1. Five Things Every Agent and Underwriter Should Know About the Law
Thomas Duke
Legal Counsel
AmTrust Surety

2. PAYMENT?

3. A PAY–IF–PAID CLAUSE
“Subcontractor…acknowledges that all progress and final payments to it are contingent upon Contractor’s receiving payment from Owner, Subcontractor expressly agreeing to accept the risk that it will not be paid… Subcontractor represents that it relies primarily for payment on the credit and ability to pay of Owner…and…agrees that payment by Owner to Contractor for work performed by Subcontractor shall be a condition precedent to any payment obligation of Contractor to Subcontractor. Subcontractor agrees that the liability of the surety on Contractor’s payment bond…is subject to the same conditions precedent….”

4. STAYING ON SCHEDULE

5. A SUPPLEMENTATION CLAUSE
“In the event Subcontractor defaults, Contractor…has the right…to: …provide supplemental labor, materials and equipment regarding Subcontractor’s scope of work and deduct the entire cost thereof, together with all loss or damage occasioned thereby, from any money then due or thereafter to become due to Subcontractor… Subcontractor acknowledges that it is reasonable to employ a supplemental contractor or allow Contractor to self-perform upon a cost-plus or time and material basis…. In the event Contractor supplements Subcontractor’s work, [Subcontractor is liable for] all costs incurred…plus ten percent (10%) of the actual cost of the work performed…

6. NEW…MAY NOT BE BETTER

7. PRINCIPAL DEFAULT. Whenever the Principal shall be, and is declared by the Obligee to be, in default under the Subcontract, the Surety, not later than ten (10) days after receipt of such notice of default from the Obligee, may remedy the default within such ten-day period… If the Surety does not confirm in writing its intent to complete the Subcontract or obtain a new subcontractor to complete the Subcontract within three (3) days after the passage of the ten (10) day period following the Surety’s receipt of written notice from the Obligee…then the Surety shall be deemed to have waived its right…

8. “Principal and Surety expressly acknowledge that…all provisions relating to consequential, delay or liquidated damages contained in the contract are expressly covered by, incorporated in, and made a part of this Labor and Material Payment Bond. Principal and Surety acknowledge that any such provisions lie within their obligations and within the policy coverage and limitations of this instrument.”

9. TRUST, BUT VERIFY

10. A Sad Story
“Our office…filed your bond claim…with the surety…in the amount of $230,000.  [The surety] has verified receipt of your claim…[but] did file an additional response claiming that most of this claim was date prohibited, as the unpaid pay apps were from We of course expected this…Non-payment by any surety does not mean [you] will not get paid.

12. The False Claims Act, 31 U.S.C. §3729
Any person who –
knowingly presents or causes to be presented a false or fraudulent claim for payment or approval;
knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim;
conspires to commit either of these violations,
“is liable to the United States Government for…not less than $5,000 and not more than $10,000 (for each violation)…plus 3 times the amount of damages which the Government sustains….”

13. Between 2009 and 2016, the Department of Justice (“DOJ”) recovered $31
Between 2009 and 2016, the Department of Justice (“DOJ”) recovered $31.3 billion under the FCA. Recently, Lockheed Martin paid $27.5 million for misrepresenting the job qualifications of some of its employees. Recently, Iron Mountain Companies paid $44.5 million for misrepresenting its commercial sales practices and failing to offer commercial discounts to the government. Last year, Trinity Industries, Inc. (a Texas company) had a $663 million final judgment entered against it.

14. A Scary Story
U. S. ex. rel. Andrew Scollick v. Vijay Narula, et al., (DC Cir., 2016)
Lawsuit alleged conspiracy to defraud the government by falsely claiming SDVOSB status, HUBZone status or section 8(a) status.
The claims against the sureties arose in the underwriting context.
The court found there was insufficient evidence that the sureties:
“envisioned the scheme or pushed the other defendants to enact it.”
“agreed to bond in furtherance of the fraud alleged.”
“continued to do business with the [contractors] upon becoming aware that [they] were submitting false claims.”

15. Questions?