To:                  Superintendents, Member School Districts (K-12)

From:              Susanne K. Reed, Associate General Counsel

Subject:          Governmental Entities in Awarding Public Contract Must Ensure that Payment Bond Surety is an Admitted Surety

                        Memo No. 4-2001

 In a recent case, Rankin v. City of Murrieta (2000) 84 Cal.App.4^th 605, the 4^th District Court of Appeal held that:

 1)  a surety providing a payment bond in a construction contract must be an admitted surety insurer (an insurer licensed in the State of California) and

 2)  the City of Murrieta had a duty to investigate the surety’s sufficiency by either obtaining a county clerk’s certificate verifying that the surety was an admitted surety or  by otherwise verifying that the surety was admitted in the State.

This case involved a non-admitted surety insurer that provided a payment bond to the City of Murrieta for a playground project.  The City bid specifications did not require that the surety be admitted in the State of California and the City did not take any action to investigate whether the surety was an admitted insurer.  A subcontractor on the project failed to receive full payment from the contractor and filed a claim under the payment bond.  Unfortunately for the subcontractor, the non-admitted bonding company did not have any assets and the bonding company’s president eventually pled guilty to fraudulent misrepresentation in connection with his participation in an “individual surety bonding program.”  The subcontractor then sued the City claiming that the City was negligent in that the City had a duty to both require a licensed surety and to investigate the bonding company.  The Court of Appeal agreed, finding that the City had a duty to investigate the surety’s sufficiency by requiring the surety to submit a county clerk’s certificate with its bond showing that it was an admitted surety insurer or otherwise verifying that the surety was an admitted surety insurer.

For those districts using our office’s standard construction documents, our contracts require 100% payment and performance bonds from an admitted surety insurer for all contracts in excess of $25,000.  We have revised our contract documents to require the contractor to provide a county clerk’s certificate with its bonds.   It is also possible to determine whether a surety is admitted by using the California Department of Insurance web site at www.insurance.ca.gov.   Once there you should click on the bullet “Check your insurance company’s profile” and follow the instructions.