Don’t Be Fooled: Those Who Would Dupe Are Still Very Active, Though Perhaps in Different Guise

Every year I have the privilege of attending and presenting at NASBP Regional Meetings. This year, I traveled to Vancouver, Amelia Island, and Kansas City and provided an overview of NASBP initiatives and actions, including our continuing efforts to advance federal legislature to curb abuses of individual sureties who furnish essentially worthless assets to back bonds on federal construction contracts. NASBP has worked diligently to move this important legislation through three Congresses, with the furthest advancement in the current Congress, where the legislation resides in the National Defense Authorization Act for Fiscal Year 2016 (NDAA), which was passed by both Houses. The NDAA was vetoed by President Obama but a budget deal may mean that the U.S. House of Representatives will have the necessary votes to overide the veto on November 5, preserving our federal legislative priority. NASBP, together with other stakeholder organizations like the American Subcontractors Association and The Surety and Fidelity Association of America, have focused increasing attention on the issue of worthless individual surety bonds. Trade press, most notably, Engineering-News Record, likewise has placed within a spotlight the problematic activities of various individual sureties, showing how such actors skirt regulations but typically face a paucity of enforcement actions, allowing them to continue to pursue strategies to mislead and misdirect vulnerable or less knowledgeable businesses to gain premiums.

I sense, however, that the label of “individual surety” is not as favored as it once was by those engaging in such activities. Perhaps the surety industry has heightened the awareness that the individual surety moniker should invite further scrutiny to ensure that the person possesses the proper authority, e.g., state licensure, to engage in activities as a surety insurer and can deliver on his or her bonding promises. I do not have new empirical evidence leading me to that sense; rather, I simply have noticed fewer reports of individual surety activities coming to my office over the last six months. However, I also sense a shift in nomenclature used by those who wish to proffer suspect bonds and to exploit unwitting businesses and project owners. In the same six month period I have been receiving increasing reports of various entities that purport to be trusts, insurance captives, or limited liability companies that seek to place bonds. Sometimes these entities claim they are licensed businesses. Some, in fact, may have received state licensure to operate as business entities.

But being licensed to operate as a business is not equivalent to being authorized to act as a surety insurer! Only the state insurance commissioner/insurance department makes the determination of whether an entity possesses the necessary qualifications and financial wherewithal to merit a certificate of authority to conduct business as a surety insurer in that jurisdiction. In other words, even if an entity possesses a valid business license in the jurisdiction but does not possess a certificate of authority as an insurer, it is not authorized to conduct surety business in that jurisdiction and is acting as an unauthorized insurer if it attempts to place bonds on private and state and local public contracts. If the entity is not a natural person and seeks to place bonds at the prime level on a federal contract, that entity must be certified by the U.S. Department of the Treasury and listed on Circular 570. It also is worth noting that, in Circular 570, the U.S. Department of the Treasury indicates the states in which each surety company is authorized as an insurer. Bonds placed at the subcontract level on federal contracts are subject to the state law in the jurisdiction of the project, and sureties writing bonds at the subcontract level must be authorized as insurers to write in the jurisdiction.

A few years ago, NASBP issued a one-page document to help surety professionals explain to obligees how to verify the authenticity of a surety bond. This document, entitled “Always Verify Your Bond,” lists an easy, two-step process to help a project owner or a general contractor readily determine if the surety is licensed in the jurisdiction of the project and that the bond has been authorized by that surety. The document may be accessed by clicking here.

Unfortunately, unscrupulous persons wishing to dupe unsuspecting businesses into accepting suspect or worthless bonds demonstrate continued enterprise in reinventing their schemes, requiring surety professionals to keep on their toes to uncover these schemes and to preserve and protect the integrity of the bond product and the industry.  In such times, there simply is no substitute for informing your clients and other stakeholders on how to authenticate the bonds that are presented to them!