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Why Surprise Payment Bond Claims Are Bad for Everyone

Construction industry participants have protections against nonpayment built directly into the laws of every state. While mechanics’ liens are the general remedy for nonpayment on private projects, public property is not lien-able, so an alternate solution is required.

This alternate solution is the payment bond. Every state requires general contractors to provide a payment bond for public projects that meet the state’s minimum threshold requirements. The bond works to provide security against the nonpayment of subcontractors and suppliers in a very similar manner to a mechanics lien. Whereas a mechanics lien provides an interest in the property being improved, a bond claim provides an interest in what amounts to a pool of money set aside for the purpose of ensuring payment. The pool of money that backs this security is provided by a surety, but that’s not the end of the story.

The surety requires the contractor to agree to indemnify it from claims, which means that any claims made against the bond will be paid for by the contractor, as well as any attorney fees incurred by the surety in dealing with the claim. To ensure the contractor will do this, the surety will require the contractor to pledge assets to protect the surety against the risk of the contractor’s default.  The contractor may pledge rights to cash stocks or properties. In the event of a default, the surety can seize these assets without much judicial work and use those assets to pay any claims.

How To File a Bond Claim

Just like mechanics’ liens, bond claims have strict procedural and timing requirements. Interestingly enough, filing a bond claim can actually be more complex than filing a mechanic’s lien claim. That’s because the requirements for which parties must receive a bond claim vary, in stark contrast to mechanics liens, virtually all of which are filed in the county recorder office and served on the property owner.

Filing a bond claim with the county recorder is only required in a few states. More typically, the bond claim is “filed” by sending it to the statutorily required parties and by the correct method. Generally, the prime contractor must be sent the bond claim; in addition, many states require the claim to be sent to the public entity commissioning the work or the surety.

Far from being a generally required party, it is not normally the case for the surety to be required by statute to receive the bond claim–despite the integral part the surety plays in the bond claim process. Parties that do send a copy of the claim to the surety, even when not required, may have a leg up on getting paid.

Don’t Surprise the Surety – Send Notice of the Claim

Contractors have pledged quite a bit to the surety to get the bond in order to secure the project. Because they have so much at stake, general contractors don’t generally like the surety to be involved at the beginning of the claim process, or to find out about it. If the contractor is in financial trouble, the contractor may procrastinate in sending the claim to the surety, or forget about it entirely.

Further, a surety that doesn’t have knowledge of a claim until a lawsuit is filed to enforce it has had no opportunity to provide pressure to get the claim paid prior to litigation. If there’s one thing everybody would like to avoid, it’s dealing with lawyers. Waiting until litigation to notify the surety of the claim slows down the claim process and is expensive and time-consuming.

When informed, the surety will require backup information, including invoices, contracts, correspondence, change orders and other supporting materials. Waiting too long to inform the surety throws a wrench in the works, and may result in enforcement deadlines approaching before the claim has a chance to be resolved. While making a bond claim may not help a relationship with a general contractor, dragging that general contractor into litigation where they likely will be expected to foot not only the legal bill, but that of the surety as well, is definitely not a way to strengthen that relationship.

It makes more sense to ensure the surety knows the claim has been made, and work with both the surety and the general contractor to get the claim resolved prior to litigation. This can’t be done if the surety is surprised by the claim.

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