William (“Trey”) W. Watkins, Jr. 145 King Street, Suite 300
Charleston, SC 29401 843-329-9500
Introduction to Surety
3 Main differences between Insurance and
Bonds
1) Parties to the agreement 2) Loss Expectations
Introduction to Surety
Surety Companies Today
• Defined
Surety Bond Underwriting
•
The Process
• Defined
•
The Players
•
The 3 “C’s” of Company Underwriting
• Character • Capacity • Capital
Basic Contract Surety Bonds
•
Bid Bond
•
Performance Bond
•
Payment Bond
•
Owner assurance if contractor can obtain
Liens v. Bonds
•
No Lien Rights on Public Projects
Partial Text of Miller Act
Before any contract, exceeding $100,000 in amount, for the
construction, alteration, or repair of any public building or public work of the United States is awarded to any person, such person shall furnish to the United States the following bonds, which shall become binding upon the award of the contract to such person, who is hereinafter designated as “contractor”: . . .
S.C. Miller Act – “Little Miller Act”
When a construction contract is awarded pursuant to Section
11-35-3020, the following bonds or security shall be delivered to the using agency and shall become binding on the parties upon the
execution of the contract:
(i) a performance bond satisfactory to the State, executed by a surety company meeting the criteria established by the board in regulations, or otherwise secured in a manner satisfactory to the State, in an amount equal to one hundred percent of the price specified in the contract; (ii) a payment bond satisfactory to the State, executed by a surety
company meeting the criteria established by the board in regulations, or otherwise secured in a manner satisfactory to the State, for the protection of all persons supplying labor and material to the contractor or its
subcontractors for the performance of the work specified in the contract. The bond shall be in an amount equal to one hundred percent of the
contract price.
(iii) in the case of a construction contract valued at fifty thousand
The Miller Acts
• Theory
• Triggers
• Fed. - $100,000
• S.C. - $50,000
• Federal or state ownership, not just funding
• What it guarantees
• Performance
• Payment
Miller Acts - Who is covered?
Only those who furnish labor or materials directly to a bonded contractor or
directly to a subcontractor of a bonded contractor.
light green are key players green entities are protected Red are not
Miller Acts – Work Covered?
• Labor and Materials
• Good faith intent to be used on job • Fair rental value of leased equipment • Directed changes (including oral)
• All sum “justly due” under the contract
Miller Acts – Notice Requirements?
90 days for remote claimants –
Anyone who does not have a direct
relationship with the bonded contractor and is covered by the Miller Acts
Miller Acts – Details of the Notice
Requirements?
•
Written Notice
• actual notice may not be enough
•
Served within 90 days
•
Served on General Contractor
• Registered mail, or personally
Miller Acts – Statute of Limitations?
1 year for anyone protected by the Miller Acts – i.e. in green
Contractor’s Notice of Project Commencement and
Location Notice
• File with the clerk of court or
register of deeds in the county or counties where the real property is located,
• Pay filing fee,
• Post copy at the project,
• Complete all within 15 days of commencement of work.
Notice of Furnishing Labor or Materials
• Provide via certified or registered mail when first supplying labor, service, materials, or rental
equipment to a Project. • Statute allows fax or email for Bond Claim
• If notice is given, then the only limit on a claims is the penal sum of the bond.
Bond Claims – Making a claim
•
Must give timely and proper notice
• Documentation
• Demand in writing (27-1-15)
Bond Claims – Keep the Surety Informed
and Involved
The key to receiving a benefit under the
bond is:
•
Proper Notice
Claim Letter Example
• If protected by the Miller
Acts this is example form to make a claim under a
payment bond.
