Penal Sums of Performance Bonds: The Illusion of Certainty

When a contractor defaults, a battle usually ensues among the contractor's creditors over the limited funds generated by a performance bond. Often, creditors attempt to hold the insurance company (surety) liable for total completion—usually an amount beyond that predetermined in the penal sum of the bond. Under certain circumstances, courts have ignored the penal sum and held the surety liable for completion of a project.