Wednesday, September 24, 2014

Two Types of Fraudulent Bonds

Public agencies regularly require a variety of bonds from contractors including bid bonds, performance bonds, payment bonds, retainage bonds, and warranty bonds.  The bonds are backed by sureties that promise to step in and protect the public agency if a contractor fails to meet their various obligations described in the bond.  If a bond is not legitimate, however, a public agency has no protection.  There are a couple of different scenarios of how fraudulent bonds are issued. 

Fraudulent representation as a surety:  Some individuals have posed as brokers representing bonding companies, issued fraudulent bonds, and collected bond premiums from unsuspecting contractors who then submit the bogus bonds to public agencies.  Last year, a report in Engineering News-Record described how 22 contractors in nine states lost more than $3 million to two men who claimed to be authorized to issue bonds for Chubb subsidiaries Pacific Indemnity Co. and Federal Insurance Co. 

Fraudulent bonds:  Some contractors have used Photoshop and copy machines to dummy up bonds that they then submit to public agencies to comply with bonding requirements for a contract they have been awarded.  Agencies who unwittingly accept such bonds end up with no protection from these bogus bonds, nor has there been any financial review by a surety of the contractor's financial stability.  Click here to read a previous blog posting discussing verifying bonds and referencing a number of forged bond cases.  

Is a bond legitimate?  It is a prudent business practice for public agencies to verify with the bonding company that a bond has been issued.  Bonding companies authorize others, known as an "attorney-in-fact" to obligate the surety.  The attorney-in-fact must, however, report to the surety when they have issued a bond.
  • Research the surety's phone number:  Independently research the surety's phone number.  Do not rely on a phone number that may be on the bond.
  • Call the surety:  Call the surety to verify the legitimacy of the bond.  
  • Verify for all or some contractors:  Some public agencies do not verify bonds for well-known contractors they have done business with for years, and that pose a low risk.  However, researching the legitimacy of a bond for a new or unknown contractor is a good idea.
Mike Purdy's Public Contracting Blog
© 2014 by Michael E. Purdy Associates, LLC


Rob Pitkin said...

Mike, thanks for sharing this post. I have also run into situations where individuals served as sureties (accepted by the contracting agency), but they were fraudulent as well.

Mike Purdy said...

Not many agencies will permit an individual to serve as the surety as there are significantly more risks associated with that approach.