SUBMITTING THE PAYMENT BOND CLAIM TO THE SURETY 
(Revised September, 2011)
By Attorney Jonathan Sauer

Introduction
           
            Assuming there is sufficient time within which to do so (e.g. before the statute of limitations expires),  a subcontractor/materialman can often further its own cause  by contacting the bonding company itself and submitting its own claim.   The purpose of this article is to provide in detail some ideas on how to do this.   Additionally, two forms are attached.  The first is a sample letter to the bonding company indicating how it should be set up and what should be included with the letter.  The second is a ‘third party verification form’, discussed in this article. 

Getting a copy of the payment bond

            Initially, if you are thinking of making a claim against a bonded principal on any bond other than the general contractor's payment bond on a Massachusetts or Federal project (the terms of which bonds are set forth by statute), the first thing to do is get a copy of that bond.   Try not to  ask the principal (the bonded contractor)  for   a  copy  of  his own bond.  That  is a good way to get issued a rash of backcharges or  a  termination letter!   Always ask the obligee (the person holding the bond and to whom the bond runs) for a copy of the bond.  Therefore, to get a copy of a subcontractor's payment bond, ask the general contractor.  To get a copy of the general contractor's payment bond, ask the owner, the owner’s project manager (or, in some circumstances, the architect).

            In some circumstances, you may not be able to obtain a copy of a bond either as quickly as you would like or at all.   Here’s a tip.   If  you know or suspect that there is a general contractor’s bond on a private project and the owner balks at giving you a copy of the bond, tell him that you are left with no other choice than filing a mechanic’s lien.   This often helps.  

Three things to understand with regard  to the payment bond

            Although payment bonds tend to have a lot of arcane language in them,  there are three things to look for in looking at any particular payment bond.     

First, what is the statute of limitations contained in that bond?   (This is the period of time within which you have to bring suit to perfect your rights.)   Keep in mind that most bonds are only actionable (you can only sue them) for a period of not more than one year.  The 'one year' is figured two different ways.  The more restrictive way (for claimants) is one year from the date the claimant last performed labor, supplied materials or furnished services for which claim is being made.    This is,  essentially,  the standard for suit against a general contractor's payment bond on Massachusetts public and Federal general contractors' bonds.   Some common law  bonds (non-statutorily required or provided for) figure the one year period from the date the principal  (the bonded party) last worked.   An older form of payment bond – the AIA A311 – so provides.   This is, obviously, a more liberal standard to a claimant inasmuch as in almost every circumstance, your contracting party will be at the job for a longer period of time than you will.
  
Secondly, are there any "notice" provisions as to parties to whom you must give notice to protect (and perfect) your claim?   Notice provisions typically apply to those who do not have a direct contract with the bonded principal.  Thus, as involves a general contractor's payment bond, frequently, a subcontractor would not have to give notice to a general contractor for a claim against a general contractor's bond while the subcontractor's subcontractors (so-called 'second tier' subcontractors) and material suppliers would.     Various bond forms – AIA A312 – call for notice to someone prior to bringing suit.    And, the chance of there being a notice requirement is more likely with regard to ‘common law’ payment bonds, which means payment bonds not submitted to comply with some statutory requirement.   Common law bonds would include all payment bonds executed with regard to private work and some subcontractor payment bonds on public work and all subcontractor bonds on private work.

            The third provision to be concerned with does not apply at this point in time:  namely, is there any specific 'venue' provision, which provides where suit against the bond has to be brought.     (Your knowledgeable lawyer will attend to that one.)

            If you do not have a copy of the bond, you should assume the more restrictive limitations period.  As a practical matter, I have seen many payment bonds with a provision for suit only within a period of six months, although this does not represent the norm and I haven’t seen this lately.  There really is no substitute for getting a copy of the bond and seeing what the provisions of the bond you are interested in are.   This is especially so for common law bonds.    And, if you don’t have a copy of the general contractor’s bond and are, as to the general contractor, a second tier material man or subcontractor (your contract is with a subcontractor and not with the general contractor),  assume that there is a notice requirement and provide written notice to the general contractor in hand (meaning the date the general contractor receives the notice, not the day you send it) no later than sixty days after you have supplied the last of the labor and materials for which claim is or will be made.  Giving such notice within forty-five days would be even better.   (For public work,  for second tier materialmen and subcontractors, the requirement is for sixty-five day notice (Massachusetts public work) and ninety day notice (federal projects)).   You need to have that document in the general contractor’s hands by then, meaning that the general contractor has actually received your notice letter within that time period.     Most of the time, you will need to prove “actual notice” to the general contractor, which means some form of mail requiring a receipt or delivery by a disinterested third party, such as a constable.    (Practice tip:   if you are within the last couple of weeks of your notice period, consider using a constable.  Typically, they can serve a copy of that letter the next day and provide you with an ‘officer’s return’, which is generally sufficient.)   Also, since some general contractors have a pretty good idea what might be inside of your certified letter, keep a good eye on how long your certified mail is out there.   If you don’t have a green card within one week to ten days from when you sent the letter,  chances are that you won’t be receiving one, as the general contractor will not be accepting that letter.

