Guest editorial by Scott Wolfe Jr., attorney and publisher of the Construction Lien Blog.
When filing a bond claim, most state laws only require the claimant to file their notice of claim with the prime contractor and/or the public entity commissioning work. It’s then the responsibility of those parties to report the claim to the bonding company. One reason for this is simply because the claimant may not know who the surety is, and therefore, can’t file the claim with them. However, you can request this information, and should.
To qualify for a payment bond, a contractor must apply with the surety, and then to get the payment bond, the contractor must sign certain agreements with the surety. In the application process, the surety is looking at the creditworthiness and solvency of a contractor. A contractor will not be bonded for $5m if they have $20,000 in assets. It just won’t happen. Surety companies are going to issue a bond and take some risk, but they aren’t going to take much risk. Just like a credit card company reviews their cardholders before issuing credit, so too does a surety company do some due diligence on the company they are agreeing to protect.
Once approved, the surety company will require the contractor to sign contracts to acquire the bond. The prime contractor essentially signs away their corporate or private lives to these surety companies. The surety requires the contractor agree to indemnify it from any and all claims, meaning that any claims made against the bond will be paid for by the contractor, and the contractor will also pay any attorney fees incurred by the surety in dealing with the claim.
To ensure the contractor will do this, the surety also requires the contractor to pledge assets to it in the event of a 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. Since contractors have so much pledged to the surety, and such onerous contracts with those companies, they hate it when the surety discovers a claim. Immediately after discovering a claim, the surety sends a formal demand to the contractor requiring they indemnify the surety and resolve the claim, or else.
So, in reality, when contractors receive claims, they frequently procrastinate sending them to the bonding company. If times are tough enough for the contractor, the contractor may never send the claim along, trying to bury their head in the sand and forget about their problems.
It’s a good idea to send the claim directly to the surety so you need not trust that the contractor will do it. Send it to the surety and you turn up the pressure immediately, and you insure that your claim is correctly and timely lodged. The bonding company will force the contractor to assess the claim and pay it if there’s no legitimate dispute, and indemnify the surety, which all equals more expense and results in you getting paid. Read More.