April 2020

The Three C’s Of Surety Bond Underwriting And The Increasing Importance Of Character

BEFORE ISSUING A BOND, A SURETY WILL EVALUATE A COMPANY USING THE THREE C’S: (1) CAPITAL, (2) CAPACITY, AND (3) CHARACTER. AND WHILE SURETYSHIP IS NOT A FIELD THAT CHANGES OFTEN, A SMALL SHIFT TOWARDS RELYING MORE ON CHARACTER IN THAT EVALUATION HAS BEEN MAKING ITSELF MORE VISIBLE IN RECENT YEARS. Suretyship encompasses many traditional practices and is not always amenable to emerging trends. However, even the smallest change that occurs within the field can have a major impact. In evaluating a potential principal, sureties have gone back to focusing more on a potential principal’s character. As explained below, while construction companies seeking bonds have always focused on having sufficient capital and capacity, they now also must focus on having good character. Just like how homeowners need homeowner’s insurance in the case of a flood or earthquake, builders and developers need bonds when taking on projects in case they develop issues with things like design, subcontractors, or supplies. However, while insurance and bonds may seem similar, they are actually very different. Bonds are more analogous to a form of credit that involves three parties where the bonding company (the surety) guarantees to the owner of the project (the obligee) that the contractor (the principal) will perform all its obligations under the contract. Subsequently, if the principal does not perform its duties, the surety must step in to ensure completion of the project and will then look to the principal for all the losses it incurs in doing so. Due to the risks associated with underwriting a bond, a surety will meticulously evaluate a potential principal before deciding to issue a bond. In doing so, as is industry practice, the surety will focus on the three “C’s”: capital, capacity, and character. Capital A surety must ensure that a principal has the financial wherewithal to be able to complete a project and fulfill its obligations under a contract. As such, a surety will evaluate a principal’s cash on hand, its assets, and its current lines of credit. This is not, however, limited to a present-day analysis. It will also include an analysis of the principal’s future capital, because the surety will need to learn how much cash the principal may require from the surety in case someone makes a claim against a bond or if the principal may not have sufficient funds to complete the project. Capacity When a surety looks at a principal’s capacity, it looks at the ability of the principal to complete the project under the contract. In addition to examining financial ability, the surety looks at a principal’s technical ability and ability to close out the bonded contracts. A principal is technically able to perform the work if it employs or can secure the necessary manpower to timely perform it.1 Additionally, the surety must be assured that those people have the necessary expertise to do the work correctly. This includes on-site laborers, as well as administrative staff, such as accountants and project managers. A principal’s ability to close out the bonded contracts is even more important. To assess this, the surety will look to a principal’s past projects to see what projects were ultimately completed. In addition, the surety will attempt to learn how the principal performed on a project that was known to have difficult issues. Character While character has always been an important “C”, sureties are placing more and more weight on a principal’s character, because it is the key to a successful relationship between the principal and the surety. In evaluating character, a surety company will assess whether a company is trustworthy enough to fulfill its obligations under the contract. A surety will look to the principal’s reputation in the market, including successes with prior projects and operational integrity, such as promptly paying its suppliers. A surety will also look to whether the principal is good at communication, whether it is trustworthy, and whether it is honest in conducting business. The relationship between a surety and a principal is generally not a short one, especially if it involves multiple bonds for multiple projects, which is not uncommon. The surety and the principal must communicate regularly regarding any and all disputes that may arise, including those with supplies, laborers, or contractors.2 While the surety and the principal need not agree all the time, the surety must believe that the principal is doing everything it can to fulfill its obligations under the contract and that the principal will provide ready access to its books, records, and other necessary information.3 As such, communication, trustworthiness, and honesty are extremely important characteristics for a principal to have. Character is evaluated not only in the potential principal, but also in the individual indemnitors who are the personal guarantors for the surety bond. Specifically, if the surety incurs losses on the principal’s behalf and the principal has insufficient funds to indemnify the surety for the losses, the individual indemnitors are responsible for the rest. As such, it is important for the surety to assess the same characteristics for the indemnitors. Without good character in a potential principal and indemnitors, a surety will be extremely hesitant to issue a bond. Even if the principal has enough capital and the necessary capacity to complete a project, it means nothing if the surety cannot trust the principal to make a good-faith effort to complete the project and fulfill its obligations under the contract. https://www.jdsupra.com/legalnews/the-three-c-s-of-surety-bond-62597/

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How Chubb Is Navigating Coronavirus and Its Impact on Growth

