RS C.S.H.B. 3158 75(R) BILL ANALYSIS INSURANCE C.S.H.B. 3158 By: Hilbert 4-21-97 Committee Report (Substituted) BACKGROUND The Texas Government Code requires that a performance bond and a payment bond be obtained from a prime contractor prior to the start of a public works construction project. These bonds are the statutory protection provided to the owner, subcontractors and suppliers. The performance bond insures that the general contractor will complete the work. The payment bond insures that the general contractor will pay for the labor and material used on the project. Currently, the only requirement of a surety issuing such bonds is that the surety be authorized to do business in Texas. This sole requirement has left many subcontractors and suppliers in the untenable situation of not having good security on a construction project as the surety may not have the financial resources to complete a project or pay for the labor and materials when the general contractor fails. Another public works problem exists when a public entity allows an insurance company to replace a building pursuant to an insurance claim rather than paying cash to the public entity for the claim. In this case, there is no statutory requirement for the insurance company to provide a payment bond. This loophole leaves subcontractors and suppliers in an unsecured position as they do not have the protection of the state bond statutes. PURPOSE H.B. 3158 requires sureties that issue bonds for public works contracts or private construction work pursuant to the Property Code or Government Code to be the holders of a certificate of authority from the United States Secretary of Treasury. This will provide a higher standard of financial responsibility without the public agency needing to provide its own financial screening process. The act also requires a performance and payment bond for public work performed by an insurance company that is fulfilling its obligation under an insurance policy. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency or institution. SECTION BY SECTION ANALYSIS SECTION 1.Amends Article 7.19-1 of Texas Insurance Code by amending subsection (a) and adding a new subsection (c) and (d): (a)Makes a non-substantive change to allow subsections (c) & (d) to be exceptions in addition to subsection (b). (c)Requires that bonds over $100,000 issued pursuant to Subchapter H or I of Chapter 53 of the Property Code, or Chapter 2253, of the Government Code be issued by sureties holding a certificate of authority from the United States Secretary of the Treasury for issuing bonds on federal projects. A bond must state that the surety is a holder of a certificate from the secretary of the Treasury at the time the bond is made tendered or given. (d)Provides that (c) does not apply if the bond is reinsured by a Treasury Listed reinsurer. SECTION 2. Amends Section 53.172 and 53.202 of the Property Code to make sections comply with Section 1, (Article 7.19-1, Insurance Code). SECTION 3.Amends Subchapter B, Chapter 2253, Government Code by adding Sec. 2253.022 as follows: Sec. 2253.022. PERFORMANCE AND PAYMENT BONDS; INSURED LOSS. (a)A governmental entity shall ensure that an insurance company fulfilling its obligation under contract by arranging for the replacement of a loss rather than payment directly to the government entity will furnish a performance bond under section 2253.021(b) or a payment bond under section 2253.021(c). (b) The bonds to be furnished under subsection (a) must be furnished before the contractor begins work. (c) It is an implied obligation under a contract of insurance for the insurance company to provide the required bonds by this section. (d) To recover in a suit involving a payment bond, the only notice required of a beneficiary is the notice to the surety under subchapter C. (e) This section does not apply to a governmental entity when a surety is complying with an obligation under a bond issued for the benefit of a government entity. (f) If the payment bond under subsection (a) is not furnished, the governmental entity is subject to the same liability as would a surety. To recover in a suit involving a payment bond, the only notice required of a beneficiary is the notice to the governmental entity as if it were a surety in accordance with subchapter C. SECTION 4. Effective Date, September 1, 1997; Act applies only to bonds issued after effective date. SECTION 5. Emergency Clause COMPARISON OF ORIGINAL TO SUBSTITUTE SECTION 1. (c) Surety must state that it is a holder of a certificate of authority from the US Treasury "at the time the bond is made, given, tendered, or filed" and adds language "as described by this subsection". (d) Makes non-substantive changes adding "company" on page 3, line 5, and "as a surety" page 3, lines 7 and 8. SECTION 3. Makes new amended language Section 2253.022 instead of Section 2253.021(f). Makes other non-substantive language changes. Adds new subsection (b) requiring the bonds to be furnished under subsection (a) to be provided before work begins. Makes other non-substantive language changes to reflect different numbering and lettering of sections.