Texas Department of Insurance Takes Narrow Interpretation of Code Concerning Construction Payment Bond Claims

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Chapter 3503 of the Texas Insurance Code (the Insurance Code) governs the obligations of sureties in handling of claims under construction payment bonds.  Recently, the Texas Department of Insurance (TDI) communicated its intention to construe § 3503.055 of the Insurance Code more narrowly, to require a payment bond surety to accept or deny a claim or request additional time within 30 days from its receipt of all supporting documents from the payment bond claimant, without regard to whether the surety is waiting for information from its principal. To ensure compliance with § 3503.055 of the Insurance Code, and in accordance with TDI’s more restrictive interpretation, TDI is initiating investigations into the practice and conduct of, and launching formal actions against, any surety company whose policies and guidelines are inconsistent with TDI’s interpretation.  

For your convenience, we have outlined below §§ 3503.054 and 3503.055 of the Insurance Code, to provide you with a template by which to ensure that our clients’ policies and procedures consistent with TDI’s interpretation. In complying with the Insurance Code, a payment bond surety has specific duties and obligations to investigate, accept or reject, and if perfected, pay a claim. Specifically, with respect to acknowledgement and investigation of a claim, § 3503.054 of the Code provides that:

(a)  a surety company that has issued a construction payment bond shall, not later than the 15th day after the date of receipt of notice of claim under the bond:

1)  acknowledge receipt of the claim;
2)  begin any review or investigation necessary to determine whether the surety company is obligated to satisfy the claim under the bond; and
3)  request from the claimant each document, item of information, accounting, statement, or form that the surety company reasonably believes, at that time, will be required from the claimant.

b)  If a construction payment bond provides an address to which a notice of claim under the bond should be submitted, the notice is effective on the date the notice is received at that address.

c)  This subchapter does not exempt a claimant from complying with any applicable statutory or contractual notice requirement.

With respect to acceptance or rejection of a claim, § 3503.055 of the Code provides that,

a)  except as provided in Subsection (c), a surety shall notify a claimant in writing of the acceptance or rejection of a claim no later than the 30th day after the date the surety company receives all documents, items of information, accounting, statements, and forms requested by the surety company under § 3503.54. 

b)  if the surety company rejects all or part of the claim, the notice required by Subsection (a) must state in specific terms the reasons for the rejection that are known by the company at the time of the rejection. 

c)  If the surety company is unable to accept or reject the claim within the period specified by Subsection (a), the company, in that same time period, shall notify the claimant in writing that the company is unable to accept or reject the claim.  The notice provided under this subsection must:

1)  State the reasons for which the company needs additional time to accept or reject the claim; and
2)  Include a request for any additional information the company reasonably needs to process the claim.

d)  No later than the 30th day after the date a surety company notifies a claimant under Subsection (c), the company shall notify the claimant in writing of the acceptance or rejection of the claim. If the company rejects all or part of the claim, the company shall state in specific terms the reasons for the rejection that are known by the company at the time of the rejection.

TDI has narrowly interpreted §§ 3503.054 and 3503.055 of the Code to read that although § 3503.055(a) names §3503.054 as opposed to §3503.054(a)(3), specifically, in identifying the deadline by which a surety must notify a claimant of the acceptance or rejection of a claim, § 3503.055(a) uses the language of § 3503.054(a)(3) in setting the date by which a surety must respond. Section 3503.054(a)(3) contemplates requesting “from the claimant each document, item of information, accounting, statement, or form that the surety company reasonably believes, at that time, will be required from the claimant.” Section 3503.055(a) refers to “all documents, items of information, accountings, statements, and forms requested by the company under § 3503.054. TDI interprets § 3503.054(a)(3) as the only place that the language of 3503.055(a) is applied in reference to the claimant.

Additionally, TDI has interpreted § 3503.055(c)(2) as requiring a surety who is unable to accept or reject a claims by the 30_day period in subsection (a), to inform the claimant in writing, state the reason why, and request any additional information.

Based on the foregoing, § 3503.055 should not be interpreted to imply that a surety’s 30-day period to accept or deny a claim or request additional information begins to run the day it receives all information requested in its investigation initiated under § 3503.054(a)(2), including information requested from the principal in furtherance of its investigation under § 3503.054(a)(2).  Section 3503.055 is applied restrictively to include all documents, items of information, accounting, statements, and forms requested from only the payment bond claimant.

Accordingly, to ensure proper compliance with §§ 3503.054 and 3503.055 of the Insurance Code, our surety clients should within 15 days after the date of receipt of the notice of claim under the bond, acknowledge receipt of the claim, begin any review or investigation necessary to determine its obligation to satisfy the claim under the bond, and request from the claimant the necessary documents.  Further, a surety should implement policies and procedures consistent with TDI’s interpretation requiring a surety to accept or decline a claim or request additional time within 30 days from its receipt of all supporting documents from the claimant.