Unregulated Surety Bonds Condemning Construction

Individual surety ship is said to be the Wild West of contract surety bonds; there is little to no regulation on the bonds. When contractors have trouble obtaining bonds from licensed sureties, they turn to “individual sureties” who are not regulated. These individual sureties can ruin a construction project with their unregulated bonds, just like it did with the Korean Seventh-day Adventist Church.

The Korean Seventh-day Adventist Church and Rev. David Sul have hit a roadblock with the construction of their church. The church, which is located in Columbia, MD, was supposed to be up and running by now with 150 members. A contract was signed for the construction of the church and ended just as quickly as it started in 2008. Church officials say this botched job happened because the surety bond that was obtained didn’t fully cover the church project. Since there is no church open for worship, members of the church must occupy a sister church after other congregations in the morning are concluded. The misfortune the church has had in Maryland is an example of why individual surety bonds need more regulation when it comes to these affluent individuals backing smaller contractors who otherwise can’t obtain a bond from a licensed surety company. These wealthy “individual sureties” are pursuing legislation that would enable them to continue to guarantee construction jobs without any regulation involved. These unregulated “sureties” help smaller contractors find work, but is it worth the risks involved?

“This is the only financial transaction that I can think of that is completely unregulated,” says Minor Carter, a lobbyist for Liberty Mutual, one of the regulated, corporate surety companies that wants greater oversight for individual underwriters. “It’s the Wild West.”

The unregulated bonds no doubt help smaller contractors who can’t obtain a bond from a licensed corporate surety company to perform state work, but there are reasons that not all smaller contractors can get a licensed surety bond. Many small contractors are unable to get a bond because of a lack of experience, business financials that don’t meet surety standards, or poor credit; all of these requirements are safeguards to ensure a contractor has the ability to fulfill the contract of a specific job. The argument against regulation on contract bonds declares that increases in regulation will hurt contractors who can’t get bonds from corporate sureties which won’t let them perform state jobs; but in many cases small businesses and entities alike are being hurt because contractors that can’t handle certain workloads are being bonded anyway because of the lack of regulation.

Unregulated contract bonds definitely have their advantages and disadvantages; but the risks involved with the individual sureties more often than not dwarf the upsides. Any state or city that allows unregulated contract bonding, in this case Columbus, Maryland, needs more regulation because construction jobs are often the victim of the lack of supervision in the “Wild West” of construction bonds and projects.