Chubb Chairman and CEO Evan Greenberg insists his global P/C insurer has strong fundamentals, but warned at the same time that the ongoing pandemic crisis will spur unpredictable revenue challenges affecting many lines of coverage. Broadly speaking, the insurer will likely take hits on the liability side and earnings via at least a temporary reduction in premium revenues, Greenberg explained during an April 22 investor call held to discuss Chubb’s Q1 2020 earnings. “Our growth momentum, particularly in our commercial [property/casualty] business globally, continued into April, and we continue to experience improved rate to exposure,” Greenberg said. “As we go forward, offsetting that, will be a meaningful impact to growth from the health and economic crisis as exposures in important areas shrink for a time, with the impact varying by country.” Reduced Exposures Consumer-related lines including travel insurance, A&H “discretionary purchases” and automobile insurance will all take hits, as customers ride out stay-at-home orders or quarantines. Commercial lines are also vulnerable, he said, “where exposures are reduced while businesses are closed, or as they reopen and are diminished, or simply go out of business.” He expects trade credit, surety and workers compensation to also be affected by reduced exposures. “It will be pretty broadly based,” Greenberg said, noting the pandemic “has created exposures for clients and industries broadly.” Beyond that, Greenberg emphasized that the company does not give specific forward guidance, and that it is hard to specify how much of a revenue impact it will face in the months ahead. “In this case the degree of revenue impact is simply unknowable,” Greenberg said, though he added that Chubb’s fundamental condition is otherwise solid and thriving. “We are and will continue to benefit in terms of growth from improved technical conditions, as many insurance companies take actions to reduce exposures or improve their rate to exposure to correct for inadequate underwriting,” Greenberg noted. In trying to draw a parallel to past events, Greenberg said that for now, the COVID-19 crisis seems manageable even with its uncertainties. “From what we know now, this will be a manageable, cat-like event,” Greenberg said. “However, from an exposure we really don’t discretely price for … its impact is additive to our normal projected loss exposure. In a sense, it is like terrorism exposure was before 9/11.” Business Interruption Greenberg emphasized multiple times that the insurer’s capital position is “strong,” and insisted “Chubb will continue to operate at a high level.” He noted, for example, that the insurer is working to keep its 33,000 employees around the world safe by way of “aggressive work-from-home protocols” and reiterated that they have secure jobs with no-layoffs during the crisis. He also said the company is maintaining standards about how it supports customers and distribution partners, and also extending payment terms and taking other measures to support clients and others facing pandemic stresses. “We are operating around the globe as a normal company during abnormal times,” Greenberg said. Greenberg strongly opposed the pressure from states and trial attorneys to force carriers to retroactively cover business interruption claims for COVID-19 losses. He spoke on the topic recently. “That is retroactively changing contract and increasing our exposures,” Greenberg said. “That is unnecessary harm and would do great damage.” He had harsh words for trial attorneys seeking to force the change through the court system. “Lawyers and the trial bar would come to torture the language on our standard industry forms and try to prove something exists that actually doesn’t exist, and try to twist the intent when the intent is very clear,” Greenberg said. “The industry will fight this tooth and nail. We will pay what we owe.” https://www.insurancejournal.com/news/national/2020/04/27/566365.htm

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legislation

Construction Performance Bond Surety Relieved of Liability Because Bond Owner Did Not Provide Timely Notice of Default

A recent decision from the D.C. Circuit Court of Appeals provides notice to construction performance bond owners and sureties that a bond owner may forfeit its rights under a bond if timely notice of default is not provided to the surety. See Western Surety Company v. U.S. Engineering Construction, LLC, — F.3d —, 2020 WL 1684040 (April 7, 2020)  In this case, the appellate court affirmed a district court’s summary judgment decision dismissing claims against a surety under a construction performance bond because the surety had not received timely notice of a default and therefore was prejudiced by its inability to have an opportunity to cure the default.   Subcontractor U.S. Engineering Construction, LLC (“U.S. Engineering”) contracted with sub-subcontractor United Sheet Metal for sheet metal work relating to the construction of a new South African embassy in Washington, D.C.  U.S. Engineering paid the premiums for a construction performance bond from Western Surety Company to ensure completion of United Sheet Metal’s work.  The parties entered into an AIA A312-2010 contract for the performance bond, which included a requirement under Section 3 for U.S. Engineering to provide Western Surety with notice if it considered declaring United Sheet Metal in default.  The bond did not explicitly state the required timing for such notice. United Sheet Metal failed to perform under its contract and U.S. Engineering terminated its subcontract with United Sheet Metal without any prior notice to Western Surety.  In fact, U.S. Engineering waited more than eight months after terminating United Sheet Metal before notifying Western Surety of the default, which notification only occurred when it filed a notice of claim against the bond. The district court granted Western Surety’s motion for summary judgment on the basis that timely notice was not provided under the bond.  In affirming that decision, the appellate court determined that U.S. Engineer’s delay precluded a claim under the bond.  Western Surety was harmed by the delay because “[b]y unilaterally completing United Sheet Metal’s remaining contractual obligations before notifying Western Surety, U.S. Engineering deprived Western Surety of its contractually agreed-upon opportunity to participate in remedying United Sheet Metal’s default.”  The appellate court concluded that, “because the bond expressly provides the surety with the opportunity to participate in curing the subcontractor’s default, we hold that it is a condition precedent to the surety’s obligations under the bond that the owner must provide timely notice to the surety of any default and termination before it elects to remedy that default on its own terms.” This case serves as a reminder for construction companies and sureties to review and follow the terms of a bond before taking any actions to enforce it, and that timely notice may be required in order to give the surety an opportunity to cure the default, even if not the bond does not explicitly state a deadline for such notice.

