Legislation

Whether you are the owner or the general contractor, dealing with mechanic’s liens filed by subcontractors or suppliers can be frustrating and, in some cases, present the very real threat of having to pay twice for work or materials. Most, if not all, states’ lien laws provide that prior payment, whether by owner to contractor or contractor to subcontractor, are not a legal defense to a lien filed by a lower tier subcontractor or supplier who has not been paid. While there may be legal penalties for filing improper or exaggerated liens, when a lien is filed, it causes a ripple effect “upstream.” First, it is almost certainly a violation of the owner’s mortgage. The failure to pay that led to the lien is a default under the owner/contractor and contractor/subcontractor agreement. It makes no difference if the lien is legitimate or illegitimate because once filed it is a cloud on title and will delay or preclude refinancing, sale, or the approval by a lender of the owner’s next construction draw (which can then delay payment and cause more filed liens). Most states have statutes that allow such liens to be “bonded over,” but that means going to a surety company for the bond, which may require full cash collateral. Bonds not only cost money, but also absorb bond capacity that is then no longer available for other projects until the liens are released. If an owner has to bond off a lien, it normally does not have a relationship with a surety company and has to go through a complete financial disclosure process to qualify for a bond. Finally, some states (Texas and Arkansas, for example) mandate that the amount of the lien bond has to be twice the amount of the filed lien. Obviously, such a requirement can cause serious issues particularly where the underlying lien is arguably invalid. But…what if there is an existing payment bond already in place for the project, normally provided by the prime contractor (the costs of which were passed through to the owner)? That bond does not prevent the filing of liens, but simply gives the lien claimant another “legal” way to try to get paid. Most claimants will make a formal claim against the bond but also assert liens. d. One answer: Most states should follow the lead of Tennessee, which allows a copy of an existing payment bond, if it meets certain criteria, to be filed of record in the same place as the filed lien, and the filing of the bond automatically “discharges” the lien of record, just like a separate filed lien bond. No separate lien bond from a surety is needed. While the underlying dispute must still be resolved, at least the cloud on the title to the real property of the project is removed. The owner is happy. The payments continue to be made. The claimant is normally very happy to now be able to sue on the payment bond. The Tennessee statute is located at T.C.A. 66-11-142(b). If your state does not have such a statute, consider “lobbying” for a change. The local chapters of the various construction trade associations, such as ABC and AGC, may be willing to provide legislative support. https://www.lexology.com/library/detail.aspx?g=3c30bd7b-c786-42b0-b26c-1971c75f7596

Proposed state legislation would evaluate if the current $15,000 bond should be increased to match current economic conditions and construction risks Contractors who wish to operate in California need to go through a licensing procedure with the Contractors’ State License Board. This process entails providing a $15,000 surety bond. A recent legislation, Senate Bill 610, may lead to changes in the licensing and bonding requirements for contractors. The bill was introduced in February 2019 and is now on the move. It has already passed out of committee in the Senate and is undergoing hearings. If introduced as law, it would require the board to conduct a study on whether the current California contractor license bond amount is sufficient, or if it should be increased. Find out the essential details about the proposed bill and how it may affect your California contracting business. Changes in Senate Bill 610 The proposed bill, if enacted, would lead to a study on the appropriateness of the current contractor license surety bond amount in California. The amount now is $15,000 — among the lowest bonding requirement for contractors in the country. The board will have to evaluate whether an increase is necessary to match the current economic conditions and the risks involved in construction contracting. The license board will have to announce its findings, and the recommended course of action by January 1, 2024, giving enough time to contractors to prepare for the potential changes There are a few other changes that the bill may bring if it is accepted. It would lead to an extension of the deadline for the appointment of a Registrar of Contractors by the license board from January 1, 2020, to January 1, 2024. In addition, the legislation would also make the rules for contracting businesses that have a judgment against them much stricter. In cases when there is a judgment against a licensee or personnel of record, qualifying persons and personnel of record are prohibited from serving in such roles until the judgment is satisfied. License bond amounts vary By introducing the bill in question, legislators in California are moving towards a potential increase in the contractor license bond requirement. One of the reasons for this is the fact that California is among the states that have relatively low bonding amounts for contractors. Lawmakers need to balance between ensuring enough protection for the general public, and an appropriate level of strictness towards the contractors. The contractor license bond amounts range between $1,000 and $500,000 in all the states. However, in most places, there