The Office of General Counsel issued the following opinion on February 5, 2003, representing the position of the New York State Insurance Department.
Re: Surety Bond
Is a surety bond program in which the insurer provides a "bond line" to an insured and under which the insured writes bonds for itself as needed permissible under the New York Insurance Law?
The program as described may be inconsistent with the New York Insurance Law.
An electrical contractor ("Contractor") has been approached by ABC Surety Company ("Company") which offers a program that provides a "bond line" to the contractor who is then permitted to write bid and performance bonds to itself in the name of the Company and within the bond line limits. 1 Under the program, a contractor could only write bonds for itself and not for other entities.
Without further details of the operation of the program, this Office is unable to definitively determine the permissibility of the program described. However, the following is provided for informational purposes. In defining "fidelity and surety insurance" in the context of bid and performance bonds, N.Y. Ins. Law § 1113(a)(16) (McKinney Supp. 2003) provides as follows:
"Fidelity and surety insurance" means:
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(C) Any contract bond; including a bid, payment or maintenance bond or a performance bond where the bond is guaranteeing the execution of any contract other than a contract of indebtedness or other monetary obligation . . . .
As indicated by the definition, contract bonds, to qualify as fidelity and surety insurance, generally relate to a specific contractual obligation. The product offered by the Company appears to offer what amounts to a type of credit line; an undedicated bonding limit for the benefit of the Contractor. According to the description, none of this monetary limit applies to any specific contract until a portion thereof is designated by the Contractor in its own discretion. Thus, the product may not constitute fidelity and surety insurance under the New York Insurance Law. It is noted, however, that the concept of a "blanket surety" is permissible, provided that the contracts covered are all of a type and magnitude preauthorized by the insurer.
In addition, the role of the Contractor in utilizing the product may place the Contractor in the position of acting as the agent of the Company. This is not permitted under the law in that the Contractor is presumably not licensed as such by the Department. See N. Y. Ins. Law § 2102 (a) (McKinney 2000), which prohibits an unlicensed entity from acting as an insurance agent.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.
1 The "bond line" appears to function in the same manner as a "line of credit" in that it would be "drawn down" as bonds are written.