Proof of Claim
• Standard proof of claim attachment for claim letter
• Surety will likely
Bond Claims – Surety Options
• Deny claim and rely upon GC to resolve
• Independently investigate both positions
• Reimburse owner for damages
• Complete the work with an internal contractor
• Hire a replacement contractor
• Finance the defaulted contractor’s completion of the
Bond Claims – Surety Defenses
•
Surety stands in shoes of Principal
• Notice and procedural requirements • Payment defense
• Material misstatements on application • Right to contract balances
•
Penal Sum of Bond
•
Indemnity
Bond Claims – What about Private Jobs
with Payment Bonds?
•
Payment Bonds on Private Projects
• 2 Remedies
• File Mechanics Lien and • Make a claim on the Bond
• Statutory Notice requirements are still
applicable on Private projects for Payment Bonds
Sureties Rights & Obligations
Test - 1
Surety bonds are the same as insurance. FALSE
Many distinctions between insurance and surety
bonds exist. The main difference is that insurance is written to insure against expected losses. Surety
bonds, however, are never written to cover expected losses. The surety’s goal is to properly underwrite the risk and issue bonds for a principal whose assets are sufficient to cover a loss in the event of a default
Sureties Rights & Obligations
Test - 2
Can an unpaid subcontractor file a lien on a
public project?
NO
It is against public policy to lien public property.
Accordingly, most jurisdictions and public
entities require surety bonds to protect parties
that would otherwise have lien rights. On
Sureties Rights & Obligations
Test - 3
A supplier to a supplier of the general
contractor on a federal project is
protected by the Miller Act.
FALSE
Only those with a direct relationship with the
prime contractor are covered. This is true for
South Carolina projects covered by the
Sureties Rights & Obligations
Test - 3
Only Subcontractors and Suppliers to the GC or first tier subcontractor are protected by the Miller Acts
Sureties Rights & Obligations
Test - 4
A supplier to a subcontractor on a federal
project is protected by the Miller Act.
TRUE
Claimants with a direct relationship to the
prime contractor are protected by the Miller
Act and by the State’s Little Miller Act.
Sureties Rights & Obligations
Test - 4
Only First and Second Tier Subcontractors and Suppliers are protected by the Miller Acts
Sureties Rights & Obligations
Test - 5
Attorney’s fees can be recovered under the
Miller Act.
Sureties Rights & Obligations
Test - 6
Notice of a claim to the prime contractor on a
federal project must be made within 3
months of the last day the claimant
performed labor or provided materials for a
project.
DEPENDS
The statute requires written notice within 90 days. Under certain situations, 3 months is less than 90 days.
Sureties Rights & Obligations
Test - 7
A suit against a payment bond on a federal
project must be brought within how many days of last furnishing labor or materials?
a. 6 months b. 180 days c. 1 year d. 3 years
c. 1 year
Although the notice period for 2nd tier claimants is based on 90 days,
the time for filing suit against a payment bond is 1 year for 1st tier
Sureties Rights & Obligations
Test - 8
In South Carolina, a Notice of Project
Commencement and a Location Notice can only be used on a private, non-bonded project.
NO
Sureties Rights & Obligations
Test - 9
A Notice of Project Commencement and a Location Notice can be used at any time during a project.
FALSE
Under the terms of the statute, a Notice of Project
Sureties Rights & Obligations
Test - 10
If a private project is bonded, subcontractors and suppliers cannot file a mechanic’s lien, but must instead pursue their claims against the bond.
FALSE
Key Points on Offensive
• Obtain a copy of the payment bond at the start of the project
• Know who the players are and whether you can recover under the bond
Key Points on Offensive (cont.)
• Send out Notice of Furnishing Labor or Materials-
• make sure it:
• identifies the amount outstanding and
• the party you supplied labor or materials to and • demands payment of the amount due
Key Points on Defensive
• File a Notice of Project Commencement and post a Location Notice.
• Consider requiring large subcontractors to provide their own payment bonds.
Key Points on Defensive (cont.)
• Obtain Bond Waivers from 1st Tier Subcontractors
and Suppliers, as well as 2nd Tier Subcontractors
and Suppliers who have given a Notice of Furnishing Labor or Materials.
