Legislation

Mechanic’s liens provide security for nonpayment to subcontractors and suppliers on private projects. Because mechanic’s liens are not valid against property that is owned by the state or a municipality, the Little Miller Act (C.G.S §49-41 et seq.) was implemented to provide subcontractors and suppliers working on public works projects with a similar level of security. Pursuant to the Little Miller Act, any contractor entering into a construction contract exceeding $100,000 for a public works project must provide the public owner with a payment bond “with a surety or sureties satisfactory to the officer awarding the contract.” If the public owner fails to receive such a bond, the statute provides that the public owner may be liable to unpaid subcontractors in accordance with C.G.S §49-42. In a series of recent lower court decisions that involved multiple subcontractor claims in connection with the same project, the Connecticut Superior Court considered the level of investigation a public owner must perform on the surety company in order to find the surety to be “satisfactory” under the Little Miller Act. The court considered whether the public owner’s contracting officer fulfilled his obligation under the Act by merely confirming that a signed bond form was provided by the contractor. The contracting officer was unaware that the surety that issued the bond was not authorized/licensed to do insurance business in the State of Connecticut and that there were irregularities on the face of the bond and its attached power of attorney. The courts concluded that finding a surety “satisfactory” requires more than a simple review of the bond as to form. The court determined that compliance with the Act by a public owner requires a focus on the surety issuing the bond and a consideration of substantive issues including: whether the surety company actually exists; whether the surety company is authorized or prohibited to do business in Connecticut; and whether the public owner has actual knowledge of facts that might or should preclude characterizing the surety as satisfactory. To comply with the Little Miller Act (and protect itself from liability), a public owner should perform a substantive review of the bond instrument and the bonding company to determine that the surety meets the conditions identified by the court. We recommend that this review include, at a minimum, a search of the records of the Connecticut Secretary of the State under the name of the surety and an inquiry of the Connecticut Insurance Commissioner to determine whether the company legally exists and is authorized/licensed to issue surety bonds in the state of Connecticut. http://www.jdsupra.com/legalnews/court-finds-public-owners-responsible-14759

OLDWICK, N.J.–(BUSINESS WIRE)–A.M. Best believes legislative reform in the bail bond insurance sector of the fidelity and surety market segments has led to significant disruption, and the potential for further changes places the bail bond industry at a critical juncture with respect to its long-term health and viability. According to a new special report, if cash bail were to be eliminated in certain U.S. states, it would have a meaningful impact on the size of that segment of the surety market. The Best’s Special Report, titled, “Calls to Overhaul the Criminal Justice System Could Cause Major Upheaval For Bail Bond Insurers,” states that over the last five years to year-end 2016, bail bond direct premiums written (DPW) throughout the total U.S. property/casualty (P/C) industry increased by 33% to more than $1.3 billion. This total is derived from all P/C companies filing the annual bail bond supplement, and the premium total is approximately 23% of total surety DPW for the P/C industry. The level of growth in the bail bond market dwarfs the 8.9% five-year growth in DPW for the full surety line of business. Should regulatory reform be successful over time in eliminating the need for criminal defendants to post cash bail to avoid incarceration before trial, it would substantially affect an expanding portion of the surety market. According to the special report, the aggregate face amount of bail bonds in 2011-2016 written increased by 23%. While this is less than the growth in bond premiums over that time, the fact that the bail bond amount grew during a period when the U.S. economy was growing sluggishly indicates that the bail bond market is not closely tied to the economic indicators and market forces that have driven P/C market volatility. Bail bond DPW grew by 2.2% in 2016, while the face amount of bail bonds written increased by 4.0%. Since most states regard bail as a form of insurance, bail agents are licensed and regulated like any other insurance producer. Many states require bail agents to prove they have the financial backing of a surety writer to pay for forfeited bail bonds. Bail regimes vary by state, making comprehensive reform difficult, but legislative efforts have been ramped up in many states in an attempt