Category Archives: Surety Law

Construction Bonds Come With Strings Attached. Make Sure You Know What They Are.

When serious trouble befalls a bonded contractor, its surety might be called upon to shoulder significant risk both downstream (i.e., payment obligations to subs & suppliers) and upstream (i.e., performance obligations to the owner, if the bonded contractor is prime, or to the prime, if the bonded contractor is a sub).

Yet even when adversity strikes, sureties don’t expect to suffer a loss, as counter-intuitive as that might sound.  That’s a feature of suretyship distinguishing it from insurance (for a handy, 1-page chart summarizing other distinctions, see page 6 of this 18-page surety primer by CNA Surety).

How do bonding companies seek to avoid losses on troubled construction projects?  One of the most significant weapons in the surety’s loss-avoidance arsenal is the “general indemnity agreement” or GIA, an instrument that virtually every surety requires each bonded contractor, the contractor’s owners and the owners’ spouses to sign as a condition of surety credit extension.  The GIA vests in the surety numerous rights and remedies against the corporate and individual indemnitors, which are typically triggered once trouble starts brewing.

Here are some of the key rights enjoyed by sureties under a typical GIA:

1.  The Right to be Reimbursed.  Most GIAs contain a broad indemnification provision requiring the indemnitors to exonerate, hold harmless and indemnify the surety from and against all liability and all loss, including expenses and attorneys’ fees incurred.  That means, for example, if a surety pays a subcontractor’s payment bond claim, it can then demand contractual indemnification from the bonded contractor, not just for what was paid to the sub, but also for all expenses and costs incurred by the surety in so doing.

2.  The Right to Settle Claims.  Most GIAs allow the surety not only to resolve claims brought against the bonds themselves, but also the affirmative claims of the bonded contractor.  That means, for example, if a surety pays a subcontractor’s payment bond claim, and the bonded contractor has claims for extras against the project owner, the surety has a contractual right to resolve those claims on the contractor’s behalf.

3.  Assignment Rights.  Typical GIAs provide the surety with a contingent assignment of its bonded principal’s interest in contract funds on both bonded and unbonded contracts, with the assignment triggered upon the happening of an “Event of Default,” as defined in the instrument.  Most GIAs I’ve come across define “Events of Default” quite broadly, such that the surety is assigned the bonded contractor’s interest in contract proceeds upon the mere receipt of a payment bond claim.

4.  Right to Act as Attorney-in-Fact.  To give full effect to the other provisions mentioned above, most GIAs give the surety the power to execute all documents required to effectuate its rights on behalf of the bonded contractor.  That means, for example, if a bonded contractor obtains a lien judgment against the project owner, the surety can assign that judgment to itself by executing an Assignment of Judgment instrument on behalf of its principal.

Monday MemoCourts will typically enforce these such provisions in the absence of bad faith by the surety, including North Carolina courts.  In that regard, I commend to your reading the N.C. Court of Appeals’ decision in John Wm. Brown Co., Inc. v. State Employees’ Credit Union.  In that case, the bonded contractor, a GC on a bank branch office building, ran into early trouble arising from a significantly delayed notice to proceed and changed work.  Its performance costs increased, but it waited until the end of the project to seek additional compensation from the owner.  In the interim, subs and suppliers asserted claims against the payment bond that were investigated and satisfied by the surety.

Before litigation commenced, the owner offered the GC $100,000 on its claims.  The GC rejected the offer and filed its complaint.  After a year of discovery, the owner renewed its $100,000 offer.  At that point, the surety, relying upon its GIA with the GC and its owners, exercised its rights and accepted the settlement.  The trial court granted the owner’s motion to approve and enforce the settlement agreement, and the GC appealed.  The Court of Appeals held that the owner was entitled to enforcement of the settlement agreement, citing various provisions of the applicable GIA.  It also ruled that if the GC believed the surety acted in bad faith in resolving the claim, the place to raise that issue was in the indemnity action the surety had asserted against the GC and its owners, not in the action asserted against the owner.

Here’s the takeaway:

  • When presented with a GIA for signature, make sure you spend the time to familiarize yourself thoroughly with its provisions.  Each of those terms is likely to be enforced by the courts in the absence of bad faith by the surety.
  • When you acquire claims arising from the acts or omissions of the project owner, assert your time extension and/or change order requests timely.  Otherwise, you might run into cash flow problems and require the surety’s assistance later in the project to bail you out, either by paying subs or financing completion.  That, in turn, is likely to result in a complete loss of control over the claims process against the owner.
  • Make sure to document your claims well throughout the course of a troubled construction project.  Even if your claim rights get assigned to the surety by virtue of the provisions of your GIA, the surety is less likely to settle upstream claims for pennies-on-the-dollar if those claims are well-supported.

