Builders and Contractors Exchange
Weekly Bulletin: 25 jan 2008
What Are the Consequences of a Surety Not Responding as Required by a Payment Bond?
The requirement to post payment bonds for complex construction projects is fairly commonplace today, especially on public construction projects. Such bonds ensure that subcontractors and materialmen are paid for work, services, equipment, and materials they provide for the project. Contractors may be familiar with the fact that such bonds often have very strict requirements regarding the timing and contents of a bond claim; failure to adhere to these requirements can invalidate the entire claim. But what happens when the surety similarly fails to meet the bond requirements in responding to a claim?
As an example, the standard AIA Payment Bond form (AIA 312) requires that the surety send an answer to the claimant within 45 days after receipt of the claim, stating the amounts of the claim that are undisputed and the basis for disputing any amounts that are disputed. Despite this language, sureties often respond to a claim merely by (1) requesting a response (including applicable defenses) from the general contractor, and (2) sending a "Proof of Claim" or "Proof of Loss" form to the claimant, with a statement that the surety will investigate the claim upon receipt of the completed form and thereafter respond. Needless to say, these actions do not meet the technical requirements of the bond.
There is a growing trend among courts-with decisions interpreting the AIA 312 Payment Bond handed down in Virginia, Maryland, and Florida-holding that a surety's failure to meet its bond obligations constitutes a waiver of any defenses against the claim. In other words, a surety that fails to satisfy the bond requirements is precluded from challenging the validity of the claim; this allows the claimant to fully recover the claimed amount without having to prove its damages at trial. Pursuant to this trend, sureties are now being held to the same standard as contractor-claimants-they must satisfy the obligations of the bond or lose their right to defend against bond claims. Contractors need to fully understand their payment bond rights and obligations and take sufficient steps to both protect their rights and address their obligations, including consulting an attorney when appropriate.
Questions?
If you have any questions about this article or any other related matters, please contact:
This article is meant to bring awareness to this topic and is not intended to be used as legal advice.