HOUSE BILL REPORT

SSB 5654

BYSenate Committee on Financial Institutions & Insurance (originally sponsored by Senators Lee and Matson)

Restricting the insurance coverage provided by a bond.

House Committe on Financial Institutions & Insurance

Majority Report:  Do pass with amendments.  (13)

      Signed by Representatives Dellwo, Chair; Zellinsky, Vice Chair; Chandler, Ranking Republican Member; Anderson, Baugher, Beck, Crane, Day, Dorn, Inslee, Nutley, K. Wilson and Winsley.

House Staff:John Conniff (786-7119)

AS REPORTED BY COMMITTEE ON FINANCIAL INSTITUTIONS & INSURANCE

MARCH 31, 1989

BACKGROUND:

A surety guarantees the performance of another on a contract, protects against default in the payment of a given obligation, indemnifies banks and other financial institutions against loss of securities and other financial instruments from robbery, burglary, and other criminal acts, and guarantees the honesty of persons holding positions of public or private trust.

Many bonds are required by statute. For example, when a contractor obtains a contractor's license, the contractor must post a bond in a specified amount to ensure that materials, labor, taxes, and any judgment for negligent or improper work is paid. When a surety on a bond must pay on behalf of the contractor, the contractor must reimburse the surety and pay off judgments before they can continue their contractor registration. The surety charges a fee for this bonding service. Sureties are generally governed by the Suretyship Act while surety companies and coverage is governed by the Insurance Code.

SUMMARY:

BILL AS AMENDED:  The Suretyship Act is amended to provide that a public or private works or performance bond may not provide other types of insurance.

Unless a statute specifically requires otherwise and even if the bond states otherwise, a surety bond shall not be liable for tortious injury to person or property, or for the failure of the bonded person to obtain adequate insurance coverage.  The surety must give notice to the obligee of this statutory provision.

Contractor bonds covering workmanship and materials are strictly limited to correction of the work and not to other forms of property damage.

AMENDED BILL COMPARED TO SUBSTITUTE:  The act only applies to public or private works contracts and performance bonds.  Notice of the provisions of the act must be given to the obligee or the act will not protect the surety.

Fiscal Note:      Not Requested.

House Committee ‑ Testified For:    Doug Bohlke, Contractors Bonding Insurance Company; and Jeff H. Yusen, New York Life Insurance.

House Committee - Testified Against:      Andrea Dahl, Association of Washington Cities; and Mark Erickson, City of Olympia.

House Committee - Testimony For:    Public works contract bonds have been forced to pay for damages typically covered by liability insurance policies.  Surety bonds are not structured to assume this liability risk and those who require bonds should not be permitted to require a bond to cover risks that are beyond the purpose of the bond.

House Committee - Testimony Against:      Cities routinely require as a condition in a public works contract that the contractor maintain insurance.  If the contractor's insurance policy has lapsed, the contract is violated and the surety for the bond is liable up to the amount of the bond.  Restricting city authority will leave the city unprotected should the contractor fail to maintain insurance.