Bonding Companies Must Meet Deadlines Too
Kegler Brown Construction Newsletter September 1, 2005
In the case, National Union Fire Insurance Company of Pittsburgh, Pa. v. Wadsworth Golf Construction Company of the Midwest, a subcontractor properly submitted a claim within the time limit prescribed by the American Institute of Architects' (AIA) A312-1984 bond form. This form requires the bonding company to "Send an answer to the Claimant … within 45 days after receipt of the claim, stating the amounts that are undisputed and the basis for challenging any amounts that are disputed." The bonding company's correspondence with the subcontractor within the 45-day period did not, however, dispute any portion of the work and did not offer grounds to challenge the subcontractor's claim.
Maryland's highest court found that the bonding company waived its defenses when it failed to dispute the claim within the 45-day period. While the bonding company had argued that its "reservation of rights" letter should allow the bonding company (surety) to provide the details to contest the claim later, the Court rejected this argument and stated:
"To decide that the sureties, by inaction through time and effort, could dispute the entirety of a claim ad infinitum, would greatly undermine the bond's purpose of safeguarding those entities that supply goods and labor to the general contractor. The requirements of Paragraph 6 function to insure that subcontractors and sub-subcontractors are not forced to absorb the risk of nonpayment over a protracted period by the contractor and the owner, through no fault of their own."
This case may encourage bonding companies to move promptly to investigate and pay legitimate payment bond claims.