SENATE BILL REPORT

SB 5656

BYSenators Lee, Smitherman, McMullen and Matson

Limiting the amount of surety liability.

Senate Committee on Financial Institutions & Insurance

Senate Hearing Date(s):February 17, 1989

Majority Report:  That Substitute Senate Bill No. 5656 be substituted therefor, and the substitute bill pass.

      Signed by Senators von Reichbauer, Chairman; Johnson, Vice Chairman; Fleming, McCaslin, McMullen, Matson, Moore, Rasmussen, Sellar, Smitherman.

Senate Staff:Walt Corneille (786-7416)

                  February 17, 1989

AS REPORTED BY COMMITTEE ON FINANCIAL INSTITUTIONS & INSURANCE, FEBRUARY 17, 1989

BACKGROUND:

Bonds are often required to ensure the performance of a given activity by a party.  Many bonds are required by statute.  When a contractor registers pursuant to the Registration of Contractors Act, he must post a bond in a specified amount to ensure that the contractor pays for materials, labor, taxes and any judgment against the contractor for negligent or improper work.  The bond for a general contractor is $6000 and for a specialty or subcontractor, $4000.  A contractor may post cash in lieu of the bond.

The contractor's bond must be filed at the same time the contractor registers with the Department of Licensing and is renewed yearly with the registration.  The bond stays in effect until it is subject to a judgment.  A cash deposit merely stays on deposit if not reduced by judgments.  Once a judgment has been entered against a contractor, he must reimburse the bonding company (surety) and pay off the judgment before he can continue his registration as a licensed contractor.  Bond companies charge a fee for their services, usually on an annual basis.  At such time as a bond or cash deposit has been impaired in part, or totally, by a judgment, a new bond is issued.

A recent Court of Appeals decision held that a bonding company is liable for claims accruing during each registration period.  Thus judgments against a bond may accumulate from one year to the next.  It has been suggested that, in light of the statute applicable to bonding requirements for contractors, the total sum of the bond should be the maximum that can be collected against that particular bond regardless of the number of claims or the amount of those claims.  Once a bond is impaired, a contractor may not be relicensed until all judgments are paid and a new bond has been procured or cash is deposited.

SUMMARY:

The liability of a company issuing a bond must not cumulate, regardless of how many claims are brought or how long the bond has been in effect, or regardless of how many annual premiums have been paid to keep the bond in effect.  Cumulation is defined as liability in an amount more than the full sum of the continuous bond.

A bond that is renewed, continued, reinstated or reissued even if the sum is increased, must be considered only one continuous bond regardless of how many times it is renewed.  The amount the bonding company is responsible for under a bond at two or more points in time may not be added together in determining the bonding company's liability.  The total sum of the bonding company's liability under a bond must be the single highest sum on the bond should the amount be increased or decreased for any reason.  The amount of the liability of the bonding company is determined by the amount of the bond in effect at the time any claim accrues.

EFFECT OF PROPOSED SUBSTITUTE:

If a cash deposit is allowed in lieu of a bond, the deposit must be in the same amount as the bond.  The cash deposit may not be increased because of renewal, continuation or extension of the period for registration or because of the length of time on deposit.  Cancellation of a cash deposit for failure to replenish or replace the deposit because of partial or full exhaustion is not affected.

Appropriation:    none

Revenue:    none

Fiscal Note:      none requested

Senate Committee - Testified: Doug Bohlke, CBIC (pro); Steven Gaines, CBIC (pro); Barb Dettorre, Safeco Insurance Company (pro)