HBA-ATS H.B. 2493 76(R) BILL ANALYSIS Office of House Bill AnalysisH.B. 2493 By: Keffer Insurance 3/22/1999 Introduced BACKGROUND AND PURPOSE The construction industry is a multi-tiered hierarchy of principals, agents, contractors, subcontractors and suppliers. Historically, payments in the contractual chain convey from one participant to the other. Problems occur when participants are not paid in full and on time, despite contractual obligations to do so. In the private sector, the typical solution to assure some form of payment is through a mechanic's lien, also called a construction lien. The lien attaches to the land as well as the improvements thereon. In the public sector, construction liens are not allowed to be placed on government property. To assure some form of payment in this context, the law requires the contractor to secure a payment bond and a performance bond on all public projects. The payment bond guarantees that the material suppliers and subcontractors will be paid by the contractor. The performance bond guarantees completion of the contract. Although the bonding company is often an insurer, these types of bonds are not liability insurance contracts, but are credit transactions in which the principal (the person or company whose performance is guaranteed) buys protection from a surety (the person or company who issues the guarantee) for a guarantee made to the obligee (the party to whom the guarantee is given). Under the McGregor Act, a subcontractor or material supplier has the right to sue a general contractor, its bonding company, or both in state court, if the general contractor defaults. Because sureties traditionally are entitled to rely upon all defenses available to their principal as to the debt owed to the bond obligee, there are concerns that a surety may take advantage of a bond obligee in the claims resolution process. This is because the Texas Supreme Court has held that there is no common law duty of good faith and fair dealing between the surety and the bond obligee comparable to that between a liability insurer and its insured. The court further held that Article 21.21 of the Insurance Code (provision that creates a private cause of action for injuries caused by practices declared to be "unfair or deceptive") is inapplicable to a commercial surety. As a result, it is not uncommon to discover bonding companies that refuse to pay on a claim until they are sued, and who then attempt to wear down the subcontractor or material supplier in court to force a settlement on favorable terms. The result is that increased costs to collect on the bond may lead to insolvency of the subcontractor or material supplier. H.B. 2493 amends Section 2(a), Article 21.21, Insurance Code, to include within the definition of "person" the provision that, for purposes of Section 2(a), the business of insurance includes making or proposing to make, as guarantor or surety, a guaranty or suretyship contract as a vocation and not merely incidental to another legitimate business or activity of the guarantor or surety. In addition, this bill creates a new article in the Insurance Code to deal specifically with commercial sureties. It requires a surety to acknowledge that it received a claim, begin any review or investigation necessary to determine whether the company is obligated to pay the claim under the bond, and request from the claimant each item, statement, or form that the company reasonably believes will be required from the claimant within 15 days of receiving a claim. A surety is required to notify a claimant in writing of the acceptance or rejection of the claim within 15 business days after it receives all items, statements, and forms required by the company to secure final proof of the company's obligation to pay under the bond. A surety is required to pay a claim by the fifth business day after the company notifies a claimant that it will pay the claim or part of the claim. Failure to to pay when obligated to do so subjects a surety to liability for interest on the amount of the claim accruing at the rate of 18 percent a year, in addition to the amount of the claim. A surety is also for attorney's fees when a suit is filed. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that this bill does not expressly delegate any additional rulemaking authority to a state officer, department, agency, or institution. SECTION BY SECTION ANALYSIS SECTION 1. Amends Section 2(a), Article 21.21, Insurance Code, to include within the definition of "person" the provision that, for purposes of Section 2(a), the business of insurance includes making or proposing to make, as guarantor or surety, a guaranty or suretyship contract as a vocation and not merely incidental to another legitimate business or activity of the guarantor or surety. SECTION 2. Amends Chapter 7, Insurance Code, by adding Article 7.20, as follows: Art. 7.20. BOND OF SURETY COMPANY; PROMPT PAYMENT Sec. 1. DEFINITIONS. Defines "bond," "business day," and "surety company." Sec. 2. NOTICE OF CLAIM. (a) Requires a surety company (company) that has issued a bond to do the following by the 15th day after it receives a notice of a claim under the bond: _acknowledge receipt of the claim; _begin any review or investigation necessary to determine whether the company is obligated to pay the claim under the bond; _request from the claimant each item, statement, or form that the company reasonably believes will be required from the claimant. (b) Requires a company to make a detailed record of its acknowledgment of the receipt if the acknowledgment is not made in writing. (c) Authorizes a company to make a request for an item, statement, or form in addition to the request made in compliance with Subsection (a) if during the review or investigation the company determines that the additional request is necessary. Sec. 3. ACCEPTANCE OR REJECTION OF CLAIMS. (a) Requires a company to notify a claimant in writing of the acceptance or rejection of the claim by the 15th business day after the company receives all items, statements, and forms required by the company to secure final proof of the company's obligation to pay under the bond, except as provided by Subsection (c). (b) Provides that the notice required by Subsection (a) must state the reasons why a company rejected a claim. (c) Requires a company to notify a claimant by the date specified under Subsection (a), in the event the company is unable to reject or accept the claim within the period specified by Subsection (a), that the company is unable to accept or reject the claim within that period. Provides that the notice provided under this subsection must give the reasons the company needs additional time to accept or reject the claim. (d) Requires a company to accept or reject the claim by the 45th day after the company notifies the claimant under Subsection (c). Sec. 4. PAYMENT OF CLAIMS. (a) Requires a company to pay a claim by the fifth business day after the company notifies a claimant under Section 3 that it will pay the claim or part of the claim. Requires a company to pay a claim by the fifth business day after a claimant performs an act if that act is a condition of receiving payment. (b) Provides that a surety company that delays payment of a claim until after the 60th day after the first day on which all items, statements, and forms reasonably requested under Section 2 are received is liable to the claimant under Section 5. Provides that this subsection does not apply if it is determined in a legal proceeding that the claim received by the company is invalid. Sec. 5. DAMAGES. (a) Provides that, if a claim is made under a bond and the company obligated on the bond violates this article, the company is liable to pay the claimant, in addition to the amount of the claim, interest on the amount of the claim accruing at the rate of 18 percent a year beginning on the 16th day after the date on which the claim is filed, together with reasonable attorney's fees. Requires attorney's fees to be taxed as part of the costs when a suit is filed. (b) Provides that a company that violates this article in bad faith is liable to a claimant for an amount equal to two times the amount of a claim. Sec. 6. CUMULATIVE REMEDIES. Provides that the remedies and procedures of this article are not exclusive but are in addition to any other remedy or procedure provided by any other law. Sec. 7. LIBERAL CONSTRUCTION. Requires this article to be liberally construed to obtain prompt payment of claims made under the bonds of surety companies. SECTION 3. (a) Effective date: September 1, 1999. (b) Makes application of this Act prospective for a claim made under a bond that is delivered, issued for delivery, or renewed on or after January 1, 2000. SECTION 4. Emergency clause.