Surety Liability Under The False Claims Act

• Published date: 29 August 2022
• Subject Matter: Government, Public Sector, Real Estate and Construction, Government Contracts, Procurement & PPP, Construction & Planning
• Law Firm: Seyfarth Shaw LLP
• Author: Mr Edward Arnold

The federal Miller Act requires government construction contracts over $100,000 to be bonded. This process involves insurance companies, known as "sureties," who issue payment or performance bonds to contractors, who in turn furnish the required bonds to the federal government. The bonds guarantee that the contractor will comply with the terms of the contract and perform as required. Although the sureties do not interact directly with the federal government, a recent decision from the US District Court in DC suggests that sureties could face liability where the bonded contractor violates the civil False Claims Act ("FCA"), 31 U.S.C. ' 3729. In Scollick ex rel. United States v. Narula, No. 1:14-CV-01339-RCL, 2022 WL 3020936 (D.D.C. July 29, 2022) the court held, under the facts of that case, that the sureties had no knowledge of the fraud allegedly committed by the bonded contractor, and thus did not violate the FCA. Although the sureties escaped in this instance, this case demonstrates the expansive reach of the FCA and puts the insurance industry on notice that they are not immune from FCA liability.

In Scollick, a qui tam relator ("Relator") filed a lawsuit against thirteen contractors, including various construction entities and the insurers furnishing bonds to those companies, alleging that the defendants violated the FCA by misrepresenting their service-disabled veteran-owned small business status in order to obtain federal contracts set aside for small businesses by the Federal Aviation Administration. SDVOSB set-aside contracts are government contracts specifically set aside for companies owned by service-disabled veterans. To be awarded an SDVOSB set-aside contract, a company must be certified as an SDVOSB.

The FCA applies to those who knowingly submit false or fraudulent claims for payment to the federal government. To this end, the FCA creates liability for any person who, inter alia, "(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; [or] (B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim." Thus, the party alleging an FCA violation must prove: (1) defendant made false statements or engaged in a fraudulent course of conduct; (2) with the requisite knowledge; (3) the statements or conduct were material; and (4) caused the government to pay out money or to forfeit monies due on a "claim."

The Relator filed suit under...