HBA-TBM H.B. 548 77(R)BILL ANALYSIS Office of House Bill AnalysisH.B. 548 By: Keffer Insurance 7/19/2001 Enrolled BACKGROUND AND PURPOSE Prior to the 77th Legislature, Texas law required a contractor to secure a payment bond and a performance bond on all public projects. Often a construction payment bond is issued by an insurance company performing the duties of a commercial surety (surety). The contractor is the principal. The governmental entity contracting the construction or any subcontractor providing services may be the bond obligee. If the contractor defaults on completion of the project or payment for services rendered, the bond obligee may file suit against the surety to collect compensation. However, the Texas Supreme Court had ruled that there was 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 had further held that provisions regarding compensation of injuries sustained due to practices declared to be unfair or deceptive are inapplicable to a commercial surety. As a result, some commercial surety companies refused to pay on a claim until the surety was sued, and then attempted to force a settlement with the bond obligee that favored the surety. House Bill 548 amends the Insurance Code to provide that the business of insurance includes the actions of a surety company, and sets forth provisions relating to the duties of a commercial surety. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that rulemaking authority is expressly delegated to the commissioner of insurance in SECTION 1 (Section 5, Article 7.20, Insurance Code) of this bill. ANALYSIS House Bill 548 amends the Insurance Code to regulate the conduct of a surety company issuing a construction payment bond. The bill sets forth provisions regarding a surety company's duties of acknowledgment and investigation upon receipt of notice of a claim on a construction payment bond. The bill sets forth the methods by which the surety company accepts or rejects the claim. The bill specifies the procedure for payment of a claim by the surety company. The bill authorizes the commissioner of insurance to adopt rules enforcing these provisions in cases in which a surety company violates this article as a general business practice. EFFECTIVE DATE September 1, 2001. The Act applies only to construction payment bonds delivered, issued for delivery, or renewed on or after January 1, 2002.