By Jordan Faux & Willi Siepmann

For most contractors in Nevada, the Nevada State Contractors Board (“NSCB”) requires the contractor to obtain a license bond or to post a cash bond in order to get a contractor’s license. These bonds vary in amounts between $5,000 and $50,000, with those amounts, which are also known as ‘penal sums’ set by the NSCB depending on the license history of the contractor and the license amount. This article will address the following questions:

1. What happens if there is a claim against my bond?
2. How can I assert a claim against another contractor’s bond?

Claims Against Your Bond

Bond claims can pop up at any time, while you are licensed, and may come from customers, laborers, suppliers or other contractors, and we have received claims from parties in accidents involving the contractor’s trucks, and from individuals or companies, to whom the contractor owes money. Such claims, even if they appear to be frivolous, should be taken seriously, as the bonding company may cancel the bond just for the claim having been asserted, which in turn may lead to your license being suspended. There may have been indicators that a claim may be asserted, such as complaining e-mails, messages and letters, and if the problem cannot be resolved, you will want to alert your attorney of the impending claim.

In most cases, you will be notified by the Surety of the claim, and they will ask you for your claim defenses. In order to protect the bond and thereby your license, you should respond immediately and as thoroughly as possible, delineating your defenses in writing and attaching all documents you consider relevant. If a complaint has been filed against you and your surety and you believe that you have valid defenses, you should immediately contact your attorney and propose that the attorney also represent the Surety. In many cases, the Surety itself will tender its defense to you. Defending the Surety will have two important benefits: (1) It probably will not cancel your bond, and it will not incur attorney’s fees and cost, which it would seek to recover from you pursuant to the indemnity agreement, which you signed in order to obtain the bond. (2) If the Surety does not tender its defense or rejects your offer to defend them, you should cooperate with them nevertheless, as you are required to do by the indemnity agreement.

In the process, you will want to assess the potential validity of the claim against your bond. In defending itself against the claim, the Surety can rely on your defenses, though it can also assert its own defenses to the claim. Such ‘independent’ surety defenses may be the two-year statute of limitation or that the bond was not in effect when the claim arose. Additionally, the applicable Nevada statute, NRS 624.273, limits bond coverage to four categories of potential claimants:

(a) Owners of the property to be improved entered into a construction contract with the contractor and is damaged by failure of the contractor to perform the contract or to remove liens filed against the property;

(b) Employees of the contractor performed labor on or about the site of the construction covered by the contract;

(c)  Suppliers or materialman furnished materials or equipment for the construction covered by the contract; or

(d) Those injured by any unlawful act or omission of the contractor in the performance of a contract.

The Nevada Supreme Court expanded these categories in the case of Midland Ins. Co. v. Yanke Plumbing & Heating, Inc., 99 Nev. 66, 657 P.2d 1152, 1983 Nev. LEXIS 389 (1983) by adding subcontractors to subsection (c), while limiting claims under subsection (d) to unlawful acts or omissions of a contractor declared to be unlawful by NRS 624, the contractor licensing statute. (Day & Night Mfg. Co. v. Fidelity & Cas. Co., 85 Nev. 227, 452 P.2d 906, 1969 Nev. LEXIS 523 (1969) ) It is presently unresolved whether construction defect claims are covered under subsection (a).

In summary, it is of utmost importance that you cooperate with the surety once a bond claim is asserted, that you inform the surety of your defenses as quickly as possible, and that you offer to defend the surety if the claim is asserted through a lawsuit.

Claims Against Another Contractor’s Bond

If you work as a subcontractor on a construction project and you do not get paid for your work or are improperly terminated from the project, you will have a legal cause of action for breach of contract against the general contractor, but you can also assert a claim against the general contractor’s bond. You will find the bond information on the NSCB web site for the contractor, and once you ascertain the name of the surety, you can find that surety’s claims information through a simple google search. As stated above, subcontractors are proper bond claimants in Nevada pursuant to the Midland Ins. Co. case cited above. But make sure that the bond referenced on the NSCB web page was in effect when your claim arose, i.e. when you were not paid or when you were terminated. Also, the two-year statute of limitations means that you must file a lawsuit within two years from the date your claim arose. If the bond information does not cover the date when your claim arose, you can contact the NSCB to learn which surety bond was in effect at that time. If you have retained an attorney to represent you, make sure that a bond claim is included in the  legal tools to assert your claim.

Special Considerations for General Contractors

General contractors are not mentioned as potential bond claimants by NRS 624.273 or by the bond and are not covered by the Midland Ins. Co. decision. Accordingly, your only potential bond claim against a subcontractor is for the commission of an unlawful act or omission in the performance of a contract. The Day & Night case cited above limited these claims to those unlawful acts or omissions specifically declared to be unlawful by NRS 624. Among these are engaging in business without a license, unlawful advertising, taking the contractor’s examination on behalf of another, and acting in a joint venture or combination without an additional license. A full list can be found in NRS 624.750. Additionally, embezzlement, i.e. receiving payment from the owner or general contractor and then not paying a supplier or subcontractor, is an unlawful act if properly proven. Vegas Paint Co. v. Travelers Indem. Co., 87 Nev. 46, 482 P.2d 813, 1971 Nev. LEXIS 345 (1971).