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Uncertain Surety: Expiration Of A Limitation Against A Principal Is Not A Defence To A Bond Claim

Sometimes failing to arbitrate a dispute with a binding arbitration provision can be fatal to a claim under a construction contract, particularly if the limitation period to commence the arbitration has expired.  But, in the case of a project with a performance bond, things can sometimes become more complex. Performance bonds are a common tool on major construction projects. They are three-party contracts: the obligee (the party to whom the obligation under the bond is owed; typically an owner, although can be a general contractor on large projects in which multiple levels of bonding are in place); the principal (the party performing the work under the bonded contract; typically a general contractor, although can be a subcontractor on large projects in which multiple levels of bonding are in place); and the surety (an insurance company). If the bonded contract proceeds without issue between the obligee and the principal, then the surety plays no role in the project. However, if issues arise between the obligee and the principal and the principal is declared to be in default of the bonded contract, then the surety is required to step in and investigate. The surety can either deny or allow the bond claim. If the claim is allowed, then the surety essentially steps into the shoes of the principal, and has the same defences available to it as against the obligee as did the principal under the bonded contract prior to its default. A Surety Cannot Rely on the Expiration of a Claim against the Principal to Deny a Bond Claim However, the Alberta Court of Appeal in HOOPP Realty Inc v Guarantee Company of North America, 2019 ABCA 443 held that the expiry of an obligee’s limitation period to sue the principal does not provide the same limitations defence to a surety in the face of a bond claim lawsuit. In that case, Clark Builders (“Clark”) was the principal/general contractor, HOOPP Realty (“HOOPP”) was the obligee/owner, and The Guarantee Company (“GCNA”) was the surety. Clark was hired to construct a warehouse. HOOPP was unhappy with the warehouse floor. Clark replaced the floor at its own cost, but argued it was not required to do so under the bonded contract. The parties agreed the performance bond would extend to the floor replacement if Clark was in default of the bonded contract. In litigation between HOOPP and Clark, the Court of Appeal held that the dispute was subject to a mandatory arbitration clause, and HOOPP could not maintain a Court action. Subsequently, the Court held that HOOPP was limitation-barred from commencing an arbitration against Clark, and as such, HOOPP could not maintain any claim, in Court or arbitration, against Clark. HOOPP had commenced a separate, parallel action against GCNA under the bond, which it continued to pursue notwithstanding the dismissal of its claim against Clark. The issue then was whether GCNA was also immune from liability to HOOPP, given that HOOPP’s claim against Clark was limitation-barred. The matter was heard via summary trial. The trial judge concluded that GCNA was not relieved of liability, as the expiry of a limitation period does not necessarily extinguish the underlying debt, but only bars the remedy against the defendant. In addition, the trial judge held that HOOPP had distinct claims against Clark and GCNA, even if those claims may overlap. The Court of appeal upheld this decision. It noted that the general statement that a surety is entitled to any defence available to the principal is accurate when related to the principal’s liability under the bonded contract. However, when the issue is whether the surety is directly liable to the obligee, that is a separate issue. The Court confirmed that the surety’s liability under the bond required that the principal had defaulted under the bonded contract. But in the facts at bar, where there was an alleged default by the principal, the obligee had a potential independent claim against both the principal and the surety. This was supported by the bond wording in this case, which provided that the surety and principal were jointly and severally liable under the bond. In addition, the Court noted that an obligee is not required to exhaust all remedies against the principal in order to advance a claim against a surety. While HOOPP in this case had made an attempt to sue Clark, the Court noted that the outcome of the appeal would have been the same even if no such attempt had been made. Finally, the Court rejected GCNA’s argument that by permitting HOOPP’s claim against GCNA to proceed, it was allowing HOOPP to indirectly pursue Clark. GCNA argued that if HOOPP made a successful claim against GCNA, GCNA would then have an indemnity claim against Clark; i.e. in the end, Clark would still be liable for HOOPP’s claim despite the expiration of HOOPP’s limitation period to sue Clark directly.   The Court held that Clark, as principal, did not have the protection of a limitations defence until the limitation had expired against both it as principal and GCNA as surety. Similarly, GCNA, as surety, did not have the protection of a limitations defence until the limitation had expired against both it as surety and Clark as principal. In other words, if GCNA was held liable to HOOPP, GCNA could then pursue an indemnity claim against Clark. While many of the Court’s comments were general principles applying to all performance bonds, in the end it was clear that the result on this appeal depended on the wording of the GCNA bond. In particular, the Court noted there was nothing in this bond requiring HOOPP to exhaust its remedies against Clark in order to maintain a bond claim against GCNA. The Supreme Court of Canada has now refused leave to appeal for this matter, so it remains the law applicable in Alberta.  The case adds another level of complexity when trying to assess limitation periods in the context of projects with mandatory arbitration provisions coupled with separate performance bonds. https://www.jdsupra.com/legalnews/uncertain-surety-expiration-of-a-74015/

