How well do you communicate with your bonding company when you receive notice of a claim? A recent case out of Indiana highlights the problems that can occur if you do not investigate the claims and timely report back to the bonding company.

In this case, the bonding company was contacted by various subcontractors demanding payment. The bonding company called the contractor to investigate the claim. It took several weeks for the contractor to report back to the bonding company about the amount owed. Ultimately, the contractor did admit to owing some amount to the subcontractors, but claimed that the subcontractors did not comply with state law in submitting their claims.

The bonding company paid various subcontractors and then filed suit demanding that the contractor indemnify the bonding company for the amount it paid to subcontractors. In defense of the lawsuit, the contractor again claimed that the subcontractors did not comply with state statutes in making their bond claims, but did not provide any specifics of how the subcontractors failed to comply with state law.

The court was not persuaded by the contractor’s state law arguments. Instead, the court found that the contractor was obligated to pay because the indemnity agreement, signed by the contractor, provided the bonding company the right in its “sole and absolute discretion to determine whether any claims under the bond shall be paid.” In essence, the court found that it simply did not matter if the subcontractors complied with state law in making their claims.

Perhaps the contractor would have been in a better position if it had shared with the bonding company that subcontractor claims were out of time or failed to comply with various state statutes on bond claims. Communicating with your bonding company is always a good idea, but that is especially true if claims have been made.