The Engineering News-Record reported on August 5, 2014 that the largest individual surety business has filed for bankruptcy protection. The surety is Edmund C. Scarborough, which opened its doors in 2003, and led the highly criticized industry for years. This is a devastating blow to the controversial individual surety industry.
Individual sureties were started as an alternative to high risk contractors who could not otherwise get bonding with regulated corporate sureties. The distinctive difference between individual and corporate sureties are how they are regulated. A corporate surety must be admitted in the state that it does business, and subject to the state’s insurance department’s strict financial and regulatory requirements. An individual surety doesn’t necessarily have financial backing, and loosely unregulated. Edmund Scarborough allegedly backed its bonds with coal waste. An example of the ‘loose’ regulations is that of a parcel of land it owned in West Virginia. A consultant valued the land at $191 million because Scarborough had convinced the right person that the land sat on a coal waste and could be mined and sold. The bankruptcy documents listed this same piece of property for $120,000. And it’s total assets were listed at $4.5 million and liabilities of $16.2 million.
Scarborough, in particular, has been a voice and advocate of the individual surety industry for years, and built a team of lobbyists and lawyers over the years. Ironically, some of those same trusted advisers are owed hundreds of thousands dollars, another reaching $1 million, as part of the creditor list in the bankruptcy filings.
Many contractors rely on bid bonds, performance and payment bonds, and sometimes warranty bonds to grow and thrive, especially those in public works. Contractors migrate to a individual surety because they have been declined by corporate sureties based on either financial strength, credit, capability, or a combination of all. It’s easy to see that if a company is willing to bond these same contractors in a loosely regulated fashion, it would often lead to predatory underwriting principles, fraud, and bogus bonds.
To state the obvious – go to a corporate surety professional for your bonds. At Surety 1, along with ALL reputable agencies throughout the country, we would never place a piece of business through an individual surety. The bonds do not suitably protect the obligee, and often lead to fraud and predatory underwriting practices.