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Wet Ink Signatures Requirements May Fade After Coronavirus

pril 10, 2020, 4:56 AM; Updated: April 10, 2020, 10:34 AMListen In-person signatures were on decline pre-virus Global pandemic has accelerated use of eSignatures, expert says Gabe Teninbaum was stuck in a precarious situation when he had to close on his mortgage refinance on March 24. At this point, states were in lockdown due to the coronavirus outbreak. Teninbaum, who is director of the Institute on Law Practice Technology & Innovation at Suffolk University Law School in Boston, said he called his bank to ask whether the transaction could be done electronically, but “the short answer was no.” The bank said Teninbaum could not delay the closing while keeping his refinancing rate, so he felt he had to act. Teninbaum drove with his wife and young children to the bank’s law firm. His family waited in the car while he went in to sign. The office was empty except for the attorneys involved, he recalled. They wore blue surgical gloves and “cloroxed everything.” After he signed about 50 documents, he went to the car and it was his wife’s turn. The wet signature requirement, that a document be signed in-person and with ink, could see its demise as social distancing practices take hold across the globe in an effort to stop the spread of coronavirus. Covid-19, as the disease caused by the virus is known, has accelerated the already growing use and acceptance of electronic signatures to such an extent that wet signatures may soon become relics for attorneys. We’re “clearly at an inflection point” and “there will be no turning back,” said Margo H.K. Tank, the co-chair of DLA Piper’s U.S. financial services sector practice in Washington. Rise of eSignatures Since two pieces of legislation—the Uniform Electronic Transactions Act in 1999 and the Electronic Signatures in Global and National Commerce Act in 2000—were enacted, the use of eSignatures has steadily made inroads into almost every type of consumer and commercial transaction, like signing on pads when shopping at the grocery store or pharmacy. Forty-eight states, plus Washington, D.C., Puerto Rico, and the U.S. Virgin Islands have adopted some form of the UETA, Tank said. New York and Illinois have their own electronic signature law, she added. The ESIGN Act was enacted to make sure the states didn’t vary from uniformity in their adoption of UETA, she explained, calling it a “federal backstop” to UETA. Both are procedural laws saying if a document requires a signature, the signatories can use eSignatures because they have the same legal status as ink signatures, Tank said. Electronic signatures are used roughly equally in consumer and commercial transactions, Tank said. And lawyers who “understand the law underpinning their use,” are also “eager” to use them, she said. However, there are certain legal transactions not within ESIGN’s scope that are still done in person, including wills, testamentary trusts, adoptions, and divorces, Tank said. But states can and have enacted their own laws to enable eSignatures in such matters. Tank said the question right now is how lawyers and clients can do business in the current climate if they can’t e-sign. She pointed to the example of online notarization, which has been “exploding” in the wake of the virus. Before coronavirus, 23 states allowed remote online notarization. Now, at least 19 states have enacted emergency, short-term measures to enable RON. Legal Implications Lawyers have to follow the law when wet signatures are required, even though it may expose them and others to the coronavirus. The insistence on wet signatures on documents “is causing all kinds of distancing issues for lawyers doing closings,” Lucian T. Pera said in an email. Pera is an attorney with Adams & Reese in Memphis whose practice includes legal ethics. These are often very important transactions involving real estate where courts have historically been difficult about any deviations from the traditional or required elements, Pera said. For example, for an affirmation with a formula that requires the signature in the presence of the notary, there “may be no legitimate substitute for the notary and signer being in the same physical space, even if 6 feet apart,” he said. “My sense is that some lawyers are simply doing this in person, even under a shelter-in-place order,” Pera added. The benefits of using eSignatures instead of wet signatures in the age of Covid-19 “far outweigh the negatives,” said Connor Jackson. Jackson is a founding partner of the national healthcare firm Jackson LLP whose practice focuses on regulatory compliance in telemedicine. He is based in Evanston, Ill. But there are some things to be cognizant of, including authenticity, he said. “It’s crucial to confirm that the email address being used for obtaining the e-signature is unique and private to the signer,” Jackson said. If it’s not, then authenticity can’t be verified beyond confirming that someone with access to that email address signed the document, he explained. If an entire family uses the email address [email protected], for example, and Jane Doe is trying to digitally and securely sign something, “most programs would technically permit anyone with access to that email account to assert that they’re Jane and to execute the document on her behalf,” Jackson said. Reflecting on his closing experience, Teninbaum said he doesn’t see economic benefits to requiring wet signatures. For the firms, offices aren’t necessary and they can save copying and related costs, he said. For the consumer, they can save time and money by avoiding travel. Teninbaum said wet signatures remain a common practice, like a lot of legal practice processes, simply because of inertia. “The more I thought about it, the situation was emblematic of everything that’s broken with the legal system,” Teninbaum said. “If we just paused and evaluated the way we work in light of new tools and technologies, situations like this one wouldn’t occur anymore.” https://news.bloomberglaw.com/tech-and-telecom-law/wet-ink-signatures-requirements-may-fade-after-coronavirus

