HBA-TBM C.S.H.B. 548 77(R)BILL ANALYSIS Office of House Bill AnalysisC.S.H.B. 548 By: Keffer Insurance 4/9/2001 Committee Report (Substituted) BACKGROUND AND PURPOSE Texas law requires 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 has ruled 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 has 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 refuse to pay on a claim until the surety is sued, and then attempt to force a settlement with the bond obligee that favors the surety. C.S.H.B. 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 C.S.H.B. 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, and applies only to construction payment bonds delivered, issued for delivery, or renewed on or after January 1, 2002. COMPARISON OF ORIGINAL TO SUBSTITUTE C.S.H.B. 548 differs from the original by removing the definition of "person," adding the definition of "notice of claim" and "claimant," and modifying the definition of "surety company." The substitute provides that if a construction payment bond provides an address of the surety to which claims should be submitted, the notice of claim is effective upon the surety's receipt of the notice at that address. The substitute provides that nothing in this article exempts a claimant from compliance with any applicable statutory or contractual notice requirement. The substitute requires all notices of claims to be in writing and removes provisions regarding notices made by telephone. The provision limiting the surety's right to request additional information at a later time is removed. The substitute increases the time required for the notification of acceptance or rejection by a surety from 25 to 30 days. A surety's reasons for rejecting a claim are required to be provided in specific terms for all reasons known to the surety at the time. The substitute does not limit a surety in an action brought by the claimant to only those defenses stated in the bill so long as the surety has made a good faith effort to inform the claimant of reasons for rejecting the claim as required. The substitute authorizes a surety to reject a claim that is subject to a legitimate dispute between the principal obligor and the claimant or for which the claimant has failed to provide supporting documents and information reasonably requested by the surety. C.S.H.B. 548 increases the time for a surety to pay an accepted claim from 7 to 15 days after the surety's notice of acceptance. A surety company is required to pay within seven days of receipt of any required executed settlement documents or other conditions of settlement. C.S.H.B. 548 authorizes the commissioner of insurance to adopt rules enforcing the statutory obligation of a surety company that violates this article as a general business practice. The substitute removes provisions regarding private causes of action, claimants' rights to recover damages from sureties for violations of statutory obligations, and the exemption of investigatory information from disclosure privileges. C.S.H.B. 548 prohibits the provisions of the bill from being construed to create a private cause of action, be a precondition by a claimant in judicially enforcing its rights against a surety, diminish a surety's other obligations that may exist by law, or prohibit a surety from asserting a defense against a claim in an enforcement proceeding.