In the world of surety bonds, payment bonds are often the overlooked siblings of performance bonds.
As explored in a previous frequently asked questions post — The Difference Between Payment and Performance Bonds — performance bonds are placed to protect those up the contracting chain against non-performance by those below the chain, while payment bonds are placed to protect those down the chain against non-payment by those up the chain. In most situations, where one type of bond exists, so does the other.
Claims against a payment bond arise when someone claims non-payment, and the proper filing and processing of the payment bond claim depends on a number of legal nuances that are difficult to master. Construction Executive’s Risk Management eNewsletter just published an article we wrote on this topic, which aims to provide both sides of the payment bond claim process tips and best-practice information to avoid costly missteps: Payment Bond Claims: Tips for the Claimant and Bonded Party.
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The article breaks down its advice by audience.
Part I speaks to the claimants in a payment bond claim scenario. Those who are unpaid on a construction project and are looking to the payment bond for protection must properly file their claim, and then followup. The followup element here is vital, as we explore in the Construction Exec Risk Management article, as well as some articles here on the Lien & Credit Journal. See, for example, What To Do After You File A Bond Claim.
Part II speaks to the bonded party who are faced with defending the claim. Bonded companies must pass along the claim to the surety (don’t sit on it!) and get their materials in order to defend a fight of the claim, if necessary. The risk on the bonded party if proper action is not quickly taken cannot be understated, and in fact, the Construction Executive article closes with this:
Those carrying payment bonds carry a lot of risk. If a claim is received, it’s important to act honestly, clearly, and quickly with the claim. Pass it along to the surety, provide any backup of the dispute, and pay undisputed claims or portions of claims. Otherwise, a company could face more exposure than bargained for.