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Top Five Surety Bond Misconceptions

On October 19, 2011

As many contractors know, starting a large construction project isn’t as simple as having your crew show up to the job site to begin work. There is a lot more involved in acquiring the appropriate permits, licensing and legal documents in order to be granted permission to start. To add to the pile of paperwork, surety bonds are usually the starting process to not only begin construction work, but it’s also required of many businesses prior to opening their doors. Although they are a necessity for a wide-range of industries many still ask, what is a surety bond?

Simply put, surety bonds are a three-party agreement, which consists of an obligee, principal and surety company. The surety agency assesses the financial stability of the person obtaining the bond (the principal), and if approved assures the obligee (the party requiring the surety bond) that he/she will hold to the terms specified in the contract. If the principal should default on the agreement in anyway, the surety agency is responsible for payment of financial damages.

In general the surety bonding process can seem overwhelming and confusing, leaving purchasers with questions swirling in their heads. To help clarify the most common concerns raised during the bonding process, we’ve put together the five most common misconceptions in acquiring a surety bond.

Surety bonds are another form of insurance.

Although they both serve to protect parties in an agreement, there are several differences between surety bonds and insurance. With insurance, risk is assigned to the insurance company that is protecting their customer. However, with a surety bond the risk remains with the principal – or the party purchasing the bond and the protection is for the obligee, or the person requiring the bond. Should the principal default on an aspect of their contract, the surety company will provide financial compensation to the obligee and then refund the damages from the principal.

Another major difference between surety bonds and insurance are how rates are determined in pricing structures. Unlike insurance, surety bond rates are not contingent on one’s past history. For example, many insurance policy premiums are determined based on an individual’s claim history. Those fortunate enough to have a flawless record are almost guaranteed to pay the lowest rates for their policies. However, surety bond costs are not written in the same manner as insurance policies. Rates are based upon one’s financial history, credit, and amount in liquid assets. Unlike insurance which is acquired to help in times of loss, bonds are written with the assumption no losses or claims will be filed. The premiums paid by principals for surety bonds are seen merely as service charges, while the surety company serves as the financial guarantor of the project. Because of this, those who have acquired a surety bond and had a claim filed against them, it is likely they won’t be approved to purchase a surety bond again.

Surety bonds protect the purchaser of the bond.

The main service of surety bonds is to protect the person requiring the bond, not the individual who is obtaining it. In surety terms, the person who requires the bonds is the obligee while the purchaser is the principal. Although principals pay a premium to obtain a surety bond, they do not receive protection. Rather, the obligee will be awarded financial compensation should the principal default on the agreement.

Performance and payment bonds serve the same function.

Even though they are typically acquired together, performance bonds and payment bonds are two separate entities. Payment bonds ensure that principals will compensate all laborers on the project. This includes subcontractors and material suppliers.

A performance bond guarantees the principal will perform the work on the project as specified in the contract.

Principals are expected to pay for the bond in full.

Depending on a principal’s financial history, he/she may only be required to pay an annual premium to acquire a surety bond. The amount individuals are expected to pay at once and annual varies by bond type and whether they are considered a bad credit surety bond applicant.

Surety bonds can be used from state to state.

Just as each state has its own set of laws surety bond regulations also vary from state to state. The easiest way to determine your bonding needs is to research your state’s requirements or speak to a reputable surety bond agent.

Posted in:     State & Federal Contracting, State Bond Claims  /  Tags:   /   Leave a comment

2011 Fantasy Football League Now Open For Registration

On August 22, 2011
2011 Fantasy Football League with Wolfe Law Group and Zlien

Last year, we had a lot of fun with the Wolfe Law Group / Zlien fantasy football league. Actually, it was so successful we had to open two leagues. Folks have been asking whether we’d have a league set for up 2011, and we’re happy to announce that we are, and the league is now open for registration.

Register early, because we’ll likely fill up. You can view our league and sign up at the following link:

http://football.fantasysports.yahoo.com/league/wolfelaw_zlien

To join our league on Yahoo! Fantasy Sports, you’ll need the League ID (634669) and password (WZ2011).

We’ll conduct a live draft, which is currently scheduled the evening of Wednesday, August 31, 2011, at 7:15 CST, 5:15 PST.

Posted in:     About Our Services  /  Tags: , ,   /   2 Comments

Scott Wolfe Quoted in New Orleans City Business Article About Delays When Paying Subcontractors

On August 11, 2011

Scott Wolfe Jr. Construction LawyerSubcontractor non-payment is something very familiar to me. It’s been written about here on the Construction Law Monitor (especially with regard to how pay when paid clauses affect subcontractor payments), and it’s something my other blog (the Construction Lien Blog) focuses on exclusively in its discussion of mechanic liens.

So it’s no surprise that New Orleans City Business magazine contacted me to discuss how the law can help and hurt subcontractors who are frustrated when waiting for payments to trickle down from the owner.  The article can be found on City Business’ website (subscription required) here:  Subcontractors grow tired of waiting on delayed job payments.

The article’s author, Ben Myers, does a great job of capturing the friction between general contractors and subcontractors on the subject of payment. General contractors complain that getting payment can be complex and time consuming because that’s how money trickles through, and that subcontractors should be taking the risk for their portions of the work.  Subcontractors complain that they are bullied around and “pay when paid” provisions sometimes leave them drowning because of problems the general has completely unrelated to their work.

It’s a real complicated mess – and the article gets both sides on the subject and helps explain the complications.

