<p><em>by Joseph C. Blanner, Partner at Behr, McCarter &amp; Potter, PC</em></p>
<p>The three primary bonds that are purchased on construction projects are bid bonds, performance bonds and payment bonds.  Over the years, I have spoken to contractors and owners and, in many instances, there is confusion about what each bond covers.  This brief article will attempt to explain the differences.</p>
<p><strong>Example 1: Bid Bond</strong></p>
<p>ABC School District has put out a Request for Proposals for a new roof on their high school building.  Contractors X, Y and Z submit bids to perform the work listed in the RFP.  The School District requires each of the contractors to submit a bid bond with their bid.  The bid bonds are purchased by the three contractors from sureties.  The School District decides to accept Contractor Y's bid.  Contractor Y determines that they have underbid the project and decides not to execute the contract and not to perform the work.  In this instance, the School District can make a claim against the bid bond due to Contractor Y's failure to abide by its bid.  Thus, a bid bond is a type of bond (often required on public construction projects, but not exclusively) designed to protect the owner in the event that the bidder refuses to enter into a contract after the contract is awarded or the bidder withdraws his bid before the award.  A bid bond is an indemnity bond, which will be discussed below.</p>
<p><strong>Example 2: Performance Bond</strong></p>
<p>Municipality 123 retains Contractor AB to construct a municipal swimming pool at its recreation center.  Contractor AB enters into a written contract and begins performing the work.  During the performance of the work, Contractor AB goes out of business leaving the work about 50% finished. Additionally, some of the work that was performed was defective.  Contractor AB has provided Municipality 123 with a performance bond.  Municipality 123 can assert a claim against Contractor AB's performance bond for the cost to perform the unfinished work and the cost to correct the defective work.  Thus, a performance bond protects the owner from the contractor's failure to perform in accordance with the terms of the contract.  A performance bond does not provide protection against subcontractor or suppliers who have not been paid.  A performance bond is also an indemnity bond.</p>
<p><strong>Example 3: Payment Bond</strong></p>
<p>Public Water District QQ has retained Contractor ZZ to install a new water tower.  Because the project was over $25,000, Contractor ZZ was required by the Water District to provide a payment bond.  Contractor ZZ completed the work, but failed to pay Subcontractor X for its work.  Subcontractor X cannot pursue any claim against the Water District.  However, Subcontractor X can assert a claim against the payment bond for the amount owed to it for its work on the project.  Thus, a payment bond is designed to provide security to subcontractors and materials suppliers to ensure payment for their work, labor and/or materials on the project.  A payment bond is also an indemnity bond.</p>
<p>Indemnity Bonds: As set forth above, bid bonds, performance bonds and payment bonds are indemnity bonds. These bonds are not insurance policies.  If a covered claim arises against a commmercial general liability policy, the insurer has a contractual obligation to indemnify and defend the insured (i.e. the party obtaining the policy) and cannot seek repayment from the insured for amounts paid out as a result of a covered claim.  If a claim arises and is paid out on a bid bond, performance bond or payment bond, the surety (the party issuing the bond) will look to the contractor to indemnify and defend it.  So, if a claim is asserted against a contractor's bid bond, performance bond, or payment bond, the surety is going to look to the contractor to defend the lawsuit and to pay any damages.</p>
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