to end the practice of cash bail. While some surety companies have somewhat diversified portfolios, the potential impact on bail bond specialty writers from potential reforms could be substantial. In states where the need for defendants to post cash bail is lessened significantly or eliminated entirely through bail reform measures, the business of bail bond agents and specialists likely will cease to exist as currently constituted. To the extent that legislative changes result in more and more jurisdictions moving away from defendants relying on a system rooted primarily in secured monetary bail, to systems grounded in more objective risk assessments by pre-trial experts, bail bond insurance specialists could be forced into diversification to survive over the long term. http://www.businesswire.com/news/home/20170516006333/en/A.M.-Special-Report-Potential-Criminal-Justice-System

CLEVELAND, May 2, 2017 /PRNewswire/ — Continental Heritage Insurance Company today announced a program to provide surety bonds to applicants for Ohio’s Medical Marijuana Program. Continental Heritage, based in Mayfield Heights, Ohio, is an insurance carrier rated A- by AM Best. Edward Feighan, an owner and director of Continental Heritage, is leading the new bond program. Mr. Feighan is a former Member of Congress from Cleveland (1983-1993), the founding CEO of CBIZ, Inc., and Chairman and CEO of ProCentury Corp., a national property and casualty insurance company. The Ohio Medical Marijuana Control Program recently finalized application rules for marijuana cultivation licenses. In lieu of posting cash collateral to demonstrate their financial reliability, applicants can post a surety bond issued by an authorized insurance company. The cash or bond amounts required are $750,000 and $75,000 for Cultivation Categories I & II, respectively. “Continental Heritage has over thirty years of experience writing surety bonds,” stated Mr. Feighan. “We have been monitoring the marijuana industry and are eager to help Ohio applicants that qualify as financially stable cultivators of medical marijuana.” Continental Heritage plans to expand its program for processing and dispensation applicants once the applicable rules are finalized. “It’s exciting to see the national trend towards legalization of medical marijuana reach our home state,” observed Charles Hamm, President of Continental Heritage. “Our heritage is helping clients in emerging markets navigate bonding requirements, so this is right in our wheelhouse – not to mention our backyard.” The Ohio Legislature and Gov. John Kasich approved the medical marijuana program last year. The Ohio Medical Marijuana Control Program is the official State agency promulgating the rules and regulations regulating the cultivation, distribution and use of medical marijuana in Ohio. ABOUT CONTINENTAL HERITAGE INSURANCE COMPANY: Continental Heritage Insurance Company is an insurance carrier specializing in surety with executive offices in Mayfield Heights, Ohio. The company has an A- rating from AM Best. The senior management team has been engaged in providing risk management solutions for a variety of industries since 1980. http://www.prnewswire.com/news-releases/ohio-based-insurer-provides-surety-bonds-for-ohio-medical-marijuana-control-program-300449857.html

Several surety bond companies that are partners with the U.S. Small Business Administration (SBA) in helping small contracting businesses with their surety bond needs were recently honored by SBA’s Office of Surety Guarantees at a ceremony held at the Agency’s headquarters in Washington, D.C. Michael Konzen, with CCI Surety Inc., was recognized as Surety Agent of the Year. Carol Nevin with Tokyo Marine HCC Company, and Kenneth Turner, Bruce Allen and Greg Allen with KOG International Inc. were also honored as Surety Partner of the Year and Surety Agency of the Year, respectively. All three firms have excelled in their participation, activity, claims and recovery as well as in their commitment to continue growing and helping small businesses obtain and perform contracts with both government entities and the private sector. SBA increased its guarantee percentage for bonds issued in the Preferred Surety Bond Program from no more than 70 percent to no more than 90 percent, per Public Law 114-92 of the National Defense Authorization Act of 2016. SBA guarantees will be 90 percent if the original contract is $100,000 or less, or if the bond is issued on behalf of a small business owned and controlled by socially or economically disadvantaged individuals, veterans, service disabled veterans, or qualified HUBZone and 8(a) businesses. In all other cases, the guarantee will be 80 percent. The increase will be effective Nov. 25, 2016. The new guarantee limits will expand bonding opportunities for many small businesses. For more information about the Surety Bonds Guarantees Program, please visit https://www.sba.gov/surety-bonds. http://www.prnewswire.com/news-releases/sba-recognizes-surety-bond-companies-increases-bond-guarantees-to-90-percent-300365404.html

