Bond Claimants Take Note: Another Bonding Company Hit Hard for Failing to Meet Deadlines

By Eric B. Travers

In another victory for subcontractors and suppliers with bond rights, the U.S. District Court for the Eastern District of Virginia, has affirmed that bonding companies, like bond claimants, have to strictly follow the rules set forth in the payment bond form.

In the case Casey Industrial, Inc. v. Seaboard Surety Co., a subcontractor properly submitted a claim (for increased costs, delays, and extra work claims) within the time limit prescribed by the bond posted by the Seaboard Surety Company. The bond contained language identical to that in the American Institute of Architects' (AIA) A312-1984 bond form, in that it required the bonding company to "[s]end 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."

Within the 45-day period after receiving the claim, the bonding company wrote the subcontractor and denied the claim. In its letter, the bonding company stated that it disputed: (1) the subcontractor's right to payment for delays that the Owner had not paid; (2) the amounts claimed with respect to deductive change orders and alleged payments; and (3) entitlement to interest and attorneys' fees.

Almost one year later, in separate litigation between the owner and general contractor for the Project in question, the judge presiding over that case issued a 107 page Findings of Fact and Conclusions of Law. In his findings, the judge in that case found that the subcontractor's work suffered "numerous quality problems," including wrongfully delaying performance of certain work and incorrectly installing other work. When the surety got wind of these findings, it attempted to use them as a basis to have the subcontractors' bond claim dismissed.

But the Eastern District of Virginia Court rebuffed this attempt, holding that the bonding company could only rely on the reasons it had identified in the 45-day period, which did not include defective work, because all "other bases for challenging the amount in question are waived." The Court explained that the bond was a contract to which ordinary rules of construction apply, and it required the bonding company:

to delineate which portions of the contract were disputed, and the bases for dispute in the 45-day period (which it did). However, the contract did not permit [the bonding company] to raise any additional bases for dispute after the 45-day period. …[T]his does not mean that Defendant is precluded from raising legal defenses, nor … from … raising any facts that support or defend the bases for contention raised in the contractual period. Defendant is precluded, however from developing new bases for dispute outside the 45-day contractual period.

This decision builds and expands upon the reasoning in the 2005 decision of Maryland's highest Court in National Union Fire Insurance Company of Pittsburgh, Pa. v. Wadsworth Golf Construction Company of the Midwest. In that case, which the Casey Industrial Court in Virginia found persuasive, the Maryland court ruled that a bonding company's failure to (within the 45 day period) specify what portions of a bond claim it intended to contest amounted to a waiver of the bonding company's right to dispute any of the claim.

Like Wadsworth, the Casey Industrial case represents another welcome development to bond claimants in that it confirms that bonding companies have the same obligation that claimants do to strictly follow the rules set forth in the payment bond form in making and defending claims. In doing so, Casey Industrial represent a useful tool subcontractors and suppliers can use against bonding companies that do not take seriously their obligation to promptly investigate and pay legitimate payment bond claims.

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