We sneak a glimpse into some of the typical surety bond fraud and scams and how you can avoid getting conned by choosing a reputable surety bond provider.
Various types of scams and fraudulent activities have proliferated across different sectors and industries, and the surety bond industry is no different.
Surety bond fraud is not common; however, it tarnishes the reputation that the sector has earned over decades of delivering service and guaranteeing value to the construction industry.
A surety bond is a three-party contract in which the surety promises to answer for the default of an obligation by a contractor.
Principal: The party mainly responsible for fulfilling contractual agreements.
Obligee: The party protected by the surety bond.
Surety: The Bond Company that backs up financial guarantees for the Principal.
On public construction projects, three types of bonds are typically required:
- Bid bond ensures that if the contract is given to the principal, the principal will perform the contract and post the other types of construction bonds: performance and payment bonds.
- Performance bond guarantees to the owner that the contractor will complete the contract in return for payment of the contract price.
- Payment bond requires the principal and surety to pay certain workers and project suppliers for labor and materials provided for the contract.
Although most bonds issued are authentic bonds, contractor or subcontractors should be careful and take steps to assure that the bond will provide the guaranteed protection. It is important to verify that a surety is legit before signing the bond.
How to avoid being a victim of surety bond fraud
Con artists and their fraudulent activities have long posed a challenge for the construction surety bond industry. Surety fraud is extremely damaging to its unsuspecting victims as they are left to suffer significant losses with no effective means of recourse.
Anyone can avoid becoming the victim of surety bond fraud by taking steps to verify the legitimacy of the surety bond company.
The surety companies serve under the direction and legal mandates of state and city laws that consequently and indirectly define the terms of the bond services provided by the company. The surety is the point of contact between the principal and the obligee. The primary job of the surety is to provide general contractors and subcontractors with the most suitable bonds that may be required by their clients (government agencies, regulation departments, etc. long term).
The initial step of selecting a surety bond company includes:
- examination of their credentials
- years of experience in the surety bond and insurance industries
- how they fare when claims are filed
- how they facilitate the underwriting process
It is important that you ask as many questions as are necessary when checking out potential sureties. Being clear about your construction or contract needs in the short-term or long-term view is essential as these will help foresee any financial or legal subtleties that would otherwise go unnoticed. The sureties do the primary assessment of a contractor’s performance - financially and materially to authorize the surety bond. When selecting your surety, it is important to gauge their legal know-how of the surety regulations wherever your projects may be taken.
That said, selecting a safe and suitable bonding company for your surety bond needs eliminates your security hassles. A reputable surety bond company covers you for good so you can better utilize your time and resources and prevent being conned. The surety bond industry remains to be vigilant and has been redoubling its efforts to educate the surety bond market about the dangers that con artists present.
How the surety industry withstands threats from con artists
Over the years, con artists skillfully prey on the construction industry with elaborately constructed documents, clever ruses, and promises of easy surety credit for minimal or otherwise unbondable contractors. They have come to depend on the neglect of project owners to perform any due diligence or to question red flags throughout the documents they receive and review.
Here are some prime examples of surety bond scams that have plagued the industry.
Same surety bond company names
There are cases where the surety on a worthless bond has a very similar name to a well-known, reputable surety bond company. Using the name of an established surety is a persisting red flag in connection with surety bonds. Some of these similarly-named surety companies own websites that should be carefully checked.
Look for the absence of information on the states in which it is authorized to write surety or insurance business, has a Chartered Property Casualty Underwriter (CPCU®) certification, or a U.S. Treasury certificate of authority. The best way is to research over the Internet and explore any background you can find to identify the surety bond company.
Forged surety bonds
The years between the 1970s and 1980s saw a recurring stream of surety bonds that were forged by bond principals who were denied surety credit from traditional sources. They took it upon themselves to obtain bid, performance, and payment bonds by falsifying documents, using legal powers of attorney samples. These bond principals were contractors.
These forged documents became known almost immediately after the unsuspecting authorized surety whose name appeared on the bond received a bond claim notice but found no record of that bond. Public owners suddenly found themselves holding only an irrelevant paper as protection against a failing contractor. Project suppliers were left with large receivables and no recourse to a payment bond or lien rights.
But this type of scam still continues today.
For example, a contractor in Twin Cities is believed to have forged construction bonds to win contracts with state and local governments. According to a Star Tribune article, entitled “Investigation broadens in purported construction bond scam,” indicates that,
“The alleged scam by Gerard Roy of RSI Associates in Prior Lake cost the public, and some of his subcontractors, hundreds of thousands of dollars, a search warrant affidavit claims.
The bond company, CNA Insurance, determined RSI Associates had falsified a signature using a deceased person’s name. CNA alerted the subcontractor as well as law enforcement agents, alleging that Roy, operating under different business names, had submitted fraudulent bond documents to at least four other projects before 2012.”
With these common scams, the surety industry has been making efforts that include comprehensive educational programs and insightful lobbying activities. The National Association of Surety Bond Producers (NASBP) has planned and implemented actionable programs and education in the fight against surety bond fraud. The goal is to make the construction industry and public less vulnerable to scams.