BOND CLAIMS
Surety Bond Claims

1. INTRODUCTION 1
2. PAYMENT BONDS 1
   1. Public Projects 1
      1. Federal (The Miller Act 1
         1. Coverage 1
            1. Persons Covered 2
            2. Type of Claims Covered 2
               1. Labor and Materials 2
               2. Delay Damages 3
               3. Insurance and Employee Benefits 3
               4. Attorneys Fees Not Recoverable 3
               5. Prejudgment Interest 3
         2. Making a Claim Against the Bond 3
         3. Actions on the Bond 4
      2. State/Texas (The McGregor Act) 4
         1. Contracts Less Than $25,000.00 4
         2. Contracts in Excess of $25,000.00 5
            1. Persons Covered 5
            2. Type of Claims Covered 6
            3. Making a Claim Against the Bond 6
               1. Additional Notices by Derivative Claimants 7
            4. Actions on the Bond 8
   2. Private Projects (Texas) 9
      1. Statutory Payment Bonds 9
         1. Requirements of Bond 9
         2. Making a Claim Against the Bond 10
            1. Perfection in Manner for Fixing Lien 10
               1. Retainage 11
            2. Perfection by § 53.206 of the Property Code 11
      2. Non-Statutory Payment Bonds 12
   3. Response of Surety to Payment Bond Claims 12
      1. Investigation 12
      2. Defenses of Surety 14
         1. Defenses of Principal 14
         2. Surety Defenses 14
   4. Suit on the Bond 15
3. PERFORMANCE BONDS 15
   1. Coverage 15
      1. Persons Covered 15
      2. Claims/Damages Covered 16
         1. Direct Damages 16
            1. Completion Damage 16
            2. Correction Damages 17
         2. Consequential Damages 17
            1. Liquidated Damages 18
            2. Delay Damages 18
               1. Loss of Use 19
               2. Overhead 19
               3. Interest and other financing costs 19
            3. Warranty Items 19
            4. Attorney's Fees 20
            5. Interest 20
            6. Lost Profits 21
            7. Extra-contractual Damages 21
   2. Presentation of a Performance Bond Claim 21
   3. Response by Surety 22
      1. Admission of Default by Principal 22
         1. Investigation 22
      2. Declaration of Default by Obligee 23
         1. Investigation 23
         2. Options of the Surety 23
            1. Payment to Owner 24
            2. Financing the Contractor 24
            3. Completion by Surety (Contract with Surety) 26
            4. Reletting the Contract (Contract with Obligee) 27
            5. Doing Nothing (Denying Liability) 28
   4. Defense of Surety 28
      1. Defenses of the Principal 28
      2. Surety Defenses 29
4. BAD FAITH CLAIMS 30
   1. Status of Bad Faith Claims in Texas 30
      1. Action on Implied Duty of Good Faith and Fair Dealing 31
      2. Statutory Cause of Action for Bad Faith 32
   2. Texas Case Law Applied in a Surety Context 33
      1. Underlying Suretyship Principals 33
      2. Suretyship is Not Insurance 34
      3. Implied Duty of Good Faith and Fair Dealing 35
         1. Special Relationship Nonexistent 35
         2. Sufficient Penalty Available 36
         3. No Exclusive Control by Surety 37
      4. Statutory Cause of Action for Bad Faith 37
   3. Surety's Response to Claims in Light of Bad Faith 38
   4. Possible Defenses to Bad Faith Cause of Action 39

   BIBLIOGRAPHY 40
   ENDNOTES 42

   Abstract

   This paper is an examination and discussion of payment and performance bonds on Federal and State public projects as well as private projects in the State of Texas. The discussion generally includes persons and types of claims and damages covered by the various bonds, as well as notice requirements for making a claim under the bonds. An emphasis is placed on claims handling by the surety, including the investigation and response by the surety to claims under the bonds. Defenses available to the surety are also discussed. Finally, the paper concludes by examining the status of bad faith claims in the State of Texas and their application to a construction payment and performance bond surety.

   Although the paper is written primarily from the perspective of a surety or a surety's attorney, the broad principles discussed should also be of benefit to the principal and the potential claimants under payment and performance bonds.
   
   

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