Stanley and Jocelyn Tucker, founders of a nearly 20-year-old landscaping company in Central Jersey, know firsthand the difficulties that minority-owned small businesses face. So they welcome a new state program that will enable firms like theirs to compete for lucrative state and federal contracts. The husband-and-wife team, partners in Job One Lawn and Landscape LLC in Ewing, are among those voicing their support for legislation signed into law earlier this month by Gov. Chris Christie that created the Small Business Bonding Readiness Assistance Program. The program, under legislation passed unanimously by both houses of the Legislature, will be administered by the New Jersey Economic Development Authority and provide support services and assistance to small companies so they can secure surety bonding, a task that has discouraged many small businesses in the past. Surety bonds, which ensure a project’s completion in the event of a contractor’s default, may not be a sexy subject. But they are important because securing them is typically required for contractors, big or small, who want to bid on government projects. The new state program aims to make that bidding process less exclusionary — and more competitive — by making more players eligible. According to the the governor, 98 percent of all the businesses in New Jersey are small businesses, with fewer than 100 workers, and they employ more than 1.7 million people. And 28 percent, or 31,395, of Bergen County’s companies, are minority owned, while 36 percent, or 16,478, of Passaic County’s are minority owned, according to 2012 U.S. Census data. Jocelyn Turner described bonding requirements as both “the gateway” and the “big wall” for small businesses to win “larger and more substantial” contracts. “You could have done a lot of the leg work to prepare yourself in many ways, and then you’ll hit that roadblock,” she said. “We are still in that same space and have not been given a surety bond or been able to bid where one is required to date. Years in the making The legislation had bipartisan support and involved several years of work and meetings between the African American Chamber of Commerce of New Jersey and state officials, including Christie, according to John Harmon, president and chief executive of the chamber. The bill also had the support of the Statewide Hispanic Chamber of Commerce of New Jersey and the New Jersey Chamber of Commerce. “You hear about public projects and then wonder, ‘Why isn’t the small-business community participating?’” Harmon said. “It’s because the law says that in order to do a public contract over $200,000, you need a bond. So this was in response to a growing need to have more of New Jersey small businesses participating in economic opportunity.” The bonding assistance program will walk small-business owners through the necessary steps to obtain a surety bond, he said. “The bonding is a strong vetting process,” Harmon said. “They sit down with you and want to know your history of work done and completed. How many jobs have you done over the last year? What was the size of those jobs? Did you complete those jobs? How good is your record-keeping, your financial management? How good is your understanding of estimating and contract law? What we proposed is the state of New Jersey start a program that will take small businesses, contractors, through this process and then introduce them to sureties so they will be bonded.” Under the new law, the EDA will also create a $250,000 fund to award grants to small businesses that participate in the program. Governor’s support When Christie signed the bill at a ceremony at the chamber’s headquarters in Trenton, he called the new program “another avenue for small, minority-owned and women-owned businesses to have greater access to job creating opportunities.” The governor added, “Increased competition for public contracts will lead to lower costs and a more diverse pool of small businesses performing public services.” The Tuckers are likely to avail themselves of the program, and they have turned to the EDA for assistance in the past. “Legislation like this is meaningful because when you think of a situation where the majority of a minority group or minority groups face the same consistent obstacles historically over time, then there needs to be this kind of a door opener,” Jocelyn Tucker said. “And that’s what I equate this legislation to.” Her husband, Stanley Tucker, added, “A program like this would just help us get over the top.” Carlos Medina, chairman of the state’s Hispanic Chamber of Commerce, said that his group has members, “mostly in the construction industry — painters, Sheetrock guys, carpeting guys, flooring guys — where the surety bond becomes an issue.” The process can be onerous because “you have to have a certain amount of sales, it’s paperwork, it’s a combination of things,” according to Medina. The new EDA program “definitely eliminates one of the