Surety Bond Fraud – Easy to Avoid Yet Continues to Occur

Every so often, a story comes out about fraudulent surety bonds.  Sometimes, it’s the contractor committing fraud by issuing his own unauthorized bonds as was the case of a Northern California contractor in 2010. Click here to read the article Other times it’s an agency issuing bogus bonds from admitted carriers without their knowledge most recently in the south involving larger carrier, Chubb Group Click here to read the article  Sometimes the scheme doesn’t even make sense to people in the construction and surety industry, such as a Florida woman convicted of a Ponzi scheme involving bid bonds. Huh? How she convinced people to give her $2.5 million for a product that is not only free to the contractor, but it is not even an investment product is just crazy. Click here to read article However the tangled web of lies is formulated, a fraudulent bond usually ends with something or someone being hurt financially….and it shouldn’t. Why?

While it’s tragic, most of the time it can be avoided.  The obligee (entity requiring the bond) should do two simple tasks once it receives the bond – verify it’s a treasury listed company AND call the surety company and validate the bond.  If it’s a fraudulent company, it won’t show up on the treasury list.  It it’s a valid bond, the surety company will confirm.

When contractors are the victims, like the example above in which the contractor paid 6% for a bogus bond, these cases can also be avoided most of the time by following grandma’s old golden rule – If it’s too good to be true, it probably is.  Call me a cynic, but anyone paying that much for a bond had to know something wasn’t quite right.  When profit margins are already thin, a contractor that is told the cost of their bond would be 6% should be picking up the phone and getting another consultation.  Best guess: the contractor was turned down by every surety out there before he came across the “saving grace” agent who was able to get the bond written, albeit at a near criminal rate. The contractor should have asked himself, after being declined by so many others, how did this agency get me the bond when others could not?  Not all contractors know the industry standards, but most have been the public works game long enough to know a 6% charge is not the norm.

While some scams are elaborate and unavoidable, most can be recognized by common sense and little due diligence.  If one is still unclear to whether or not a bond is valid or an agent’s rate is legitimate, contact Surety1 or a couple different agents from nasbp.org for a 2^nd and 3^rd opinion.