Michigan's public works bond statute (MCL 129.201, et seq) requires that contractors furnish a payment and performance bond for projects over $50,000. The bond must be executed by a surety authorized to do business in Michigan. Many contracts also require the surety to be listed in Treasury Circular 570. In 1993, the Michigan Supreme Court held in Kammer Asphalt Paving v East China Twp that local governments contracting for improvements have a duty to verify the validity of bonds furnished by contractors [1].
So if you receive a contractor's payment and performance bond, how do you know whether it complies with these requirements? How can you check on a bonding company whose name doesn't sound familiar? How do you verify the financial strength of a surety?
There are 4 steps to verifying a payment and performance bond and the surety named in these bonds.
Step 1 - Check with the State of Michigan
The Michigan Department of Insurance and Financial Services (DIFS) maintains an online database of insurance companies that are registered to conduct business in the State of Michigan. The search interface is somewhat confusing, but if you search using the last field on the form, you should be able to find the surety you are looking for.
If you don't find the surety, it means they are not registered to conduct business in Michigan. Take this finding as a red flag. As noted in Step 4.5 (below), many sureties have changed their name. Be sure you’re searching under the current name. Note too that individual sureties are not listed here and are not permitted under Section 4 of Michigan's bond statute.
For insurance companies that are registered to conduct business in Michigan, you get the usual information about the state of incorporation and registered agent. Here's a sample report for Hartford Fire Insurance Company, a surety that is active in Michigan.
If you are not in Michigan, check with your state’s insurance commission. All states have an office that regulates insurance companies.
Step 2 - Check with Treasury Circular 570
Treasury Circular 570 is a list of acceptable sureties on federal bonds maintained by the U.S. Department of Treasury. A surety that isn't on this list is probably very small or one that should not be accepted or relied upon. Consider it a red flag if you don’t find a surety on this list.
Step 3 - Check with A.M. Best Company
A.M. Best issues financial strength ratings measuring insurance companies’ ability to pay claims. If the contract requires that a surety bond be furnished by a surety with a particular rating (ie., AA or B+), you can verify this rating online through the A.M. Best website.
Step 4 - Inspect the Bond Itself [2]
To avoid accepting a fraudulent bond, it’s also important to pay attention to the bond itself.
4.1 Make sure the bond and Power of Attorney are crisp, clear copies. Fake and Fraudulent bonds are often made by photocopying other bonds, and when documents are photocopied more than once, the letters lose their crisp, clear nature.
4.2 Make sure the font and size of the font are the same on the project description and all other information (e.g., obligee, principal, etc.).
4.3 Make sure the Power of Attorney has a seal on it.
4.4 Get the copy of the bond by certified copy from the Owner/Obligee. Remember the East China Township case.
4.5 Many sureties have recently changed their names: International Fidelity Insurance Company is now IAT Insurance Group; Guarantee Company of North America is now Intact Insurance. Beware of this when checking third-party records (SFAA, State of Michigan, U.S. Treasury).
Checklist
By request, we’ve prepared a checklist to use when reviewing the next payment or performance bond you receive for a project. It’s available through this Dropbox link.
References
[1] Kammer Asphalt Paving Co, Inc v East China Township Schools, 443 Mich 176, 190-191; 504 NW2d 635 (1993) (finding that Michigan’s Public Works Bond Act (MCL 129.201, et seq) imposes upon a governmental unit the duty to verify the validity of a payment bond furnished by a general contractor of a public works project).
[2] Step 4 was added at the generous suggestion of Phillip G. Alber, Lipson Neilson. Phil is recognized as one of the premier surety attorneys in Michigan. He is past Vice-Chair of the ABA’s Tort Trial and Insurance Practice Section’s Fidelity and Surety Law Committee. Phil is also a member of the Surety Claims Institute and the National Bond Claims Association, where he is a Past Program Chairperson.