Yet Another Fraudulent Bond Case – How to Avoid

We blogged a few weeks ago about how to help prevent fraudulent bonds, and yet we have another example of a bogus bond that probably should have been avoided.  From an Arkansas Business newspaper, via the NASBP Smart Brief, an Oklahoma contractor was provided a bond from a bogus surety and unlicensed agent. For the entire story, click HERE. Though the case was recently settled, the unlicensed insurance agent who brokered the bond deal and was indicted on more than 23 counts, starts trial on April 3.  The details of the case seem tangled, but several missteps were clearly taken from a bonding standpoint.  At the end of the day, a contractor seemed to be misled and deceived by a crooked agent and fake surety company.  However, the contractor could and arguably should have avoided this. Let’s discuss some of the missteps or issues that probably should have raised eyebrows:

Contractor posted cash in lieu of a bid bond – On public works projects contractors have the option of posting a cashier’s check or a bid bond. The only time we would recommend posting cash is if the bond company prequalified the contractor, and there was simply not enough time to proivde a bid bond.  We don’t know all the details of this case, but the fact that everything was done last minute, and that the contractor needed to secure a performance bond from an unlicensed contractor and a bogus surety company implies to us that he was not prequalified by a surety company.  He should have never posted the cash to secure the bid.

The Contractor Purchased a Bogus Performance Bond  – Before the City had a chance to reject the bond – which they did – and before the contractor gave $69,000 to a surety company, he should have verified it was a legitimate Treasury listed company.  This link provides a list of all T-listed companies.  Rule of thumb, 99% of carriers have the word “company” in the name.  Regardless, the contractor should check the treasury list, especially if he’s writing a check for $69,000.  

Fee for performance and payment bond should have raised questions – We don’t know the exact contract amount, but the article says it was less than $500,000. Even at $500,000 the cost of the bond would have been 3.8%. While the rate is a possibility, albeit very high, having to pay 3.8% + $50,000 collateral when the contractor apparently had a lot of cash just seems ridiculous.  In the article he states he offered to post $500,000 with the City.  So the contractor had $500,000 cash and couldn’t get a bond from a standard surety? My gut is that the contractor was declined by other legitimate surety companies and/or agents before coming across the unlicensed agent and bogus surety company.

Recommendation? I don’t know many contractors that pick insurance and surety agents based on the recommendation of a mayor, especially the mayor of the city for which the contractor was awarded the project.  If this insurance agent could get things done that others could not, seems like the contractor would have a suspicion that something fishy is going on.  Like grandma says, if it’s too good to be true it probably is. As stated prior, the contractor was likely a victim of deception and fraud from some predatory people, but in hindsight if the contractor simply followed some measures this could have been avoided.