are separate bonding requirements for the different licensing types. Thus, contractors working on larger contract amounts or on specific higher-risk jobs, need to obtain larger bonding amounts. This is currently not the case in California where all types of contractors need a $15,000 surety bond. The lowest bond amounts for contractors are in New Jersey ($1,000 to $3,000) and Idaho ($2,000), but they are exceptions. In most states, the requirements gravitate around $20,000 and above. Bonding requirements in Delaware can reach $200,000, $350,000 in North Carolina and $500,000 in South Carolina. How bonding works for contractors The purpose of requiring construction specialists to have a surety bond is to protect their customers and the state in which they operate. If you fail to follow applicable laws as a contractor, you can face a claim against your bond. It can provide fair compensation for any damages that a party may have suffered as a result. The maximum reimbursement that can be demanded from you on proven claims is the full bond amount that you have posted. That is why the bonding amount is important. Lawmakers examine various factors to assess the appropriate requirements in each state. In order to get your contractor license bond, you need to cover a small percentage of the required bond amount. It is formulated on the basis of your personal and business finances. The stronger they are, the smaller the perceived bonding risk is, which leads to a lower bonding premium. The rates that you can expect if your finances are in good shape are between 1% and 5% of the bond amount. https://www.forconstructionpros.com/business/article/21071195/california-to-examine-the-amount-of-surety-bond-for-contractors-license

The federal government should follow Ontario’s lead in addressing contractor insolvency before the federal budget bill becomes law, says the Surety Association of Canada (SAC). The federal budget bill, Bill C-97, was tabled in March and passed second reading on Apr. 30. SAC’s president Steven Ness appeared before the Standing Committee on Finance earlier this month to advocate for the need for Bill C-97 to address contractor insolvency through surety bonds that guarantee construction projects will be finished and bills will be paid. SAC is very supportive of any measure that speeds up payment in the construction industry and praised the government for taking this initiative. However, Ness suggested that leaving out any provision to deal with contractor insolvency is a serious oversight. In Ontario, changes recently implemented through the Construction Act of Ontario require surety bonds on all public projects valued at $500,000 or more. “What we did in Ontario is, we devised special bond forms that not only pay, but pay promptly,” Ness told Canadian Underwriter in an interview Thursday. “We have a fixed amount of time to review the claim submission that is brought in and once we’ve done that, we have to pay any undisputed amounts within 10 days.” The prompt payment portion of Bill 142, the Construction Act, comes into force this October. In the federal budget bill, however, there is no measure included to deal with contractor insolvency. “We spoke to the committee and said if you are not addressing that risk of insolvency, you’re making a law that brings about prompt payment, but not certainty of payment, so you are only doing half the job,” Ness said. “You can’t have prompt payment if you don’t have certainty of payment. What happens if a general contractor goes broke and can’t pay his subcontractors at all? It doesn’t matter how prompt the payment requirements are if there’s no money to pay them.” So far, Ontario is the only province to have addressed prompt payments and insolvency in legislation. Saskatchewan and Nova Scotia have passed skeleton bills, Ness reported, but they haven’t become law yet and there will likely be changes to each of them. Ness spoke at the Standing Committee on Finance May 16 along with Pierre Cadieux, SAC’s business development manager for Quebec. A simultaneous Standing Senate Committee on Banking, Trade and Commerce was held that day; representing SAC was Frank Faieta, national vice president at The Guarantee Company of North America. https://www.canadianunderwriter.ca/insurance/how-ontario-got-it-right-on-surety-1004163856/

This decision is a major victory for Ohio contractors and their sureties. The Fifth District Court of Appeals of Ohio issued a recent decision confirming that Ohio’s construction statute of repose, R.C. 2305.131, applies to breach of contract claims. It also confirmed that sureties are entitled to rely on the statute of repose as a defense to claims under the bond. The Fifth District affirmed the Stark County Court of Common Pleas’ decision to grant motions to dismiss filed by a contractor, its surety, and the project architect. The complaint asserted breach of contract claims against each defendant, alleging that the architect and contractor breached their respective contractual duties by improperly designing and constructing a school. Relying on a statutory public works bond form, the school district claimed that the contractor’s surety was liable for all damages arising from the contractor’s default. As counsel for the surety and co-counsel for the contractor, Hahn Loeser & Parks LLP filed motions to dismiss the complaint pursuant to the statute of repose because the complaint was filed more than ten years after substantial completion of the project. Relying on dated Supreme Court precedent applying a prior version of the statute of repose, the plaintiff countered that the statute of repose applies only to tort claims and not to breach of contract claims. The plaintiff also claimed that the surety was not permitted to use the statute of