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SFAA Addresses Legislation in Ohio Permitting Captives to Write Surety and Fidelity

Friday, May 24, 2013  
Ohio HB 117 would authorize the establishment of captive insurance companies in Ohio. The bill would permit captives to apply for the authority to write certain lines of business, including surety and fidelity.

SFAA has written to the bill sponsor to explain why it is not a sensible idea for captives to write surety and fidelity bonds. Under the bill, a pure captive, which is one that can write insurance only for its parent and affiliated companies, could bond its parent and affiliated companies. This means that an innocent third party relying on the existence of a bond would find that if the captive’s parent or affiliates became bankrupt or otherwise defaulted, there may be no independent entity to look to for payment of claims. This may be an unintended consequence of the legislation.

Our comments also explained the basics of how a surety bond works and the surety’s process for underwriting the bond. SFAA offered examples of bonding requirements in existing law in Ohio and the public policy reasons behind such requirements, including the value of the surety’s independent third party assessment of whether a principal qualifies for a bond. We highlighted the increased likelihood of losses if a parent company were to be permitted to essentially bond itself through a captive. Our letter contrasted these public policy benefits of an independent third party review of the bond principal with a captive’s evaluation of its parent company, which likely would not occur, at least with any degree of independence. For these reasons, SFAA urged that the bill be amended so that captives would not be permitted to write surety and fidelity bonds.

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