As always, be sure to contact an experienced construction attorney to enhance your understanding of the obligations contained in a GIA.

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Filed under Indemnity Rights, Surety Law

Paying Twice For the Same Work is Horrendous. What Can You Do About It in North Carolina?

If you’re a prime contractor on a private, commercial construction project, your contract with the owner likely includes a provision requiring you to bond off or otherwise dispose of real property liens filed by your subs & suppliers.  And if you’re a prime contractor on a bonded public project, the agreement of indemnity between you and your bonding company makes you ultimately responsible for any bond claim the surety might pay.

Either way, you’re exposed to financial loss arising from the lien & bond claims of second-tier and more remote subs & suppliers, even if you faithfully pay your first-tier subs each and every time payment is due.

So what can you do about the risk of double payment in North Carolina?

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Filed under Lien Law, Payment Bonds, Subcontractors

A Trap for 2nd-Tier Miller Act Claimants to Avoid

Wednesday WisdomMost second-tier Miller Act subs and suppliers understand that in order to recover under a prime contractor’s Miller Act payment bond, written notice of the claim must be made to the contractor “within 90 days from the date on which the person did or performed the last of the labor or furnished or supplied the last of the material for which the claim is made.”  40 U.S.C.A. § 3133(b)(2).  With that 90-day rule in mind, consider the following hypothetical:

You’re a second-tier supplier who last furnished materials to a first-tier subcontractor on a Fort Bragg project on December 13, 2013.  Today is the 89th day since your last furnishing, and you still haven’t been paid.  Realizing your claim notice deadline is fast approaching, you send your claim to the prime contractor by certified mail, return receipt requested this morning.  The prime will receive the notice and sign the green card on March 14, the 91st day after your last furnishing.  Was your notice of claim timely?

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Filed under Federal case law, Federal law, policy & news, Payment Bonds, Subcontractors, Surety Law

4th Circuit Stages “The Collateral Battle” Between A Contract Surety & Its Principal’s Trustee in Bankruptcy

stage-233086_640Prelude:

Friends, underwriters, bond claim managers: lend me your eyes, and behold the saga of a surety that accepted collateral security from a financially unstable principal as an inducement for the issuance of new Miller Act performance & payment bonds.  The drama unfolds when the principal files for bankruptcy protection within 90 days of the collateral transfer and the bankruptcy trustee — that most formidable of foes! — seeks to avoid the transfer as preferential.  Fear not, dear readers!  Our hero fights gallantly in In re ESA Environmental Specialists, Inc., and is richly rewarded in this Fourth Circuit Court of Appeals production.

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Filed under Federal case law, Surety Law

Wednesday Word to the Wise: Verify Your Performance & Payment Bonds

Yesterday my Twitter feed delivered a pair of tweets about a rash of fraudulent contract surety bonds in Tennessee:

The owner/obligee got “lucky” in the case of the Regency Hotel demolition project at the Memphis International Airport, in that it discovered the fraud before contract award; that at least provided an opportunity to rebid the contract and award it to a properly bonded prime contract.  Goes without saying that the discovery of a forged or otherwise fraudulent bond during contract performance can be a much messier proposition.

What can owners/obligees do to protect themselves?  Verify your bonds.  How?  I suggest utilizing the resources furnished by the Surety & Fidelity Association of America (@SuretyFidelity) on its “Verify Your Bond” webpage. There you will find information needed to locate a particular bonding company and inquire about the authenticity of a specific bond.  You’ll also find a current list of surety companies participating in the Association’s Bond Authentication Program.

Stay vigilant, owners/obligees.

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Filed under Payment Bonds, Performance Bonds, Surety Law

Top 10 Things to Know About North Carolina’s New Design-Build/Public-Private Partnership Law

This past summer, the N.C. General Assembly passed and Governor McCrory signed into law groundbreaking legislation authorizing the use of design-build, design-build bridging and public-private partnerships in the delivery and financing of public construction projects in the state.  The legislation is sure to alter North Carolina’s public procurement landscape drastically and influence the complexion of the state’s construction industry, particularly at the design and prime contractor levels.

