Claims

PITTSBURGH – A surety bond issuer alleges it was damaged by several contractors/subcontractors because of a breach of indemnity agreements. Developers Surety and Indemnity Co. (Amtrust) filed a complaint on Oct. 19 in the U.S. District Court for the Western District of Pennsylvania against Iron City Constructors Inc., Iron City Constructors Inc. as general partner of MV Holdings, Chrisellie Corp., et al. alleging breach of contract, breach of indemnity agreement and other counts. According to the complaint, the defendants were either general contractors or subcontractors for projects in Pennsylvania. The suit states the defendants applied for surety credit from the plaintiff in 2009 and 2011. The plaintiff holds Iron City Constructors Inc., Iron City Constructors Inc. as general partner of MV Holdings, Chrisellie Corp., et al. responsible because the defendants allegedly breached their contractual agreement with the plaintiff by failing to indemnify, exonerate and save the plaintiff from loss and reimburse it as demanded. The plaintiff seeks damages, court costs, interest and any further relief the court grants. It is represented by W. Alan Torrance Jr. of Dickie, McCamey & Chilcote P.C. in Pittsburgh. https://pennrecord.com/stories/511254202-developers-surety-and-indemnity-co-seeks-damages-over-alleged-breach-of-indemnity-agreements

A construction subcontractor that was not fully paid and whose claim on a surety bond was denied had its case heard Tuesday before the Supreme Court of Canada. In 2009, Langford Electric Ltd. subcontracted directional drilling work to Valard Construction Ltd. on a Suncor Energy oil sands project near Fort McMurray, Alta. Langford was a subcontractor for Bird Construction Company, Suncor’s general contractor. Langford’s contract with Bird required Langford to obtain a bond. Langford’s surety was the Guarantee Company of North America, which in 2008 issued a $659,671 surety bond with Langford as principal and Bird as obligee. “Generally labour and material payment bonds are a form of risk management directed at mitigating the financial risks associated with non-payment,” Bird Construction wrote in a factum to the Supreme Court of Canada. “Labour and material payment bonds require the Surety who issued the bond, to pay unpaid suppliers of labour and material in the event of the Principal’s default, thereby keeping the construction project free from liens and minimizing delay.” Bird had been sued by Valard, which claims that Bird “had a fiduciary duty” to inform Valard of the existence of the bond. Valard had not been paid in full by Langford and tried to make a claim on Langford’s surety bond. In 2010, Valard obtained a default judgement of $660,000.17 against Langford. The Guarantee denied Valard’s claim because it had not provided timely notice. In a ruling released Feb. 27, 2016, Justice Gerald Verville of the Alberta Court of Queen’s Bench ruled that Bird was not obliged to provide notice to Valard of the existence of the bond, which “expressly states that the obligee is not obliged to do or take any act, action or proceeding against the surety on behalf of any of the claimants to enforce the provisions of the bond.” The bond does provide that “claimants may use the name of the obligee to sue on and enforce the provisions of the bond.” Justice Verville’s ruling in favour of Bird Construction was upheld in 2016 in a divided ruling. Valard appealed to the Supreme Court of Canada, which heard the case Nov. 7, 2017. “On April 19, 2010, Valard made an inquiry of Bird as to whether there was a Bond,” Justice Verville wrote in 2015. “Bird responded in the affirmative and provided contact information for GCNA. Valard submitted its claim to GCNA on April 19, 2010, which claim was denied on June 14, 2010.” Valard commenced an action against The Guarantee in 2010 but filed for discontinuance in 2013. The Alberta Court of Appeal ruling in favour of Bird “requires a finding that the legislature determined that trustees under labour and material payment bonds (which are usually the owner or the general contractor) should be free of any obligation to try to notify those below them of the existence of the Bond except on Public Works projects,” Valard wrote in its factum to the Supreme Court of Canada. “This is a fallacy. The legislature’s decision to provide lien claimants with rights to information and to mandate posting of bonds on government projects in no way shows a ‘legislative intent’ to free owners and general contractors from duties that arise from the law of trusts.” Two of the three Alberta appeal court judges ruled that Valard “had the means,” under the Alberta Builders’ Lien Act, to “legally compel” Bird to provide information about a bond. Valard “remained ignorant of the existence of its entitlement to claim under this specific labour and material payment bond” because it “elected not to make inquiries, all the while knowing that such inquiries would definitively confirm or refute the existence of a bond,” Justice Frederica Schutz of the Alberta Court of Appeal wrote on behalf of herself and Justice Patricia Rowbotham, in their 2016 ruling. Dissenting was Justice Thomas Wakeling. “As a general rule, if a beneficiary or a potential beneficiary would derive a benefit from knowing that a trust exists and the criteria identifying a beneficiary, a trustee must undertake reasonable measures to make available to a sufficiently large segment of the class of beneficiaries or potential beneficiaries information about the trust’s existence and the criteria identifying a beneficiary,” Justice Wakeling wrote, adding “the costs of a communications strategy designed to bring the bond’s existence to the attention of all undertakings that did business with Langford Electric was relatively low.” Bird argued that the surety bond “has certain unique characteristics which distinguish it from a business or reliance based fiduciary trust.” Under a surety bond, a claimant “has no absolute entitlement to be paid under a labour and material payment bond as any claim is subject to compliance with the notice requirements in the labour and material payment bond and the claim is subject to investigation and analysis by the surety,” Bird wrote. “It is an important and prudent practice, in the construction industry, for potential claimants to make a request as to the existence of a labour and material payment bond.” https://www.canadianunderwriter.ca/construction/supreme-court-canada-hears-surety-bond-dispute-1004123404/