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Surety bond at issue in Merchants Greene contractor’s bankruptcy [CNA]

The cessation of operations at Trent-Wyatt Contracting, a Jefferson City-based company that had a large erosion-control contract at the Merchants Greene development in Morristown, has created a complicated legal wrangle involving city government and Western Surety, Trent-Wyatt’s former bonding company, officials say. Trent-Wyatt obtained a bond through Western Surety that guaranteed erosion-control work, including a piping system and catch basins to convey runoff to a retention pond, would be completed. If Trent-Wyatt didn’t perform the work, Western Surety would be on the hook for construction costs. On June 5, 2019, however, Western gave a 30-day notice it was terminating its liability under the erosion-control bond, according to Morristown City Attorney Lauren Carroll. That date is important because it’s 29 days after one of Trent-Wyatt’s owners, Kevin L. Trent, filed for personal Chapter 7, or liquidation, bankruptcy. The other company owner, Gary W. Wyatt, filed for personal Chapter 7 bankruptcy on July 11. Both Trent and Wyatt estimated their liabilities range from $10 million to $50 million, according to their bankruptcy filings. Western Surety was released from the erosion-control about nine months ago. What complicates matters, Carroll says, is calculating how much work remained when Western Surety was released from the bond. Carroll and Michael Poteet, Morristown stormwater coordinator, estimate it will cost approximately $750,000, and that’s the amount Carroll is seeking to recover from Western. On Thursday, Carroll declined to identify how much Western Surety is willing to pay, but the city attorney did say it was “substantially less” than $750,000. Morristown real estate developer Shannon Greene, one of the developers of the Merchants Greene property in West Morristown, said Thursday the dispute between Morristown government and Western Surety has “nothing to do with him.” That’s partially correct, Carroll says. The city attorney says that while legal action is a possibility, she’s trying to negotiate a mutually acceptable settlement with Western to finish the erosion-control work. The Greene family owns the property, and ultimately is responsible for installing the stormwater system specified in the plans, according to the city attorney. Greene says it’s too early to install drainage pipes because the location of the stormwater system will be dictated by future tenants. It makes no sense, Greene says, to lay underground pipes that could run beneath a restaurant, hotel or other business. Similarly, spreading topsoil and seeding it with grass isn’t smart if it’s going to be removed in the foreseeable future, Greene says. However the erosion-control bond conflict is settled, Morristown city government and Greene are compelled to work together on other development-related matters in the future, Carroll says. Part of the tax-increment financing arrangement the Greene’s received when they began the development required them to put up a traffic signal at the intersection of West Andrew Johnson Highway and Howell Road. The proposed deadline is in the fall. Greene says it’s too early to install a traffic light. He says it makes more sense to spend the money when the road linking Merchants Green and Exit 4 of Interstate 81 is complete. That’s when he anticipates interest in Merchants Greene will dramatically increase. He says Merchants Greene has created approximately 800 new jobs, and he would appreciate a little flexibility from city government in trying economic times that have been disastrous for prospective buyers. “Nobody thought the economy would fall like this,” Greene said. The developer says that if he were to move immediately to order traffic signals, there’s no guarantee they would arrive by fall. He says the overwhelming majority of traffic light components are manufactured in China. https://www.citizentribune.com/news/local/surety-bond-at-issue-in-merchants-greene-contractor-s-bankruptcy/article_6984c51a-7b48-11ea-bbf0-a36e9321d2b3.html

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The Importance of Reviewing and Complying with Performance Bonds

