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The COVID-19 pandemic has forced many U.S. businesses to become more flexible with the way they operate and conduct business. When state governors began to issue stay-at-home and/or social distancing orders earlier this year, the surety industry was confronted with adhering to these orders while attempting to meet the traditional federal, state and local requirements surrounding the acceptability of surety bonds. 

In most jurisdictions, in practice, a surety bond is accepted as fully executed by most governmental authorities when it includes a wet signature, a raised corporate seal and notarization. Because this practice requires the close, physical presence and proximity of multiple persons, including a public notary, it runs afoul of social distancing and stay-at-home orders, in addition to needlessly endangering human health. 

In short, the current practices required by most public owners of executing physical copies of bonds is unworkable and imprudent during the COVID-19 crisis in order to maintain a safe environment for those executing, delivering and receiving surety bonds. Adherence to such practices also is less efficient and is simply an outdated practice, as the advent of technologies and legal authority permitting execution and delivery of electronic bonds with digital signatures and seals is here and equally enforceable.

Executing Surety Bonds Electronically

Executing surety bonds electronically is not a new practice. Commercial surety bonds, for example, have been submitted electronically for years in the form of mortgage broker and customs bonds. To date, no issues have arisen with the enforcement of electronic bonds in these sectors. Nearly 20 years ago, the surety industry recognized the need to eventually transition from submitting paper bonds with wet signatures to electronic bonds by creating a joint initiative, focused on electronic bidding and bonding.

With the assistance of construction industry stakeholder organizations, this joint initiative between NASBP and SFAA created an educational best practices whitepaper, “eProcurement Bidding/Bonding Guidelines,” to assist public owners with implementing electronic procurement methodologies and system characteristics that respect the interests of all parties. The whitepaper (available at suretyautomation.org) was intended to establish common parameters for all public owners in the electronic procurement and bonding process. 

While a few states did adopt acceptance of electronic bid bonds through the state departments of transportation, acceptance was not widespread beyond those state departments. 

The Legal Environment Uniform Electronic Transactions Act 

The electronic issuance of surety bonds meets the legal standards for the historic wet signature and notary requirements. The Electronic Signatures in Global and National Commerce Act (E-Sign), which is largely based on the Uniform Electronic Transactions Act (UETA), provides that a contract relating to interstate commerce may not be denied legal effect solely because an electronic signature or record was used in its formation. 

E-records and e-signatures have the same legal effect as paper contracts and handwritten signatures, subject to specific exceptions not applicable in this context. However, E-Sign and UETA both provide that all parties must consent to doing business electronically. And therein lies the issue for the surety industry.

While nearly all states have adopted some form of UETA, the challenge is the public owner must consent to receipt of the surety bond in this manner. Recently, the Texas Department of Insurance issued Bulletin B-0035-20 to assist surety bond companies in the performance of their duties during the COVID-19 outbreak. TDI’s bulletin, however, stipulates that all parties must agree to conduct business electronically in this manner. 

Remote Online Notarization (RON) Model Act

According to the National Notary Association, 24 states have adopted the RON model to allow for acceptance of remote online notarization prior to the pandemic. While the RON model seems to be advancing in the states, not all these states have issued regulations. For the surety industry, it is not a practical, workable solution during the COVID-19 crisis under the current RON model because: 

  • it’s not widely accepted in all states; 
  • most of those states which have adopted RON require a notary to first register with and receive certification by the state before utilizing RON; 
  • some states require an in-person presence to use RON; and 
  • while the model may address other industries such as real estate agents and attorneys, it does not specifically address surety transactions.  

During stay-at-home orders, a number of governors issued Executive Orders to allow for some form of virtual online notarization to adhere to social distancing standards, which was helpful to the surety industry as this solution did not require preregistration or the use of a particular platform as in the case of RON.

Need for Immediate Action

The surety industry quickly realized that elected and appointed decision-makers and public procurement officials needed to be educated about the potential health risks associated with traditional execution and delivery of surety bonds during a pandemic in order to comply with social distancing orders. 

Subsequently, the surety industry, in early April, along with its construction allies, began a grassroots information campaign targeting federal, state and local elected/public procurement officials, which included background materials requesting such leaders/officials consider issuing emergency orders requiring acceptance of electronically executed and delivered contract surety and commercial surety bonds due to the COVID-19 pandemic. The request stated the following: 

  • With respect to all construction bonds, all government agencies and officials shall accept surety bonds and powers of attorney containing e-signatures and e-corporate seals affixed to each document and shall waive the requirement of a notary
  • With respect to all commercial surety bonds, government agencies and officials shall accept all surety bonds and powers of attorney containing e-signatures and e-corporate seals affixed to each document, and shall waive the requirement of a notary. 
Notable Successes 

Because of the surety industry’s dogged effort, several state and federal agencies acted by temporarily allowing bonds to be submitted electronically. Most notably, the U.S. General Services Administration, one of the federal government’s largest procurer of construction services, issued a FAR Deviation (Class Deviation CD-2020-05) for sureties to use electronic signatures in lieu of manual signatures and which eliminated the requirement for any seals. Soon thereafter, the Department of Defense issued a FAR Deviation (DARS 2020-O0016) providing flexibility to DoD contracting officers regarding “original documents, manual signatures, seals and notarization in order to facilitate certain essential contracting procedures.” 

In May, the Small Business Administration issued notice (CONTROL NO.: 5000-20026) that the Surety Bond Guarantee Program will accept electronic signatures on certain program documents.

Several states also took affirmative action in response to the request, resulting in the issuance of temporary emergency orders, although those referenced below have since expired. 

Georgia: EO June 16, 2020, mandated contracting officers accept electronic signatures and corporate seals and waived in-person notarization. 
Michigan: EO 2020-41 in essence required the use of electronic signatures, as well as remote notarization and witnessing, unless wet signatures were expressly required by law. 

Minnesota: Department of Commerce & Department of Administration issued regulation/guidance accepting bonds with electronic signatures. 

Tennessee: EO 28 suspended the notarization requirement on surety bonds and allowed all government departments and officials to accept electronic signatures and corporate seals.

Wisconsin: Department of Facilities Development and Management moved to accept electronic bid, performance and payment bonds, as well as remote online notarization. 

Much Work Needs to Be Done

Prior to the COVID-19 pandemic, advocating for the adoption of electronic bonds was not viewed as a priority for the surety industry. However, the COVID-19 pandemic acted as a catalyst for renewed focus on the need for transitioning to electronic bonding. 

It is vital that public procurement officers, in tandem with the construction and surety industries, work together to find a viable alternative to the execution of surety bonds while continuing to achieve the public policy purpose of protecting state and federal taxpayer funds and the downstream parties that rely on surety guarantees of performance and payment. 

NASBP and SFAA are exploring a long-term strategy to focus their energies and efforts to advance the acceptance of electronic surety bonds and will continue to partner with their contractor friends to enlist industry-wide support and guidance on this critical matter. 

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