Recovery Against a Contractor's Surety Bond

Today's economic environment has created challenges in construction, particularly for subcontractors. The construction industry recession has led to insolvency of builders and general contractors. When builders do not pay subcontractors, remedies available for a subcontractor become challenging. Typically, a subcontractor has no contractual relationship with the owner as it contracts only with a general contractor. Absent a proper lien (Preliminary 20-day Notice), a subcontractor has few remedies against the owner.

One remedy for a subcontractor is to recover against the insolvent contractor's surety bond. A contractor's surety bond is not an insurance policy. It does not afford the protections of an insurance policy. Limits of recovery for the surety bond are $7,500 for contractors and $12,500 for owners. There are several factors to consider:

Statute of Limitations (Time Limitations)

It is important to commence a lawsuit within two years from expiration of the bond. The claim procedures could take several months to resolve. Also, payment on the bond is first come, first served. Therefore, a speedy claim procedure is necessary.

Burden of Proof

Recovery against the contractor's surety bond is set forth in California Business and Professions Code § 7000-7120. A surety's liability is established by statute. Liability of a surety bond is premised upon a proven violation of Bus. & Prof. Code § 7000. There are two primary violations when a subcontractor is not paid: (a) Diversion of Funds, and (b) Willful and Deliberate Failure to Pay.

A. Diversion of Funds

To establish "Diversion of Funds," a subcontractor is required to show the owner paid the contractor in full and these funds were specifically marked to pay for the work of this subcontractor. (Bus. & Prof. Code § 7108.) Depending upon the surety, the burden of proof can be challenging. A subcontractor will need the assistance of the owner to show evidence of payment.

B. Willful and Deliberate Failure to Pay

Another method to establish liability is to show "willful or deliberate" acts of failure to pay. "Willful or deliberate failure to pay" money due for services when a contractor has sufficient funds, establishes liability by statute. (Bus. & Prof. Code § 7120.) However, a surety will deny a claim if one fails to establish "willful or deliberate" acts by the defaulted contractor. For example, a contractor may plan to pay the subcontractor, but it is unable to pay because of unforeseen circumstances. This contractor may have received sufficient funds, but the surety may deny the claim because there was no "willful and deliberate" act required by statute. Regardless, if a contractor was paid in full for the project, it will be difficult for the surety to argue later that the defaulted contractor's failure to pay was not a "willful and deliberate." However, some sureties take the above stance.

Multiple Surety Bonds

A defaulted contractor may have multiple bonds over a length of time or changed sureties. If the damage occurred during multiple bond periods, a subcontractor may be eligible to seek recovery against multiple bonds. However, the dates of damage by the subcontractor will need to occur within these dates.

Conclusion

Making a claim on a bond must be carefully considered. The subcontractor may have remedies against the defaulted contractor's license bond and multiple bonds may exist. If a subcontractor has properly served a Preliminary 20-Day Lien on the project, Mechanic's Lien and/or Stop Notice procedures against the owner should be first considered. However, recovery of the surety bond against a defaulted contractor can be a wise method to reduce a subcontractor's loss.

No Comments

Leave a comment
Comment Information
Premium Av Preeminent 5.0 out 5 Rating Peer Review Rated LexisNexis Martindale Hubbell Avvo Super Lawyers OC Metro Register
Contact

How Can We Help You?

Bold labels are required.

Contact Information
disclaimer.

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

close

Privacy Policy

Office Locations

Irvine Office
38 Corporate Park
Irvine, CA 92606

Phone: 949-345-1621
Fax: 949-261-8800
Irvine Law Office Map

Los Angeles Office
3435 Wilshire Blvd., Suite 2700
Los Angeles, CA 90010

Phone: 949-345-1621
Phone: 213-232-1633
Map & Directions

Temecula Office
41955 Fourth St., Suite 315
Temecula, CA 92590

Phone: 949-345-1621
Phone: 951-331-4520
Fax: 951-257-0450
Map & Directions

Sacramento Office
2620 J Street #1
Sacramento, CA 95816

Phone: 949-345-1621
Phone: 916-266-9000
Fax: 916-266-9001
Map & Directions

San Diego Office
11682 El Camino Real, Suite 100
San Diego, CA 92130

Phone: 949-345-1621
Phone: 858-436-0268
Fax: 858-436-0279
Map & Directions

Las Vegas Office
1050 Indigo Dr., Suite 200
Las Vegas, NV 89145

Phone: 949-345-1621
Phone: 702-260-9500
Fax: 702-260-9434
Map & Directions