As we continue to cope with the economic impacts of the COVID-19 pandemic, it is important for participants in the construction industry to take affirmative actions to protect your investments in current and planned construction projects.  One of the ways owners and contractors can protect themselves is by ensuring that you understand how to enforce any performance bonds that you have required for your projects.  Performance bonds are intended to act as a guarantee that performance, as required by the relevant construction contract, will be completed.  Generally, it is the owner of the construction project who requires its general contractor to acquire a performance bond as assurance and protection against default by the general contractor under the prime contract.  It is also possible, and common on large projects, for a general contractor to require its subcontractors to obtain performance bonds.  There are three parties to performance bonds in the construction context: the “obligee,” which is the entity who is owed the contract performance and who is protected by the bond; the “contractor,” who owes obligations to the obligee to complete its contract work in accordance with the contract requirements; and the “surety,” generally an insurance company that engages in the practice of suretyship, that agrees in the case of contractor default to complete the work of the contractor, pay others to complete the work of the contractor, or pay the obligee the amount of the performance bond.  In North Carolina, performance bonds are mandatory on public projects that exceed $300,000.00 in cost for a local governmental project, or which exceed $500,000 in cost for a State department or agency project.  Additionally, they are sometimes required by the owners of private commercial construction projects.  In fact, due to the negative economic impact of the current coronavirus pandemic, we can expect the frequency with which performance bonds will be required on commercial construction projects to increase.  Performance bonds are paired with payment bonds on government projects and are almost always paired with payment bonds on private projects.  When paired together, these bonds are commonly referred to as “P&P” bonds.  Payment bonds are distinguishable from performance bonds in that they are intended to protect lower-tier contractors from the threat of non-payment by the general contractor or the contractor above them in the construction chain.  This article focuses on performance bonds, but a future Ward and Smith article will cover payment bonds. Critically, while a performance bond is intended to guarantee contract performance in accordance with contract terms, it can be rendered void and useless if the obligee fails to comply with any requirements contained in the bond.  Thus, it critical for construction project owners and general contractors to read your performance bonds carefully to ensure that you do not take actions (or fail to take actions), which might negate your rights and protections under your bonds.  Performance bonds are treated and interpreted as contracts and can be breached and enforced like contracts.  If there is a contractor default, the terms of the bond will lay out any actions that are required of the obligee before the surety’s obligations to correct the contractor’s default arise.  Additionally, the terms of the bond set out the surety’s liability and provide the actions it may take in responding to a contractor default.  Notably, many performance bonds contain provisions that require the obligee to provide the surety with notice of the contractor’s default before the surety’s obligations to cure the contractor’s default under the bond arises.  As an example, the form AIA 312-2010 performance bond requires the obligee to do at least the following before the surety’s obligations under the bond arise: (1) declare the contractor in default, terminate the contract, and notify the surety that such actions have been taken; and (2) to agree to pay the balance of the contract price in accordance with the contract terms to the surety or to a replacement contractor the surety selects.  In some instances, the surety must also provide the contractor and the surety notice when it is considering declaring the contractor to be in default, in which case the surety can request a conference with all parties to the bond in an effort to reach a resolution which allows the contractor to correct and continue its performance of the contract. Only after complying with these notice requirements, does the surety’s obligations under that performance bond arise.  Upon receipt of proper notice in conformance with the terms of the bond, the surety’s obligations become due, and it can elect one of multiple courses of action to correct the contractor’s default.  The surety can either: attempt (with the consent of the obligee) to arrange for the original contractor to cure the default; undertake to complete the contract work itself; obtain bids or negotiate proposals from qualified contractors to complete the contract work; waive its right to complete or arrange for completion of the work and agree to pay the obligee the costs it incurs to complete; or deny liability and state the basis for denial. If the surety fails to perform its obligations in a reasonable time, the form AIA 312-2010 performance bond requires the obligee to provide additional notice to the surety demanding that the surety perform its obligations under the performance bond before the surety will be deemed to be in default with respect to the surety’s obligations under the bond.  While not all performance bonds are as demanding of the obligee as the AIA 312-2010, it provides a good example of requirements that might be contained in your bond, which, if not complied with, could result in a loss of your rights under the bond.  North Carolina case law does not directly address the consequences of an obligee failing to provide notice as required by a performance bond, but numerous cases from the federal courts and other state jurisdictions have made clear that such a failure constitutes a material breach of the performance bond and excuses the surety from its obligations under the bond.  This is because the purpose

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Douglas County warned activist group of $3 million surety bond if it filed lawsuit challenging jail expansion