 

What’s the point in writing to the surety company?

            Why should one write the bonding company at all?   After all,  you generally will only be entitled to interest on your claim at the pre-judgment rate of 1% per month simple interest (12% per year) only from the date  you file suit.   And, with   the  exception  of  claims against the general contractor's payment bond for Massachusetts public work, you will not be entitled to recover attorneys' fees as part of your recovery.  (This is because Massachusetts follows the so-called “American Rule”, which provides that parties to litigation bear their own legal costs in  a case unless the contract at issue specifically provides for attorneys’ fees as part of the award or one is suing under a statute that provides attorneys’ fees as part of the award to the prevailing party.   

All that being said, claims for small amounts of money (five to ten  thousand dollars) are often uneconomical for a  lawyer  to handle for very long,  particularly at the claim level.
Moreover, sometimes more responsible companies will try to settle some payment bond claims at the claim level, if for no other reason than to save the expense of shipping the defense of a claim out to an attorney.    In my experience, I wouldn’t think that this happens  more than twenty per cent of the time and that’s using a lawyer’s letter as the notice to the bonding company.   Insurance companies do tend to be very expense conscious.  (Payments to claimants are called “loss payments” and payments to consultants, attorneys and accountants assisting in the claims process are called “expense payments”.   Since the losses will be what they will be, insurance companies try to manage those expenditures over which they have some control, which are the expense payments.)    So, the first reason to write an insurance company would be in the hopes of getting paid as a claim,  saving you the expense and delays of litigation.

            The second reason for writing an insurance company is that even if your claim doesn’t settle ‘as a claim’ – no payment is made at the claim level – by your properly submitting a payment bond claim with substantiating documentation at the claim level, the insurance company begins getting comfortable with the claim and is in a better position to establish a reserve for that claim, which is usually necessary before the claim can be paid.    Since educating the surety concerning your claim is necessary whether it is a claim or a litigation, getting some of this done before the case gets filed may save time and  work after the case gets filed.   For example, if the bonding company doesn’t know anything about the claim, its counsel is more likely to serve you with interrogatories (written questions that have to be answered under oath) and document requests, which have to be responded to.   A well-documented payment bond claim could lessen the possibility of the surety wanting to depose you (asking you questions under oath in front of a stenographer).   Avoiding these steps saves both time and money.

How does one determine where the letter should be sent?

            Where do you get information about insurance companies - their addresses and contact information?   For one thing, there is nothing to be gained by sending your claim letter to the insurance agent who signed the bond.   He or she is generally an independent contractor and not an actual surety employee.   Also, he or she is in “sales” and with your payment problem, you need someone in “service” (the claims department).  

There is good information from the United States Treasury,  which is the Circular 570,  which lists addresses,  telephone numbers and certain financial information regarding all sureties acceptable to the federal government on federal jobs.  This circular used to come out once a year on July 1, issued by the Department of the Treasury on paper.  It is now only issued on their website, which address is http://www.fms.treas.gov/c570/c570.html.      This list is sometimes called “the Treasury List” or “the T-List”.   Included in the information provided is an identification of the largest single bond each company is authorized to write.  This lets you know which companies are smaller companies and which companies are larger companies.  My experience is that larger companies do a better job at handling and evaluating payment bond claims than do smaller companies.   

Various states, including Massachusetts, keep lists of sureties acceptable to that individual state and/or registered to execute surety bonds in that individual state.   In Massachusetts, this list can be found at www.mass.gov/?pageID=ocaterminal&L=5&L0=Home&L1=Licensee&L2=Lic.   If this reference appears too complicated for your URL skills, simply type into your browser “Massachusetts list of admitted insurers” and you will get the reference.

Very occasionally, you might find that your surety company is not registered with the federal government or is not registered with the State of Massachusetts for a Massachusetts job.  In that case, get legal counsel immediately.   

