Payment bonds are required on nearly all state and federal construction projects, and are placed on many private projects as well. These bonds insure against non-payment. Typically, a general contractor is required to acquire a payment bond to insulate the owner against non-payment claims down the contracting chain. Payment bonds may also be acquired further down the chain as well (e.g. by subcontractors) to insulate a general contractor from the same risk.
When a payment dispute arises and a payment bond is implicated, certain actions are required by both the claimant and the bonded party. Missteps by either party can be costly and result in unnecessary exposure.
Claimant Party: Filing the Claim and Following Up To Get Paid
For the unpaid party looking to a payment bond for cash, the most critical step is filing the claim. The payment bond is there to protect the claimant, but the claimant must show up and properly make the claim to qualify.
Just as mechanic lien claims are technical and ripe for error, so too can mistakes be made when filing a payment bond claim with the surety. Claimants must navigate the terms of the payment bond, as well as state and federal statutes to make the claim. Occasionally, the direction from these two sources may conflict.
The general rule is that a claimant must follow the state and federal statutes if filing a claim on a state or federal construction project, and that he must usually follow only the payment bond terms if filing a claim on a private project. More information about the friction between state law and bond terms can be found in article: What to do if state law conflicts with the terms of a payment bond?
While filing the payment bond claim is important, following up on the claim is where the rubber meets the road. Most sureties will receive the claim and start a very thorough process of evaluating it. They may give the general contractors a long time to respond, and the claim won’t get paid (or won’t get paid quickly) unless the claimant follows up with the claim representative and promptly responds to document requests.
Bonded Party: What to Do After Receiving a Claim to Protect the Company
General contractors, and sometimes subcontractors, will obtain a payment bond at the request of the party who hired them. In the event of any payment issue or delay, however, a sub-tier contractor or supplier can file a payment bond claim. After receiving a bond claim from a sub-tier contractor or supplier, it is very important to notify the surety immediately.
Some states and bond terms require the claimant to notify the surety, but there is a large number of situations when this is not the case. And accordingly, the bonded party is the only one who receives the claim, and the surety could obtain a defense against paying it if that claim is not passed on to the surety. If the surety can avoid payment, 100 percent of the liability (including potential legal defense costs for the surety) always falls on the bonded party. This fate is easy to avoid. When the claim is received, pass it along.
The next required step is to evaluate the claim and defend it if necessary. If the claim is disputed, communication with the surety will be essential. Bonded parties must communicate clearly with the surety about the dispute and provide backup of the dispute.
Sureties will usually stick by a bonded party’s arguments as long as they are well documented and organized. However, without adequate communication or organization, a surety may be forced to pay a claim regardless of the bonded party’s desire. The result is that the bonded party may have a legitimate dispute with the claimant, but still be forced to reimburse the surety for the claim.
If the claim is an undisputed and legitimate, however, the proper action is to pay it.
Those carrying payment bonds carry a lot of risk. If a claim is received, it’s important to act honestly, clearly, and quickly with the claim. Pass it along to the surety, provide any backup of the dispute, and pay undisputed claims or portions of claims. Otherwise, a company could face more exposure than bargained for.