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Baltimore Business Journal - May 15, 2006
http://baltimore.bizjournals.com/baltimore/stories/2006/05/15/story7.html

Friday, May 12, 2006
New law allows contractors to use individual surety bondsBaltimore Business Journal - by Rachel Sams Staff
When Jeff Hargrave testified in support of a bill allowing contractors to submit individual surety bonds for state work, he directed legislators' attention to the woodwork in the Senate Office Building.

His company, architectural millwork specialist Mahogany Inc., had done the woodworking. But though Mahogany has done high-profile work throughout the state -- including M&T Bank Stadium and the Hippodrome Theatre -- it has mostly done so as a subcontractor. Mahogany had a bad year in 1997, he said, and ever since he has struggled to get a surety bond from an insurer, which he needed for big projects.

"For minority contractors, it's one of the biggest hurdles we have facing us," says Hargrave, whose company posted $6 million in revenue last year and is now bonded through a state program.

The bill, which Ehrlich signed into law May 2, allows contractors to submit individual surety bonds for state work. Supporters believe it will help small and minority contractors like Mahogany get the backing they need to land state projects. But the law's opponents say it could wallop small subcontractors and construction suppliers.

A surety bond guarantees that a contractor will complete a project and pay subcontractors and suppliers. All state projects costing more than $100,000 require a bond, as do some smaller projects. Maryland previously only accepted surety bonds issued by insurance companies.

"This bill represented the breakup of a monopoly" -- that of corporate sureties, said Wayne Frazier, president of the MD. Washington Minority Contractors Association.

Individual sureties must have enough assets to back the full amount of the bonds they issue. To qualify for an individual surety, a contractor must first have been rejected for a corporate surety.

The availability of surety bonds often came up as an issue when the state looked at ways to make its contract process more competitive, said Del. Dan Morhaim, D-Baltimore County, chief sponsor of the bill.

Minority business participation in state construction contracts was flat in fiscal year 2005 at around 17 percent, state data shows.

Supporters of the bill say underwriting has tightened among corporate sureties as some have left the business, making it harder for small contractors to qualify. But industry associations, which opposed the bill, say insurers have plenty of resources to issue sureties to qualified businesses.

Insurers that issue corporate sureties are licensed with the Maryland Insurance Administration and participate in a state guaranty fund, said Edward Gallagher, general counsel for the Surety Association of America. Individual sureties don't have those safeguards, he said. If an individual surety can't cover a default, subcontractors and suppliers won't get paid, Gallagher said.

Karen Barbour, the president of a Westminster construction bond brokerage who advocated for the bill, says individual sureties won't take business from corporate sureties. Rather, she said, they will help small contractors build a track record to attract corporate sureties.

Companies that belong to the American Insurance Association -- including St. Paul Travelers Cos. and Chubb Corp. -- control 67 percent of the corporate surety market in Maryland, according to the group.

Opponents of the bill noted several highly publicized frauds by individual sureties in the early 1990s.