Payment Bond: It’s not insurance

11/28/2010

Many subcontractors presume that if there is a payment bond on a project they have insurance of payment from the surety, but that’s not true. A payment bond is not insurance. It only comes into play if the claim is covered by the payment bond and the claimant makes proper claim under the payment bond, or applicable statute.

Typically that includes a written notice requirement and then filing suit to enforce the bond claim within a specified period. There is no set periods or form for either for commercial construction projects, but for Virginia public projects (if bonds are required) the notice must be given within 180 days of last work or delivery and suit must be filed within one year of last work or delivery. The time period varies in NC for those that cross the border. A common norm is 90 days for notice and 1 year for suit, but again that will vary by specific bond or statute.

If claim is made, that does not, of itself, require the surety to pay the claim. The surety typically will investigate the claim first, and then decide if it believes payment is due; but even then it is not obligated to make payment unless the claimant provides notice when required and brings suit. Some states have “bad faith” statutes allowing pursuit of a surety that “drags its heels” in either investigation or payment, but Virginia is not one of them, so the surety does not always have incentive to move quickly if at all.

That all said, payment bonds remain a comfortable assurance of likely payment at some point, and projects with bonds are unquestionably better from a lower tier standpoint as a means of ensuring payment; but again perhaps not as prompt of payment as desired.

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