DBP3Last Wednesday, October 23, I attended an excellent panel discussion covering key aspects of House Bill 857 (“HB 857″) sponsored by Carolinas AGC Foundation, AIA North Carolina (@AIA_NC), the Professional Engineers of NC (@ProfEngNC), United Minority Contractors of North Carolina and the American Council of Engineering Companies of North Carolina.  Based on that discussion and my own review and analysis of the legislation, here are my top ten observations:

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Filed under Feature story, Local law, policy & news, Payment Bonds, Project Delivery Systems, Public Bidding, State law, policy & news

Construction Tweets of the Week

Alright, faithful readers, it’s time to launch a new feature here at N.C. Construction Law, Policy & News, a little something I’m christening the “Construction Tweets of the Week.”

The construction industry at all levels — local, state and national — enjoys an increasingly vibrant presence on Twitter.  I aim to showcase some of the voices that left an impression on me in the preceding week, as well as to facilitate ongoing discussion, whether in the Comments section of this blog and/or in the Twitterverse beyond.

You’ll note the tweets embedded here are fully interactive, with hotlinks to each Tweep’s profile, linked content and “Follow” button.  The reply, retweet and “favorite” functions are also fully operational.  Click early, click often, and become a part of the Construction Twitterati.

Without further ado, here are the Construction Tweets of the Week for the week ending Saturday, October 5, 2013:

1.  Dave Simpson of CarolinasAGC blasted out this tweet about six not-to-be-missed, CAGC-sponsored seminars concerning the North Carolina Legislature’s recent adoption of the design-build and public-private partnership (“P3″) project delivery systems for public projects in North Carolina:

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Filed under Mediation, Project Delivery Systems, Surety Law

Who Benefits from Subcontractor Default Insurance? Not Project Owners.

The good folks at Bricker & Eckler, an Ohio law firm, recently blogged about a New York appellate decision concering subcontract default insurance (“SDI”), often referred to as “SubGuard” based on a Zurich SDI product of the same name.  The case involves a private owner who alleged it was misled by its construction manager (presumably at-risk) into believing that the SDI policy the CM had procured from the project’s largest subcontractor provided coverage to the owner in the event of that sub’s default.  Turns out the policy only named the CM, but not the owner, as an insured, and when the owner discovered it had no coverage after the sub’s default, it sued the CM for fraud, among other claims.

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Filed under Construction Risk Management, Performance Bonds, Subcontractors

Seeing the Forest AND the Trees: Handling Contract Surety Claims with an Eye on the Big Picture

A Grim Tale

Image by Larisa Koshkina / PublicDomainPictures.net

Image by Larisa Koshkina / PublicDomainPictures.net

Once upon a time, Best General Contracting, Inc. hired Able Electric Services Co. to perform the $900,000 electrical scope of work on a library project for a local college.  Having not worked with Able before, and in light of the value of the electrical scope, Best required Able to obtain subcontractor performance & payment bonds for Best’s benefit, agreeing, of course, to reimburse Able for the $13,500 bond premium.  As fate would have it, the library project proved one too many for the not-so-able Able, who ran into cash flow problems, sought bankruptcy protection and abandoned the project.  Best immediately fired off a notice of default letter to Superior Surety and hoped that the claims handling process would match previous, positive experiences with subcontractor sureties and culminate in a quick, fairy-tale resolution to this project setback.

To Best’s surprise, it would not.   Continue reading

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Filed under Claims Handling, Performance Bonds, Surety Law

The Surety’s Salvage Efforts: Equitable Subrogation v. Contractual Assignment Rights

It was an honor and pleasure to speak at last week’s surety and fidelity claims conference in Philadelphia hosted by the American Conference Institute.  Mark Oertel, a surety attorney from Los Angeles, and I closed out the conference on Thursday, October 18 with a presentation entitled “The Interplay Between Equitable Subrogation and the General Agreement of Indemnity’s Assignment Clause.”

Our remarks focused on two of the tools sureties use to minimize loss after satisfying claims made under payment and performance bonds.  One of those tools, equitable subrogation, allows the surety to step into the shoes and assert the rights of those entities to whom or on whose behalf the surety has performed or made payment.  That means after it performs its bond obligations, a surety becomes “subrogated” to the owner’s right to apply contract funds to completion costs, to the bond principal’s right to recover against poor-performing and/or late-performing subcontractors, and to the subs’ and suppliers’ rights to payment.  Since the courts have held that the surety’s equitable rights trump the rights of bankruptcy trustees, lenders and taxing authorities, equitable subrogation is undoubtedly the most powerful weapon in the surety’s salvage arsenal.

That’s MOST powerful.  Not ALL powerful.

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Filed under Equitable Subrogation, Indemnity Rights, Payment Bonds, Performance Bonds, Surety Law