“For the want of a nail…”
This often quoted proverb reminds us that if left unresolved, small problems may become catastrophes. Construction liens fall into this category.
If you are a contractor or insurance agent with construction clients, this is a subject worth knowing about.
It all starts with a small problem: A money dispute. It could be a performance issue a general contractor (GC) has with their subcontractor or defective materials received from a supplier. This could happen on ANY project. The sub or supplier files a lien against the property to protect their interests until the matter is decided.
A Release of Lien Bond removes effect of the lien and restores the property owner’s right to sell or deal with the property as they wish. It does so by acting as the replacement security to assure the lien claimant will receive any payment that is eventually due them.
That’s all pretty simple. There is a money dispute and the Release of Lien Bond becomes the replacement security for the claimant until there is an actual decision in the matter.
Here’s where it gets exciting. Assume the project is not bonded. If there WAS, the claimant could have gone against the Payment Bond – then there would be no lien. Also assume the GC’s contract requires that they protect the owner from liens, which is a common requirement. Owners want to avoid having to pay twice if they pay the GC but the money doesn’t flow down to suppliers and subcontractors. So the GC (or prime contractor) may be charged with the task of removing the lien against the owner’s property.
From the surety’s side, a release of lien bond is difficult; it is a financial guarantee. It promises that money will be paid at a future date. Because of the immediacy of claim payment (if the matter is decided in favor of the plaintiff), the surety needs funds (collateral) in hand. This means the GC (bond applicant) has to come up with cash for possibly twice the lien amount, because that’s how the bond amounts are set.
It gets worse: The GC faces three bad options.
- Pay the claimant just to settle the dispute (and thus release the lien)
- Put up collateral (2x?) and pay for a Release of Lien Bond for the privilege of fighting the claim in court
- Ignore the lien and risk being in default of their contract or at the minimum, have contract funds withheld by the owner
We think the P&P bond is just for the protection of the owner, but the GC would have benefited if the project was bonded. There would have been a Payment Bond claim. With their sureties support the GC would deal with the matter and not involve the owner.
KIS Surety is the national contract bond underwriting department for Great Midwest Insurance Company, a national, corporate surety with an A-8 rating. We throw all this underwriting talent at your bond opportunities and support contracts up to $10,000,000.
If you have a contract surety case that needs a fast, creative response, call us: 856-304-7348
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