hurdles” for small firms to land government contracts, he said. Sponsor speaks up The lawmakers who sponsored the bill, including Assemblyman Jamel Holley, D-Union, said it was in response to feedback from minority-owned small businesses, adding that they will now be able to tap into the fund created by the new program. Tom Bracken, president and chief executive of the New Jersey Chamber of Commerce, said he has witnessed the problems small companies have getting surety bonds. “When I was in the banking business, if a small business went to a bonding company to try to get a bond, it was pretty much a quick conversation because they couldn’t qualify,” he said. “So, the new program is a way to open up new avenues of potential revenue for small business.” http://www.northjersey.com/story/money/small-business/2017/01/24/new-program-aid-small-firms-get-government-contracts/96724648/

Many owners, particularly large corporations or public entities, require contractors to provide a labour and material payment bond to ensure that sub-trades are paid and (hopefully) avoid protracted payment disputes. A typical labour and material bond creates a tri-partite relationship among the principal (the contractor who is being bonded), the surety (the bonding company) and the trustee or obligee (typically the owner or head contractor). Any party with a direct contract with the principal may make a claim against the bond; however, most standard bond forms have very strict notice requirements and very strict time limits for submitting notice of a claim and (if necessary) commencing an action to enforce the claim. If these procedures are not complied with, the right to claim under the bond will be lost. One question that often arises in this context is whether the trustee under the bond has any duty to advise sub-contractors of the bond’s existence. In its recent decision in Valard Construction Ltd. v. Bird Construction Co.,[1] the Alberta Court of Queen’s Bench answered this question with a definitive “no”. The facts of the case were relatively straightforward. Bird Construction Co. was the general contractor on a project in Alberta and entered into an electrical subcontract with Langford Electric Ltd. Langford’s subcontract with Bird required it to obtain a labour and material payment bond. The bond was issued by the Guarantee Company of North America with Langford as the principal and Bird as the trustee. Langford then entered into a further sub-contract with the Plaintiff, Valard Construction Ltd. Valard was not fully paid by Langford, so it sued Langford and obtained a default judgment. Valard then asked Bird whether there was a labour and material bond and Bird confirmed that there was. However, Valard’s claim on the bond was denied because it had not complied with the notice requirements in the bond. Valard sued on the bond, but also added Bird as a defendant, claiming that Bird had a fiduciary duty to inform it of the existence of the bond in a timely manner. Bird denied that it had any duty to take the initiative to advise Valard as to the bond’s existence. Valard argued that Bird’s fiduciary duty as trustee under the bond included a positive obligation to inform potential claimants that a bond existed, and noted that Bird could have easily discharged this obligation by taking steps such as posting a copy of the bond at the site, providing copies at project meetings, or including a term in its contract with Langford to oblige Langford to inform its sub-trades as to the existence of the bond. Justice Verville of the Alberta Court of Queen’s Bench disagreed with Valard’s position. He found that the trust wording in the bond making Bird the nominal trustee of the bond, was really a procedural convenience intended to permit claimants to sue the surety directly, and did not create a substantive duty on the part of the trustee to take positive steps to protect the interests of potential claimants. He also found that Valard was a large and sophisticated company that must have been familiar with the use of bonds and ought to have had standard procedures in place to request bond information on all subcontracts. He noted that Bird had readily revealed the bond’s existence when asked, and concluded that Valard simply ought to have asked sooner. While the result in this case may depend somewhat on the finding that the claimant was a “large and sophisticated entity” and thus ought to have known better, the safest course is always to ask for bond information at the commencement of the project, or indeed even during the bid stage. It is clear from the result in Valard Construction that the courts will be very hesitant to impose any positive obligations on bond trustees to take any positive steps to look out for the interests of potential bond claimants. Given the strict timelines and notice requirements that apply to claims under bonds, it is good practice to have all bond information available before any problems develop, rather than waiting until it becomes necessary to submit a claim. When in doubt, it cannot hurt to ask. [1] 2015 ABQB 141. Please note that this case is under appeal. http://constructionandengineeringlawblog.ahbl.ca/2016/08/08/is-there-a-labour-and-material-payment-bond-on-my-project-why-its-always-wise-to-ask/?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original

