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Legislation to Extend the Individual Surety Law Fails to Pass the Maryland Senate

Wednesday, March 19, 2014  
Maryland is the only state that permits individual sureties to bond state public works projects.
The law is scheduled to sunset on September 30, 2014, and two Senate bills that would extend the law remained in committee as the deadline for bills to pass the Senate expired yesterday.

Maryland SB 377, which would extend the individual surety law for five more years, remained in the Senate Health, Education and Environmental Issues Committee, where Senator Conway is both the bill sponsor and Committee Chair. If Senator Conway seeks to move the bill out of committee and through the Senate, SB 377 would go to the House Rules Committee. March 17 was the deadline for bills to pass out of their house of origin in order to be considered for enactment in 2014. It would be difficult to get SB 377 out of the House Rules Committee and back into play this year. The projected adjournment date for Maryland is April 7.

SB 851 also would extend the individual surety law for five more years, but this bill also contained a registration process under which individual sureties could have filed a minimal amount of information and requested the Maryland Insurance Administration (MIA) to register them under the Insurance Code. If MIA did not act within 60 days on the application, individual sureties would have been deemed registered. Senator Conway also is the bill sponsor of SB 851, which was referred to the Senate Finance Committee, which has jurisdiction over insurance issues. The Finance Committee reported the bill unfavorably. Senator Conway was the only proponent of both bills when they were heard.

SFAA took the lead in testimony in opposition to both bills when they were heard and supported the conclusions that the MIA made after an extensive study of corporate and individual sureties, which the legislature requested last year. The MIA report concluded that the individual surety market is unnecessary in Maryland as there is a robust market for surety with 145 sureties licensed, and that adequate programs are in place to help small and emerging contactors obtain bonds. Only 6 bid submissions were made since 2006 when the individual surety law became effective, and only two actually were accepted. In that same time period, corporate sureties wrote approximately 15,000 bonds under $500,000 for a total of $4 billion in contract value. The individual surety law has not achieved its intended purposes of helping small and emerging contractor obtain bonds

The MIA report also documented that there is significant fraudulent conduct in the individual surety market in Maryland and in other states. More subcontractors and small contractors have been harmed than helped. The MIA report notes that several of the sanctions against individual sureties have been for failure to return premium when individual surety bonds were not accepted and failure to pay claims. They also have been sanctioned for misrepresenting that they were authorized insurers or that their products were approved by the state or that they were exempt from state licensure requirements.

The MIA recommended that the individual surety law should be allowed to sunset this year so that all sureties in Maryland will be licensed and subjected to the same level of regulation under the Maryland Insurance Code. The failure of the Senate bills to pass before crossover yesterday is a big step toward implementing the MIA recommendation.

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