• Watch the clock. Be aware of the 90 day period and 1 year period and attempts by parties to
27-1-15 Demand Letters
•
SC Code
§27-1-15
•
Demand letter for payment to Surety to
make a fair and reasonable investigation of
the claim.
•
Allows recovery of
Subcontractors and Suppliers
Payment Protection Act
• S.C. Code §29-6-210
• “Paid if paid” not enforceable
• “Paid when paid” enforceable, but only for a reasonable
amount of time
• Creates duty, giving rise to private cause of action,
against a government entity for failure to ensure that a contractor is properly bonded. Sloan Construction v. Southco Grassing, 377 SC 108 (2008).
Prompt Pay Act
• SC Code §26-6-10
• Contract performance entitles party to payment from owner within 21 days of pay request.
• Contractor to pay its subcontractors within 7 days
• Does not include disputed amounts
• Contract may state different timeframes
• Penalty
Failure to Pay Subs is Criminal
• SC Code §29-7-10
• Crime for Contactor or sub to not pay lower tiers out of money they receive from their contract.
MECHANIC’S (CONSTRUCTION) LIENS
•
Purpose and Theory
•
What Property is Lienable
•
Notice Requirements
•
The Suit to Enforce the Lien
– Timing – Venue
MECHANIC’S (CONSTRUCTION) LIENS
•
Suppliers & Subcontractors
– Which Statute Applies
– Supplier Proof Requirements
MECHANIC’S (CONSTRUCTION) LIENS
•
Suppliers & Subcontractors
– Which Statute Applies
– Supplier Proof Requirements
– Notice of Project Commencement
MECHANIC’S (CONSTRUCTION) LIENS
•
Suppliers & Subcontractors
– Which Statute Applies
– Supplier Proof Requirements
– Notice of Project Commencement
– Notice of Furnishing of Labor or Materials – Payments After the Filing of Lien
•
Bonding Off Lien
Project Name Owner G C Date last Material Shipped Date notice of Furnishing Material Date Notice of Commence Date Building Permit Account Balance Okraberry at the Farm
The Ocean Co. Happy GC 01/29/10 02/12/09 104247.78
Hogbreath Island Island
Shelbray Assoc., LP
ABC Builders 01/09/10 02/04/10 11/13/08 10/29/08 43800.75 IGA Store AC Development
Club, LLC ABC Builders 01/24/10 02/04/10 11/14/08 10/26/08 43460.85 IGAStore AC Development Club, LLC ABC Builders 08/30/09 02/04/10 11/14/08 10/26/08 15257.68 Teakwood Townhouses Seascape, LLC Happy GC 01/24/10 02/12/10 04/29/09 04/23/09 6608.06 Fairway Oaks &
Bonding Off Lien
Contractor Files $30,000.00 Lien
Owner Posts $40,000.00 Bond (1/3 Amount of Lien)
Contractor Limited to $40,000.00 Recovery when otherwise could have recovered $30,000.00 Attorneys Fees.
Potential Recovery $60,000.00
Bond $40,000.00
MECHANIC’S (CONSTRUCTION) LIENS
•
Waiver, Release Failure to Perform
•
Extra Work
•
Settlement Offers, Set-Offs and Compulsory
Counterclaims
•
Priorities
– Mechanic’s Lien vs. Mortgage
Example 1
Contractor File $25,000.00 Lien
Owner makes written offer of $10,000.00
Contractor makes counteroffer of $20,000.00 $20,000.00
Example 2
Contractor Files $25,000.00 Lien
Owner makes written offer of $10,000.00 Contractor does not counter
$25,000.00
Example 3
Contractor Files $25,000.00 Lien Owner makes no settlement offer
Contractor makes offer of $20,000.00 $20,000.00
MECHANIC’S (CONSTRUCTION) LIENS
•
Contractor’s Defenses Against Subcontractor
and Supplier Liens
MECHANIC’S (CONSTRUCTION) LIENS
• Contractor’s Lien Checklist
– File Notice of Project Commencement within 15 days of work commencing.
