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Legal Brief

Protecting District Construction: Require and Validate Payment and Performance Bonds

November 28, 2023

Always require performance bonds for construction projects.

Many districts ensure that construction contracts require contractor insurance coverage and collect the associated certificates of insurance. However, it often shocks public officials when being “insured” is not only insufficient but potentially worthless. Common construction/design contractor coverages include Commercial General Liability, Builder’s Risk, Umbrella/Excess Liability, and Professional Liability.  If a project is covered by one or more of these contractor coverage types, a district expects that if a contractor defaults or produces defective work, such default or defect would be covered.  However, that is unfortunately not always the case.

For discussion purposes, imagine a district paid a contractor to replace the floors in all district campuses. Within two months of installation, all tiles are uneven, lifting, breaking, and hazardous. Let us examine how the following coverages might apply, or not:

Commercial General Liability (CGL) and Umbrella/Excess Coverage Concerns:  A lesser-known aspect of CGL coverage is “it is not intended to protect against a mistake or an error in the construction process that only damages work in progress.”[1]Thus, the costly defective floors in the example, could be excluded from coverage regardless of contractor fault.

Builder’s Risk Coverage Concerns: The title “Builder’s Risk” suggests that risks associated with building would be covered. While it often covers events such as a natural disaster affecting a project, the policy language often excludes faulty work alone, unless the faulty work results in other issues.[2]  Thus, those faulty floors may again go without coverage recourse.

Professional Liability Coverage: Many design professionals and construction/project managers produce Professional Liability coverage.  While this could be helpful for design defects, such policies can exclude “faulty workmanship” or severely limit the timing of claims, again leaving your district without coverage for unfunded replacement of universally defective floors.

What Should I Do?  Ensure that the district always requires, receives, and validates project payment and performance bonds in accordance with Texas Government Code Chapter 2253.  These bonds provide direct protection to the district when the vendor defaults, fails to pay subcontractors, or delivers defective work.  If you need assistance securing these protections at the beginning of a construction project, or setting up a process to ensure that you are doing so effectively, attorneys at Leon | Alcala are available to assist.

[1] § 9:22. Insuring construction risks—Commercial general liability coverage, Canterbury and Shapiro, TX Construction Law Manual § 9:22(3d ed.)

[2] Glens Falls Ins. Co. v. Covert, 526 S.W.2d 222, 223(Tex. Civ. App.—Beaumont 1975), writ refused n.r.e., (Oct. 29, 1975).

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