Know which bond you are making a claim against

            Keep in mind that if you as a supplier or subcontractor is seeking to get paid, almost always the only bond which could/would respond to such a claim is the “payment bond” or “labor and materials bond”.    The performance bond usually only addresses claims by the obligee of the bond to get a job completed.    It does not ordinarily respond to payment bond claims.    In certain circumstances – a private job – there might be a lien bond available to make a claim against.   Coverage under a lien bond is similar but not identical to the coverage of a payment bond.   In a lien bond situation, one will have to comply with various provisions of the mechanic’s lien law, which is beyond the scope of this article.   (Practice tip:   If you are a second tier material supplier or subcontractor – i.e. your contract is with a subcontractor – be mindful of the fact that there could be a subcontractor’s payment bond available in addition to the general contractor’s payment bond.   This can be particularly useful in situations where you may have missed the notice requirement as to the general contractor’s payment bond.)
 
Understanding the insurance company environment

            Initially, one has to understand what an insurance company environment is like.  Generally speaking, a surety company which has an office in Massachusetts probably has an involvement one way or another - whether in claims or in underwriting or both - with dozens or hundreds of principals.  An insurance company which has only regional offices -- such as, for example, one office in New England -- probably deals at any one time with several hundred or even thousands of  principals.   An insurance company which has a single national claims office, which is not all that uncommon (e.g. CNA), could be involved with tens of thousands of principals, whether in claims or in underwriting or both.   Moreover, each principal may have outstanding at any given time  bonds on  several different projects.    This is made all the more complicated in that for some of the jobs the principal has, they will be bonded while for other jobs the principal has, the principal will not be bonded.   Sureties have legitimate concerns that some claimants try to file claims against bonded projects when they supplied labor and/or materials for unbounded projects. 

            Much as an army travels on its stomach, an insurance company travels on its files.  Therefore, it is extremely important that your claim letter has  certain things in it.    For  one  thing, before sending the letter, attempt to find out what individual will be handling your claim at the surety company.  This can be as simple as calling up the  claims  department  and  asking who handles (or will handle) claim matters pertaining to Last Chance Construction Company.    Many times, the receptionist will have in front of him/her a computer screen listing that information.    Although the claims manager may be startled to hear that there are claims against Last Chance Construction Company, identifying a specific person to whom to send your letter is critical.  In every instance, your letter should be sent to a specific named  individual.   If you cannot identify which claims representative has the file or will have the file, then at least identify what individual is the bond claims manager for the particular branch you will be dealing with and address that letter to the bond claims manager.   People who simply send a letter addressed to the insurance company at its address are not likely to have their letter go to the right department.   And, even sending a letter to the claims department – but not to someone specific – means that when you call up in 30 or 60 days to find out what is happening with your claim, there is no one person you can hold responsible for having done something (or not done something) with your claim materials.

It is not necessary to send  correspondence certified mail, return receipt requested.   Insurance companies, by my experience, don’t lose much correspondence unless the correspondence is not addressed to a specific person or if the correspondence does not sufficiently identify the project or  principal or bond.   If you are close to the limits of a notice period, you might use certified mail in that situation so that you can get a specific, provable date that the insurance company received your letter.

What should be contained in your claim letter?

            A sample letter to a bonding company is attached hereto at the end of this article.   Yours should look something like this one in terms of covering the elements that this letter covers.

            After addressing your letter to a specific named individual, in the "re" of your letter you should identify who the principal is.   The ‘principal’ is the surety equivalent of ‘the insured’ in an insurance situation.   (Surety bonds are not, strictly speaking, an insurance product.)   Against which of that insurance company's clients are you making a claim?  Also, identify in the “re” the  project  you  are  making  a  claim relative to.  If possible,  and if you have had the good fortune of obtaining a copy of the payment bond, attempt to identify the bond number.  Many insurance companies use the bond number as the file number for claim files: at least, initially.   Also, in the “re” of your letter, identify the claimant, which is your company's name.   You might also identify in the “re” who the obligee is.  The ‘obligee’ is the party to whom the bond runs, which would be the owner (for a general contractor’s bond) and the general contractor (for a subcontractor’s bond.)

            In the body of the letter, you want to educate a person who doesn't know anything about you or your unfulfilled relationship with the principal as to that relationship and your current situation.  You should send a copy of your contract with the principal and copies of various billings,  ledger cards, statements, prior correspondence, change order documents, extra work materials,  emails, requests  for  payment (including demands for direct payment and any responses to them) and other documents which in the aggregate establish two things: (1) that you have a contract with the principal for the bonded project;  (2) what precisely is the amount of your claim and its elements and that you have previously sought payment from the principal to no avail.     As a practical matter, sending them as much as you have in the way of documentation - e.g. delivery tickets for sand, gravel, concrete claims - may shorten the process somewhat.    Bonding companies, for a lot of reasons, tend to  keep the claims process going longer than might be necessary and have tendencies to send you letters asking for this piece of paper or that piece of paper.    Giving them everything up front tends to keep this to a minimum.  I would not generally include submittals or scheduling documents unless your claim involves a submittal or scheduling issue.    Sending them evidence that the punch list is completed can be useful.   Sending them pictures of your work in place certainly will not hurt.    If you have a computer accounting system that kicks out statements, my sense is that these are well-received by bonding companies as people generally view computer reports as ‘official’.  

