On public projects, payment bonds provide protection against nonpayment, rather than by liens against the property. Just like mechanics liens, the requirements for filing and serving bond claims can vary from state to state. But, what happens after the claim has been filed?
After making a bond claim, it’s not unusual for things to get very, very quiet. This makes it hard to determine what next steps should be taken, when you may be paid, or if there is anything you can do to move your claim along. However, there are some things that bond claimants can and should do in order to get paid faster. Read on to find out more.
Step 1: Send a copy of the claim to every party with an interest
The claim process and the parties required to receive your payment bond claim vary from state to state. Generally, most jurisdictions in the United States require giving a copy of the bond claim to some combination of the direct contractor, the public entity contracting for the work, or the surety. In many circumstances, however, the surety is not specifically required to receive a copy of the bond claim.
While you must comply with the specific requirements, don’t just stop there. In order to best position yourself to get a response on your claim, you want to make sure everybody with an interest has received it. This means sending a notice of the claim to the public entity contracting for the work (i.e. “project owner”), the prime contractor, the contractor who hired you (if different), and especially, the surety.
Don’t forget to involve the surety
It may not be totally obvious why sending the claim to the surety makes a big difference in shortening the time of time from claim to payment. The reason for sending the claim to the surety works has to do with how surety bonds are structured. To qualify for a payment bond, a contractor must apply with the surety, and then to get the payment bond, the contractor must sign certain agreements with the surety.
Throughout the application process, the surety will examine the creditworthiness and solvency of the contractor applying for the bond, like checking the GC’s assets. While surety companies issuing a bond will take some risk, they aren’t going to take much, and they will try to limit it as much as possible.
Once approved, the surety company will require the contractor to sign contracts to acquire the bond. These generally include agreements that the contractor will indemnify the surety from any and all claims. To ensure the contractor will do this, the surety may require the contractor to pledge assets such as cash or property to the surety in the event of a default. In the event of a default, the surety can seize these assets without much judicial work, and use those assets to pay any claims.
Given the above, contractors can be reluctant to inform their surety of a claim against the bond, hoping instead to get it resolved without the surety’s involvement. As soon as a claim is discovered, the surety will send a formal demand to the contractor requiring the contractor to indemnify the surety and resolve the claim.
So, in practice, when contractors receive claims, they frequently procrastinate sending them to the bonding company, or they may never send the claim along in an attempt to bury their head in the sand and forget about their problems.
This all means that it’s a good idea to send the claim directly to the surety so you don’t need to trust that the contractor will do it. Sending the claim to the surety directly turns up the pressure immediately, and is a good way to ensure that your claim is correctly and timely lodged.
Step 2: Wait for surety’s response – and reply promptly when you receive it
After you have sent your bond claim to all the appropriate parties, there is not much that you can do other than to wait for a response. So, you send the claim, and then you hurry up and wait. What you are waiting for is for the bonding company to formally open your claim and send you a response letter requesting backup information.
While you are waiting for a response, it may be worth it to gather all documents or other information supporting your claim and have it ready to provide to the surety when the response comes. It typically takes about two weeks to a month or so from the date you sent your claim to hear anything back. The more organized you are with your supporting information, the quicker you can reply to the surety, and the faster you will get paid.
Step 3: Follow up with the surety – all the time
When you finally do receive a response from the surety, take note of the specific representative who has been assigned to your claim. When you send your response of supporting documentation, contact the representative to make sure it was received, and then set a schedule to check in with the representative every week or so.
The amount of time in which a surety must process a claim varies but can be as long as 60 days or more. Since this time period may allow for your claim to get stale or slip from the top of the representative’s mind, your constant contact can make a difference. Not only will routine contact keep your claim on the representative’s mind, but you will also be able to quickly resolve any issues that may delay getting paid.
Step 4: File a lawsuit
If the above steps do not work to get you paid in a timely fashion, you may need to escalate the situation by filing a lawsuit. Lawsuits are time consuming and expensive, so they should only be used as a last resort, but there comes a point where it is the only remaining option. And, just like with mechanics liens, bond claims have an expiration date. If you haven’t been paid as the deadline to enforce approaches, you will need to file suit in order to preserve your bond claim and get paid.