In many states, both red and blue, legislators and regulators have been examining and questioning insurers’ use of personal credit scores when underwriting insurance products. Some of these discussions began at the National Association of Insurance Commissioners (NAIC) and the National Conference of State Insurance Legislators (NCOIL). Acting independently from NAIC and NCOIL and wanting to lead efforts to protect consumers, some state legislators and regulators investigated how an insurer’s use of personal credit determines consumer access to insurance and the prices consumers pay for premiums. Though these discussions have focused on, generally, auto and home policies, and only had a tangential relationship to surety, any broadly drafted legislation, regulation, or bulletin could impact how a surety relies on personal credit or a contractor’s financial data to underwrite bonds.
August 17, 2022 Legislative Update
False Claims and New Bonding Opportunities: Surety Updates at the Federal, State, and Local Levels
By Adam Brackemyre
Last year, the Colorado Senate took the lead by passing a law to limit how an insurer relies on personal credit to price personal insurance policies. As initially drafted, Senate Bill (SB) 169 would have prohibited commercial products, including surety carriers, from underwriting bonds using credit and company financial data. This, of course, would have made it extremely difficult for sureties to assess the underlying risk and, thus, write and issue bonds in Colorado. Through hard work, SFAA was able to specifically exclude surety from the final version of SB 169. However, legislation like this can be introduced in any state and include surety, whether intentional or not. Thankfully, no credit legislation like the initial draft of Colorado SB 169 was introduced in 2022, but legislator and regulator concerns about how insurers, including surety carriers, rely on personal credit remain prevalent, and this issue will therefore be worth monitoring for at least the next few legislative sessions. This issue could also take a new turn as regulators are interested in monitoring how insurers use algorithms to predict claim activity and losses.
State false claims acts, like Colorado House Bill (HB) 1119, generally have not been a concern for the surety industry until recently. In the federal False Claims Act case, Scollick v. Narula (Scollick), a court ruled that a surety had liability for abetting a false claim when, in the court’s opinion, the surety should have known the contractor who fraudulently obtained certification as a disabled veteran-owned business was neither a veteran nor disabled. Although the case has been appealed and a court decision remains pending, there are roughly 15 state False Claims Acts, generally mirroring the federal False Claims Act language. These state acts may require clarification, specifically that sureties only guarantee a contractor can complete a job and do not guarantee a contractor will not commit fraud when issuing surety bonds for a project. Like in the Scollick case, sureties do not issue, police, or verify a contractor’s credentials for federal certifications, nor should they be required to.
Colorado HB 1119 passed this year without the surety amendment, which sought to exempt sureties from coverage. SFAA learned that attorney general staff would prosecute such claims. Generally, staff who enforce the state False Claims Acts do not like to give specific industries a safe harbor. This would invite others to request similar protections, no matter how reasonable the industry’s request. Also, prosecutors like to reserve the right to investigate and to retain broad discretion in pursuing violators. A carve-out could give an entity the ability to aid or abet a false claim, even if the chance of this happening is minimal. If the Scollick case does not end favorably for the surety, SFAA is concerned some relators could use it to aggressively expand False Claims Act liability under state law.
On the federal side, there was a significant surety victory embedded in last fall’s Infrastructure Investment and Jobs Act (IIJA), commonly known as the Bipartisan Infrastructure Law. Section 12002 of the IIJA requires Transportation and Infrastructure Financing and Innovation Act (TIFIA) low-interest loans to be issued with “appropriate payment and performance security” for the design and construction of the project. The effective date of the law was November 15, 2021, and the security requirement applies to TIFIA loans approved on or after the effective date.
So, what is the impact of Section 12002 on bonding? This security requirement will be a significant new bonding opportunity for sureties, although it is difficult to precisely calculate how large that opportunity will be. As the TIFIA program is nearly 20 years old, it is difficult to know which TIFIA loans have been authorized by the IIJA. As of April 2022, however, the U.S. Department of Transportation closed nearly $38 billion in financing assistance through TIFIA, supporting more than $130 billion in construction. Presumably, most of these TIFIA loans would have been “approved” on or after November 15, 2021, and subject to the IIJA’s performance and payment security requirements. Given the TIFIA-financed projects may not have required surety bonds before the IIJA passed, this could represent a significant new bonding opportunity for the industry.