An Extra Layer of Payment Protection
Subcontractors on construction projects often face a basic risk: they perform the work but depend on the general contractor—not the owner—to get paid. If the contractor encounters financial trouble or simply refuses to pay, the subcontractor may be left chasing payment long after the work is complete. Pennsylvania law offers several protections for subcontractors, including statutory remedies such as the Contractor and Subcontractor Payment Act or a mechanics lien. But neither of these guarantee payment.
Property owners also face risk: an underpaid subcontractor’s mechanics lien goes against the property.
To address these concerns, a practical and powerful tool exists in construction contracting: the surety bond.
This article explains, in plain terms, what a surety agreement is, how it works, and some legal questions that arise when subcontractors seek payment from a surety.
What Is a Surety Bond?
A surety bond is essentially a three-party agreement designed to guarantee that certain obligations will be fulfilled.
The three parties are:
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The principal – usually the general contractor performing the construction work.
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The “obligee” – typically the property/project owner or another party protected by the bond.
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The surety – a company that guarantees the contractor’s obligations.
When a contractor obtains a payment bond, the surety promises that subcontractors and suppliers will be paid for their labor and materials if the contractor fails to pay them. Payment bonds are common on public projects and frequently used on private projects as well. Their purpose is straightforward: to reduce the risk that subcontractors will go unpaid for completed work.
Unlike insurance, a surety owes no special duties beyond basic contractual duties, discussed below. And when it pays a claim, it retains a a contractual right (not one based on subrogation as with insurance) to recover that payment in full from the contractor (the principal). This means, it can go after the responsible party (here, the contractor) for every dollar owed and other contractual costs, without limitation to what’s “fair,” based based on the equitable concept of subrogation, as with an insurance.
In this sense, the surety temporarily steps in to satisfy a debt while preserving the express contractual right to reimbursement.
How a Surety Bond Works in Practice
Consider a common scenario.
1. A subcontractor performs work on a project.
2. The general contractor fails to pay the subcontractor.
3. The subcontractor makes a claim under the contractor’s payment bond.
4. If the claim is valid, the surety may be required to pay the amount owed.
The surety’s obligation depends on the language of the bond and the underlying contracts. In many bonds, the surety and contractor promise “joint and several” liability for amounts owed to subcontractors. That means the subcontractor may pursue payment from the surety if the contractor cannot or will not pay.
Legal Questions Raised by Surety Liability
Although surety bonds provide additional protection, they also raise several legal questions that courts continue to address.
1. When Is the Surety Liable for the Contractor’s Debt?
A surety’s liability depends primarily on the language of the bond, which is a contact. The scope of liability—such as whether it includes attorneys’ fees, interest or “joint and several liability”—often turns on the exact wording of the bond and the subcontract.
2. Is a Surety an “Insurer”?
Another issue is whether a surety should be treated like an insurance company, which would create special duties to promptly pay on claims, for example. Or, a court may require the carrier to pay the claimant’s attorney fees and punitive damages, which is unique to claims against insurance companies.
Pennsylvania courts have held that a surety bond is not the same as insurance, and therefore PA’s insurance bad-faith statute does not apply to sureties.
3. Do Arbitration Clauses Bind the Surety?
Construction subcontracts often require disputes to be resolved through binding arbitration. A recurring question is whether a surety—who may not have signed the subcontract—must honor an arbitration award issued against the contractor.
Pennsylvania courts have indicated that a surety with notice of the arbitration and an opportunity to participate may be bound by the resulting award, even if it did not attend the arbitration itself.
But the precise limits of that rule—and how it interacts with the language of individual bonds—remain an evolving area of law.
A Recent Pennsylvania Case Illustrates the Issue
A recent decision from the Supreme Court of Pennsylvania—Eastern Steel Constructors, Inc. v. Int’l Fidelity Ins. Co., 318 A.3d 810 (Pa. 2026)—illustrates how these issues arise in real disputes.
In that case, a Subcontractor (Eastern Steel) performed steel work on a Pennsylvania State University (PSU) construction project for a General Contractor (Ionadi), which ran into cash flow problems and stopped paying Eastern Steel. The General Contractor had obtained a payment bond from a Surety company. The subcontract required arbitration of payment disputes, but the surety company was not privy to it.
The Subcontractor proceeded to arbitration against the General Contractor, alone.
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The General Contractor’s Default: Eastern Steel claimed it was owed over $622,000.
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The Surety’s Response: Eastern turned to the surety (Fidelity) for payment under the bond. Fidelity paid part of the money but disputed the rest.
The surety was notified in advance of the arbitration but did not participate.
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Arbitration Award: The General Contractor (Ionadi) also declined to participate resulting in a default judgment in favor of the Subcontractor (Eastern) for approximately $433,000, which included:
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the unpaid work, ($253,788.08), interest and penalties on unpaid or untimely paid amounts due under the Subcontract as well as Pennsylvania’s Contractor and Subcontractor Payment Act (CASPA)($68,299.08), and attorneys’ fees ($111,404.62), entered “jointly and severally” against the General Contractor and Surety.
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The Lawsuit: When Fidelity still refused to pay the full arbitration amount, Eastern sued Fidelity to force them to honor the arbitrator’s decision.
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Procedural history: the trial court and superior court upheld some parts of the arbitrator’s decision and set aside others.
What the Pennsylvania Supreme Court Resolved
The Pennsylvania Supreme Court decided as follows:
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Binding the Surety: The Court ruled that because Fidelity had notice of the arbitration and a fair opportunity to participate but chose not to, it was stuck with the arbitrator’s decision. Fidelity could not ignore binding arbitration and then complain about the result later.
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Look at the Contract and all its language, such as “All Sums Due”: The Court decided that the surety’s duty to pay for “labor and materials” included the interest and attorneys’ fees the subcontractor spent chasing the contractor in arbitration. Moreover, “joint and several” liability typically does not apply in breach of contract cases, unless, as here, the parties agreed to it.
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Bad Faith Claims: The Court ruled that Eastern could not sue Fidelity under Pennsylvania’s insurance “bad faith” law. It explained and confirmed that a surety bond is a financial credit product for a three-way relationship, not a standard two-party insurance policy. The court reasoned: “Section 8371 [of PA’s insurance bad faith statute] applies to ‘insurance policies.’ It does not apply to suretyship. Eastern is not entitled to relief on its cross-appeal.”
Future Impact
This case sets several important precedents for future construction and contract law in Pennsylvania:
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Sureties Must Pay Attention: If a surety is notified that its contractor is being taken to arbitration, it can no longer sit on the sidelines and expect to challenge the outcome later in court.
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Clarity on “Bad Faith”: Construction companies and subcontractors now know they cannot use the insurance bad faith statute to get extra “punitive” damages from a surety who refuses to pay.
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Broader Liability for Fees: This confirms that a surety bond covers the full debt defined in the underlying subcontract—including legal fees and interest—if that subcontract specifically allows for them.
These questions are increasingly important as courts continue to define the scope of surety obligations in modern construction disputes. The recent Pennsylvania case discussed above provides a useful example and leads to a closer examination of when a surety may ultimately be responsible for paying a contractor’s debts to subcontractors.
The decision highlights the practical importance of surety bonds for subcontractors seeking payment. Here are some of the surety bond producers doing business in Western PA.
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