"ICE - BOX" PAYMENT BOND CLAIMS: A RECIPE FOR SUCCESS

by Jonathan P. Sauer

There are two recipes for submitting payment bond claims to a surety: the ice-box method followed by amateur cooks (such as yourself); or, a more formal submission by a professional chef (lawyer) using a commercial oven (the courts). This article summarizes the former, which can be very productive and profitable, assuming you know a few basics and you have met any applicable conditions precedent (usually, the giving of certain notices within various timeframes, which are often required if you are making a claim against a party more than one tier away) and are well within any applicable statute of limitations for filing suit (usually, one year from the date of your last performance for which payment is sought, but check the bond or applicable statute). Now, get on your apron and let's go to work!

First of all, and as with any good cook following a recipe, assemble all of the ingredients on your work table. You need to have a copy of the payment bond to send to the bonding company, as it is sometimes difficult (and takes time) for bond claims people to obtain these from bond underwriters. (Get the bond from the tier above the one owing you money (i.e. if you are a first tier sub, get the bond from the owner).) You need the name of a specific person in the claims department to write to: letters addressed to the Last Chance Bonding Company are not likely to make it out of the mailroom and you need a specific person to write to so that you have someone to hold accountable for the progress (or lack thereof) of your claim. If you do not know to whom to send your letter, call up the bonding company itself (not the insurance agency which wrote the bond) and get the name of a specific claims representative handling claims for that principal or, failing that, the name of the bond claims manager. You can get a wonderful -and free - publication from the United States Treasury, which is 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, whose address is http://www.fms.treas.gov/c570/c570.html

In the "RE" of the letter, list the name of the principal, identify the project, give the bond number and the claim number (if you have either or both) and identify yourself (the claimant).

Never send your claim to the agent who wrote the bond, as he/she customarily has no authority to handle claims (he/she is an underwriter) and it is in his/her own personal interests to delay the handling (and payment) of claims. Send all of your documents to the bonding company in one submission. These should include: your contract/purchase order; all billing information (invoices and statements); copies of delivery tickets (for concrete, asphalt, sand and gravel and similar claims); prior correspondence with the principal seeking payment (your debtor, or the general contractor, if you are a second tier sub or supplier); and, and very importantly, evidence that your materials and work are acceptable to the owner or the owner's technical representative. If possible, get a short one or two sentence letter on letterhead from the owner, architect, engineer or other third party in substantially the following form: "To whom it may concern: the HVAC work performed by Superior HVAC at the construction of the Howdy Doody Hot Dog Stand is complete and acceptable and apparently in conformance with the plans and specifications, with all applicable punch list work done, and all balancing reports and as-builts have been received." That one sentence can shave months off of the handling of your claim, as this is what is called "third party verification" of the rightness of your claim by someone with no axe to grind (no interest in your claim, one way or the other).

Always show the debtor and/or principal as a "cc" on your letter and send them copies of all documents that you send the bonding company - and say you are doing so in the body of your letter - even though the debtor and/or principal has umpteen copies of them. If you do not, you will lose at least sixty days in the handling of your claim. Otherwise, no sooner than thirty days from its receipt of your letter, the bonding company will send it out to its principal, not expecting a response in fewer than thirty days. As Mick Jagger, who recently became a grandfather, might say, "Time is On Their Side - (yes it is)"!

Ask for a written acknowledgment of your claim in two weeks (they have that letter on the computer as a form) and ask for a progress report on your claim thirty days thereafter. You have to strike a careful balance: do not be overly strident, as the person getting your letter probably makes less than you do (and knows it) and will be put off by too much of "an attitude". On the other hand, make it abundantly clear that you are looking to the bonding company for payment by the bonding company and that your letter is, in fact, a claim. Check in with the claim representative at least once a month and, generally speaking, confirm your contacts after the fact in writing. If your claim is "clean", meaning that there are no real defenses to it, the bonding company should ordinarily pay within three or four months. Surprising as this may seem, the filing of bankruptcy by the principal on the bond has no bad effect on your claim and may even speed up (slightly) your check.

Keep in mind, however, that the only way one can "file on the bond" is to sue the bond. That does not mean that the bonding company does not have a legal and contractual obligation to pay your claim while it is still a claim; it does, in most cases. However, you are reading nothing new by my saying that some bonding companies do not pay easily and the fact that there have been a number of contacts back and forth does not, in the ordinary course, excuse the claimant (that be you) from meeting the statute of limitations by suing the bond in a timely manner.

The amateur chef's efforts are unsuccessful? That is what the professional chef is there for. If you have done your homework - made a proper submission and followed up at least once a month - even if suit is necessary, your claim will likely be resolved more quickly because of your efforts. Very few of these cases - especially, as regarding "clean" claims which have not been tendered to the principal for defense - actually go to trial. And, there is a better chance that you will be able to collect (some of) your attorneys' fees for the effort - even as part of a settlement - if the bonding company should have paid your claim based on your submissions.

Bon appetit!

*******************

This article is not intended to be specific legal advice and should not be taken as such. Rather, it is intended for general educational purposes only. Questions of your rights and obligations under the law are best addressed to legal professionals.

Sauer & Associates sees as part of its mission the providing information and education to the contractors it daily serves, which will hopefully assist them in the conduct of their business. Articles are available on a number of construction subjects (e.g. rights under payment bonds, how to present payment bond claims, the mechanics’ lien law, how to file a demand for direct payment) on this website.

Copyright, Jonathan Sauer, 2004