Countersignature requirements are still listed on some surety bond forms and need to be updated and eliminated.
Countersignatures are a requirement on some surety bonds that require the signature of an agent whose primary residence is in the state. For example, a Florida agent would be required to sign a bond written for the state of Florida. If the broker issuing the bond was in another state, they would have to get a Florida resident agent to sign the bond for them on behalf of the customer. The resident agent would usually charge a fee or share commission in exchange for this service. Countersignatures were a requirement by many states and local jurisdictions to favor local agents.
Countersignatures on surety bonds are no longer valid in any state on public or federal work. These requirements were deemed to be against public policy by favoring local agents over the customer’s choice of broker. In one of the most famous cases, Council of Insurance Agents and Brokers v. Tom Gallagher, 287 F. Supp. 2d 1302 (N.D. Fla. 2003), the courts ruled that there was no rational basis to favor a resident agent over a non-resident agent. Similar challenges and rulings have occurred in other states and the courts have all ruled against countersignatures.
During the early 1900s, states enacted countersignature laws to ensure that bonds were being issued in accordance with local laws and regulations. The laws likely made sense in a time where it was more difficult to operate across state lines. However, advancements in technology have made it very easy to look up state and local regulations. Surety Bond companies have also simplified the process by giving brokers access to resources, bond form libraries and other tools to operate nationally.
Countersignatures are generally bad for the public. They slowed down the process of obtaining surety bonds. Instead of just issuing bonds for their clients, out of state brokers had to wait on a local resident broker to issue or sign a surety bond. Additionally, they decreased competition. By mandating a resident agent there was often no incentive for local agents to get better or decrease costs. This was bad for all parties to a surety bond.
Even though countersignature requirements are no longer valid on public work, it’s important for customers and brokers to understand their rights on surety bonds. Many public bond forms have not been updated in decades. Therefore, many of them still have countersignature requirements on them. Worse, many government entities and politicians do not realize that these signatures are impermissible and may still try to require them. Surety Bond principles, brokers and sureties should push back on such requirements. They should educate the public entity in such cases and encourage them to update their forms. The National Association of Surety Bond Producers (NASBP) is a great resource for this advocacy and has a template letter to share.
Unfortunately, countersignatures on private work can still be valid. There is little that can be done if a private project owner is favoring a local agent and bond requirement. Inquiries into why the requirement exists may be the only avenue. Also, if the agency is a member of groups against the requirement, pressure can be applied through those associations. Still, it will be up to the private project owner, whether to keep the requirement in place.
Countersignatures on surety bonds are no longer valid on public work. Bond principal, brokers and owners should all reject any attempt to enforce those requirements. Simply putting “N/A” on the bond form is an acceptable practice. Learn more about other relevant surety bond issues by visiting our blog or contact Axcess Surety anytime.
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