Help May Be on the Way to Address Surety Problems
|By Shappell, Brian|
Introduced federal legislative efforts designed to reduce fraud and other abuses tied to surety bonds have a real chance to go on the books as soon as the end of summer. Nothing is guaranteed, of course, especially within the partisan divides of the modern
The last few years have seen suppliers and subcontractors more hamstrung since any time in nearly a quarter century because of inadequate or even fraudulent surety bond pledges.
Even when surety bonds are adequately funded and those responsible for regulating them aren't asleep at the wheel, there's the potential for disputes. After all, it is basically a form of insurance and sometimes there's a reason that insurance companies are viewed as being in the business of collecting premiums, not paying out claims. "The automatic response of the surety is often to 'take the claim under advisement,' which is shorthand for 'we hope it will go away,"' said
Brooks also said it is noteworthy that the government has been looking into more cases of fraudulent bonds, and she views the increase in investigation and potetional justice brought to the few bad actors-those who cast an unfair shadow over the majority licensed and operating under good faith-as good for the industry.
Regarding the bad actors, Fullerton suggested the best way to turn around the negative trends in the surety industry is often to remember that public service employees, like individual contracting officers and even lawmakers, answer to the public to some extent. It underscores the importance of contacting the powers that be individually or, better yet, getting involved in group advocacy like that of the
As noted in the NACM Legislative Introduction and Position Brief of 2014 (see pp. 46-51), the Security in Bonding Act would be a welcome step in reducing the risk of nonpayment stemming from problems with surety bonds: "The Security in Bonding Act does a great deal to alleviate the concern by giving subcontractors and materials suppliers the confidence they need to extend credit."
HR 776 co-sponsor
Though a similar effort previously failed to gain traction in the House, a bit of maneuvering by Hannah and co-sponsor
In the Meantime
It is important to remember that bond use should never replace credit standards and due diligence. Overreliance on sureties to save the day is simply not a good, risk-averse practice, even if many act like it is. "Many times, the prime takes the lowest bid and will risk nonperformance in the hope that they will dodge that bullet," Kean said. "Firms that are financially challenged often wind up not paying their vendors, and the result is the vendor has to file a claim."
Even with potential legislative improvements, a little skepticism won't necessarily be a bad thing. Having documentation in order is as critical as looking into issues like licensing or bond content when a worst-case scenario hits and a bond issuer becomes combative. "I think sureties will continue to seek ways to avoid paying out on claims," said
Brooks agreed that documentation is critical, but also added "there are some legitimate reasons to not pay a claim. It could be they didn't submit enough documentation or do it timely. Overall, licensed and regulated sureties pay claims. That's what we do. I don't think you can make a broad-brush statement that sureties don't pay claims. We have data that show we pay a lot."
"You see the same movie every 10 or 20 years, and were certainly on the downward part of that cycle. After a similar recession in 1989-1990, federal projects had a problem with shady sureties. Were back to the same thing again."
"The more credit managers complain and bring light to problems, the more it will tend to cause contracting officers to be more careful. That's what happened in the early 1990s with sureties, and it worked for almost 20 years.''
Read more about sureties in "Public Private Partnerships: Payment Security Concerns" on page 8. Also follow the NACM blog (http://blog.nacm.org) for future developments in construction and credit law.
|Copyright:||(c) 2014 National Association of Credit Management|