Often owners produce contract requirements that are far-stretched and sometimes even against public policy. Surety qualifications for bonding is one of these areas.
On public works projects in California, the law is very clear that public agencies cannot decline surety bonds based on “AM Best Rating” or other qualifying criteria other than being a California admitted surety insurer.
The practice of requiring a minimum “AM Best Rating” or qualifying criterion for determining the sufficiency of a surety is not consistent with statutes that govern California. Specifically, the California Code of Civil Procedure, Section 995.670 states, “No state or local public entity shall require an admitted surety insurer to comply with any requirements other than those in Section 995.660 whenever an objection is made to the sufficiency of the admitted surety insurer on the bond or if the bond is required to be approved.”
The related legislation passed in 1992, provides that local public agencies can only require a surety company to be “California admitted.” Requiring a particular “AM Best Rating” of any kind (i.e., “A+”) is contrary to California law and could leave a public agency vulnerable to legal action.
A plain reading of the law requires that a public agency cannot utilize an “AM Best Rating”, or any other rating criteria to disqualify a surety, so long as it is a California admitted surety company and they otherwise comply with section 995.660 of the California Code of Civil Procedure.
Although private owners and general contractors in California have the flexibility of asserting various requirements on downstream parties, both should be aware of and take into consideration, Section 995.670 of the California Code of Civil Procedures, when setting surety requirements.