HBA-TBM H.B. 548 77(R)BILL ANALYSIS


Office of House Bill AnalysisH.B. 548
By: Keffer
Insurance
7/19/2001
Enrolled



BACKGROUND AND PURPOSE 

Prior to the 77th Legislature, Texas law required a contractor to secure a
payment bond and a performance bond on all public projects.  Often a
construction payment bond is issued by an insurance company performing the
duties of a commercial surety (surety).  The contractor is the principal.
The governmental entity contracting the construction or any subcontractor
providing services may be the bond obligee.  If the contractor defaults on
completion of the project or payment for services rendered, the bond
obligee may file suit against the surety to collect compensation.  However,
the Texas Supreme Court had ruled that there was no common law duty of good
faith and fair dealing between the surety and the bond obligee comparable
to that between a liability insurer and its insured.  The court had further
held that provisions regarding compensation of injuries sustained due to
practices declared to be unfair or deceptive are inapplicable to a
commercial surety.  As a result, some commercial surety companies refused
to pay on a claim until the surety was sued, and then attempted to force a
settlement with the bond obligee that favored the surety.  House Bill 548
amends the Insurance Code to provide that the business of insurance
includes the actions of a surety company, and sets forth provisions
relating to the duties of a commercial surety.   

RULEMAKING AUTHORITY

It is the opinion of the Office of House Bill Analysis that rulemaking
authority is expressly delegated to the commissioner of insurance in
SECTION 1 (Section 5, Article 7.20, Insurance Code) of this bill.   

ANALYSIS

House Bill 548 amends the Insurance Code to regulate the conduct of a
surety company issuing a construction payment bond.  The bill sets forth
provisions regarding a surety company's duties of acknowledgment and
investigation upon receipt of notice of a claim on a construction payment
bond.  The bill sets forth the methods by which the surety company accepts
or rejects the claim.  The bill specifies the procedure for payment of a
claim by the surety company.  The bill authorizes the commissioner of
insurance to adopt rules enforcing these provisions in cases in which a
surety company violates this article as a general business practice.  

EFFECTIVE DATE

September 1, 2001.  The Act applies only to construction payment bonds
delivered, issued for delivery, or renewed on or after January 1, 2002.