            Sending them a ‘third party verification’ letter can be especially helpful.   Namely, try to get someone with no direct interest in your claim – such as the architect, the owner or the owner’s project manager in the case of a subcontractor’s claim – and get them to issue a letter on letterhead stating that you have done your job, all work appears satisfactory and in compliance with the specifications and all punch list work is done.  If you can develop information that the general has requisitioned for your work, this is helpful in that the general’s requisitioning for your work is the general’s representation to the owner  - often as a sworn statement - that your work has been done to the percentage complete of the requisition.   If you can develop that the general has been paid for your work, better yet!   For, if he has been paid for your work, he can’t argue things such as a ‘pay-when-paid’ clause. 

            Generally speaking, on Massachusetts public work, there is a requirement that a general contractor pay its subcontractors ‘forthwith’ after its receipt of monies for their trades.   This is a statutory requirement.    There is no clear definition of what is ‘forthwith’ but a common definition is ‘immediately’ and I would think that this would be no later than seven days, in the ordinary course.

            If  at all possible, send the bonding company a copy of its own payment bond!  This may sound ridiculous but it really isn’t.  Underwriters (those who write bonds) often do not communicate well with claims, particularly during the early stages of a principal’s “going into claim.”  (There can be a certain amount of denial by underwriting that a principal is in trouble.)  Underwriting and claims are separate departments and have distinctly different attitudes and approaches to payment bond claims.  Also, most companies use outside insurance agents,  who are not employees of the company,  to write some or all of a company's surety bonds.  While, generally, these agents are supposed to promptly report the execution of bonds to the insurance company, under various circumstances this reporting can be delayed.  It always helps the claims person to give him or her a copy of the bond against which you are making claim.     This also tends to demonstrate to the claims person that you are reasonably savvy and know what you are doing.   That recognition could increase your chances of getting paid as a claimant, rather than as a plaintiff.   

              Since the claims person is going to attempt to verify every single thing that you say in your letter by writing to the principal, showing the principal as a carbon copy on your letter and sending the principal a carbon copy of your letter with  all  enclosures accomplishes or at least makes progress towards three  goals.  For one thing, you are going to save the insurance company a little time in that the surety company does not have to write to its principal: this is not necessary, as you have already written the principal.  (They will do it any way but at least they can’t claim that they had to or needed extra time in the evaluation of your claim because they had to send copies of your letter to their principal.)   Secondly, by writing the principal at an early  stage of a claim, that principal,  particularly a viable (still in business and with some ability to pay) principal, may realize that he has to deal with you and quickly.  Let’s face it.  In difficult times – and, for some, during non-difficult times – it takes a little hooting and hollering to get paid.   Some folks may only pay when they are pushed some.    Principals in the know understand that with an outstanding claim against them,  the next desired bond  may be harder to get.   Thirdly - perhaps, most importantly - everyone will realize that you know  what you  are doing.   Let’s face it.  In every form of human activity, including business, ‘players’ get more respect than do ‘non-players’.   It is only human nature for a bond claims representative to think that if you are capable of sending a good bond claim letter with proper documentation, you are not likely to miss the statute of limitations for suing the bond in time.    Missing the statute of limitations in suing the bond is one of a surety’s principal defenses in resisting claims.

            Always ask for a written response from the insurance company within a defined time period.  For example, in most cases you should ask the surety company to acknowledge its receipt of your claim in writing within ten days.   If you have provided the insurance company with the documents I have identified above, you should also ask the insurance company to give you an indication of its evaluation of your claim within thirty days after it has received the information and documentation.   Unless the principal is in bankruptcy or has closed its doors, these are not typical times within which claims are handled.   On the other hand, what we are doing here is trying to get as much of the claim presented and evaluated as a claim before any necessary litigation  has to be filed and to lay a factual basis for a possible claim for interest and counsel fees should the surety not settle the claim as a claim when it had the necessary information and documentation to do so.   

          At some point, the insurance company might send you a ‘proof of claim’ or ‘proof of loss’ form for you to fill out.  There is inherently nothing wrong with filling one out, provided you understand why you have been sent it.  Principally, the insurance company is trying to establish what your last date of performance on the job is, which would start the bond statute of limitations running.    So, if you are subject to a one year statute of limitations, listing your last date of performance as one and one-half years ago will not help your claim!   And, the bonding company is trying to get you to commit to a figure as the maximum value of your claim.    So, before you fill this form out, make sure that the job has been fully and completely billed, including extra work and retention, if applicable.    Since these forms are typically sworn statements, modifying something that is contained in that form down the road will be very difficult, if not impossible.
Give a ‘proof of claim’ form as much attention and concern as you would a lien waiver.

