Performance Bond Guarantees Completion of Work

Our client, a municipality, has contracted with a builder to construct a service center. At the time of the contract award, the contractor presented evidence of a builders risk policy, a payment bond, and a performance bond. Half way through the project, (50 percent complete and the city had not accepted any part of the project), a lightning strike caught the building on fire, and it was destroyed. At the time of the loss it was discovered that the contractor had allowed the builders risk policy to lapse. The contractor did not have sufficient assets to complete the project in the absence of the builders risk coverage and abandoned the project.

Would the provider of the performance bond step in to complete the project under the terms of the contract, including the 50 percent of the structure that was destroyed by the fire but not insured since the builders risk had lapsed?

Texas Subscriber

If builders risk coverage is required by the contract, and given that a performance bond guarantees completion of the work as outlined in the contract, a surety would be responsible for all of the rebuilding costs in this situation. The bond guarantees performance as stated in the contract, and the contract requires builders risk insurance.

Keep in mind that the surety is responsible only for the amount of the contract costs that have been paid out by the owner. In other words, if the owner hadn't already paid the contractor for the final 50 percent of the work, that amount would not be paid by the surety.

This situation is one reason that insurance professionals advocate that the owner control the builders risk policy but charge the premium back to the contractor, who is also insured on it.

 

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