Earlier this year the Memphis-Shelby County Airport Authority was forced to postpone the planned demolition of the Regency Hotel, located on airport grounds. In September, the authority announced that it would rebid the demolition project due to an increasingly common issue faced by contractors and local authorities – bad surety bonds.
The lowest bidder, Nelson Inc, was awarded the $485,000 contract to demolish the hotel, but the bid went out the window after it was found that the surety bond, bearing the name of Chubb Insurance, was bad.
This is not an isolated case – the Associated General Contractors of Tennessee are already calling on the government to be more vigilant, as surety bond fraud is nothing new.
So what went wrong?
When a company bids on a publically funded project, it typically has to submit a surety bond. The bond ensures that even if the contractor goes out of business, the bond issuer will find another contractor to complete the project. Surety bonds are a vital part of many public projects, and they limit the exposure of public entities in case something goes wrong.
This also makes bad surety bonds a very tempting proposition for less than reputable businesses who like to cut corners to secure the contract. The trouble with the Nelson Inc bid was that nobody bothered to check.
Chubb Insurance is listed by the US Treasury as a surety bond issuer and it is unclear what was wrong with the bond. It could have had some technical issues, it might have been altered in some way, or it might have been outright faked. However, this should have been relatively easy to check, and it is unclear how or why the bid was awarded without the proper due diligence.
Individual sureties are not the solution
In a recent interview with Memphis Daily News, Terry Lotz, executive director of the West Tennessee Associated General Contractors branch, pointed out that individual sureties were not a solution - in fact they are part of the problem.
He said that there had been instances of individual sureties simply not being what they appeared to be. When the time came to collect, the assets that were supposed to underwrite the individual sureties just weren’t there.
This is why the association has lobbied for new legislation that would move away from individual sureties.
The new law helps, but…
Thanks to the new state law, contractors, engineers, and architects can check the legitimacy of surety bonds using the US Treasury list even before the bids are opened, let alone awarded.
However, although contractors are doing their homework, public officials aren’t always doing there part. That is what led to the Regency Hotel mess. A contractor or engineering firm would have simply picked up the phone, called the issuer, and checked whether the bond is legitimate, using the bond number. In this case, that simple check was never performed.
What’s more, other states have experienced similar issues with fraudulent surety bonds. Small contractors are paying premiums on them, and they are losing them as the insurance company discovers the fraud and tells contractors the bonds aren’t worth the paper they’re printed on.
The shift away from individual sureties is creating demand for fraudulent surety bonds bearing a legitimate name, and when there’s demand there is bound to be someone willing to provide the service. Therefore, it is vital to get your surety bond directly from an established insurance agency such as Gibson and make sure everything checks out when a contractor, or hopefully a public worker, picks up the phone to check the legitimacy of the bond.