A number of professionals in the financial field across the U.S. undergo their required licensing procedure via the National Multistate Licensing System and Registry (NMLS). As the NMLS is introducing a new system for submitting and managing surety bond requirements, it’s important for businesses to get acquainted with the electronic surety bond (ESB). The new method for collecting and storing surety bonds is effective for licensees as of September 12, 2016. The first phase was rolled out in January 2016 and affected surety bond producers and surety companies. By using electronic surety bonds, the NMLS aims to make the licensing and bonding process smoother for all parties involved. The new system allows for online submission of required bonds by licensees and their surety providers, plus electronic bond issuance and monitoring for relevant authorities. The rationale for electronic surety bonds Let’s look at the basics of the new ESB system and the changes that licensees should be aware of. The NMLS manages the licensing procedure for a number of professions across the country. In many cases, state authorities ask licensees to obtain surety bonds in order to be granted the right to operate. As of 2014, 177 licensing bodies required bonding. The new electronic system for submission and management of NMLS surety bonds aims to speed up the process for licensees, surety underwriters, and state authorities alike. By being able to submit and track all bonding online, all parties would have easier access and better information. The NMLS also seeks to serve as a complete database for all licensing information, so electronic management of surety bonds is a step in this direction. States and industries affected by the change Until now, nine states have moved to the ESB system, including Texas, Washington, Idaho, Wyoming, Iowa, Wisconsin, Vermont, Massachusetts and Indiana. While the idea is to convert all states, it is not yet clear whether and when this would be realized. In Idaho, collection agencies need to start using the new system by March 15, 2017. Debt management companies, exempt companies, first lien mortgage lenders, money transmitters, and subordinate lien mortgage lenders in Indiana have to comply with the changes by the end of 2016. The same deadline applies for closing agents, debt management companies, exempt companies, money servicers, mortgage bankers, and mortgage brokers in Iowa. In Massachusetts, check sellers, debt collectors, and foreign transmittal agencies have to convert to ESB by December 15, 2016. Mortgage brokers, mortgage lenders and exempt companies have to comply by the end of 2016. All new licensees had to meet the NMLS surety bond requirements via the electronic system as of September 12. Money transmitters in Texas do not have an obligation to use ESBs, but are encouraged to do so. In Vermont, debt adjusters, money transmitters, and litigation funding companies need to adopt the new system by November 1, 2016. Lenders, loan servicers, and mortgage brokers have to move to ESBs by June 30, 2017. All types of new licensees have started using the online system as of September 12. Mortgage brokers in Washington will need to adopt ESBs by the end of 2017. As for mortgage brokers and mortgage bankers in Wisconsin, the deadline is September 1, 2017. Finally, in Wyoming, by June 30, 2017, all exempt companies, money transmitters, mortgage brokers, and mortgage lenders will have to use ESBs. What’s changing for you as a licensee While the NMLS surety bond requirements are not changing, complying with licensing rules for certain licensees in the above-mentioned states and license types will happen by using ESBs. In essence, this means the next time you obtain or renew your surety bond you will have to submit it online via the NMLS website. Surety bonds on paper will not be accepted, so you won’t need to print your bond and send it to the state authority via post. Instead, bonds will be uploaded to the online NMLS system, where all involved parties would be able to track deadlines and monitor compliance. Reposted from http://www.econotimes.com/what-you-need-to-know-about-nmlss-electronic-surety-bonds-365894

