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SFAA Opposes Requirement of Best’s Ratings for Sureties in Illinois

Wednesday, February 12, 2014  

Illinois HB 4769 would amend the Little Miller to specify the requirements for the surety on the bond in public works projects in Illinois. The bill provides that the surety would have to be a company that has a certificate of authority from the Department of Insurance specifically authorizing it to execute surety bonds. The bill also would require the surety company to have a financial strength rating of at least "A” as rated by A.M. Best Company or a similar rating agency. Current law requires bonds to have "good and sufficient sureties.”

AIA’s state counsel will meet with the bill sponsor and express our opposition to any additional state eligibility requirements for sureties other than licensure by the insurance department. Since the insurance department is the agency charged by state law with regulatory oversight of the insurance industry, it makes sense that other state and local entities should rely on it, and not private sector rating agencies, for insurance matters.

There are good reasons to rely on the state insurance department’s regulation. The state insurance department is in the best position to know the financial standing of the surety, and it would be the most readily accessible source for other state and local entities for questions about the surety’s licensing status, financial condition or the surety’s business practices in the state.

It makes little sense for the law to require public owners to assure that the surety on their bonds maintain a rating of "A” or above, as determined by A. M. Best, when the insurance department already takes into consideration the surety’s rating from private entities as one element in its overall financial analysis of an insurance company. Moreover, the ratings from nationally recognized rating companies are based in part on information from the state insurance departments. It is important to note that an "A” rating still is considered excellent and so is an A-so that the bill may needlessly eliminate financially sound sureties from the Illinois market.

In the meeting with the bill sponsor, we also intend to determine the impetus for this bill. Why there is a need at this time to include a requirement that the surety have a license from the insurance department? Is this a response to individual sureties, fraudulent bonds or unlicensed companies writing bonds in Illinois? The Illinois insurance code already requires a license to write any kind of insurance in the state.

SFAA will keep its members informed of developments on this legislation.

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