            Under Massachusetts law,  the following are unfair insurance claims settlement practices:

“(9) Unfair claim settlement practices:  An unfair claim settlement practice shall consist of any of the following acts or omissions:  . . . . . .
 (b) Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies;
 (c) Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies;
 (d) Refusing to pay claims without conducting a reasonable investigation based upon all available information;
 (e) Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed;
 (f) Failing to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear;
 (g) Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds; . . . . .
(m) Failing to settle claims promptly, where liability has become reasonably clear, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage;  . . . . .”
 
            Why am I telling you this?  I am telling you this because in more egregious cases, significant violations of one or more of the above sections might constitute or support an action for triple damages and actual attorneys’ fees under C. 93A against the Surety.   Particularly regional and national claims offices may not be “up” on all of the local requirements.  Generally, they are unaware of them.    If you do business in Massachusetts, you do business in a very liberal and not insurance-friendly state.   At some point in time, reminding the surety company of its obligations to you might be in order, particularly where violations of these requirements might constitute triple damage claims under MGL C. 93A, so-called ‘unfair and deceptive trade practices’.   

            Don't make two mistakes.  Don't write to an insurance company and request payment within two or three days: this is simply not possible.   (Typically, and on a non-emergency basis, when a claims representative has settled the payment bond claim and requests the settlement check from that insurance company department which will cut it,  this process generally takes  two to three weeks or so to get that check.)  At the same time, don't be excessively polite in writing to the insurance company.   Don’t give the insurance company the impression that there is no time urgency to your claim or that you don't really expect the insurance company to pay you.    As a claimant, you have to ‘trigger’ the condition of the payment bond and, to do so, you have to make it abundantly clear that your letter to the surety company is a claim.   

            You have to give the insurance company a sufficient amount of time to investigate the claim.   But, you do not want to give them an annuity to handle the claim for the next two years (the second year of which your claim will be, more likely than not,  time-barred!)    More than once, I have seen insurance companies write back to claimants saying  “I need this, I need that”,   the clock, all the while,  ticking.   More than once, I have seen an insurance company after the limitations period expires deny the claim with the very next letter because the claimant did not meet the statute of limitations, even though it had been corresponding with the claimant over a period of time.    If you learn only one thing from this article, let it be that the only sure and safe way to meet a limitations period applicable to a surety bond is to sue it within that time frame.    When I say that there is a one year statute of limitations,  that doesn’t mean that this is the time period within which you have to contact the insurance company by a letter.   This is the time period by which you have to actually sue the payment bond.

            How much time do you give the bonding company to handle the matter as a claim?  This is a difficult question to answer and depends on various factors.

            If your claim is clean (e.g. you are entitled to be paid and there is little or no criticism of your work) and there are no or only minimal  backcharges or colorable (possible) backcharges,  if you present the bonding company with a thorough documentation package as discussed above, sending contemporaneously a copy of the package to the contractor principal, I think that you should have some response from the bonding company within a period of six to twelve  weeks, if there is going to be a substantive response.    Bonding companies, generally speaking, do not give much faster service than that other than in emergencies, which generally means performance bond claims (claims on performance bonds by obligees) or paying payment bond claims of subcontractors who are working on completing a project within the context of the performance bond as completion contractors.

            After a period of six to twelve weeks has expired after you have presented your initial payment claim, with several reminder telephone calls and letters - letters are far better than telephone calls, of which there will be little or no record of down the road -  I would then turn the matter over to an attorney with instructions to file suit.   If this is necessary, you have not failed!  You have given the bonding company the material necessary to evaluate the claim.   It needs this information to set a reserve and evaluate your claim irrespective of whether the claim is received and resolved as a claim or is received and resolved as a lawsuit.     The bonding company has established a file and has caused the claim to be initially reviewed and (hopefully) to some extent verified.  These steps will be taken by the bonding company whether the matter is presented as a claim or whether the matter is presented as a litigation.  Therefore, you have saved some time and have laid the groundwork for an ultimate settlement of this claim, even if litigation has to be commenced.   Again, it can not be repeated too often that most civil cases are concluded before the trial stage.   As many as 99% of all civil superior court cases get resolved short of a complete trial.

