The Office of General Counsel issued the following opinion on September 9, 2003 representing the position of the New York State Insurance Department.
Re: Imposition of Requirements on Surety Issuing Performance Bonds
In the course of granting a public works contract, may a governmental entity require that the winning bidder provide to the governmental entity payment and performance bonds issued by a surety having an A.M. Best rating of not less than A?
The governmental entity would not be prohibited from imposing such a condition.
The inquirer represents several local municipalities and other governmental entities that occasionally enter into public works contracts. These entities would like to be able to require that a contractor awarded such a contract obtain payment and performance bonds only from a surety rated "A" or better by A.M. Best. Recently, the inquirer was advised by surety representatives that N.Y. Ins. Law § 1111(b) (McKinney 2000) would prohibit the imposition of such a requirement.
The provision of the New York Insurance Law cited to the inquirer as precluding the imposition of the "A" rating requirement provides as follows:
(b) (1) Whenever by any law of this state a bond, undertaking, recognizance, guaranty or like obligation is required, permitted, authorized or allowed, or the performance of any act, duty or obligation, or the refraining from any act, is required, permitted, authorized or allowed to be secured or guaranteed, such bond or like obligation, or such security or guaranty, may be executed by any insurance company authorized to do in this state the business of executing such instruments and empowered by its charter to execute them. The insurers execution of such instrument by its officer, attorney-in-fact or other authorized representative shall be accepted as, and in all respects shall be, a full compliance with every law or other requirement, now or hereafter in force, that any such obligation be given or accepted or that it be executed by one or more sureties, or that such sureties be residents, householders or freeholders, or possess any other qualifications.
(2) The superintendent may on written application issue to any company his certificate of qualification stating the companys capital and surplus as shown by its last annual statement or its last filed report on examination, whichever is later, and that such capital and surplus complies with the requirements of this chapter. The certificate shall further indicate the limitation upon the amount of a single risk which such company is authorized to assume.
N.Y. Ins. Law § 1111(b)(McKinney 2000).
The surety representatives to whom the inquirer has spoken regarding this matter rely upon the above-cited provision as rationale for their view that where the Superintendent of Insurance has issued a certification of qualification to a surety, then a governmental entity may not refuse to accept a suretys payment and performance bond. Absent any further legal authority, such an interpretation would be acceptable. However, the question of the ability of a governmental entity to reject a suretys bond is addressed by N.Y. Ins. Law § 2504 (McKinney 2000). That statute was enacted to prevent a public entity from requiring a contractor to use a specific insurer. However, the statute expressly preserved the discretion of the governmental entity with respect to the disapproval of bonds in certain circumstances. The relevant portion of that statute provides as follows:
(c) This section shall not, however, prevent the exercise by such officer or employee on behalf of the state or such public corporation1 or public authority of its right to approve the form, sufficiency, or manner of execution, of surety bonds or contracts of insurance furnished by the insurance company selected by the bidder to underwrite such bonds or contracts. Any provisions in any invitation for bids, or in any of the contract documents, in conflict herewith are contrary to the public policy of this state.
N.Y. Ins. Law § 2504(c) (McKinney 2000).
The discretion granted to a governmental entity under the above-referenced provision has been interpreted by this Office as specifically allowing the governmental entity to reject a bond of a given surety in the event that it had reservations regarding the suretys stability or solvency. See Office of General Counsel Opinion No. 95-13 (NILS) (February 23, 1995). In another opinion it was stated that, under § 2504(c), a governmental entity could, as a condition of accepting a bond, require that a surety maintain a specific A.M. Best rating. Office of General Counsel Opinion (April 2, 2001).
Accordingly, the New York Insurance Law does not preclude a governmental entity from requiring that any necessary performance and payment bonds be issued by a surety rated "A" or better by A.M. Best.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.
1 N.Y. Gen. Constr. Law § 66 (McKinney 2000) defines "public corporation" as including a municipal corporation, a district corporation, or a public benefit corporation. A "municipal corporation" is defined to include a county, city, town, village and school district. N.Y. Ins. Law § 2504(a)(2) excludes certain entities from the definition of "public corporation" for purposes of the application of the provisions of that section. The entities excluded by that paragraph are those public corporations or authorities created pursuant to a compact with another state, the City of New York, corporations or authorities created to generate or transmit electricity or construct or extend light or heavy rail transport or commuter railroads.