Prior to local activist group Justice Matters filing a lawsuit last month against Douglas County’s plan to expand its jail, an attorney for the county warned that he would pursue a $3 million surety bond from the group if it went through with the lawsuit. In response, William Skepnek, an attorney representing Justice Matters, wrote a letter calling the county’s tactic one of “edict, threat and condescension.” If a court were to go along with the county’s request for a surety bond, it basically would mean that Justice Matters would have to purchase the equivalent of a $3 million insurance policy before the case could continue. Often, a surety bond also requires a business or organization to pledge its own assets if the bonding company must make a payment on the claim. In this case, the county would be seeking the bond to repay the county for costs associated with the lawsuit and to help cover any added construction costs for the jail that a lawsuit may cause. On Monday, John Bullock, the county’s attorney, disagreed with Skepnek’s characterization. He said in an email to the Journal-World that pursuing a surety bond was appropriate because Justice Matters was seeking an injunction on the county’s plans to expand the jail. If an injunction is granted, the project could be delayed and result in higher construction costs and higher interest rates on the bond market, among other increased expenses, he said. “When a party in litigation seeks an injunction, the court can require a security bond to protect the other party against losses caused by the suit,” Bullock said in an email to the Journal-World. “The county’s exercise of this statutory right is not a ‘threat,’ but a necessary measure to protect the taxpayers from significant losses expected to result from Justice Matters’ suit seeking injunctive relief.” The Journal-World reached out to the three Douglas County commissioners for comment on Bullock’s pursuit of a surety bond, but they did not immediately respond. Joanna Harader, a member of Justice Matters, recently provided the letters to the Journal-World at a reporter’s request. The three-letter correspondence between Skepnek and Bullock highlights their differing views on whether Douglas County has the legal authority to expand its jail without a new public vote. Before filing the lawsuit, Skepnek sent a letter to Bullock on Feb. 15 explaining that Justice Matters had retained him and James Kaup for legal representation and explained the group’s opposition to the expansion of the jail. He said the group had requested to send the letter and explain the reasons for its opposition in an effort to be transparent. “Among those reasons is that we believe the Douglas County Commission lacks the authority to issue the proposed bonds without first either submitting the matter to a vote, or alternatively publishing notice of its intent to issue, enabling voters to petition to place the issue on the ballot,” Skepnek wrote. In a response, dated March 5, Bullock noted the county’s previously stated rationale for the expansion without a new vote: a 1994 sales tax referendum, which created a 1-cent sales tax “for general government purposes, including the issuance of sales tax revenue and general obligation bonds, and also including … The Expansion and operations of the county jail.” Bullock said that gave the county the authority to issue bonds without voters signing off. However, if Justice Matters went through with the lawsuit, he said the county would seek the dismissal of the lawsuit on “various legal grounds.” He also said the county would pursue a surety bond from Justice Matters “to protect the taxpayers against the costs the county will suffer on account of your client’s lawsuit.” Bullock said the surety bond, which would need to be approved by the court, would be “not less than $3 million.” “We urge your clients to reconsider their plans to use litigation to advance their agenda,” Bullock said in the letter. In a second letter to the county, dated March 6, Skepnek said he was disappointed in the county’s response. He also said he and Justice Matters did not believe the court would approve such a surety bond in its challenge to the county’s legal authority to expand the jail. He, again, asked the county to consider a new public vote on the expansion of the jail. “If the citizenry of Douglas County want a jail expansion it will surely be authorized by the voters in a public contest,” Skepnek said. Justice Matters filed its lawsuit in Douglas County District Court on March 16, making the same argument that Douglas County commissioners are not allowing residents to vote or petition against the plan to fund an expansion of jail, despite the group’s belief that they have an obligation to do so under state law. Karrey Britt, a spokeswoman for the county, said the county planned to file a response to the lawsuit on Tuesday. The lawsuit is a culmination of a yearslong effort by the group and others to stop the county from expanding the jail to house more inmates. As the Journal-World has reported, county leaders say that the jail is overcrowded, making it unsafe for both staff and inmates; opponents argue that the county needs to try more alternatives to incarceration to lower the jail’s population. Two local nonprofit organizations, Justice Matters and the Lawrence Sunset Alliance, along with five individuals who reside within the county, are petitioning for an injunction to stop the county from issuing bonds to fund the planned expansion, estimated to cost roughly $29.6 million, plus a separate estimated $1.5 million renovation of the jail’s central heating and cooling plant. The county had approximately $9 million on hand to go toward the jail, the Journal-World has reported. County staff planned to pursue a bond issue with a 20-year debt service to finance the rest of the estimated $31.1 million total, which is about $22.1 million. https://www2.ljworld.com/news/county-government/2020/apr/06/douglas-county-warned-activist-group-of-3-million-surety-bond-if-it-filed-lawsuit-challenging-jail-expansion/

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Trisura issues coronavirus advisory for contractors

To aid brokers in guiding their contractor clients through the pandemic, Trisura Guarantee Insurance has issued an advisory with helpful suggestions and reminders. The advisory, authored by Trisura vice-president of surety and warranty claims Stuart Detsky, was posted on the company’s official blog. Contractors should contact all of their employees, sub-contractors, and suppliers, the advisory suggests. This will give contractors an opportunity to discuss and determine how each will be modifying their workflow in response to COVID-19. Contractors should be asking sub-contractors questions – such as whether there will be any remote work arrangements, or how essential travel would be for the project – in order to gauge their ability to perform their sub-contracts. Contractors should also ask if suppliers are able to make deliveries as scheduled. After determining the capabilities of their employees, sub-contractors, and suppliers, contractors should then update their projects’ schedules as needed. These schedules need to be as realistic as possible, Detsky said, and contractors should maintain buffers in case of any unforeseen developments. These revised schedules must be relayed to all relevant parties, including owners and their consultants, to ensure everyone is on the same page. Trisura added that contractors should review the construction contracts, since they can be inconsistent in terms of how they deal with schedule changes and delays. Most contracts will require contractors to provide timely notice to the owner in the event of delays. Force majeure clauses (provisions in the contract which provide for time extensions due to factors beyond the contractor’s control) can also be inconsistent in wording and applicability. Many contracts do not contain a force majeure clause, and even those that do may not have language that would be triggered by an event such as the COVID-19 outbreak. Contractors should not be afraid to rely on advisors, Detsky noted. Most construction lawyers have been writing articles, reviewing contracts and preparing action plans for their clients due to COVID-19. Because of these difficult and confusing times, contractors should utilize their lawyers – or retain one if they haven’t already. https://www.insurancebusinessmag.com/ca/news/construction/trisura-issues-coronavirus-advisory-for-contractors-218832.aspx

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The Intertwined Business Worlds of Construction & Surety: Can the Surety Industry Weather the COVID-19 Storm?

