subscribe to ENR magazine subscribe
contact us
advertise
careers industry jobs
events events
FAQ
Dodge Data & Analytics
ENR Logo
SUBSCRIBE TODAY
& receive immediate web access
comment

A Bold Individual Surety Claims His Coal-Backed Bonds are Rock Solid

Text size: A A
[ Page 1 of 4 ]
Photo by Lundy Bailey
Scarborough has pledged coal waste at this West Virginia tract as the asset backing his bonds.
----- Advertising -----

Special Investigative Report Individual surety has had plenty of shady dealings. One of the regulars in the field, Robert Joe Hanson, has received cease-and-desist orders for insurance-related violations in at least 10 states in as many years. His latest scrape with the law came last year in Montana, where state regulators accused him of selling bogus surety bonds to Native American contractors under a new alias, Chief Joe Blue Eyes.

Created by federal regulations for small contractors as an alternative to more risk-averse corporate sureties, individual sureties are people willing to provide payment and performance bonds—guarantees made in exchange for a premium based on a small percentage of the contract—to small firms that would otherwise fail to qualify for public-works projects.

Corporate sureties and brokers view these individuals with disdain, calling their practices a taint on the industry and citing examples such as Hanson, who has pledged assets of questionable value that may not exist at all. The corporate sureties want to tighten the rules on assets via legislation in a way that would knock most individual sureties out of business—including an antagonist who claims he is providing a service for an underserved market that corporate sureties avoid.

Unlike individual sureties who have stayed in the shadows, Edmund C. Scarborough is the founder and chairman of the U.S. Individual Surety Association. The website of Scarborough's Charlottesville, Va.-based company, IBCS Fidelity, boasts of being capable of providing bonds as high as $50 million, "far surpassing most other sureties," as the website says.

"If you or your clients have been told NO by traditional sureties, try one of our many services," the website proclaims.

A burly former Florida contractor who claims to have written 6,000 to 7,000 bonds for small federal, state and local contractors, Scarborough says he has developed a business with revenue from bond premiums of $5 million to $6 million a year. He says he backs his bonds with about 15 million tons of Kentucky and West Virginia usable coal waste. He also says the bonds are as solid as those provided by A.M. Best-rated insurance companies, such as Travelers and Liberty Mutual.

 

Scarborough has a gift for hitting the corporate surety world, deploying a narrative in which he plays a noble, unbending David struggling valiantly against corporate surety's imposing Goliath—all for the benefit of small and minority contractors.

"We've had hundreds of bonds accepted by the federal government—and hundreds also rejected—and the only common denominator among the rejected bonds is that they were all minority contractors," he says. If Congress adopts the proposed asset rule changes, eliminating coal products and requiring a federal Treasury bond or something similar, corporate sureties would have "won their battle at the expense of the overwhelming majority of small, up-and-coming or independent contractors, who would no longer exist."

In Scarborough's view, the surety playing field tilts steeply to the corporate side. Everything works against the individual surety providers and their clients. For one thing, corporate sureties can leverage the assets backing their bonds, while an individual surety must back them on a dollar-for-dollar basis. Furthermore, in Scarborough's case, corporate sureties nitpick over whether coal is more like a speculative asset (such as antiques) forbidden under federal rules or more like a share of an actively traded stock, which is allowed.

For accounting purposes, corporate surety is covered by detailed rules for risk-based capital; any bond requires a certain amount of risk-based capital behind it. Even accounting rules for sureties are rigged, he claims. "The surety world is the only entity that [generally accepted accounting principles] say you don't have to report the liability on your books because it's a third-party guarantee," says Scarborough. "And they call me a crook."

Scarborough's adversaries may agree with that quote but keep quiet because they fear what they call his litigious streak. Scarborough has kept several lawyers skilled in the art of litigation quite busy.

Does Scarborough deserve a place in a small-business Hall of Fame or in a rogues' gallery with figures such as Robert Joe Hanson? The answer may depend on the value of Scarborough's hard-to-verify coal holdings and his opponents' will to outlast him in court battles.

For eight years, Scarborough has engaged the U.S. government and the corporate surety industry in the judicial equivalent of trench warfare. In 2005, he sued the U.S. Army and the National Association of Surety Bond Producers (NASBP) over their disclosure of information about an Army investigation of individual sureties and possible fraud. Although he and NASBP settled long ago, on Jan. 15 Scarborough filed an amended complaint in his claim against the U.S. Army. The complaint alleges the Army violated the federal Privacy Act in divulging details of Scarborough's business publicly.

A separate matter carried the bond battle from federal court to Capitol Hill. In 2011, surety bond brokers, insurers and major contracting associations threw their support behind H.R. 3534, the Security in Bonding Act, which passed the House of Representatives last year but died in the Senate. It would have tightened asset rules, requiring U.S. Treasury bonds or related debt securities to be placed in escrow and held by the obligee. Rep. Richard Hanna (R-N.Y.) reintroduced the measure this year on Feb. 15. It included an expansion of the Small Business Administration's surety loan guarantees.

Data Lacking at Federal Agencies

In an effort to gauge the impact of individual sureties, ENR sent Freedom of Information Act requests to eight federal agencies to determine how many are in use on federal projects. Most had no data about how often individual surety bonds have been accepted.

Scarborough has never been charged or convicted of a surety-related criminal offense. But state regulators have ordered him not to do business in Iowa and Virginia, and he has been embroiled in numerous lawsuits. Civil court and state regulatory records provide a glimpse into the controversies that have flared over Scarborough's business dealings. As part of its investigation, ENR reviewed thousands of pages of court pleadings, evidence and cease-and-desist orders and interviewed a number of Scarborough's business associates, clients and adversaries.

Under payment and performance surety guarantees, the surety promises to finish work or make payments on behalf of the contractor if the contractor defaults. Scarborough presents a real alternative to corporate sureties that stick to rigorous underwriting designed to avert losses. "I respect the man," says Wayne Frazier, president of the Maryland-Washington Minority Contractors Association. "He is a maverick and tough to deal with, and most successful business people are that way."

Keywords:

[ Page 1 of 4 ]
----- Advertising -----
  Blogs: ENR Staff   Blogs: Other Voices  
Critical Path: ENR's editors and bloggers deliver their insights, opinions, cool-headed analysis and hot-headed rantings
Project Leads/Pulse

Gives readers a glimpse of who is planning and constructing some of the largest projects throughout the U.S. Much information for pulse is derived from McGraw-Hill Construction Dodge.

For more information on a project in Pulse that has a DR#, or for general information on Dodge products and services, please visit our Website at www.dodge.construction.com.

Information is provided on construction projects in following stages in each issue of ENR: Planning, Contracts/Bids/Proposals and Bid/Proposal Dates.

View all Project Leads/Pulse »

 Reader Comments:

Sign in to Comment

To write a comment about this story, please sign in. If this is your first time commenting on this site, you will be required to fill out a brief registration form. Your public username will be the beginning of the email address that you enter into the form (everything before the @ symbol). Other than that, none of the information that you enter will be publically displayed.

We welcome comments from all points of view. Off-topic or abusive comments, however, will be removed at the editors’ discretion.