United States of America vs Walsh Construction Company II, LLC, Walsh Global, LLC and Travelers Casualty & Surety Company 1:2017cv04460 A Chicago-based contracting firm on Tuesday sued an insurance company and a surety bond provider for at least $6 million in D.C. federal court, alleging they failed to cover a subcontractor’s shoddy work on a hotel construction project in the Adams Morgan neighborhood of Washington. https://www.law360.com/insurance/articles/980455/contractor-files-6m-surety-bond-suit-over-dc-hotel-work

A United States District Court ruled that there are instances where a surety and its broker could face liability for its principal’s violation of the Federal Government’s False Claim Act. In United States ex rel. Scollick v. Narula, 2017 WL 3268857 (July 31, 2017), an individual whistleblower brought an action under the False Claims Act alleging that construction companies, their principals, sureties, and others participated in fraudulent schemes to obtain set-aside government contracts. The principals had obtained the government contracts in question by submitting performance and payment bonds issued by various sureties. At least in part, the whistleblower relied on a theory of “indirect presentment” and alleged that the sureties’ and broker’s actions led to the submission of false claims, and continued to do so upon becoming aware of the principals’ fraudulent activity. The principals’ sureties and their broker sought to dismiss the case at an early stage, but the Court found that there were sufficient allegations that the sureties and broker knew or should have known the principals were fraudulently asserting their status as a service-disable veteran-owned small business. Whether the allegations against the sureties and the broker are ultimately proven remains to be seen, as the case is still ongoing in the United States District Court of Columbia. However, the sureties and the broker continue to face significant exposure in the form of three times the damages sustained, which could include the economic benefit obtained by the allegedly fraudulent conduct. It should also be pointed out that the individual whistleblower is seeking to recover anywhere between 15% – 30% of the proceeds awarded to the government. This case serves as another example of the increasing scrutiny and exposure on those who stretch the requirements to obtain contracts under set-aside government programs, thereby negating the program’s fundamental purpose – which is to assist those targeted groups to increase their share in the marketplace. https://www.lexology.com/library/detail.aspx?g=06560f5b-9d5f-4bef-ba4f-44b387aa3049

