The Expert Podcast

so what happens when a surety company has to pay out on a very large bond because of a construction defect or some other type of claim by the obligee. here's a perfect example and this is a very large project in Austin where there was a hotel being built and the subcontractor defaulted on their obligations. meaning that they didn't complete the work or completed it an improper manner. and the general contractor and the property developer decided to pursue remedy under their surety bond. and so it started out with a lawsuit where the subcontractor was sued by the prime contractor and they were countersued by the surety. now again this isn't designed to get into the weeds of the legal interpretation or legal advice it just gives you an example of what happens when a surety is disputed. what happened is the surety company went to pursue remedy against the principal which is the company that purchased the bond. and there was a countersuit because even though the principal doesn't have immediate obligation of paying under that defect eventually if the surety has to pay to be obligee to the third party after that payments done they will go back and subregate against the principal. so you're not off the hook if you buy surety bond. your client is made whole by the coverage on the bond but you as the principal are now liable to pay back the surety the company. some of these cases can get pretty big millions of dollars. so how do you protect yourself as a contractor general contractor. first even though you have a surety bond you want to make sure that all of the steps in the construction process or licensing process are being followed up and there's good quality control. because one your subs defaults and your surety bond has to pay out it's gonna come back to you. once the surety pays not only will you have to pay restitution to the surety you're also going to have that flag on your record which means it might be difficult to get a surety bond in the future. so just because you have a bond doesn't mean it's carte blanche you have to worry about quality control or the proper fulfillment of contracts. you still have to follow through. now if the subcontractor had assured that was benefit you ask the obligation now it's a different story. now you may have more protection. so making sure you understand the different layers of surety and even general liability insurance these claims get into GL coverage or work comp coverage if there's an injury. and you don't want to rely just on layer of coverage want to make sure all the gaps are filled in for potential exposure to you and third parties because of a third party is injured of course they're going to come back and either sue you or their insurance company will subregate against you as the oximeter cause or distal because of the injury or damage. so make sure you understand what you're surety covers if there's holes or gaps in that exposure you wanna make sure you have all the pieces of that liability protection in place so they don't end up with a large payment that you thought you're covered for that comes out of your profit and loss.