Surety Bonds provide valuable protection, but it is important to Verify a bond and make sure it is valid. Learn more about how to do this and why you should.
Unfortunately, fraud exists in most businesses including Surety. Having a fraudulent surety bond means that there may be no protection available. It could also mean that a contractor pays for a surety bond that will not be accepted by an Obligee and the contractor may be stuck paying for another bond.
There are both easy and more detailed steps that all entities can take to protect themselves from surety bond fraud.
A corporate surety bond company is an entity licensed in one or more states to conduct the business of surety. These corporations are required to have liquid assets backing their obligations and heavily regulated to make sure they can back up their guarantees and pay their claims.
Individual surety bond companies are individuals who pledge assets as a surety. Although individual sureties can be accepted on Federal projects, these bonds should be avoided. This industry has been historically filled with fraud. In many cases, individual sureties do not have the assets to fulfill their obligations.
Individual Sureties are also not an acceptable surety for most contract requirements. Contractors may not discover this until they have already paid for the bond. It is best to steer clear of these companies.
All corporate surety bond companies that are allowed to do business with the United States Federal Government are listed on the U.S Treasury Department 570 Circular. This is also referred to in the industry as a “T-Listing.” Each company will be listed on the 570 Circular along with the largest bond amount the government will accept from each surety. Most GC contracts also require that a Subcontract Bond be listed on the 570 Circular as well. You can find the listing here.
Most contracts require that a corporate surety bond company have a rating of A- or better by an approved rating service. A very popular service is A.M. Best. A.M. Best rates the surety bond companies by their ability to meet their claims obligations. Even if it is not required by a contract, a contractor should do business with a surety company with an A- rating or better to ensure they are getting a company that will be able to meet their obligation. Most contracts will require the contractor to replace a bond if the surety company goes out of business before the obligation is complete. Although this is not common, it could cause a contractor to pay for a bond twice. You can check a surety bond company’s A.M. Best rating here.
Every valid surety bond must have a seal from the bond company to be valid. In the past, this was an embossed seal on the bond. However, technology has made this more difficult as many surety bond companies now have electronic seals that are completely valid.
Whether a seal is embossed or electronic, the important thing to check is that the company on the seal is also one of the companies listed on the power of attorney that should accompany the bond(s).
A Power of Attorney is a piece of paper that should be attached to every surety bond. In surety a Power of Attorney (POA) gives authority for certain individuals to sign bond on behalf of the surety bond company. Each Power of Attorney also lists the maximum amount those individuals can commit the surety bond company to. It is very common for a Power of Attorney to be “unlimited’.
The important thing to check when verifying a Power of Attorney is that the person signing the bond on behalf of the surety is listed on the POA and that the bond does not exceed the stated limit. Fraud can happen when an unauthorized person gets ahold of a surety bond company’s seal and issues bonds without being on the POA.
One of the best ways to protect against agent fraud is to contact the surety company who issued the bond. They will likely ask the bond number and bond amount. Ask them to verify that the bond is both valid and active. Many surety bond companies allow you to submit this request through their websites to make the process easier.
Contacting the Surety allows somebody to skip the steps of verifying a POA but the Principal or contractor still needs to check the T-Listing and financial rating to make sure the bond company is in compliance.
Verifying a surety bond may seem like a hassle but Contractors, Owners, Lenders and Bond Brokers should all take this process seriously. Surety Bonds are necessary to protect these parties but they do not work when fraud is involved. Contact Axcess anytime with questions or help in verifying your surety bond.