bond claims: how to make them + how to avoid them

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SubcontractorsBond Claims: How to Make Them + How to

Avoid Them

Presented by Don Gregory Kegler Brown Hill + Ritter

and Jack Kehl Overmyer Hall Associates

February 26, 2014

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What is a Bond?

+Bonds are legal documents designed to protect a one or more parties to a contract

+There are three types of bonds:+Bid Bond+Payment Bond+Performance Bond

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Bond Forms

+The bond format is a legal document and binding upon all parties to the contract

+Statutory Forms – Federal, State, Local+Industry Standard Forms

+AIA 312+Consensus+EJCDC

+Surety In-house Forms+Contractor Drafted Forms+Private (Individual) Sureties

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+Who is a proper claimant under the bond?+Subcontractors+Suppliers+Laborer+Others

Payment Bonds – When to Make a Claim

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+“Subcontractor”

+“Material Supplier”

+“Laborer”

Includes lower tiers

Who Can Recover Under Ohio Public Work?

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Who Can Recover?

Federal State PrivateSubcontractor Subcontractor Who knows?(1st tier and 2nd (all tiers) tier if notice)

Material Supplier Material Supplier Read Bond (1st tier) (all tiers)

Laborer Laborer

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Yes No

Labor Prompt Pay Interest + Fees

Material Prevailing Wages Interest

Union Pension Funds + Fees

Payroll Taxes Workers’ Comp. Premiums

Equipment Federal Taxes

Attorneys’ & Consultant

Fees

What is a “Lawful Claim” Under Payment Bond?

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+Subcontractors+Labor costs

+Wages+Labor Burden+Lost Productivity

+Materials+If incorporated into project

+Rental Equipment (State)+Others

Payment Bonds – What is Covered?

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+Bonds on Federal Projects+Form 25A

+Bonds on State Projects+Form ORC 153.571

+Local Projects+Franklin Co.+City of Columbus

+Common Law bonds – Sub to GC

Payment Bonds – What Forms are Used?

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Notice of Claim Waiting Period File Suit

90 days after 60 days 1 year after

“final acceptance” “final acceptance”

Timing of a Public Payment Bond Claim in Ohio

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Federal Projects

+Only A Bond Claim Is Available

+Key Points To Remember –+If you are not in contract with the prime you

must file your “notice” within 90 days after your last day of work.

+Must file suit on the bond within 1 year from last day of work.

+Limited Protection – no protection if you are providing material to a sub-subcontractor

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+Notice of Commencement+Notice of Furnishing+Documentation+Notice+Suit

Payment Bonds – How to Make a Claim

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+Phase 1 - Preserve Your Payment Bond Rights • Request A Notice of Commencement• Serve A Notice of Furnishing (if no contract with Prime)

+Phase 2 –File Your Bond Claim• Bond Claim Affidavit

Two Phases

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Who Has to Serve a Notice of Furnishing?

+You do not have a contract with the Prime (GC, CM, D-B)

+Such as sub-sub or supplier to sub

+You are providing labor and/or material greater than $30,000

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Not Required If -

+Less than $30,000 of labor and/or material provided

+Subcontractor directly to Prime

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Phase 1 – Preserve Your Payment Bond Rights

+Provides information about an improvement, including bond

Available upon request from Public Authority.

Step One: Request a Notice of Commencement

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Step Two: Serve a Notice of Furnishing

+Puts the Prime Contractor on notice+Send by Return Receipt (certified mail)

Phase 1 – Preserve Your Payment Bond Rights

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Notice of Furnishing for a Public Project

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When Do You Do All of This?

+Simple Answer+Right When You Start Work /Furnish Material

+21 Day Window+“Better late than never”

Phase 1 – Preserve Your Payment Bond Rights

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21-Day Window

Looking Back Looking Forward

NOF

Preserved if in the

21 Day Window

Preserved Going Forward

Phase 1 – Preserve Your Payment Bond Rights

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Phase 2 – Perfect Your Payment Bond Rights

+Rumors +You Have Payments Overdue

Phase 2 – Perfect Your Bond Claim

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Deadlines to Keep in Mind

+Serve Bond Claim on Surety+90 days from final acceptance of work by Owner+Surety has 60 days to “investigate”

+File Suit+Within one year after final acceptance

Phase 2 – Perfect Your Bond Claim

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Practice Tip:Obtain a copy of the Bond when you start the Project. This can be done via a public records request.