Before the COVID-19 pandemic spread, construction in the U.S. was booming. Backlogs were deep and project funding was easily accessible. Back before we knew the term COVID-19, the “crisis” in the construction industry was the labor shortage, an aging generation of skilled tradesmen, or the nation’s infrastructure. No one could have ever envisioned that in just a few weeks’ time, those problems would pale in comparison to something far worse – a zoonotic disease that is wreaking havoc on almost every ongoing construction project in the nation. As our clients know, the surety and construction worlds are inextricably linked. When the construction sector is booming and economic times are prosperous, surety companies see very few claims. They collect premiums and are largely profitable in their zero-loss ratio approach to bonding, meaning their business model is that they expect to incur no losses. Conversely, when there is a downturn in the economic market, there is a corresponding uptick in performance and payment bond claims. Fast forward to the unfortunate and unimaginable present. The President of the United States declared a national emergency on March 13, 2020. Most states have declared a state of emergency, and many states and some local governments have issued shelter-in-place (or stay-in-place) orders, restricting businesses and citizens from all but essential functions. Some orders exempt construction from the ban by defining them as “essential,” but many are unclear or only permit certain kinds of work to continue. Regardless, the restrictions are impacting construction jobsites, either because parties are unsure if they can continue or specific leave or “hall passes” for workers are required to proceed. [Read about the magnitude and genesis of the anticipated delays due to COVID-19 at Smith Currie Client Alert on COVID-19 Delays]. In addition, for some projects and trades, materials such as masks and gloves required for normal construction operations, are also critically needed by hospitals and health care workers fighting COVID-19. This unanticipated market demand is creating material shortages which threaten the viability of ongoing projects. Restrictions on operations across the world have hindered production, acquisition and transport of other materials, driving up prices or slowing job progress. Finally, the advent of the pandemic has created personal safety issues for workers and jobsites which can result in substantial project slow-downs or even wholesale shuttering of projects. All of these scenarios yield to the unmistakable conclusion that bond claims will increase exponentially over the next year, given the COVID-19 impacts on construction projects around the country. Bond Claims Related to Coronavirus Project Delays or Nonpayment As the impacts are being felt and local and state governments are issuing orders rapidly, sureties and their contractors are racing to read the fine print of their contracts. The following clauses or provisions are likely to govern most of the delays relating to COVID-19: force majeure and/or comparable excusable delays; suspension of work or work stoppage; terminations; change in law; material escalation; safety/health requirements; protection of work; notice requirements; and claims or changes clauses granting equitable relief. Standard form bonds do not address work stoppage, delays, acts of God, or any of the above clauses. They simply incorporate the contract or subcontract they stand behind and set forth procedural notice requirements to pursue claims. As such, it is imperative for sureties, obligees, principals, and bond claimants to carefully assess legal directives concerning jobsite delays or shutdowns, ensure proper notice is given of delays, productivity losses, jobsite shutdowns, and nonpayment, and keep meticulous, detailed records of all costs incurred as a result of COVID-19 impacts. For example, some contract provisions include pandemics as a defined force majeure or a cause of excusable delay, but many others do not. Thus, there is a fair amount of uncertainty whether the bond principal and its surety have a legal excuse for work delays or other impacts from a pandemic such as COVID-19, or the right to additional time or compensation. Regarding future bond claims, contractors will have a difficult burden proving delays on a bond claim if a contractor is keeping an omnibus cost code for “COVID-19,” without breaking out and segregating the specifics of what labor and material is being charged to that cost code. On federal jobs, pursuing schedule relief or compensation for delays rests solely in the Contracting Officer’s acknowledgement of, and agreement to, a change or delay. Because only the Contracting Officer (CO) has authority to change contract terms, a writing from the CO agreeing to delay/changes is the best form of proof a principal can furnish. Sureties will likewise require this documentation before paying out on a claim. Additionally, contractors should seek a contractual modification incorporating new department/agency guidance. Contract modifications should be used to document any deviations from the contracting regulations that contain certain types of relief for contractors impacted by COVID-19. While authoritative, the regulatory language can be general and may not be precisely tailored to the contractor’s situation. As such, sureties may assert defenses to the extent the obligations of the contractor are not clearly spelled out. Surety defense to performance or payment bond claims One surety defense that will be especially lethal with COVID-19 payment and performance bond claims is failure to give proper notice. Claimants will face unique difficulties in ascertaining deadlines for notice requirements, given that “project completion” or “date work last performed” may be in flux as noted above with lack of clarity with governmental orders, and jobsites shutting down multiple times due to infected jobsite workers. Some projects have been halted, but may not commence in earnest again. With the economic downturn, project funding may be pulled and for projects that do not start back up, potential claimants will unknowingly miss their 90-day bond notice requirements, unaware that the clock began to run when a project was initially shut down. Likewise, most jurisdictions have not tolled the statute of limitations on filing lawsuits, but some have. Contractors must be astutely aware of payment bond claim deadlines, as sureties will not be bound to pay any claims that are

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