– Post Location Notice on job site.
– File and serve Notice and Certificate of Mechanic’s Lien, Affidavit of Mechanic’s Lien, and Statement of Account within 90 days of last performing work or furnishing materials.
– File suit to foreclose mechanic’s lien and notice of lis
MECHANIC’S (CONSTRUCTION) LIENS
•
Contractor’s Defense Checklist
– Contractual Defenses
• Progress Payment Use Restrictions • Payment Use Verification
• Partial Lien Waivers
• Contractor’s Remedial Actions for Subcontractor’s improper payment
MECHANIC’S (CONSTRUCTION) LIENS
•
Contractor’s Defense Checklist
– Statutory Defenses
• Notice of Project Commencement • Notice of Intent to Lien
• Notice
• Time Limitations
• Statement of Account
• Timely Suit to Enforce Lien • Lis Pendens
MECHANIC’S (CONSTRUCTION) LIENS
•
Contractor’s Defense Checklist
– Other Defenses
• Bonding Off Lien
• Subcontractor’s Licenses (where subcontractor required by law to have license)
• Waiver, Release, Failure to Perform
South Carolina Mechanic’s Lien
Check List
• Subcontractor/Vendor Supplier and Remote Claims
n Sub-subcontractor and supplier to subcontractors serve Notice of Furnishing Labor or Materials on General Contractor. Service can be effected by certified mail, return receipt requested,
restricted delivery.
• Prepare Statement of Account. § 29-5-90
n Prepare and file the Notice and Certificate of Mechanic’s Lien, Affidavit of Mechanic’s Lien and Statement of Account in the Office of the Register of Deeds, the Clerk of Court for the county in which the property is located.
South Carolina Mechanic’s Lien
Check List
• Subcontractor/Vendor Supplier and Remote Claims
• Serve the Notice and Certificate of Mechanic’s Lien, Affidavit of Mechanic’s Lien and Statement of Account on the Owner of Record and all other upstream parties in claim of contracting. Service can be effected by certified mail, return receipt
requested, restricted delivery.
• Time requirement: must serve within 90 days of last performance or furnishing of materials.
• Suit to Foreclose on Lien
Mechanics’ Lien Test
Is someone who chooses to file and
foreclose a mechanics’ lien limited to
that remedy only?
If not, what other remedies are available against the general contractor (if applicable) and against the
owner?
NO
Payment Bond Claim, Action for Breach of Contract
Mechanics’ Lien Test
A Mechanic’s Lien may attach only
to a fee-simple ownership interest.
FALSE
Mechanics’ Lien Test
What limits exist on liability of an
owner of property to a
subcontractor or supplier with
whom he does not have a contract?
Limited by the amount owed on the
Mechanics' Lien Test
What procedure might a general contractor
follow to guard against surprise by remote
claimants?
File and post a Notice of Project
Commencement.
Mechanics' Lien Test
A mechanic’s lien takes priority over all other
liens.
FALSE
A mechanic’s lien will not have priority over a
real estate mortgage on the property which has
been duly filed for record prior to the filing of
Mechanics' Lien Test
When is the deadline for filing suit and perfecting a mechanic’s lien?
a. 90 days from the last furnishing of labor or materials b. 180 days from the last furnishing of labor or materials c. 6 months from the last furnishing of labor or materials d. 6 months from the filing of the mechanic’s lien
c. 6 months from the last furnishing of labor or
materials
Mechanics' Lien Test
•
Is an inaccurate property description fatal to
a lien?
Mechanics' Lien Test
How may a remote claimant ensure payment
in the event the person it contracts with
defaults?
By serving the General Contractor with a
Notice of Furnishing Labor or Materials.
William (“Trey”) W. Watkins, Jr. 145 King Street, Suite 300
