The “Infallible” Surety, Is Not Immune From The Impact Of A Bad Economy

When owners and general contractors want to ensure that the work on a project is performed and the entities downstream get paid, they often require payment and performance bonds, backed by a surety.  Involving a surety reduces the owners and general contractors’ risk by giving them a fallback option if the entity that was obligated to complete that work or make those payments goes out of business.  Bonds are an appealing option, especially in a bad economy, because everyone realizes that construction companies go out of business.

Everyone must also realize that sureties go out of business, and when they do, the bonds they issued become essentially worthless.  For example, on February 8, 2012, at the request of the Pennsylvania Insurance Commissioner, a Pennsylvania Court ordered that First Sealord Surety, Inc. be liquidated.  I recently submitted claim packages on behalf of a general contractor that had been sued by an owner for alleged defects in two of its subcontractors’ work.  While the general contractor took the precaution of getting its subcontractors to have performance bonds issued, the surety that issued their bonds was First Sealord Surety, Inc.  Contrary to the “infallible” perception some people have of sureties, the instructions to submit a claim against First Sealord Surety, Inc.’s estate reveal how bleak the prospects of recovering on a defunct surety’s bond can be:

“After all claims against this company are evaluated by the Statutory Liquidator and approved by the
Court, approved claims will be paid by priority level based on available funds in accordance with 40 P.S. Section 221.1 et seq.  The amount of the payment will depend on the assets available.  The amount to be paid on an individual claim, if any, will not be known until all claims are evaluated.  In any event, payment will not be made for several years.” (emphasis added).