WASHINGTON, D.C. — A surety company is not bound by an arbitration provision in a subcontract because the provision clearly only encompassed claims between the engineering company and its subcontractor, a District of Columbia federal judge has ruled. In applying a heightened standard of “clear and unmistakable evidence,” Judge Tanya S. Chutkan of the U.S. District Court for the District of Columbia concluded in the Sept. 30 order that the surety company did not agree to arbitrate. On January 25, 2012, Turner Construction retained U.S. Engineering to perform construction and renovation work at the South African Embassy in Washington, D.C. In turn, U.S. Engineering awarded a subcontract for sheet metal work on the project to United Sheet Metal Inc. The subcontract included an arbitration clause. After entering into the subcontract with U.S. Engineering, United Sheet Metal negotiated with Western Surety Co. to issue a surety bond for $585,000. The surety bond provided that “the contractor [United Sheet Metal] and surety bind themselves, their heirs, executors, administrators, successors and assigns to the owner [U.S. Engineering] for the performance of the construction contract, which is incorporated herein by reference.” In addition, the surety bond stated that “any proceeding, legal or equitable, under this Bond may be instituted in any court of competent jurisdiction in the location in which the work or part of the work is located.” In early 2013, a dispute over the performance of the subcontract arose between U.S. Engineering and United Sheet Metal, which led to U.S. Engineering terminating the subcontract. U.S. Engineering hired a replacement subcontractor to finish the sheet metal work, and United Sheet Metal sought to compel arbitration, seeking $331,242 in damages. U.S. Engineering filed a counterclaim for $417,379 in damages. That arbitration is currently ongoing. On June 9, 2014, Western Surety received a letter from U.S. Engineering stating that it had terminated United Sheet Metal’s performance of the subcontract, and that U.S. Engineering intended to make a claim under the surety bond. U.S. Engineering subsequently sought to join Western Surety as a party in U.S. Engineering’s arbitration proceedings with United Sheet Metal. Western Surety refused to consent to the joinder, however, and filed the instant action, seeking to enjoin U.S. Engineering from compelling arbitration. U.S. Engineering moved to dismiss the action, arguing that the parties are bound by the subcontract’s arbitration clause to arbitrate their dispute over the bond. In response, Western Surety moved for partial summary judgment on the issue of whether it must arbitrate its dispute with U.S. Engineering. Judge Chutkan concluded that Western Surety is not bound by the subcontract’s arbitration clause, which provides that “any controversy or claim of Contractor [U.S. Engineering] against Subcontractor [United Sheet Metal] or Subcontractor against Contractor shall be resolved by arbitration.” The judge agreed with Western Surety that the “of Contractor against Subcontractor” language is a limiting clause that means only those two parties are bound by the arbitration agreement, and not outside parties. “Not only are the cases cited by U.S. Engineering unpersuasive because they contained broad arbitration clauses, they are also unpersuasive because the parties objecting to arbitration in both cases only challenged whether their contracts incorporated by reference the terms of the contracts that contained the arbitration clauses,” Judge Chutkan ruled. “None of the parties who challenged arbitration contested whether the actual language of the arbitration clause was broad enough to include their particular type of dispute.” Moreover, the law is clear that “when a contract incorporates another writing, the two must be read together as the contract between the parties,” the judge added. The bond agreement includes a judicial resolution provision stating that “any proceeding, legal or equitable, under this Bond may be instituted in any court of competent jurisdiction,” Judge Chutkan noted. “While the judicial resolution clause in a vacuum could be construed as merely declaring ‘ground rules’ under which any formal litigation in a judicial forum must proceed, if the court is to give every provision in the surety agreement meaning, it cannot ignore that there is a provision which calls for filing suit, not merely accepting arbitration as the sole avenue of recourse,” the judge reasoned. Finally, to the extent there is any uncertainty about the scope of the arbitration clause, the clause must be interpreted against the drafter, U.S. Engineering, Judge Chutkan held. Counsel for Western Surety are Thomas Moran and Richard Pledger of Setliff & Holland in Glen Allen, Va. U.S. Engineering is represented by Adam Caldwell of Davis Wright Tremaine in Washington, D.C., and Matt R. Hubbard and Stephen Sutton of Lathrop & Gage in Kansas City. Western Surety Co. v. U.S. Engineering Co., No. 15-327 (D. D.C.) http://harrismartin.com/article/21473/ Document Is Available Call (800) 496-4319 or Search www.harrismartin.com Order Ref# REI-1610-16

