Arthur J. Gallagher Backpedals on Surprise Individual Surety Offer by New Employee
Two days before Christmas, Arthur J. Gallagher & Co., the world's fourth-biggest insurance broker, announced one of the last of its 31 mergers and acquisitions of 2013: McIntyre Risk Management, a brokerage in Cherry Hill, N.J.
Some time during December—whether it was before or after the acquisition isn't known—McIntyre apparently hired a key player in the world of individual surety, Steven Golia. He had been president of Charlottesville, Va.-based IBCS Fidelity, an arm of Edmund C. Scarborough's controversial surety business.
What happened next turned heads.
On Jan. 30, Golia sent out one of his "Secrets of Bonding" IBCS newsletters announcing that Gallagher McIntyre, the new unit, "is now the MGA," or managing general agent, for Scarborough's individual surety bonds. IBCS, by virtue of the affiliation with Gallagher, now is offering all kinds of new products and services, he wrote.
"You may continue to rely on the fast service and creative underwriting you depend on from Steve Golia when a Scarborough Bond is needed," Golia proclaimed. After several days of confusion, Gallagher and Golia retracted the announcement.
The episode is telling for several reasons.
Created by federal regulations for small contractors as an alternative to more risk-averse corporate sureties, individual sureties are people willing to provide payment and performance bonds to small firms that would otherwise fail to qualify for public-works projects.
The announcement and retraction could simply be a matter of Gallagher not knowing everything about a newly purchased firm. The Itasca, Ill.-based broker declined to comment in depth, and neither Golia nor McIntyre's founder, Anthony McIntyre, returned calls for comment.
More broadly, Golia's newsletter seemed to crystallize Golia's and Scarborough's aspirations to link, when possible, to respected brand names in the industry and inch closer to legitimacy.
On one level, individual sureties often create for themselves names that brim with tradition and status. The sureties also create an aura of respectability by using impressive-sounding securities, such as trust receipts. But the assets backing the bonds, which are required to match contract value on a dollar-for-dollar basis, often are illusory (ENR 2/25/13 p. 22).
Scarborough has no insurance license and has been ordered not to engage in the insurance business in three states. Most recently, Idaho fined Scarborough $15,000 and forbade him from performing insurance work, and Washington state regulators proposed a fine against Scarborough in March.
Scarborough and Golia have defended their surety bonds as complying with state and federal laws and portrayed their business as a champion of small and minority contractors that fail to qualify for bonds backed by corporate, Treasury-listed sureties. Neither has been charged with a surety-related criminal offense.
According to documents attached to lawsuits, however, Scarborough started in individual surety by relying on the balance sheet of two men with long records of surety fraud. Also, Golia in recent years has signed off on Scarborough bonds backed by only claims that there was valuable coal waste on a West Virginia property. Scarborough apparently had no permit to mine and sell the waste, according to public documents.
Among the heads turned by Golia's newsletter were those belonging to Gallagher's top surety executives, who learned that Golia was an employee of the newly acquired McIntyre firm in late January. At the time Golia's email newsletter hit in-boxes, Susan Hecker, Gallagher Construction Service executive vice president, was at an industry conference in Florida. "We don't have all the facts," she told ENR. "He [Golia] is an employee, and an investigation is under way."
As a vice president of the National Association of Surety Bond Producers, Hecker was in a position to know about Scarborough. NASBP and Scarborough battled in court after he filed suit against the association in 2005 for disclosing information about a U.S. Army investigation of individual sureties and possible fraud. Scarborough and NASBP eventually reached a settlement.
In a Feb. 4 reply to ENR, Gallagher said the Golia newsletter had been sent by a "brand new employee" and that individual surety doesn't meet Gallagher's minimum standards. Gallagher McIntyre has not placed a bond with Scarborough since Gallagher acquired McIntyre and won't use individual surety at all, the firm stated. Golia, too, sent out a retraction. He said that his new employer "will not serve" as managing general agent "nor will we represent any individual surety."
Steven Golia, former president of individual surety Edmund C. Scarborough's IBCS Fidelity, announced in his newsletter, "Secrets of Bonding," that Gallagher McIntyre offered individual surety, but the company gradually said it was untrue.
DEC. 23 Arthur J. Gallagher & Co. announces the purchase of McIntyre Risk Management, one of the firm's 31 mergers or acquisitions in 2013.
Jan. 25 Gallagher surety executives learn that Steven Golia, who had been a key member of Edmund C. Scarborough's individual surety business, joined and now is with Gallagher McIntyre.
JAN. 30 Golia announces in an IBCS newsletter that Gallagher McIntyre is the managing general agent for the Scarborough bond program.
JAN. 31 In response to an inquiry from ENR, Gallagher corrects Golia's announcement by saying Gallagher McIntyre will serve as exclusive distributor—but not managing general agent—of Scarborough bonds.
FEB. 4 Reversing itself, Gallagher says that neither Gallagher nor Gallagher McIntyre will place individual surety.
FEB. 5 Golia issues a retraction and apology stating that Gallagher McIntyre will not be managing general agent for the Scarborough bond program "nor will we represent any Individual Surety."