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What Are Connecticut Payment Bonds?
If a contractor fails to pay subcontractors or suppliers, project owners could have their property encumbered by mechanic’s liens. With a payment bond in place, however, an unpaid subcontractor or supplier files a claim against the payment bond furnished by the project owner (known as the bond’s “principal”) for the financial protection of the project owner (the “obligee”). The principal is legally obligated to pay all valid claims filed by unpaid subcontractors or suppliers within a certain time period following project completion.
Who Needs Them?
Connecticut’s “Little Miller Act,” the state’s version of the federal Miller Act, is found in the Connecticut General Statutes, Chapter 53, under the title, “Bonds on Public Works Contracts.” It requires contractors to furnish a payment bond in order to enter into a contract for any state-funded construction project, regardless of the project’s size. The payment bond must be in an amount equal to 100% of the project value.
The Little Miller Act doesn’t govern bonding for privately funded construction projects. Still, private project owners may require payment bonds from their chosen contractors to protect the property against mechanic’s liens.
How Do Connecticut Payment Bonds Work?
A Connecticut payment bond is a legally binding contract among three parties: the obligee, the principal, and the bond’s guarantor (the “surety”). The surety guarantees the payment of valid claims by agreeing to extend credit to the principal for that purpose if necessary.
The standard practice is for the surety to confirm the validity of a claim and decide whether it must be paid. If the claim is valid, the surety will pay the claimant directly, drawing against the line of credit set up for the principal when the payment bond was sold. The surety’s credit terms dictate the payment schedule for the principal. If not repaid, the surety can take the principal to court to recover the funds.
How Much Do They Cost?
The premium cost of a Connecticut payment bond is a small percentage of the required bond amount. That percentage is the premium rate, which the surety sets on a case-by-case basis through underwriting.
The main underwriting goal is to determine what premium rate is needed to offset the credit risk—the risk of the principal not repaying the surety for the credit extended in paying a claim on the principal’s behalf. Credit risk is easily measured by the principal’s personal credit score.
Guaranteeing a payment bond for a principal with a high credit score entails little credit risk, making a low premium rate appropriate. A low credit score warrants a higher premium rate to offset the greater credit risk.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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