repose as a defense, despite long-standing Ohio law which generally allows a surety to argue any defense available to the principal (other than certain personal defenses such as bankruptcy). The trial court rejected the plaintiff’s arguments and granted each defendant’s motion to dismiss. On appeal, the Fifth District saw no reason to disturb the trial court’s judgment. As the unanimous opinion noted, just over a year ago the Fifth District held the current version of the statute of repose applied to breach of contract claims in State by and through Wray v. Karl R. Rohrer Associates, Inc., No. 2017AP030008, 2018-Ohio-65. The Rohrer decision was based on the plain language of the statute of repose as well as uncodified law which plainly demonstrated the General Assembly’s broad intent when it amended the statute of repose. In the recent opinion, the Fifth District correctly recognized that there was no need to “overrule or re-visit” its decision in Rohrer. The Fifth District also affirmed the trial court’s rejection of the plaintiff’s novel theory that sureties are not protected by the statute of repose. The opinion recited and approved the well-settled principles of Ohio suretyship law allowing sureties to argue defenses available to their principals. Lastly, the court noted that the plaintiff itself alleged in the complaint that the surety was only liable “to the same extent as” the contractor, so if the claim was barred as to the contractor then it must likewise be barred as to the surety. Bottom Line This decision is an important confirmation of the broad applicability of Ohio’s construction statute of repose––not only that it applies to breach of contract claims as well as tort claims, but also that it applies to sureties. The Ohio Supreme Court will issue its decision addressing the scope of the construction statute of repose in New Riegel Local School District Board of Education et al. v. The Buehrer Group Architecture & Engineering, Inc., No. 2019-0189. The parties in the New Riegel case presented many of the same arguments presented in the appeal. The court conducted oral argument in the New Riegel case on March 5, 2019, and a decision is expected this summer or early fall… This opinion confirms the importance of maintaining complete project files in order to properly defend against claims. Without proper project documentation, contractors and sureties may have to go through costly and time-consuming discovery practice in order to get the information needed to support a statute of repose argument. By maintaining proper project documentation confirming the date of substantial completion, contractors and sureties can save significant time and expense in litigation. https://www.jdsupra.com/legalnews/ohio-court-of-appeals-confirms-78137/

A common practice in cities across Canada is that residential land developers are required to post letters of credit (LOC) prior to securing land development approvals to offset potential risks posed by such costs as site servicing and deferred levy payments. “The letter of credit is a form of security where, in the event the developer does not complete the project according to the agreement, the City can call on the letter of credit as security,” says Fraser de Walle, senior vice-president, national residential construction project leader with Marsh Canada, a major surety company, working in insurance brokering and risk management. “It’s all about transfer of risk and when the City allows developers to develop land, they incur risks that they must protect themselves against.” While it is good business practice for cities to protect themselves, and therefore, their taxpayers from risks associated with some developments, a letter of credit ties up developers’ capital, which could be better spent on other projects. In the middle of March, the City of Calgary became the only top-10 major city in Canada to forgo the LOC in favour of a Developer Surety Bond, says de Walle “A Developer Surety Bond provides protection to the City, guaranteeing that the developer will complete the project development,” he says. “Developer Surety Bonds are commonly used throughout the United States but are just now starting to be accepted by municipalities in Canada. The City of Calgary is trailblazing this initiative among the major cities in Canada.” Hand-in-hand with BILD Calgary Region, de Walle and the City of Calgary administration have been working on the initiative since April 2018 and it’s a win-win situation for developers, the City and new home buyers. “The Developer Surety Bond acceptance by the City of Calgary is a major positive progressive move by the City to create business opportunities and support industry and city teamwork towards new home purchase affordability in our city,” says de Walle. “There are several positives to the City accepting a bond as an alternative to the LOC. A bond is classified as off-balance sheet security, meaning it does not tie up capital in the same way that an LOC does. When that capital is freed up, a developer can pay down costs and invest in new projects and/or innovation and in an economy like we are in today, the opportunity for a developer to free up capital is significant. “And it does affect the home buyer because when a developer is more liquid and has better access to capital, this will improve their business conditions and aid in improved affordability for the consumers.” The move is the latest in a business-friendly relationship that has formed between BILD Calgary Region and The City of Calgary. BILD was formed three years ago with the amalgamation of the Canadian Home Builders’ Association Calgary Region and the Urban Development Institute-Calgary. “By removing financial barriers for business owners, our aim is to strengthen Calgary’s