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A recent stipulation and final order entered by the Idaho Department of Insurance against an individual surety, Edmund C. Scarborough, proves that contractors and subcontractors should verify the authenticity of every contract surety bond before acceptance. The stipulation and final order, issued Dec. 20, 2013, stated that Scarborough violated the Idaho Code by transacting surety insurance without a certificate of authority issued by the director of the department. As a result, Scarborough was precluded from transacting surety insurance or issuing or delivering surety bonds as an individual surety in the state of Idaho, for Idaho residents or for contracts to be performed in Idaho.

State insurance laws require individuals, not just companies, who wish to act as a surety on bid, performance and payment bonds to obtain a license or certificate of authority from the state insurance department. A major exception is the federal government, which gives contracting officers the discretion to accept such bonds from individuals if the bonds are backed by cash or cash equivalents equal to the amount of the bonds in escrow or a deed to trust on real property sufficient to secure the bond.

A number of cases have occurred in which federal Miller Act performance and payment bonds issued by unscrupulous individual sureties were found to be false, and the assets to secure the bonds were insufficient or nonexistent. In many such cases, the subcontractors and suppliers that the surety bond was supposed to protect were left with no remedy for nonpayment. Individual surety fraud has led to substantial losses for the federal government, private owners, and many contractors and subcontractors.

The National Association of Surety Bond Producers (NASBP) is at the forefront of combating surety fraud by developing and supporting legislation that requires individual sureties issuing bonds on federal contracts to have verifiable assets to back their bonds. Last year, NASBP was instrumental in drafting and garnering support for the Security in Bonding Act of 2013 (H.R. 776). Among other things, the bill would:
  • require individual sureties to pledge only safe, liquidatable assets and to deposit them in the custody and control of the federal government;
  • eliminate future instances of individual surety bonds that are pledged with insufficient or illusory assets;
  • protect many small businesses that perform as subcontractors and suppliers on federal construction projects, knowing their payment protections are real, not illusory; and
  • increase the guarantee to 90 percent for surety companies that participate in the Small Business Administration’s Preferred Surety Bond Guarantee Program so it can assist more small and emerging businesses through regulated surety markets.
In addition, the NASBP issued a one-page resource in January that addresses the critical need to educate contractors and subcontractors on how to verify the authenticity of bonds before acceptance. This easy to understand document, available at www.nasbp.org, explains how contractors, subcontractors and suppliers can verify bonds through a two-step process.
  1. Verify the surety is licensed to issue the surety bond. Contact the state insurance department to determine if the surety is admitted in the project’s jurisdiction. Consult the U.S. Department of the Treasury List of Approved Sureties, Department Circular 570.
  2. Verify the surety authorized the issuance of the surety bond. Contact the surety directly to receive verification that the surety bond has been duly authorized.
By undertaking this two-step process, contractors, subcontractors and suppliers can avoid the harm caused by unauthorized bonds.

Mark H. McCallum is CEO of the National Association of Surety Bond Producers. For more information, visit www.naspb.org.

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