due to legal decisions where the law needs to be modified in direct response to a bad judicial outcome. This occurred with the Murrieta decision, wherein the public entity was held liable for failure to determine the “adequacy of the bond” when the local public entity (the City of Murrieta) allowed for the use of an offshore carrier.

This decision resulted in public entities demanding financials from carriers every time a bond was to be issued on a public works project. This situation left unchecked would have created an administrative nightmare for both the agents and carriers.

CSF sponsored legislation to remedy the situation by allowing public entities to be protected in verifying the adequacy of the bond.  Using a simple procedure, public entities are protected by using the Department of Insurance website to ensure the surety is California admitted. The bill also further prohibited public agencies from using offshore carriers and allowing only California admitted carriers on public works projects.

• Design Build in Public Works: The trend in public works projects, especially large projects, is the use of the design build process.  When this trend started to develop in the late 90’s, sureties were seeing bond requirement provisions in the contract which were unreasonable to the contractor and their sureties.  In addition, issues were being raised regarding how much of the “design work” was covered by the bond.

The CSF has over the years worked with the Legislature, public entities and contractors to include language in design build legislation that ensures that adequate errors and omissions coverage is included for the design elements and bond forms are consistent with surety industry practices.

This issue continues to be an ongoing and evolving process as more projects are let to bid involving design build and further legislative proposals attempt to modify existing standards.

• Bonding of CM/GC’s on Public Works Projects: There have been a few but notable instances where forgoing bonds from construction managers/general contractors on public contracts have been considered. As a result of overtures from a number of interested associations, including CSF, one public owner did reverse its position and require a sizeable project be bonded. In conjunction with the SAA, NASBP and ACSC, an informational notice was crafted advising public owners of statutory requirements.  A copy of the notice was provided to all of our members for their use should they come across such a situation.  CSF did line up a sponsor in the event legislative action was needed. To date, we are pleased that the approach to inform has proved effective. CSF continues to monitor this activity and intervene proactively when warranted

• Prevailing Wage Payment Penalties: The payment of prevailing wages in public works projects can often be an area of contention especially when it is unclear at the outset of the project if prevailing wage applies due to the nature of the project. Sureties were getting dragged into these disputes after the fact, with the public entities expecting that the carrier would simply “hand over” wage payments and penalties.

The CSF was able to negotiate a compromise with organized labor and the Labor Commissioners office to provide for notice to sureties early in the process, which in turn helped avert problems and lowered unreasonable penalties on contractors.

• Fair Claims Settlement Practices Regulations: A number of years ago in an effort by the Department of Insurance to “clamp down” on insurance claims practices, regulations were promulgated under the heading of “Fair Claims Settlement Practices Regulations.” Following much testimony at public hearings and negotiations, CSF convinced the Department that surety as a form of insurance was distinctly different from other forms of insurance. We were successful with being excluded from a number of the provisions imposing artificial claims response deadlines.

This issue was revisited when Insurance Commissioner Garamendi was reelected to this office. One provision of particular concern would have required surety carriers, anytime a claim was denied or rejected, to list “all basis for such rejection or denial, and the factual and legal basis for each reason given for such rejection.” Such a provision, were it to be allowed to stand, would have significantly increased litigation on surety bonds.

CSF, working with the Surety Association of America (SAA), recommended to SAA to join in a lawsuit to overturn the proposed changes.  Through a series of negotiations among the litigants, the surety industry prevailed, thus averting litigation that would have plagued the industry for years to come.

The aforementioned summaries are just a few of the ongoing benefits your company receives as a surety carrier or agent in California. The CSF also engages in activities and communications with elected officials and staff on a daily basis because we have established credibility and provide a presence in the State Capitol. Our goal is to resolve issues before they become problems for the industry. Our daily successes are usually unreported but nevertheless benefit the surety industry. Without CSF, the surety market place in California would look very different then it does today.