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Modifications of the Surety Bond insurance in public contracts

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8/16/2016 3:48 PM Demarest News

Recently, bills were proposed seeking the alteration of the surety bond insurance guidelines in public contracts. Those reforms aim at modifying Law nº 8.666/93, which sets the standards clauses for bids and contracts signed by the Public Administration.

Nowadays, article 56 of the Law nº 8.666/93 defines the surety bond insurance as one of the guarantees that the Public Administration may demand as a condition for signing the agreement, leaving the choice in charge of the contracted party. It also states that the guarantee's value, regardless of its type, cannot exceed 5% of the main contract value, although it may reach up to 10% in major contracts or in those with greater technical complexity.

The Legislative Bill 268/16 intends to alter article 56 in order to make the surety bond insurance mandatory for public contracts (ceasing to be a mere discretionary act of the Public Administration and an option for the contracted part), as well as increasing the limit of coverage to a minimum of 25% up to 100% of the agreement total price. Likewise, it establishes that the Insurer may opt on paying the compensation in cash or performing the object of the main contract by means of a third party, but on its own and full liability, as agreed with the contracting entity.

On the other hand, the Legislative Bill 559/13, through its 66th Amendment, claims to revoke and supersede the existing Law nº 8.666/93. The surety bond insurance would remain as an alternative guarantee, however, the main proposed alterations for the existing system would be the increase of the guarantee value (for any kind) up to 100% in major contracts, and between 10% and 50% to the others. Also, in case the surety bond insurance is chosen, there would be the possibility of demanding the Insurer to take over the contractual obligations itself.

Similarly, there is the Legislative Bill 274/16, which intends to regulate the surety bond insurance for public contracts with values equal to or higher than R$ 10 million. According to this Bill, the surety bond should be mandatory and establish that the insured amount corresponds to 100% of the value of the contract. This Bill provides that the Insurer is a third party with interest in the full execution of the contract, granting the Insurer the power/duty to supervise the contract's execution, certify the compliance of services and deadlines, perform technical and accounting audits and even the duty to initiate ex officio the loss adjustment. The Bill defines a loss either as a breach of contract, in cases of partial or total nonperformance, as well as the non-acceptance of the construction or service by the Public Authorities, in case the execution differs from the agreement provisions.

If the Insurer understands that there is coverage for the loss, it may either contract a third party to conclude the execution of the contract or take over the remaining execution by their own workforce or subcontracted labor, or fund the defaulting Borrower to fulfill the contract within the deadline. The Insurer's conclusion and intended measures must be endorsed by the Insured, otherwise the indemnification shall be paid in cash.

The above three Bills are at the Federal Senate. The 559/13 Bill is at the Special Commission of National Development and the others are still waiting for the Constitution, Justice and Citizenship Commission approval.

There are also other Legislative Bills at the Chamber of Deputies with the same purpose of modifying Article 56 of Law 8.666/93 (Bill 1242/2015, Bill 2391/2015, PL 5536/2015, Bill 5549/2016 and Bill 5830/2016), with similar proposals to those mentioned above, such as: mandatory surety bond insurance in public contracts; increase of the insured amount (up to 30%, 100% or even 120% of the value of the contract); Insurer's inspection and possibility to replace the indemnification payment for the full performance of the contract, on its own liability.

In view of such Bills, the Superintendence of Private Insurance (SUSEP) and other bodies of the Insurance market are analysing the possibility of increasing the insured amount to 30% of the value of the contracts, as well as engaging a dialogue with the Legislative Power, in order to demonstrate some negative effects that their approval, as originally proposed, may provoke on the market.


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