NASBP advises contractors to be sure they've taken the necessary steps to verify the authenticity of a surety bond. Not doing so could have wide-ranging consequences that could affect subcontractors, suppliers and project owners, putting construction projects in jeopardy.
A contractor will not be awarded a contract if a private owner or contracting officer is aware that the bond is unauthorized or invalid, amounting to a lost business opportunity, says NASBP General Counsel Martha Perkins.
“For future projects, that governmental entity receiving an invalid bond may give that contractor a very unsatisfactory past performance evaluation,” which will affect the contractor's ability to win future contracts, she says.
A contracting officer can request a replacement bond if a bond is accepted and later discovered to be invalid, although it's not always possible to obtain a new bond in such circumstances, Perkins says.
While subcontractors and suppliers on private projects might have lien rights, those working on public works projects are at greater risk when a bond is invalid. If a prime contractor doesn't pay subcontractors, the result is that subcontractors “may go without payment completely” because the payment bond, their sole remedy, is worthless, Perkins says.
The problems can extend even further. “If the prime contractor defaults and the owner makes a claim on the performance bond, there could well be no performance guarantee, which means the taxpayer is going to be paying more for a project because the public owner will have no remedy,” she says.
NASBP has identified a two-step process for verifying a bond's authenticity, outlined in a document available on
NASBP's website.
1.
First, make sure the surety has a certificate of authority from the appropriate state insurance commissioner and that it is admitted in the project's jurisdiction. A map with contact information for state insurance departments is available at the
National Association of Insurance Commissioners' website. In addition,
Treasury Department Circular 570, also known as the T-list, provides contact information for sureties and shows the states in which they are licensed to operate.
2.
Second, verify that a surety authorized a bond's issuance. This is necessary even if a firm has done business with the surety in the past. Some entities will assume a surety's name and issue invalid bonds, while others will use a name similar to that of a well-regarded surety in hopes of creating confusion among contractors seeking bonding, Perkins said. Contractors should contact their surety directly to be certain that a bond was duly authorized. They can reach a surety using the
T-list or the
Surety & Fidelity Association of America Bond Obligee Guide.
There are differences between federal contracting and state insurance laws that largely require sureties, both corporate and individual, to have certificates of authority to issue bonds, Perkins says. Federal contracting officers have the discretion to accept a bond if it is backed by cash, the cash equivalent to the amount of the bond in escrow or a deed of trust on real property sufficient to secure the bond, she says.
Individual sureties, however, are largely unregulated, “so trying to determine their ability to act as sureties is very difficult at best,” Perkins says.
“From NASBP's perspective, the best approach is to make sure any surety is duly licensed by the state insurance department in the jurisdiction of the project before accepting a bond from that surety,” she says.