            People not particularly familiar with the litigation process often make more of the litigation process than it actually is.  If you have presented a claim to the bonding company for payment of a payment bond claim, this is a claim.   If you bring this claim into litigation, you still basically  have  a  claim  which ultimately can (not necessarily will) be resolved by more formal court procedure (a trial).   The underlying thrust is, however,  that you have a claim against the bonding company's bond either way.   And,  even if you have filed suit - to comply with any statute of limitations and/or to bring pressure to bear on the insurance company – it bears repeating that only about one percent of all civil cases ever gets fully tried.    Thus, by filing suit, you have not necessarily entered the litigation highway which irrevocably and inexorably leads to a trial some day.   In other words, this doesn’t mean that your lawyer necessarily has carte blanche to bill you for the next three to five years.   In thirty-five years of practice, I have only had a couple of cases go to trial involving a payment bond.    (And, for a good piece of that time,  I only represented surety companies and never defended in court a case against a payment bond.)    “Going Legal” or “Turning this over to Legal” really only means that a complaint will be filed with a court and that only such further steps as are necessary thereafter need to be taken.   (If you are not really sure what happens during a court case,  read “The Litigation Process”, an article in the ‘Articles’ section of my website:  wwwsauerconstructionlaw.com. 
 
            If your claim is not clean in that there are some significant backcharges, claimed defective or incomplete work or unresolved issues, it would be more reasonable to allow for a period of three to six  months to resolve the claim, assuming you have met any notice provisions and are still well within any applicable  limitations provisions contained in the bond or within a  statute applicable to the bond.   What your strategy should be in this type of situation is to fairly  monetize the items in dispute and to seek the undisputed amount.    Insurance companies are loathe to partially settle payment bond claims and usually prefer to settle when they can dispose of  the entire claim.   That this might be their policy or desire does not mean, however, that they have a legal right not to pay portions of the claim as they become due.    (In this regard, see the materials supra concerning unfair insurance claims settlement practices.)

            Unfortunately, there are some "no win" situations.

            There are some principals (the company which is bonded) who are so large that they essentially dictate what claims get settled and what claims do not get settled.    Keep in mind that surety bonds, unlike insurance, ultimately all come out of the principal's pocket because of the fact that the bond principal (and, usually, its individual owners) have to indemnify and pay back the surety company for any losses which are sustained.  Some principals produce such  bond premium income – and associated premiums on insurance products, such as comprehensive general liability - that the insurance companies - whether they are supposed to or not - essentially cede control of the handling of bond claims to those principals, particularly during the pre-litigation stage.  This is particularly so as to general contractors who are responding to claims from second tier subcontractors.  Many of the names of the principals who enjoy this status in Massachusetts  would be well known to many readers!

            What can not be predicted is that there are some companies who,  at least,  subjectively, in my experience,  do not seem to settle claims as claims (as opposed to as  litigations) at all or only infrequently.  For obvious reasons, I cannot list either the names of my subjective "good carriers" or "bad carriers" in this article.   It may be that for certain of these so-called  "bad carriers"  the unwillingness to settle claims may not be attributable as much to corporate policy as to the personality and experience (or inexperience) of those persons handling claims in this area.   Keep in mind that smaller sureties - those authorized as indicated by the Treasury List to only write smaller bonds - tend to make a bigger deal of handling any claim.    If there are consultants involved with the claim, this could cause the claim to last longer.  If there are any performance bond claims and issues  associated with this principal and/or the project you worked on that the surety has to address, these are usually taken care of prior to handling the payment bond claims.   (That is because there is more money - and, stress - associated with them and sureties see completing the project as more important to them than simply paying the bills presented as payment bond claims.)

            After your payment bond claim is, like older elegant ladies of the theater of “a certain age”, then it is time to sue.    If the bonding company isn’t doing anything with the claim and they really have all that they need to evaluate the claim, nothing is gained by holding off that step.   Moreover, for larger claims, since prejudgment interest commences with the filing of litigation, every month that the claim is a claim - and not a litigation - might cost you some money.

            Finally, the only way to “go to the bond” or “pull the bond” is to sue the bond.   Writing a letter to the insurance company within the time required by the statute of limitations is not  compliance with any applicable statute of limitations, which discusses and requires suit within this time period.     Also, when figuring the when of suing the bond, figure it conservatively, in the general contractor’s/surety’s interest.   In other words, don’t depend on the performance by your company of warranty work or punch list work to be the date you use to figure the time within which suit must be filed.     The standard that I try to use - and which hardly ever fails - is to sue within - on a public job - one year from the last date you turned the last nut or supplied the last piece of equipment required by your contract and which forms the basis of the last act of your last requisition (other than any requisition submitted later for retainage.)    And, keep in mind that the statute of limitations should be figured from the date of the performance of work or the  supply of materials for which your company hasn’t been paid.    In my experience, some materialmen have figured the one year from the date they supplied materials for which they had already been paid.   As Mr. Gulden would say, that won’t cut the mustard!    

