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.