Examining new BOEM supplemental bonding requirements for OCS decommissioning obligations: Part 4 In context of the Bureau of Ocean Energy Management’s new NTL 2016-N01, the recently in force Notice to Lessees and Operators in the outer continental shelf (OCS) laying out strict new financial demands of operators and leaseholders to cover decommissioning liability on the OCS, Oil & Gas 360® took a call from the Surety & Fidelity Association taking issue with the idea that the capacity of the surety industry to cover the Gulf of Mexico OCS liability is limited. “As a simple economic fact, there is not sufficient capacity in the entire bonding industry to issue the bonds needed to cover the current cumulative P&A and Decommissioning liabilities that BOEM has estimated at $40 billion,” was the quote in a previous Oil & Gas 360® story about the new requirements. Robert J. Duke is the general counsel for the Surety & Fidelity Association of America, a surety industry trade association that has been in force since 1908. Oil & Gas 360® spoke with Duke and others in the surety industry about the changing requirements for supplemental security for operators on the OCS. Duke said his organization’s membership is about 400 underwriting companies, which includes multiple companies under about 150-200 parent companies. Those are the companies that collectively write the majority of surety and fidelity bonds in the United States. Duke said he estimates that the number of sureties that work in the energy and mineral space is probably somewhere between a dozen and 20. Surety basics in the context of federal leaseholders and operators operating on the OCS “A surety provides a bond—it’s guaranteeing an obligation. In this case, the payment of and meeting of your decommissioning obligation,” Duke explained. “A surety will provide a bond only to those entities through its financial and operational review that it determines through its assessment can perform that obligation. They want to avoid the loss. The underwriting is more akin to a credit product than an insurance product. So just like you would provide a loan only to those you think could repay you, it’s the same with a bond. You’re going to provide a bond only to those you think can meet the decommissioning obligation. “That’s why I was alluding to credit quality. If an operator comes to a surety and says ‘we just got this letter from BOEM, and our supplemental requirement is $5 million’, a surety is going to review the operator’s financial wherewithal, it’s going to review the economics of the particular lease and well operation, and the surety will make a determination as to if it believes the operator can meet the $5 million obligation down the road? “If they believe they can, they will provide the bond, and if they believe they can’t [meet the obligation], they likely won’t provide the bond. If it’s a gray area they may require some collateral. Collateral certainly is an option [to the surety], I just don’t think it’s an across the board option.” Oil & Gas 360® also spoke to Adam S. Pessin, President and CEO of Tokio Marine HCC – Surety Group, one of the larger carriers in the class. Pessin’s group works with OCS oil and gas operators. “If you have appropriate and competent management, if you have appropriate capital structure, and if the asset quality is appropriate, the surety markets are very much open on an unsecured basis for these operators,” Pessin said. “It’s your parties that have problems in one or more of those three areas that wind up in a situation where security might be required by the surety providers.” Is there enough capacity within the surety universe to provide bonding for the estimated decom liability? Duke said in the industry overall there is plenty of capacity to cover the BOEM’s estimated $40 billion in decommissioning liability in the Gulf of Mexico. “There’s enough capacity in the surety market to absorb that,” he said, “but it comes down to the credit quality of the bond principal—that’s the operators themselves and the economics of the particular well. “So of that $40 billion that the industry has available to extend, the question is: are they willing to extend it? When you look at the available capacity, the more important issue is: will the operators qualify for it?” Dual obligee scenario could relieve some pressure “I think that BOEM has to some degree recognized this issue, because they are considering this idea of ‘dual obligee.’ Particularly in instances where a major operator—a Chevron or a Shell, for example—has conveyed an interest to an independent, and there is already an existing private bond. Not a bond to BOEM, but a bond from the independent to the major operator,” Duke said. “I know the independents have expressed concern that if they have to also provide a bond to BOEM, that would be double bonding. And BOEM seemed willing to say that ‘if somehow we can get onto the private bond, then that may be sufficient to meeting the additional security requirement’.” Duke said his association has been providing suggestions to BOEM as to what would be workable language in that scenario. “If we can get language that all parties like, then that will alleviate some of the need to provide supplemental security up to $40 billion.” http://www.oilandgas360.com/surety-industry-weighs-new-ocs-supplemental-bonding-requirements/