SUBMITTING THE PAYMENT BOND CLAIM TO THE SURETY - THE LONGER VERSION

By Attorney Jonathan Sauer

Assuming there is sufficient time within which to do so (before the statute of limitations expires), a subcontractor/materialman can often further its own cause by contacting the bonding company itself. (Ed. This was fairly summarily addressed in “Ice-Box” Payment Bond Claims, elsewhere on this website. The purpose of this article is to provide in greater detail some ideas on how to do this.)

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 by statute), the first thing to do is get a copy of that bond. Never ask the principal (the bonded contractor) for a copy of his own bond: it is a good way to get issued a rash of backcharges or a termination letter! Always ask the obligee (the person holding the bond) 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 (or, in some circumstances, the architect).

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. 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. 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 but the subcontractor's subcontractors (so-called 'second tier' subcontractors) and material suppliers would.

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.

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.

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 or furnished services for which claim is being made; that 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 (bonded party) last worked. This is, obviously, a more liberal standard to a claimant inasmuch as in almost every circumstance, a general contractor will be at the job for a longer period of time than any particular subcontractor.

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.

Why should one write the bonding company at all? While it is true that you generally will only be entitled to interest on your claim at the judgment rate of 1% per month simple interest (12% per year) only after you file suit, with the exception of claims against the general contractor's payment bond for Massachusetts public work or unless there is actionable bad faith on the part of the surety, you will not be entitled to recover attorneys' fees as part of your recovery unless the case gets tried (and very few do.) That being said, claims for small amounts of money (five to ten thousand dollars) are often uneconomical for a lawyer to handle, particularly at the claim level.

Moreover, 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. Insurance companies 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 expenses over which they have some control, which are the expense payments.

Where do you get information about insurance companies - their addresses and contact information? 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. This list is sometimes called “the Treasury List” or “the T-List”.

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 - 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 thousand principals. An insurance company which has a single national claims office, which is not all that uncommon, could be involved with tens of thousands of principals, whether in claims or in underwriting. Moreover, each principal may have outstanding at any given time bonds on different 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 have certain things. For one thing, before sending the letter, attempt to find out what individual will be handling your claim. 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. 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. It is not necessary to send correspondence certified mail, return receipt requested. Insurance companies, by my experience, don’t lose much correspondence provided that the correspondence is addressed to a specific person.or if the correspondence does not sufficiently identify the project and bond.

A sample letter to a bonding company is attached hereto. Yours should look something like this.

After addressing your letter to a specific named individual, in the "re" of your letter you should identify who the principal is. 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.

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. 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, requests for payment and other documents which in the aggregate establish two things. 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 like to keep the process going as long as possible and will send you letters asking for this piece of paper or that piece of paper until the cows come home. Giving them everything up front tends to keep this at a minimum.

The first thing to be established is that, in fact, you have a contract with the bonded principal for the bonded project. Secondly, you want to identify that you have performed that contract, have sought payment, and have been unsuccessful in whole or in part in obtaining the payment to which you are entitled.

If at all possible, send the bonding company a copy of its own payment bond! This may sound ridiculous but it really is not within an insurance company framework. Underwriters (those who write bonds) often do not communicate well with claims. Also, most companies use outside insurance agents,who are not employees, 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.)

Also, 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 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 written the principal. (They will do it any way but at least they can’t claim that they had to.) Secondly, by writing the principal at an early stage of a claim, that principal, particularly a viable (still in business with some ability to pay) principal, may realize that he has to deal with you and quickly. Otherwise, the next bond it wants to get may be slower in coming. Thirdly - perhaps, most important - everyone will realize that you know what you are doing.

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 indicate how it will handle 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 and lay a factual basis for possible interest and counsel fees should the surety not settle the claim as a claim.

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. At the same time, don't be excessively polite in writing to the insurance company to 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. 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 the claim will be time-barred!)

