This put up is a part of a collection sponsored by IAT Insurance Group.
Disclaimer:
This article shouldn’t be used as authorized recommendation. All events ought to seek the advice of authorized counsel of their alternative and search professional recommendation on authorized and compliance points.
The July 2017 resolution in United States ex rel. Scollick v. Narula[1] (Scollick), decided that sureties and surety brokers may very well be held liable below the False Claims Act (FCA) for bonding a fraudulent put aside contractor. The criticism alleged {that a} bigger contractor arrange a sham firm, supposedly owned and operated by a service-disabled veteran, however truly managed by the bigger contractor to illegally bid on service-disabled veteran-owned small enterprise (SDVOSB) contracts from the federal authorities. Although the 2017 Scollick opinion was determined on the pleading stage and due to this fact didn’t discover any occasion liable, it was the primary resolution to carry {that a} surety might face potential FCA legal responsibility for bonding a fraudulent put aside contractor.
Five years later, on July 29, 2022, all claims in opposition to the surety defendants in Scollick v. Narula[2] had been dismissed on abstract judgment. In the 2022 Scollick opinion, the decide discovered no proof that the surety defendants knew of the SDVOSB necessities or meant to deceive the federal government. Without such proof, the whistleblower couldn’t show that the surety defendants knew or ought to have identified that the bonded contractors’ statements to the federal government had been false as required for FCA legal responsibility.
The decide additionally discovered that the sureties and agent weren’t required to know the federal government rules concerning disabled veteran or different put aside applications as a result of sureties didn’t take part in them, somewhat the contractors did. Because of this, the surety defendants might depend upon the federal government’s certification that the bonded contractors met federal put aside program necessities.
The query is: What does this imply for sureties?
No “Free Pass” for Sureties that Bond Federal Set Aside Contractors
The potential for FCA claims in opposition to sureties is now public data and the problem is not going to go away any time quickly. This latest resolution in favor of the surety defendants is barely the most recent chapter in a collection of ongoing developments. Here’s what you should know.
Is the Scollick resolution ultimate?
No. Since the choice was made on the trial court docket degree, it may very well be overturned on attraction after the case in opposition to the remaining defendants goes to trial. In truth, the whistleblower’s legal professionals already famous that they plan on interesting the choice.[3]
Could sureties nonetheless be sued in related instances?
Yes. The decide’s resolution doesn’t absolve a surety that is aware of the contractor its bonding is defrauding the federal government. So, if the whistleblower had supplied proof that the sureties and the agent knew that the contractors had been mendacity about their {qualifications} to bid on the topic tasks, there would have been a unique final result.
Does it matter who certifies a put aside contractor?
Yes. In the Scollick case, the Veterans Administration licensed that the contractor was a sound SDVOSB contractor, and the court docket discovered that the sureties might depend upon the federal government’s certification. The resolution might have been totally different if a contractor self-certified that it was certified to work on a federal put aside program.
Is the choice binding on different courts?
No. The Scollick resolution isn’t a binding precedent on different federal courts, which suggests it doesn’t should be adopted by different courts.
What can sureties and surety brokers do to guard themselves from potential FCA legal responsibility for bonding a put aside contractor that seems to be fraudulent?
Despite the ruling in Scollick that sureties are usually not obligated to be conversant in the necessities of federal put aside applications, it’s nonetheless beneficial that sureties have sufficient data concerning federal put aside necessities to be alert to “red flags” indicating that the account might not be a sound put aside contractor and keep away from bonding such contractors.
For extra data on the way to defend your self from FCA threat and guarantee compliance with new legal guidelines, rules and different necessities, contact the IAT crew.
For a extra full authorized evaluation, go to this hyperlink.
[1] United States District Court for the District of Columbia “UNITED STATES OF AMERICA, ex. Rel. ANDREW SCOLLICK, Plaintiff-Realtor, v. VIJAY NARULA, et. al., Defendants,” July 31, 2017.
[2] Casetext “Scollick ex. rel. United States v. Narula,” July 29.2022.
[3] Law360 “Insurers Escape FCA Liability For Bonding Construction Co.” July 20, 2022.
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