reputation as a great place to invest in land development and redevelopment,” says Darren Lockhart, managing director of Calgary Approvals, adding the City’s decision to accept bonds issued by a surety company comes after consulting with stakeholders in the industry. “The City is working to make improvements for businesses in Calgary that make it easier to invest. “Our hope is that this business-friendly change will allow our developer partners to invest those funds into projects that make Calgary one of the most livable cities in the world.” Another benefit is, in the event of a company transferring their ownership, bonds can be transferred in a manner similar to letters of credit. For companies that choose to use surety bonds to secure their development obligations, the City’s security reduction process will continue to be the same as with letters of credit. Once the Final Acceptance Certificate has been issued, bonds will simply expire after one year; no further action is required by a developer. The LOC system will remain in place, as not all developers will be approved to have access to the use of the Developer Surety Bond, says de Walle. “The bond promotes good development, meaning companies that have a solid balance sheet and history will be more quickly approved for the bond,” he says. “There may be some cases where a developer would need to use a combination of LOC plus a bond. Or there may be some cases where the developer cannot get approved for a bond — these would be the same developers that may have issues gaining access to capital from the bank.” In the end, the initiative benefits all involved. “For the City of Calgary, it removes barriers to entry for good development. Acceptance of the bond promotes growth and sends a message to the development industry that the City of Calgary is open for business, innovative and listening to the needs of the development industry,” says de Walle. “A Subdivision Security Bond provides the same quality of financial protection as a Letter of Credit. The bond pre-qualifies the developer, providing assurance to the City that the developer is qualified to successfully complete the development. The developer is motivated to perform the development obligations due to the indemnities provided to the surety by the developer.” https://calgarysun.com/life/homes/new-developer-risk-management-initiative-launched-in-calgary

North Dakota has modified the surety bond requirements under the Money Brokers Act. Presently, the law requires a surety bond in an amount not less than $25,000. N.D. Cent. Code Section 13-04.1-04.01(1). Effective August 1, 2019, the new minimum amount of the bond will be $50,000. https://www.natlawreview.com/article/north-dakota-modifies-surety-bond-requirements

United States ex rel. Am. Civ. Constr., LLC v. Hirani Eng’g & Land Surveying, P.C., 2018 U.S. Dist. LEXIS 200829 (D.D.C. Nov 28, 2018). The case involved the construction of a levee wall on the National Mall in Washington, D.C. In September 2010, the Army Corps of Engineers awarded Hirani Engineering & Land Surveying, P.C. (“Hirani”) the prime contract for the project. Hirani’s surety was Colonial Surety Company (“Colonial”). Hirani subcontracted the majority of the work to American Civil Construction, LLC (“ACC”). Following a series of disputes and project delays, the Army Corps terminated Hirani. ACC then filed suit in the United States District Court for the District of Columbia seeking over $2 million in damages under the Miller Act as well as state law for breach of contract. After a bench trial, the court entered judgment in favor of ACC. As part of its claim, ACC sought damages for costs related to idle equipment at the project site. Although the claim was only a small part of ACC’s overall claim, the court’s approach was noteworthy. ACC asserted that all of the costs were recoverable under the Miller Act. Conversely, Hirani and Colonial argued that standby equipment expenses were per se unavailable under the Act. The court disagreed with both parties and held that, although the Miller Act permitted a contractor to recover for idle equipment, it could not do so in all instances. As part of its analysis, the court first referred to the original language of the Miller Act which permits a contractor who “furnish[es] labor or materials in carrying out work provided for in a contract” to recover damages. The court then distinguished between two scenarios involving idle equipment. In the first scenario, the court described a case in which a contractor brought a piece of equipment to the work site and used it over a period of weeks, but not every day. In the second scenario, the court described an instance in which a contractor brought the same piece of equipment to the site, but the equipment remained idle for 60 days before it was used. According to the court, under the first scenario, “the equipment reasonably can be treated as ‘furnished’ ‘in carrying out the work’ even on those days it is in non-use” and, therefore, the contractor would be permitted to recover those idle equipment costs under the Miller Act. However, the same would not hold true for the second scenario because, according to the court: If a contractor brings a piece of equipment to the job site and it sits unused for two months, absent some reasonable explanation for its non-use during such an extended period, the contractor cannot be said to have “furnished” the equipment “in carrying out work.” In light of this analysis, and upon reviewing a summary of standby costs sought by ACC, the court concluded that only around 28% of ACC’s standby costs fell into the category of regularly used equipment to justify their recovery under the Miller Act. https://www.jdsupra.com/legalnews/federal-court-clarifies-when-idle-39069/?