Posted in:     Around The Web, Payment Requirements  /  Tags: , , , , , ,   /   Leave a comment

Louisiana Supreme Court Reverses Bad Decision That Allowed Bidders to Defraud the State

On August 4, 2011

If you recall, on October 19, 2010, I discussed what I believed to be a very poor decision rendered by the Louisiana First Circuit, concluding that when a bidder on a public project defrauds the State, the State is refused any remedies.

Well, apparently the Louisiana Supreme Court agreed with me (for once), because it just reversed the First Circuit’s decision!

On May 10, 2011, the Louisiana Supreme Court decided that the decision rendered by the First Circuit in State of Louisiana v. Infinity Surety Agency, LLC, et al, 2010 CA 0123, Louisiana First Circuit Court of Appeal (Rendered September 10, 2010) was wrong and the case was remanded for trial. This decision by the La. Supreme Court definitely changes things for the better.

Before this decision was rendered, the First Circuit decided that a successful bidder to a public works project in Louisiana could defraud the State by providing an unauthorized surety and, despite the misrepresentation and failing to perform the contract in a specified time, the State would not be entitled to liquidated damages. The reasoning behind the line of thought was that State should have known that the surety was unauthorized thereby making the bidder unresponsive. The First Circuit placed an affirmative duty upon the State alone that was unfair and certainly unduly burdensome.

Now, the Supreme Court has decided that an appeals court does not have the power to make such a determination.

Whether Joint Venture breached the contract; whether Joint Venture’s bid was responsive; whether Joint Venture was the lowest responsible and responsive bidder; whether the State, as opposed to the bidder, had the sole and affirmative duty to determine if Infinity Surety was an authorized surety under the bid form; whether the State could instead reasonably rely on the representations of the bidder and the surety in the bid form; whether the State should have or could have rejected the bid as defective; whether the insurance codes precludes Infinity Surety as an unauthorized insurer from asserting its surety contract is void; and whether the State could have waived any purported defects in the bid bond, are all issues that should be resolved at trial…

These were all factual determinations that were not for the appeals court to decide and should be decided at trial. The La. Supreme Court here very smartly narrowed in on the particular issue that was to be resolved, namely whether the State alleged enough facts to assert a legitimate cause of action against the defendants, rather than allowing the decision of the court below extend its power beyond that which is lawful.

The unnecessary burden placed on the State in public works projects to investigate a surety that is being represented as authorized and fit for the purpose of the contract has been lifted.  In public works projects, the State should be allowed to rely on representations made by the other party that should be made in good faith, a notion that is fundamental to the law of contracts, and this decision properly reflects that.

Posted in:     Bidding, Louisiana, State & Federal Contracting  /  Tags: , , ,   /   Leave a comment

For Louisiana Contractors Bidding on Public Works Projects: This Case is for You

On August 2, 2011

For all you Louisiana public works contractors out there bidding for public works projects to expand your private business or bidding for public works projects because that’s what you’ve always done – whatever the case may be – the 4th Circuit Court of Appeals is on your side. For cities and states trying to construct public works projects to improve their turf, take notes please.

We’ve written before about what happens in Louisiana when a bidder on a public project violates time requirements under the Louisiana Public Works Act, but what happens when Louisiana or a city within violates time requirements in failing to execute contracts  and notices to proceed with a winning bidder for a public project?

On April 27th of this year, the 4th Circuit Court of Appeals decided in the Wallance C. Drennan, Inc. v. City of New Orleans case, nuances of certain provisions of the Louisiana Public Works Act (La RS 38:2252 and 38:2212) that ultimately address the question above and render the law more stringent for cities and states advertising for public works bids.

In Wallace, the City of New Orleans advertised bids for two different public works projects under the Louisiana Public Works Act to renovate some streets around town. These two projects were to be partially or fully funded by the Louisiana and Federal governments, but financing was not finalized at the time the bids were received. Wallace C. Drennan, Inc. was the contractor that was the lowest responsive bidder and, thus, won both jobs.

However, because the City delayed executing the contracts for the two jobs within the required 45-day time limit from the day it awarded it to Wallace and because it did not thereafter within 30 days issue “Notices to Proceed,” Wallace sued the City for damages due to delay and tardiness under La. R.S. 38:2215 and 38:2212 of the Louisiana Public Works Act, both provisions cited above.

Wallace won on the issue of liability before trial began. The City appealed to the 4th Circuit, arguing that it gave the requisite notice of delay, but they lost again.

Why? Well, La. R.S. 38:2212(B) states that, “in the event the time limit stipulated herein is not applicable [namely the 45-day and 30-day notice requirements] because of…[an] exception [i.e. delayed financing], this fact shall be mentioned.” Ultimately, the City did not “mention this fact,” according to the 4th Circuit.

If a statutory time limit will not apply, in this case for the reason of tentative financing, that fact must be stated within the project specifications and the official advertisements. A reasonable bidder must be lead to believe that there will be a time delay. Because this was not the case in Wallace and the City did not give requisite notice, it lost the appeal.

The City tried to argue, in what was likely a last ditch effort to save itself from losing, that Wallace waived its right to complain about the imprecise notice. But, as is clearly stated in the statute, the applicable provisions are not subject to waiver by the bidder.

What should cities and states furthering public works projects take away from this case? As the Court itself advises, if a situation like this arises regarding the possibility of delayed financing and time delays in general, rejecting all bids for just cause or extending the deadline by mutual consent with the lowest bidder are both wiser routes to take.

It’s important to remember that public bid law and public works law are founded on the notion of public policy; Courts will almost always refuse to take any action inconsistent with these laws, so all builders take note!

Posted in:     Bidding, Delays, Louisiana, State & Federal Contracting  /  Tags: , , , , , ,   /   Leave a comment
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