Don't let it get out of control. Surety Claim investigation
MAKING A SURETY BOND CLAIM
Surety bonds offer critical protection to the construction project owners against contractor default and are essential to any prudent construction risk management strategy.
There will be a process to ascertain the validity of a claim when submitted. The Surety will have to investigate and determine if both the Obligee and Principal met obligations under the contract.
MAKING A CLAIM UNDER A PERFORMANCE BOND
Surety bonds protect construction purchasers and investors against the perils of contractor default. The claim process starts with ensuring the project owners are aware of their obligations under the Bond, the contract and have met their commitment or obligation, and have paid the Surety's Principal promptly according to job completion terms and conditions.
The Surety will commence an investigation to ascertain the claim's validity that both the Obligee and Principal have met their respective obligations when received a claim request.
CONDITIONS MET BEFORE CLAIM
Standard performance bond claim is valid when three conditions of the following are met:
- The owner (Obligee) must declare the bonded contractor (Principal) in default under the contract's terms and conditions in writing.
- The contractor is in default, not meeting obligation on the terms and conditions of the contract.
- The project owner has paid and met their obligations under the contract.
Only with all three conditions above met, four options will be available to the Surety:
OPTIONS AVAILABLE FOR SETTLEMENT
The Surety "fix" the situation and convince the owner to rescind the default declaration, allowing the contractor to continue.
The Surety will provide another contract with the project owner to complete the project under the new terms and conditions.
Arrange for Completion
The Surety will arrange for another contractor to complete the obligations. Under these circumstances, the Surety would arrange a completion contract between the project owner and the defaulted contractor. The Surety will absorb additional costs above the contract amount, if any.
The Surety will pay a lump sum to the project owner, which is either the lesser of the
a) Excess cost to complete or
b) Bond amount.
DOCUMENTS NEEDED FOR CLAIM
The following is typical information/documentation submitted to the Surety when claiming the performance bond. Depending upon the circumstances, the Surety may request additional forms:
- Copy of the agreement with the contractor concerning the job.
- Change orders issued regarding the contract.
- All progress billings and dated payment in connection with the contract.
- Latest summary of project's accounting between the contractor and the project owner.
- Evidence connected with the contract termination or the declaration of default following the contract's terms and conditions.
- Claims for a lien on the project.
- Documents help in confirming the validity of the claim.
- Specific description as how the contractor was declared in default.
WHEN A SURETY DOES NOT RESPOND UNDER A PERFORMANCE BOND?
No declaration of default
The Surety will not respond if there is no declaration of default. Thus, there is no reason or justification for a Surety to act.
When the Surety is not satisfied that contractor is in default
When a contractor and project owner's expectation of contract scope does not meet, should such a situation arise, both parties should resolve with mediators, arbitrators, or the court, the Surety will stay out of this.
When the Obligee has not fulfilled obligations
The Surety will not respond if the project owner or Obligee fails to pay according to the contract.
When the Obligee acted in a way prejudicial to the Surety
The three conditions described above were fulfilled, but the project owner made payments in advance, not according to the contract. the Surety will not respond.
CLAIM UNDER A LABOUR & MATERIAL BOND
The labour and material payment bond protect the Principal's sub-trades and suppliers listed in the Bond. However, some bonds, such as federal forms, may extend coverage to other claimants that are non-listed contractors or not hired directly by the Principal of the bonds.
The Labour and Material Bond is based on the construction contract and its terms. Any terms that are not on the construction contract will not be eligible to claim. Should the subcontract agreement provisioned that payment would be clear only when the project owner made it to the Principal, that condition would continue to apply even if submitted under a bond. The Surety would not proceed until such terms are satisfied.
Always protect your right
- When accepting the job, always request a copy of the bond form and understand its terms.
- A Surety has a claim expiry date. Any claim should comply with the notice periods and file within 120 days of the last day materials or services were supplied.
- Should a defaulting contractor owe money to a claimant on more than one job, ensure each job is bonded, and they need to file separately according to the job.
- A direct contract with the defaulted contractor must exist to claim successfully.
There is a suit limitation on the Bond. It usually expires within a year from the date on which the Principal ceased work under the agreement. These include any work performed under any guarantees or warranties.
Prepare the document before a claim
Supporting documentation is needed to prove any due and are under the contract covered by the payment bond.
Typical documentation submitted to the Surety when claiming the labour and material payment bond:
- Copy of the agreement with the Principal in connection with the project.
- Copies of change orders, if any, concerning the contract.
- Provide copies of all accounting documents such as invoices and statements submitted to the Principal.
- Payments made, including the date and amount of each payment.
- Documentation supporting other amounts which have not been agreed to or authorized in writing under the contract or within a change order.
- Provide declaration on payments to your subcontractors and suppliers.
- Proof of labour or materials were supplied to the project last. (Can be timesheet or delivery slips).
- A copy of the lien claim, if any, has been filed.
- Provide the latest Worker's Compensation Board clearance letter.
- Any other documents which you believe help to establish the validity and quantum of your claim.
Don't let it get out of control. Surety Claim investigation is no fun and could harm your future business. Understand the conditions, call and discuss with us on all your options.