On Wednesday, Mexico’s leading surety group, Grupo Financiero Aserta AM Best affirms credit ratings of Aserta Seguros Vida, Grupo Financiero Aserta: A.M. Best has affirmed the Financial Strength Rating (FSR) of B++ (Good), the Long-Term Issuer Credit Rating (Long-Term ICR) of bbb+ and the Mexico National Scale Rating of aa+.MX of Aserta Seguros Vida, S.A. de C.V., Grupo… , S.A. de C.V., which owns Aseguradora Aserta, S.A. de C.V. Grupo (Baa2/Aa2.mx stable) and Aseguradora Insurgentes, S.A. de C.V., Grupo (Baa2/Aa2.mx stable), won approval to turn its surety businesses into insurance companies. The transition will be credit positive for Grupo Aserta’s surety companies and will help them prepare for changes in Mexico’s surety industry, which will improve the group’s growth prospects and diversify its business model. The approval, which is the first of its kind for any insurance company in Mexico, will convert the group into Mexico’s first surety and credit insurer, giving it a competitive advantage just as the industry is about to undergo significant change. Grupo Aserta’s surety insurance companies will now be able to pay surety claims much faster than those paid by traditional surety firms. Indeed, by law, Aserta’s surety insurance companies will have to automatically pay claims within 30 days. In contrast, traditional sureties take many months to pay claims because they must first pass through a lengthy legal process in Mexico’s courts. The quicker claims-paying timeframe should make surety insurance products more appealing to customers and beneficiaries than those previously offered by traditional sureties. Until now, Mexico has prevented insurers from underwriting sureties and banned surety companies from involvement in the insurance business. This impeded business diversification and limited surety companies’ growth. Grupo Aserta expects its surety insurance to rise to about 15% of gross premiums over the next three years, which we believe is a reasonable expectation. One potential risk for Grupo Aserta is the new product’s risk, which cannot be fully known when the product is first introduced and can adversely affect earnings. Even so, we expect Aserta to use its large size and its purchase of reinsurance contracts to offset any related costs. Mexico has 17 surety companies. As of March, six of them (accounting for 60% of total industry premiums) had applied to become insurance companies. Aserta’s main competitor, ACE Fianzas Monterrey S.A. (Baa2/Aa2.mx stable), Mexico’s second-largest surety company with 20.3% of industry premiums, has also sought approval. If it is approved, as we expect, ACE will become an insurance company and change its name to Chubb Fianzas Monterrey, Aseguradora de Caución, S.A. MOODY’S INVESTORS SERVICE FINANCIAL INSTITUTIONS We expect the insurance regulator, the Comisión Nacional de Seguros y Fianzas, to approve most requests within the next six to 12 months, indicating that ultimately the industry will benefit from this development. Surety companies that fail to obtain approval will become less competitive and likely lose market share. Mexico’s surety industry is highly sensitive to changes in public spending because its premiums are highly concentrated in publicly funded infrastructure projects, where public works contractors buy surety policies that pay out to local and federal government if the projects are not completed. About 41% of Mexico’s surety industry premiums are specifically tied to infrastructure projects. Between 2015 and 2016, when the government cut public spending, the surety industry struggled as annual premium growth fell to 1.2% in 2016, from 3.3% in 2015 from a previous five-year compound growth rate of 10%. We expect that next year’s entrance of President-elect Andrés Manuel López Obrador’s administration will revitalize the agenda for infrastructure projects and with it, the surety industry. https://www.bnamericas.com/en/news/banking/moodys-aserta-wins-approval-to-turn-its-sureties-into-insurance-firms-a-credit-positive