Article written by Mark McCallum and Larry Leclair, NASBP in collaboration with Ed Hershon for ASA of Metro Washington
Did you know that the State of Maryland allows individual sureties, i.e. natural persons, to write bonds for prime contractors on state public works contracts without any regulatory oversight from the Maryland Insurance Administration (“MIA”)? Currently, these persons do not have to have any experience as a surety or be licensed to write surety bonds anywhere else. They are not subject to any advance review or scrutiny by the MIA, nor must they maintain minimum contacts within the state before writing bonds in Maryland. Since 2006, individual surety proponents have been politically active before the Maryland General Assembly citing the need for an unregulated surety marketplace in Maryland to address surety credit for small businesses; during the 2011 and 2013 Legislative Sessions for example, legislation was introduced to expand the ability of these unregulated individual sureties to write bonds beyond the prime level on private and public contracts. ASA of Metro Washington and other interested groups, such as the National Association of Surety Bond Producers, successfully lobbied against these efforts, arguing that protection of Maryland citizens and businesses should be of paramount concern and educating Maryland legislators on the harm that can and does occur from unregulated insurance and surety markets. The real issue is, can a subcontractor or supplier have any real assurance that they have a legitimate payment bond in place when and if a payment dispute occurs, if that bond is issued by an unregulated person? The answer is easy, no!
The 2006 law was enacted to assist small contractors to obtain state construction contracts by allowing them to obtain bonding from unregulated individual sureties if they had been turned down in the standard market. The law, however, has failed its purpose. According to three reports issued by the Maryland Board of Public Works, only one individual surety bond has been submitted to a state agency in the last six fiscal years, which ultimately was rejected by the state contracting authority.
In the meantime, individual sureties operating in Maryland have occasioned economic harm on Maryland citizens. In 2011, injured parties testified at committee hearings before the Maryland General Assembly on how they were unable to collect against individual surety bonds issued on private contracts. One such instance was the subject of an article that appeared in the Baltimore Sun, featuring the problems a Maryland church faced after accepting an individual surety bond. These examples resonated with legislators in 2011 and were a significant reason why legislation to increase use of individual sureties was defeated.
As 2014 approaches, ASA of Metro Washington members need to convey the importance of this issue to their state representatives in personal visits. We also will need to be vigilant during the 2014 legislative session to ensure that a bill to extend the sunset is not introduced by unregulated individual surety proponents.
Certainly no one benefits by the allowance of an unregulated surety market, least of all subcontractors and suppliers, who too often have to depend on the integrity and validity of the prime contractor’s payment bond to receive payment. Moreover, the risk that subcontractors and suppliers undertake when payment is at issue is huge; if there is no security in the way of a bond with actual financial backing to protect our member subcontractors and suppliers, our members face the prospect of having to pay their labor and material suppliers out of pocket and possibly put our members businesses in jeopardy of failing.