Submit a Bond Claim to the Prime Contractor’s Surety

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Risk of Doing Nothing

+Must file suit on a bond claim within one year of Owner Acceptance.

+OR claim is waived

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+You know that the money will be there.

+Cannot be trumped by owner’s claim for liquidated damages, cost to complete, etc.

+Typically, have more time to assert bond claim.

Advantages of a Bond Claim

Over a Lien

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+Perform+Document+Communicate

Performance Bonds – How to Avoid a Claim

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Questions?

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Trends for 2014 in Law + Insurance

Presented by Jack Kehl and Joe Urquhart Overmyer Hall Associates

Don Gregory and Mike Madigan Kegler Brown Hill + Ritter

February 26, 2014

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Legal Trends

1. Less trials, more mediation

2. More legalistic notice and claims process

3. Harsh results for contractors who do not dot “i”s and cross “t”s

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Legal Review 2013

1. J&H – Tenth District Court of Appeals upholds contractor recovery against state

2. Transtar – “Pay-if-paid” under attack, and appealed to Ohio Supreme Court

3. Atlantic Marine – U.S. Supreme Court upholds venue provisions.

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What to Expect Legally in 2014

1. A “pay-if-paid” decision from the Ohio Supreme Court

2. Fallout from State’s new project delivery systems (such as more sub claims and less prime claims against State)

3. Greater use of referees in Court of Claims (to the benefit of contractors?)

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Insurance Trends - 2014

1. What to Expect from Rates

2. Capacity in the Marketplace

3. New Risk and Coverage Issues

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What to Expect From Rates

+Property – Down 5 to 10%+Casualty (GL) – Flat to up 5%+Auto – up 5% to 10%+Umbrella – up 5% to 10%+Workers Comp – up over 10%+EPL – up 5% to 10%+Professional – flat to up 5%

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Capacity in the Marketplace

+Market capacity is near all-time highs+It was a good year for investment income+It was an excellent year from underwriting loss ratio standpoint for most companies

+What does this mean for you? It should stay competitive in the marketplace for accounts with good loss ratios, active safety programs, and have solid financials

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New Risk + Coverage Issues

+Cyber Liability and Crime+Fiduciary Liability+Employment Practices – Wage and Hour+Professional Liability+D&O/Entity Coverage

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General ContractorsBond Claims: How to Make Them + How to

Avoid Them

Presented by Don Gregory Kegler Brown Hill + Ritter

and Jack Kehl Overmyer Hall Associates

February 26, 2014

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Should a Bond Be Provided?

Factors To Consider+Is it a specialty subcontractor difficult to replace?+Is it a subcontractor that will drive the schedule?+Is it a subcontractor who you have not “qualified” or shows “red flags”?

+Is it a subcontractor with a contract value greater than 50% of the firm’s equity?

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What Bond Forms to Use?Performance – Mandated by Owner

(Owner) Must be responsive

Performance – Industry form (AIA, ConsensusDOCS, etc.)

(Sub) or

Use your own

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When Should You Notify Surety for Sub?

+DEFAULT+Failure to pay bills+Failure to follow schedule

+CONSTRUCTION DEFECT

+WARRANTY CLAIM

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How Do You Make Claim?

Letter with Documentation

Legal Action after 60 Days

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What Must a Sub/Supplier Do To Assert Payment

Bond Claim?1. If labor/material ˃ $30,000; and

2. No contract with GC

MUST SERVE A NOTICE OF FURNISHING

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What To Do When a Payment Bond Claim is

Threatened?+ Investigate Payment with Lower Tiers

+ Communicate with your Surety

+ Seek out Documentation Downstream

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What To Do When the First Warning Signs Occur?

1. Give preliminary notice of default/termination IN WRITING.

2. Verify payment status of all subs/suppliers regardless of tier.

3. Consider joint checks or direct payment for lien/bond waivers and backcharge the sub.

4. Set in motion a plan to take over the work if necessary.

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Benefits of Proper Affidavits

+ Lien/Bond Waivers

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Final Release + Waiver

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Tier Trades/Suppliers Get Paid?+Joint checks are best

+Can make sole check if NOF received+Due diligence to avoid overpaying+Always insist on lien/bond waiver from lower tiers

+Seek affidavit from your sub+Never forget about laborers

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What To Do When a Performance Bond Claim is Threatened?

+Communication – no surprises

+Has there been a “default” – read the Contract

+Get the right construction attorney involved

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Performance Bonds – How to Avoid a Claim

Perform Document Communicate

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Questions?