Every contractor who works on a project that requires them to post contract bonds, needs to be well aware of the responsibilities that come with them. There are several different types of contract bonds that can a contractor might have to obtain before starting work on a construction project, and each of them carries its own risk. Read on to learn more about payment bonds and, in particular, how you can avoid payment bond claims, and how to respond if a claim is filed against you.
What Exactly is a Payment Bond?
To understand what a payment bond is, you first need to know what a surety bond is. As with other types of surety bonds, a payment bond protects one party from another with the help of an intermediary called a surety bond company. In this particular case, payment bonds guarantees that the contractor will pay the people that they work with as per the terms of the contract, and in a timely manner. The protection extends to all-first tier subcontractors, suppliers and laborers, who work for the general contractors, as well as second-tier subcontractors, suppliers and laborers that are in direct contact with a first-tier subcontractor. If the general contractor fails to pay on time, the affected side can file a claim against them. If the court finds the claim to be valid, the bonding company that underwrote the payment bond will have to reimburse the plaintiff. Afterwards, however, the general contractor is responsible for reimbursing the surety in full, including its legal expenses.
Why Do I Need to Avoid Payment Bond Claims?
It’s evident that payment bond claims can hurt you financially. As payment bonds are typically required for work on large projects, and since the total bond amounts for payment bond are usually the same as the contract amount, a payment bond claim can be rather costly. If, for example, you posted a payment bond in the amount of $200,000, this means you can be liable for sums up to that amount. But the trouble doesn’t end here. If you are unable to pay the claim on time, this will severely hurt your reputation, and compromise the likelihood that any bonding company would want to grant you contract bonds in the future. So what is it you can do to avoid payment bond claims, and what can you expect in the event of one?
How Can I Avoid Payment Bond Claims?
It’s simple: paying subcontractors, suppliers, and laborers on time is the most important thing you can do to avoid payment bond claims. But since the language used in every payment bond may vary, you need to read it over carefully, and make sure there are no caveats that you can fall victim to. For example, in some cases, the payment bond may guarantee protection in case of lost profits due to a delay caused by the general contractor, while others don’t. The same holds true for cost of transportation. Be sure you know what you are signing in order to steer clear from unexpected payment bond claims.
What Can I Expect From a Payment Bond Claim?
Pursuant to the Miller Act, first-tier claimants do not have to notify you if they are filing a suit against you, whereas second-tier claimants, who are only in contact with a first-tier subcontractor but not with the prime contract, must provide written notice. The deadline for that notice depends on state laws. For example, in Pennsylvania, it is 90 days from the last date when materials, supplies or labor was provided. Written on the notice will be the amount to which the claimant demands compensation.
If you do receive notice of a claim, it is always recommended to try and settle it before it goes to court, especially if you feel the claim is valid and you are going to lose anyway. If the claimant refuses and files the claim anyway, the surety has a certain time period (also depending on state laws) within receiving the notice to decide what to do. They will hear your part of the story and if they feel you can win, they will help you in court. This is why it is important to document every part of the dispute you have with the claimant – the more information the surety and the court have, the better decision they are likely to take.
These are the fundamentals of payment bond claims which you need to know before entering into a surety agreement. As long as you read the text of the bond agreement and pay the people you work with on time, there should be no reason to worry about payment bond claims.
Need to post a payment bond for a construction project or have some more surety bonds related questions? Do not hesitate to call us at 866.450.3412 or contact us via email.