VOL. 35 | NO. 4 | Friday, January 28, 2011
Metro suspends six surety bond providers for year
By Judy Sarles
Several insurance companies and their subsidiaries are being barred by Metro Nashville’s Planning Department from providing surety bonds on subdivision development projects for one year.
The companies are being excluded for not issuing required payment on surety bonds for incomplete Metro infrastructure improvements such as sidewalks, sewers, and drainage within existing subdivision projects. The Planning Department has referred the matter to Metro’s Department of Law for litigation in order to recover about $4.2 million.
“The bottom line of it is we feel the surety bonds are owed to Metro,” says Craig Owensby, a spokesman for the Planning Department, “and we’re going to suspend doing business with them until the situation is settled.”
The exclusion covers parent companies and subsidiaries of:
Because a lawsuit against an insurance company may take longer than 12 months to be resolved, the company’s exclusion could be extended beyond a year. Metro has a record of usually winning these types of cases, which are prosecuted in Chancery Court.
“Sometimes it’s a very long and drawn out process,” says Doug Sloan, a Metro Department of Law attorney who is legal advisor to the Metro Planning Commission. “Surety companies, quite frankly, slow ball the process, in my belief, to avoid having to pay the claim as long as possible.”
Metro requires developers to purchase surety bonds on subdivision infrastructure improvements, so insurance companies that issue the bonds will pay out on the bonds if developers fail to make the improvements they said they would complete in their performance agreements.
Although the exclusion shrinks the pool of insurance companies providing surety bonds, there are still several companies remaining within the pool that will take applications for bonds from subdivision developers. Metro also accepts alternatives to surety bonds, including an irrevocable letter of credit, a cashier’s or certified check, and an assignment of certificate of deposit.
In the past, Metro only occasionally had to deal with insurance companies not paying out on surety bonds, but the sour economy and the depressed housing market have increased the number of occurrences.
“We have filed several cases in the last three years,” says Lora Fox, assistant Metro attorney.
Cases end up in court when developers go out of business or have trouble completing the infrastructure work. The insurance company that issued the bond then must pay Metro. Companies sometimes come up with a reason not to pay the bond, leading to a dispute with Metro that ends up in litigation against the third party and the developer.
“Sometimes the third party has trouble paying,” says Owensby, “or we have trouble getting the third party to pay.”
In some of the latest cases, developers have gone out of business. Those cases involve 16 different bonds ranging from $10,000 to $939,000. In a few instances, the bonds are for different phases of the same project. Among the projects whose infrastructure hasn’t been completed are Windhaven Shores, Carothers Crossing, Carrolton Station, and The Woodlands.
“There are so many different reasons why developers are not completing the work to be done,” says Jerry Underwood, vice president of surety at American Southern Insurance Co., one of the companies being excluded.
In some cases, Metro may offer an extension or do another inspection of the property, Underwood says, instead of making a demand against the bond. A problem arises when the bond wording, the guarantee part of the wording, states the surety company can complete the work if it so chooses. He says there is no right behind Metro’s demand for full penalty of the bond, and Metro should only demand an amount equal to any incomplete work. Because American Southern has the option to finish the work, that is the option it has selected.
“We do not have a good situation going right now with American Southern and Metro on any new bonds,” Underwood says. “They choose to not accept our company; we choose not to write bonds. It’s a mutual agreement that we’re not going to do any further business.”
David Kerrigan, chief legal counsel at Developers Surety and Indemnity Co., another excluded company, says it’s important for his company to make certain who is right in a dispute over the payment of bonds, and it’s not a simple process. Different sureties may have different procedures, and bonded obligations may be different.
“When we don’t pay out on bonds,” Kerrigan says, “there’s a serious question as to whether it’s owed. We have an obligation to determine if the claim is valid, it’s not overstated, and that it comes within the scope of bonded obligations.”
He says the notion that his company doesn’t pay claims is not accurate. It takes a cooperative effort for everybody to provide information to move a claim forward.
“Sometimes the other parties don’t cooperate. They don’t provide the information that they should provide, and it makes it harder and longer for us to make a determination.”
It is unclear how widespread the instances are of insurance companies not paying out on bonds. It isn’t an issue that the Tennessee Department of Commerce and Insurance collects data on, and the issue hasn’t come up in any National Association of Insurance Commissioners discussions.