New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following informal opinion on April 26, 2004, representing the position of the New York State Insurance Department.

Re: Premiums for Performance Bonds

Questions Presented

1. When a contractor purchases a performance bond to present with a bid for work for a public agency, does the New York Insurance Law require the purchaser to pay for the bond when it is issued, or when the contract is signed for which the bond is required?

2. When a contractor purchases a performance bond to present with a bid for work for a public agency, does the New York Insurance Law require the insurer to refund the performance bond premium to the contractor if the public agency cancels the project, and thus eliminates the need for the performance bond?

3. Are there any legal restrictions on the rates that an insurer may charge for a surety bond?

Conclusions

1. The New York Insurance Law does not specify when the premium for a surety bond must be paid for. Pursuant to Section 2- General Rules of the Surety Association of America Manual of Rules, Procedures and Classifications, Rule J, premiums for all contract bonds (including performance bonds) are payable in advance (from the date of bond), whether work begins immediately or not. Surety insurers generally follow the Association's manual, so unless an insurer has filed a specific exception to those rules with the Superintendent, they will apply.

2. No. Pursuant to N.Y. Ins. Law § 3428(a) (McKinney 2000), the insurer’s rate filing, in accordance with the provisions of Article 23 of the Insurance Law, will govern whether the insurer must refund all or part of the performance bond premium to the contractor if the public agency cancels the project, and thus eliminates the need for the performance bond. Pursuant to Section 2-General Rules of the Surety Association of America Manual of Rules, Procedures and Classifications, Rule H, the original premium on all contract bonds (including performance bonds) is fully earned, but renewal premiums are adjusted pro rata for short term. As noted, surety insurers generally follow the Association's manual, so unless an insurer has filed a specific exception to those rules with the Superintendent, they will apply.

3. N.Y. Ins. Law § 2303 (McKinney 2000) sets standards for rates and N.Y. Ins. Law § 2310 (McKinney’s Supp. 2004) requires insurers to file surety rates and rating plans with the Department.

Facts

No facts were provided. The inquirer asked general questions based upon your experience as a contractor. Since the inquirer did not indicate otherwise, our answers assume that the insurer is an authorized insurer and that the premium for the bond was not financed by a premium finance company.

Analysis

N.Y. Ins. Law § 3428(a) (McKinney 2000) states:

Except as provided in subsection (d) of this section1, whenever an insurance contract made or issued in this state is cancelled or otherwise terminated by the insured before the expiration thereof in accordance with the term of such contract, the earned premium to be retained by the insurer shall be determined by the applicable rate filing, if any, otherwise in accordance with the provisions of such contract.

Nothing in the Insurance Law specifies when an insurer may require that the premium on a surety bond has to be paid. However, pursuant to Section 2- General Rules of the Surety Association of America Manual of Rules, Procedures and Classifications, Rule J, premiums for all contract bonds (which includes performance bonds) are payable in advance (from the date of bond), whether work begins immediately or not.

Pursuant to N.Y. Ins. Law § 3428(a) (McKinney 2000), the insurer’s rate filing, in accordance with the provisions of Article 23 of the Insurance Law, control whether the insurer must refund all or part of the performance bond premium to the contractor if the public agency cancels the project, and thus eliminates the need for the performance bond. Pursuant to Section 2- General Rules of the Surety Association of America Manual of Rules, Procedures and Classifications, Rule H, the original premium on all contract bonds (including performance bonds) is fully earned, but renewal premiums are adjusted pro rata for short term.

Surety insurers generally follow the Association's manual, so unless an insurer has filed a specific exception to those rules with the Superintendent, they will apply.

As for the remaining question as to whether there are any limitations or restrictions on the rates that an insurer may charge, N.Y. Ins. Law Article 23 controls rates. Pursuant to N.Y. Ins. Law § 2310 (McKinney’s Supp. 2004), surety rates are subject to file and use. Pursuant to N.Y. Ins. Law §.2303 (McKinney 2000), "[r]ates shall not be excessive, inadequate, unfairly discriminatory, destructive of competition or detrimental to the solvency of insurers…"

For further information one may contact Senior Attorney Susan A. Dess at the New York City Office.


1  Subsection (d) applies to policies where the premiums are financed by a premium finance agency, which does not appear to be the case here.