Legal Spotlight

Federal Court--Bond Producers, Surety Companies Can Be Held Liable For Treble Damages Under FCA


Updated as of September 26, 2017
It was just a matter of time. NASBP CEO Mark McCallum has stated for years to the NASBP membership that sureties could potentially have liability under the False Claims Act (FCA). At an NASBP-sponsored Federal Construction Contracting Seminar three years ago, experienced attorneys from the law firm of Peckar & Abramson caused nervous laughter and consternation among the attendees by emphasizing that, given the broad scope of the FCA, it was entirely possible that both sureties AND bond producers could be held liable under the FCA. Those predictions have now come to fruition.

On August 1, 2017, the United States District Court for the District of Columbia ruled that bond producers and surety companies can be held liable under the FCA for issuing bonds to contractors that falsely claim to be Service-Disabled Veteran-Owned Small Businesses (SDVOSBs). Of course, being held liable under the FCA carries with it treble damages awarded for every dollar up to the amount of the bond that the government paid out under each contract. Be sure to read the case, United States ex rel. Scollick v. Narula, Case No.: 14-cv-01339-RCL (D.D.C. July 31, 2017).

Because of the substantial amounts involved, it has become increasingly common for contractors to falsify a certain set-aside status, resulting in various violations of the FCA. Following such violations, it has become increasingly common for the government to prosecute such activity. Plaintiff-relator Andrew Scollick brought this case against numerous defendants for violations of the FCA in connection with a scheme to obtain set-aside government contracts through fraudulent means. Among the defendants are the two surety companies, Hudson Insurance Company (Hudson) and Hanover Insurance Company (Hanover), that provided bonds to the defendants, and a producer agency, Centennial Surety Associates, Inc. (Centennial), and its President, who served as the producer for the bonds.

The plaintiff-relator alleged four FCA causes of action against all the defendants: (1) submitting or causing to be submitted false or fraudulent claims to the United States in violation of 31 U.S.C. § 3729(a)(1)(A) (presentment claims); (2) making or causing to be made or used false statements or records material to false or fraudulent claims in violation of 31 U.S.C. § 3729(a)(1)(B) (false statement claims); (3) knowingly avoiding or decreasing obligations to the United States in violation of 31 U.S.C. § 3729(a)(1)(G) (reverse false claims); and (4) conspiracy to violate the FCA in violation of 31 U.S.C. § 3729(a)(1)(C). The Complaint alleges that Hanover, Hudson, Centennial, and its President knowingly bonded and obtained bonds for dozens of Veteran Administration construction contracts totaling more than $12.5 million with the knowledge that the bonded contractors did not qualify as SDVOSBs. In short, the plaintiff-relator alleged that the two surety companies and the bonding agency and its President knew that the construction companies had falsely claimed to be SDVOSBs and that they furthered the act of fraud by issuing or obtaining issuance of the bonds: but for the bonds being issued by the two sureties through the agents and attorney-in-fact, the fraudulent bid submissions would not have been awarded.

In granting the plaintiff-relator leave to amend his Complaint, the court allows all four claims to proceed against Hudson and Hanover. The court allows Count I (presentment of false claims), Count II (making false statements), and Count IV (conspiracy) to proceed against Centennial Surety Associates and its President, but not Count III (reverse false claims). A reverse false claim occurs when a person knowingly makes a false statement in order to avoid having to pay the government when payment is otherwise due.

This ruling from the highly influential U.S. District Court for the District of Columbia should cause surety companies and bond producers to sit up and take close note. It seems that bond producers and surety companies now have to implement more stringent due diligence to validate the specific small business status claimed by its contractors seeking bonds.

September 26, 2017: 
In the Scollick case, the U.S. District Court for the District of Columbia ruled that False Claims Act allegations may be viable causes of action against surety companies, agencies, and bond producers. The court did not hold that the defendant surety companies, the bonding agency, and the agency President are liable or would be found liable under the False Claims Act. The court did grant the plaintiff-relator leave to amend his claims against the surety companies, bonding agency, and the agency President, which the court had previously dismissed in their entirety. The court granted the plaintiff-relator leave to amend his complaint based upon additional allegations he asserted.

NASBP will continue to monitor this important FCA case and update its membership.

The author of this article is Martha Perkins, General Counsel at NASBP. Martha Perkins can be reached at or 202.686-3700.

This article is provided to NASBP members, affiliates, and associates solely for educational and informational purposes. It is not to be considered the rendering of legal advice in specific cases or to create a lawyer-client relationship. Readers are responsible for obtaining legal advice from their own counsels, and should not act upon any information contained in this article without such advice.