Payment Bond – An overview of the Claims Process

CLAIM PROCESS – PAYMENT SURETY BOND

Written By: Jacob Dines, Surety1

OVERVIEW OF PAYMENT BONDS

Payment bonds – Obligates the surety for its principal’s underlying obligation to make payments to subcontractors and material suppliers for their respective work on the main contract.  Payment bond  claims are responsible for the majority of claims in contract surety.

STEPS TO PROCESSING A CLAIM ON A PAYMENT BOND

1. Acknowledgement of receipt of the claim
2. Promptly conduct an independent investigation into each claim
3. Respond to the claimant with an acceptance or denial of liability.

CAUSES OF PAYMENT BOND CLAIMS

1. The failure of the principal to make payment.
2. Dispute over the amount due
3. Failure of subcontractor or material supplier to perform
4. Failure of project owner (obligee) to make payment to principal.

TIERS OF A PAYMENT BOND CLAIMS

1. General Contractor
   1. Supplier claims
   2. Subcontractor claims

i.      Supplier to Subcontractor claims

There are special clauses in the language of some payment bonds that promise to pay a subcontractor or supplier only when the contractor is paid by the obligee.  These clauses are referred to as “pay-when-paid” clauses and are often dismissed when a claim is made on a payment bond.  The reason is that a project owner who fails to pay the general contractor does not alleviate the principal of the responsibility to pay a supplier or subcontractor involved in the project.

When a claim is paid by the surety company on a payment bond, the principal is then expected to reimburse the surety company in full for the amount paid on the claim.  The amount in which the principal reimburses the surety market may stretch beyond the amount of the paid claim.  The surety market has the right to recoup losses associated with legal fees, forensic accounting charges, travel time, etc.