How to Verify a Surety Bond

Michigan's public works bond statute (MCL 129.201, et seq) requires that contractors furnish a payment and performance bond for projects over $50,000. The bond must be executed by a surety authorized to do business in Michigan. Many contracts also require the surety to be listed in Treasury Circular 570. In 1993, the Michigan Supreme Court held in Kammer Asphalt Paving v East China Twp that local governments contracting for improvements have a duty to verify the validity of bonds furnished by contractors [1].

So if you receive a contractor's payment and performance bond, how do you know whether it complies with these requirements? How can you check on a bonding company whose name doesn't sound familiar? How you verify the financial strength of a surety?

There are 3 ways to verify payment and performance bonds and the surety named on the bonds.

State of Michigan

The Michigan Department of Insurance and Financial Services (DIFS) maintains an online database of insurance companies that are registered to conduct business in the State of Michigan. The search interface is somewhat confusing, but if you search using the last field on the form, you should be able to find the surety you are looking for.

If you don't find the surety, it means they are not registered to conduct business in Michigan. Take this finding as a red flag. Note too that individual sureties are not listed here and not permitted under Section 4 of Michigan's bond statute.

For insurance companies that are registered to conduct business in Michigan, you get the usual information about the state of incorporation and registered agent. Here's a sample report for Hartford Fire Insurance Company, a surety that is active in Michigan.

Treasury Circular 570

Treasury Circular 570 is a list of acceptable sureties on federal bonds maintained by the U.S. Department of Treasury. A surety that isn't on this list is probably very small, or one that should not be accepted or relied upon. Consider it a red flag if you don’t find a surety on this list.

A.M. Best Company

A.M. Best issues financial strength ratings measuring insurance companies’ ability to pay claims. If the contract requires that a surety bond be furnished by a surety with a particular rating (ie., AA or B+), you can verify this rating online through the A.M. Best website.

Checklist

By popular request, we’ve prepared a checklist to use when reviewing the next payment or performance bond you receive for a project. It’s available through this Dropbox link.

References

[1] Kammer Asphalt Paving Co, Inc v East China Township Schools, 443 Mich 176, 190-191; 504 NW2d 635 (1993) (finding that Michigan’s Public Works Bond Act (MCL 129.201, et seq) imposes upon a governmental unit the duty to verify the validity of a payment bond furnished by a general contractor of a public works project).