Bond Verification

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The instability of today’s economy holds many repercussions for the construction industry. Contractors have less work and lower cash flow affecting their ability to repay loans and leases. Owners seeking to build are being pushed by those financing the projects to increase the financial security furnished by the contractors to guarantee payment and performance. Sureties that relaxed their underwriting standards during the economic boom of the nineties have now increased their standards and increased prices. This perfect storm might make a general contractor willing to purchase a surety bond from an unlicensed entity. After all the surety bond is not designed to protect the general contractor.

Performance and payment bonds are required on nearly all public projects and are typically required on larger private projects. Where payment bonds are provided on private projects, they may have the effect of barring mechanics' lien claims. Subcontractors and suppliers rely on the validity of these bonds when they submit their bids, but are they confirming that the surety is legitimate before starting work? With the wealth of readily available public information on sureties, owners and subcontractors should not be falling victim to bond fraud. Nevertheless, bond fraud is on the rise. Here are some recommendations for Owners, Subcontractors and Suppliers to verify the validity on the bond and avoid the disaster of relying on a bond that will fail to pay its obligation when a default occurs.

  1. Owners: Obtain copies of the performance and payment bond before executing the contract.
  2. Subcontractors and Suppliers: Obtain a copy of the payment bond before commencing work.
  3. For a project let by the federal government verify the surety is certified by the U.S. Department of the Treasury. This list called the “T-list” is available online at http://www.fms.treas.gov/c570/c570_a-z.html. For projects let by a state or local government, verify the surety is admitted in the State where the project is located. In Pennsylvania, a list of licensed companies can be found at http://www.insurance.state.pa.us/dsf/gfsearch.html. One may also contact the Office of Corporate and Financial Regulation, 1345 Strawberry Square, Harrisburg, Pennsylvania 17120, (717) 787-2735. E-MAIL: ra-in-company@state.pa.us to confirm the status of a surety.
  4. Make sure the name of the surety company is an exact match for the name of the admitted surety company. The National Association of Insurance Commissioners (NAIC) identification numbers can be a useful aid in identifying the surety.
  5. Other sources to confirm the validity of the bonding company include rating organizations. The A.M. Best Company (http://ambest.com) issues ratings for most U.S. insurance companies. Dun & Bradstreet (www.dnb.com) is a financial rating service for both public and private corporations including insurance companies.
  6. Address any concerns regarding the documentation provided or the validity of the surety with your attorney.

Wayne S. Martin, who is part of Reager & Adler’s Litigation Group contributed this article. He holds a B.S. in Civil Engineering from the University of Pittsburgh and a J.D. from the Widener University School of Law. Prior to passing the Bar, Wayne was a licensed Professional Engineer. Wayne’s practice focuses on all aspects of civil litigation, construction law, employment law, zoning and land use, and debt recovery law. He may be reached by calling (717) 763-1383 or via email at WMartin@ReagerAdlerPC.com.

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Harrisburg Magazine Readers' Choice 2011