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Individual Surety: A Checkered History

Edmund Scarborough, who is well-known as an individual surety, filed for bankruptcy in the United States Bankruptcy Court for the Middle District of Florida on July 17. Scarborough listed assets of $4.5 million and liabilities of $16.2 million.

His company, IBCS Mining Inc., also filed for bankruptcy in the Western Court of Virginia July 11. The filing is at least the third bankruptcy filing for Scarborough. He filed for bankruptcy in 2001 after two employees of his construction company, Scarborough Civil Inc., were killed in a trenching accident, and in 2008 in the Middle District of Florida U.S. Bankruptcy Court.

Scarborough’s bonds were allegedly backed by coal mining assets in Kentucky and West Virginia. In May 2014, the U.S. District Court for the Western District of Virginia found that American Demolition and Nuclear Decommissioning, Inc. (ADND) was entitled to recover its $138,005 premium for a surety bond issued by Scarborough and The IBCS Group, Inc. after the contracting officer for the U.S. Department of Energy nuclear facility in South Carolina rejected ADND’s performance and payment bonds from Scarborough for not being in compliance with the Federal Acquisition Regulations (FAR). After ADND provided a bond from a surety listed on the Department of Treasury Circular 570 (T-List), that bond was accepted and ADND sued Scarborough. The court concluded that “ADND suffered a loss as a result of the deceptive and misleading statements contained in the marketing brochure,” ADND’s belief thatthe bond was backed by acceptable assets, and “that the premium would be refunded in the event that the bond was promptly rejected by the contracting officer.” The court continued: “Virginia’s false advertising statute makes it unlawful for any person, firm, corporation or association to publish, disseminate or place before the public a written ‘advertisement of any sort’ that contains ‘any promise, assertion, representation or statement of fact which is untrue, deceptive or misleading,’ if the advertisement is made with the ‘intent to sell’ or ‘to induce the public’ to enter into an obligation.”

State Cease and Desist Orders and Actions

State of Washington Office of the Insurance Commissioner issued a cease and desist order in March 2013 to Scarborough for “engaging in or transacting the unauthorized business of insurance or acting as an unregistered surety provider in the state of Washington; and soliciting, selling or negotiating any insurance, including sureties, issued or to be issued by an unauthorized insurer.” The order cited that Scarborough nor the IBCS Group were licensed as an insurance producer, surplus lines broker or surety insurer in Washington. Scarborough acted as surety on a performance bond for the city of Clarkston, Wash.

In February 2011, Commonwealth of Virginia State Corporation Commission ordered Scarborough not to deliver bonds in Virginia and fined him $20,000 for failing to “obtain a license from the commission to transact that class of [surety] insurance.”

State of Iowa Insurance Commissioner issued a cease and desist order in July 2011, citing that Scarborough and the IBCS Group did not have the authority as an insurance company or producer to issue surety bonds in Iowa.

In 2006, the Maryland General Assembly allowed state procurement officers to accept bonds provided by individual sureties. That regulation sunsets next month. In a November 2013 Final Report on the Analysis of the Practices of Corporate Sureties and Individual Sureties in Maryland, the Maryland Insurance Administration noted that “at least 14 state insurance regulatory agencies have taken 26 administrative actions sanctioning 12 individual sureties for acting as an insurer without first obtaining a certificate of authority.” All 12 of the sanctioned individual sureties have engaged in fraudulent or misleading conduct, such as:

  1. creating the illusion of a corporate form, which could mislead the public into believing that the same safeguards in place for corporate sureties exist as to the individual surety (e.g., regulatory financial oversight, rate approval and, in some cases, the backing of the state’s guaranty fund;
  2. inflating the valuation of property pledged;
  3. pledging the same collateral; or
  4. misrepresenting other information as part of the bond submission.

A chart of Sanctions and Other Actions Entered Against Corporate Sureties and Individual Sureties for Issuing Surety Bonds or Contracts of Surety Insurance is on page 17-18 of the report, which notes Scarborough’s cease and desist orders in Iowa, Virginia and Washington.

According to Justia Dockets & Filings, Scarborough has been a defendant or plaintiff in 42 cases in California, District of Columbia, Florida, Kentucky, Michigan, Nevada, New Jersey, North Carolina, Texas, Virginia and West Virginia.

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