            Other ideas?     If your company is a subcontractor or material supplier to a subcontractor, always be mindful of the fact that there might be a second payment bond (in addition to the general contractor’s bond.)    As often second tier suppliers/subcontractors miss the notice period to protect a claim against the general contractor’s bond, in many circumstances such would not prove fatal to a claim against the subcontractor’s bond which may not require that notice.  Notice requirements tend to be more severe when your claim is two tiers away:  a sub-subcontractor against a general contractor.   They seem more relaxed when the parties at issue have a contract between them, such as the subcontract between a first tier subcontractor and a general contractor.

            Also, as the letter below includes, try to get some “third party verification” of your claim from a disinterested third party, such as the owner, the architect or the clerk of the works.   Payment bond claims are almost necessarily a “he said, she said” type of thing where the principal is essentially negating what the claimant is claiming.   Since the surety company has a business relationship with the principal, it has the tendency to go with the principal’s position.     Having someone not involved with the dispute write a simple letter saying you have done your work can be invaluable in the handling and presentation of a payment bond claim.   Then, there are two parties saying you are entitled to be paid and only one saying that you are not. 

            Such a letter need not be complicated.   It could look like what follows.    On a piece of letterhead, the owner, architect or clerk of the works writes:  

               “To whom it may concern:    This is to certify that  Superior HVAC has supplied all of the labor and materials and equipment required for the construction of the Westwood Elementary School.  There are no remaining HVAC items on the punch list and all of the HVAC equipment works properly.  And, the Town of Westwood has paid the general contractor, Last Chance Construction, for all of the HVAC work at this project, less the value of a balancing report, which is monetized at three thousand dollars.”

            One last point.    Try to determine whether or not the general contractor – if that is who your bond claim is against – has requisitioned for your work.     Since requisitions are generally sworn statements – and are, at least, from a judicial standpoint, evidentiary admissions – the fact that your contracting party has both requisitioned for your work and has been paid for it tends to take a lot of the wind out of the general contractor’s sails in responding to your claim.      
  
            Now, here is that proposed letter to the Surety and a sample form for a third party verification:
  

 

 

 

 


SAMPLE LETTER TO THE BONDING COMPANY ON A PAYMENT BOND                                  CLAIM ON A PUBLIC JOB IN MASSACHUSETTS

May 3, 2011

           
Mr. William J. Clinton
Claims Adjuster
Back of the Envelope Bonding Company
Industrial Office Park
Quincy, MA

            RE:    Project:     Construction of Westwood Elementary School,                                                                                                                                                    
                                                    Westwood, Massachusetts
                                  Contract No:          12345
                                  General Contractor/Principal:   Last Chance Construction Company
                                  Claimant:   Superior HVAC Contractor
                                  Obligee:    Town of Westwood, Massachusetts
Dear Mr. Clinton:

With regard to the construction of the Westwood Elementary School, my company, Superior HVAC Contractor, supplied an air conditioning system.   Your principal, Last Chance Construction Company, is the general contractor for this project.   A copy of its payment bond for this project is enclosed.
 
On January 17, 2009, Superior HVAC Contractor (hereinafter Superior) entered into a contract for the supply of an air conditioning system with Last Chance Construction Company (hereinafter Last Chance) for this project.   A copy of that construction contract is enclosed.   Moreover, copies of all invoices which have been sent to Last Chance by Superior are also enclosed, along with a copy of this month’s current statement from our accounting department.

As of the present time,  between the value of the original contract, which is eight hundred thirty-five thousand dollars and with one hundred sixty-five thousand dollars  worth of approved change order work (see enclosed copies of change orders one through four), the total adjusted value for this subcontract is presently one million dollars.   Of this work, Superior has requisitioned for the entire contract as adjusted and has been paid six hundred and ninety-seven thousand dollars.    Therefore, Superior claims to be owed something in the vicinity of three hundred thousand dollars, which monies are overdue by at least two months.

All work required under this subcontract has been completed since January, 30, 2011 with the exception of the submission of a balancing report, the fair value of which is three thousand dollars  (as per the architect’s monetized punch list, a copy of which is enclosed.)  It is anticipated that this   balancing report will be submitted within the next four weeks.  There is an item of work necessary to be performed by another contractor (the electrician needs to wire some dampers) before the system can be tested and balanced and for the report to be completed.

I have enclosed a letter from the architect for this project, which verifies that all labor, equipment and materials have been supplied by Superior under the HVAC section of the contract and that all such labor, equipment and materials are in accordance with the  plans and specifications,  with the only remaining item being the balancing report, having a value (per the architect’s own monetized punch list)  of three thousand dollars.

