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Attorney: Beware of an emerging legal risk to surety professionals

  

Timothy HeffernanNASBP Attorney Advisory Council participant Timothy Heffernan wants surety bond producers and their construction clients to beware of an emerging legal risk to surety professionals.

“For the first time sureties are the focus of a Department of Justice effort to pursue violations of the False Claims Act,” said Heffernan, who is a Senior Partner with Watt, Tieder, Hoffar, & Fitzgerald, L.L.P.

Heffernan will deliver a presentation on the risks at the 2021 Associated General Contractors of America (AGC) Surety Bonding and Construction Risk Management Conference on June 2-4, 2021, at the Hyatt Regency Coconut Point Resort and Spa in Bonita Springs, Florida.  His session is designed to illuminate the thrust of government oversight of procurement so industry players can decide “what steps to take in order to avoid walking into a problem with the government.”

The in-person only, socially distanced conference will introduce construction contractors, sureties, insurance carriers, bond producers, and insurance brokers to industry risks associated with procurement fraud as described by thought leaders such as Heffernan.

Leah PilconisLeah Pilconis, Associate General Counsel for Construction and Environmental Risk Management for AGC, noted that many of the business sessions on the conference agenda are focused on surety and bonding issues. “NASBP is a valuable partner in helping AGC … cover some of the hot need-to-know topics,” she said. Pilconis explained that industry thought leaders “are going to be talking about the biggest questions on the minds of the people in the audience.’’

Pilconis said the in-person risk conference was moved from its usual January timeframe – when a virtual conference was held – to June because of COVID-19. She said conference attendees will benefit from social interaction during the conference even while engaged in social distancing, and the hotel will follow the Hyatt’s “Global Care & Cleanliness Commitment” to protect conference attendees. Learn more about the conference agenda and registration details at the AGC site.

Heffernan, whose talk will be one of five business sessions that lawyers can use to qualify for continuing legal education credits, pointed to two ongoing lawsuits that implicate sureties and their principals under federal fraud statutes: In United States ex rel. Scollick v. Narula, 2017 WL 3268857 (D.D.C. July 31, 2017), and Hanover Insurance Co. v. United States, 134 Fed. Cl. 51 (2017).

Scollick concerns plaintiff-relator Andrew Scollick, who filed suit on behalf of the United States against government contractors, their sureties, bonding agency, and individual bond producer, alleging a scheme to defraud the government by submitting bids for government construction contracts while fraudulently claiming to have the status of a service-disabled veteran-owned small business.

The case raises an interesting question as to whether a surety owes a duty to the government during the underwriting process, Heffernan said. He notes that contractors that self-certify as disadvantaged small businesses for purposes of receiving preferential treatment under government bidding procedures must understand federal rules for doing so. “But it is less clear that sureties must.”

Until the courts provide more guidance, Heffernan cautions, “what should the surety industry be doing to address this risk, and do they suddenly need to advise their underwriters to all the nuances of SBA’s 8(a), HUBZone, service-disabled veteran-owned, or women-owned small business programs, including how to ask the right questions during the underwriting process?” If the courts determine that the defendant sureties somehow “should have known” that the acts alleged are fraudulent, Heffernan believes there could be major repercussions for the construction industry. 

“To force sureties and bond producers to familiarize and train their workforce on the details of the Federal Acquisition Regulation and SBA rules is likely to either deter certain sureties from bonding set-aside contractors and/or result in a dramatic increase of cost for Miller Act bonds,” Heffernan said.

 The other pending case, Hanover Insurance Co.  v. U.S., concerns an appeal of a default termination at the United States Court of Federal Claims. A government contractor, Lodge Construction, appealed its termination for default and the agency’s denial of its claims. Lodge’s sureties also challenged the agency’s default and claimed entitlement to any funds recovered by Lodge at the Court of Federal Claims. After several years of litigation involving the contractor’s claims and the government’s default termination, the Justice Department upped the ante in 2017 by filing three statutory fraud counterclaims against the contractor and its sureties. The litigation involving the sureties was subsequently transferred to the District of Massachusetts.  

While the Scollick case presents interesting legal issues associated with the underwriting process, the focus of the Hanover case relates to the claims handling process, Heffernan points out. The stakes are high, Heffernan said, because the civil False Claims Act (FCA) allows for treble damages and penalties against violators.

Heffernan said it is too soon to draw any conclusions or provide concrete recommendations to surety professionals about how they should react to the government’s newfound zeal for drawing surety professionals into FCA cases. But he foresees at least two paths for the surety industry in response:

  • Take on the burden of educating itself about the regulatory environment involving Miller Act bonded contracts; and/or
  • Insist on clear written assurances that bonded contractors are compliant with all contractual requirements prior to issuing a Miller Act bond.

Absent a ruling from the court, it is far from clear which, if either, of these paths is the most prudent course. “The issues are still unfolding, but assuring that appropriate steps are taken to avoid a fraud investigation and being adequately prepared in the event one does befall your company is an essential part of doing business today and in the future,” Heffernan said.

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