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

If your claim is clean (honestly, now!) 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 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. Bonding companies, generally speaking, do not give much faster service than that other than in emergencies, which generally means performance claims (claims on performance bonds).

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 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 by doing so before litigation is commenced. Again, it can not be repeated too often that most civil cases are concluded before the trial stage. A collection matter against your contracting party who refuses or is unable to pay and against other assets of your contracting party held by third parties is purely a business matter which is to be handled in a business-like way. While sometimes there can be some anger involved, particularly when you have been treated unfairly, the fact that the underlying dispute is a business matter must never be lost sight of.

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. The underlying thrust is, however, still that you have a claim against the bonding company's bond. And, the fact that you have filed suit - to comply with any statute of limitations and/or to bring pressure to bear - only about one percent of all civil cases ever get fully tried. Thus, by filing suit, you have not necessarily entered the litigation highway which only and inexorably leads to a trial some day. In twenty-eight years, I have never tried a case against a payment bond. (And, for a good piece of that time I 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 and that only such further steps as are necessary will be taken.

If your claim is not clean in that there are some 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.

Unfortunately, there are some "no win" situations.

There are some principals (the people 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. Some principals produce such bond premium income that the insurance companies - whether they are supposed to or not - essentially cede control of the handling of bond claims to those principals. 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 could be predicted!

What cannot 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 litigation). 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 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 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.)

After your payment bond claim, like older elegant ladies of the theater, is of “a certain age”, then its time to sue. If the bonding company isn’t doing anything with the claim and they really have all that they need, 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 cause 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 that statute of limitations, which discusses 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 warranty work or punch list work (unless it is the first performance of a required contract action) to be the date you figure the time for suit from. 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, keep in mind that the statute of limitations should be figured from the date of piece of work or a supply of materials for which you haven’t been paid. Some materialmen, in particular, have figured the one year from the date it supplied materials for which it had already been paid. As Mr. Gulden would say, that won’t cut the mustard!

Now, here is that proposed letter to the Surety:

SAMPLE LETTER TO THE BONDING COMPANY ON A PAYMENT BOND CLAIM

ON A PUBLIC JOB IN MASSACHUSETTS

May 3, 2004

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, MA)

Contract No: 12345

General Contractor/Principal: Last Chance Construction Company

Claimant: Superior HVAC Contractor

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 is enclosed.

On January 17, 2002, 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). A copy of that construction contract is enclosed. Moreover, copies of all invoices which have been rendered to Last Chance by Superior are also enclosed, along with a copy of this month’s current statement from our accounting software program.

As of the present time, between the value of the 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, 2004 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 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 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 or so. Assuming they had any validity, the most these would do is 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.

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 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, Superior will claim that this is an unfair and deceptive trade practice.

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 within the next thirty days. Otherwise, I will turn this matter over to my attorney, Johnny Cochran, who will file suit against Last Chance’s bond forthwith. As you know, I am entitled to interest once this claim is filed in litigation 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 your forthwith.

Very truly yours,

John Doughless

JD/lt

Enclosures as indicated

cc; Mr. John Smith, Last Chance Construction

(This paper and presentation is intended for educational purposes and should not be considered as specific legal advice for specific situations facing you. This subject matter is complicated and cannot be fully presented with any ultimate degree of accuracy and finality in such a summary explanation. For teaching purposes, some cases and trends have been generalized. Really, the purpose of this article is not to provide an exceptionally accurate ‘snapshot’ of Massachusetts law at present but to identify what the issues are in these types of claims and what the key concepts are in working one’s way through them.)

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Copyright, Jonathan Sauer, 1996

This article is intended to be general information and does not constitute specific legal advice. If you need legal advice, your interests would be best served by consulting with an attorney knowledgeable in the area of your concern.

Jonathan P. Sauer
Attorney at Law
Suite 416.1410 Providence Highway
Norwood , MA 02062
Phone: 781-255-0222 / Fax: 781-255-9777
Visit our Web Page for lots of neat stuff: www.sauerconstructionlaw.com