Last Chance is claiming three backcharges against Superior, which Superior vehemently contests:  (1) a cleaning backcharge in the amount of six thousand dollars; (2) a claim for replacement of some dirty ceiling tiles, which is in the amount of seven thousand dollars;  (3)  a claim in the nature of a penalty for not attending one safety-meeting in the amount of two thousand dollars.   Copies of these backcharges and of Superior’s responses to these backcharges are enclosed.    The point I would make is that with the exception of the balancing report - which is monetized - these claimed backcharges in the amount of fifteen thousand dollars represent the only objections  Last Chance has made with regard to Superior’s claim to be paid its contract balances of approximately three hundred thousand dollars.     Assuming they had any validity, the most these would do is to reduce Superior’s present claim down to about two hundred eighty-five thousand dollars.   Deducting the three thousand dollars for the balancing report, Superior is currently due two hundred and eighty-two thousand dollars, which amount is overdue and the payment of which Superior herein demands from your company under the payment bond.

Superior has written to Mr. John Smith, President of Last Chance, on numerous occasions.   Four letters over the past three months have gone unanswered and copies of each, with applicable green cards,  are enclosed.   Moreover, Mr. Smith is not returning our credit manager’s  telephone calls and there presently are seven unanswered telephone calls to Mr. Smith in the last six weeks.    (My company’s credit manager keeps a log of collection calls made, pertinent portions of which are included.)

Superior is hereby making a claim upon the enclosed labor and materials bond issued by your company with Last Chance as the principal and expects your company to pay this claim.

If your company holds up paying the vast majority of this claim because of some relatively small deductions or claimed deductions, in any litigation that gets filed, Superior will claim that this is an unfair and deceptive trade practice, which could expose your company to a claim for triple damages under Chapter 93A of the Massachusetts General Laws.  

While I am willing to meet any reasonable requests for information or documentation, and while I am more than willing to meet with you or with your representative in an effort to verify and process  this claim, it is important for my company that it receive payment for the non-contested portions of its claim in the amount of approximately two hundred eighty-two thousand dollars as quickly as possible.    Accordingly, I am requesting that you acknowledge this letter in writing within the next ten days and that I be furnished with a status report as to the bonding company’s evaluation of this claim and intentions within the next thirty days.   Otherwise,  I will turn this matter over to my attorney, Perry Mason, who will file suit against Last Chance’s bond forthwith and will serve you up with a hot, steamy righteous bowl of  whup-ass.     (ED. Just making sure you are paying attention!)    As you know, I am entitled to interest once this claim is filed in court of one percent per month and,  since the construction of the Elementary School is public work,  I will be entitled to a reasonable attorney’s fee pursuant to Chapter 149, section 29 of the General Laws when Superior prevails.

Please note that I have sent a copy of this claim to Mr. Smith at Last Chance Construction Company along with a copy of all enclosures enclosed with this letter to you.

I would appreciate hearing from you forthwith.

 

                                                                        Very truly yours,

 

                                                                        John Doughless

JD/lt
Enclosures as indicated
cc; Mr. John Smith, Last Chance Construction    

 

                    GENERIC THIRD PARTY VERIFICATION LETTER

 

Very important that this is put on something that looks like letterhead

 

 

To whom it may concern:

With regard to a project known as "describe", I served the project as _____________. (Clerk, Architect, Owner's Representative, etc.)   For this project, your general contractor’s name was the general contractor and your company name was the subcontractor who performed the following work:  give a description of what your subcontract provided in terms of scope of work.    At the present time, all work required to be performed by your company name at this Project has been fully and completely performed to the best of my knowledge. There are no pending punch list items to be performed by your company name, whose work is fully satisfactory to the Owner’s name/firm of person writing this letter.
(If applicable or capable of being found out:) Further, the Owner has paid general contractor’s name for all work performed at this project by your company name.
(If possible to find out:) General Contractor’s name has billed the Owner’s name blank for the work of your company name  and has been paid blankagainst those billings.)
The Owner’s name reserves all rights due to it from your company name under any applicable warranties.

Very truly yours,

 

(Copyright 2011 Jonathan Sauer)

(The purpose of this information is for general education only and for the purpose of discussing  the issues involved.  This information is not intended to be specific legal advice and should not be considered as being legal advice.  For any legal problem/question,  consult competent counsel of your own choosing.)

                                                             *****

Attorney Jonathan P. Sauer
Sauer & Sauer
1410 Providence Highway
Suite 416
Norwood, MA 02062

Phone: (781) 255-0222
E-mail: jonsauer@verizon.net
Fax: (781) 255-9777
Web site: http://www.sauerconstructionlaw.com

 

“Knowledge is Money in Your Pocket”