Builders and Contractors Exchange
Weekly Bulletin: 13 june 2008
Surety Enforcement Waiver
Most contractors readily know that certain project owners require the issuance of a construction bond to ensure the completion of a project. In most cases, these projects involve government contracts. In obtaining the necessary bond to enable the contractor to secure the government bid, the contractor can haggle with the surety company for the best deal. In some cases, the best deal also involves the surety company's ability to seek reimbursement against the contractor in case the contractor cannot complete the obtained government contract. In some instances, the contractor has a strong previous relationship with the surety company and can request a homestead exemption in the enforcement provisions of the surety contract. This provision often provides that the surety company cannot enforce any judgment it has against the contractor against the "equity, title or interest" in the contractor's own home. While this provision creates some cushion for the contractor in case things do not work as intended, a simple change to this exemption would provide far greater protection.
In case a surety company does obtain a judgment against its principal, the contractor, the standard provision noted above only prevents the surety company from foreclosing on the contractor's home. In situations, where the contractor has suffered a judgment against it by it surety company, things could be in a horrible financial state for the contractor outside of the judgment problem. In these cases, the contractor may want to scale down his home to make it easier to pay bills and make ends meet. He or she may think that the homestead exemption allows him to transfer the value in his home to a scaled down home. It does not. Without the magic word "proceeds" in the exemption, the money received by the contractor from the sale of his home becomes subject to the surety company's judgment. A simple notice of lien to a closing attorney/agent requires that attorney/agent to deposit the proceeds into court or hold the money for the benefit of the surety company. So, when bargaining for a homestead exemption in your surety contract, make sure that "proceeds" are also included in the exemption.
Questions?
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.