Liberty Mutual has agreed to pay all cost overruns associated with delays in the completion of Clearfield Municipal Authority’s new waste water treatment plant, announced CMA Engineer Jim Balliet of Gwin. Dobson & Foreman. In May 2014 CMA began a $35 million project to construct its waste water treatment plant. But in early 2015, the original contractor, NVP of Jeanette, defaulted on the project. Liberty Mutual, who was the bonding company for NVP, took over the project and hired a new general contractor, Lobar Construction Services of Dillsburg, to complete the job. However, the default delayed the completion of the project by about a year causing cost overruns among several of the subcontractors. For example electrical contractor Church & Murdock incurred additional costs of $123,216 due to the delay. However, initially Liberty Mutual refused to pay the bill, and Church & Murdock threatened to walk off the job last year if they weren’t paid. CMA decided in June 2016 to pay the electrical contractor and litigate the matter with Liberty Mutual once the project was completed to avoid any more delays in the completion of the plant. Now that the project is done, Balliet said Tuesday that Liberty Mutual has agreed to pay all the costs associated with the delays as a result of NVP’s default. “It’s good news,” Solicitor John Ryan said. The final closeout from Liberty Mutual was $1.378 million, according to CMA Chairman Russell Triponey. Balliet also reported that Lobar is essentially done with all of its contract work and any work after this point would be under the two-year warranty. The CMA voted to make its final payments of $124,915.42 and $1,378,138 to Lobar and $93,817 to Church and Murdock to closeout the project. In other business, CMA Manager John Williams reported that the state Department of Environmental Protection has asked to have a training seminar for its water plant evaluators at the Moose Creek Reservoir. Williams said they agreed to host the training and in return the CMA will have both the Moose Creek Reservoir and the Montgomery Run Reservoir plant evaluations completed early this year by the DEP. http://www.theprogressnews.com/progress_news/liberty-mutual-settles-dispute-with-clearfield-municipal-authority/article_59d59eb6-de3b-5287-8aed-d693079e503a.html

This summer, the Washington Supreme Court ended a long dispute within the construction industry and issued an opinion finding that a performance bond is, in essence, an insurance contract. The court made clear that a public owner who must sue to enforce coverage of a performance bond is entitled to Olympic Steamship fees. This case, King County v. Vinci Construction Grands Projects/Parsons RCI/Frontier-Kemper JV, No. 92744-8 (“Vinci”) may significantly change the landscape for contractors performing public contracts and public agencies administering public contracts. In addition to awarding attorney fees to a public owner who must sue to enforce a bond, a majority of the court seems to gut the requirement that a public agency must make an offer of settlement as required under public works statute. Instead, the Court held that the attorney fee provision of the statute is not the exclusive fee remedy, and that parties to a public works contract may pursue fees based on contract, statute, or other equitable principles without having to make a settlement offer. Lastly, the Court determined that the County’s attorneys’ fees to dispute bond coverage could not be separated from its attorneys’ fees on the breach of contract claims, and so the County was entitled to both. The facts in Vinci were not in dispute. The joint venture contracted with King County to expand the County’s wastewater treatment system. When the contractors failed to meet the contract deadline caused by unforeseen site conditions, the County terminated the contractors and brought a claim against the performance bond. The contractors contended that they were not in breach of the contract because the delays were the fault of the County and further alleged that the County had breached the contract by terminating the contractors. The sureties agreed with the contractors and refused to cover the County’s claim against the performance bond and complete the Project. The County sued the contractors and one of the surety companies. The other sureties intervened in the lawsuit and adopted the contractors’ breach of contract defenses for refusing to perform on the bond. The trial court held in favor of the County and awarded it damages for $130 million for the contractors’ breach. The trial court further awarded the County nearly $15 million for its attorneys’ fees because the contractors defaulted under the contract and the sureties had wrongfully denied coverage on the performance bond. The Court of Appeals affirmed the trial court’s holding. The sureties appealed to the Washington Supreme Court, who affirmed the decision of the Court of Appeals. The Court’s decision resolves a longstanding issue: Olympic Steamship fees apply equally to surety bonds as insurance contracts. In determining this, the Court looked at the disparity of bargaining powers between the contractor and the surety. Yet, a performance bond involves a surety, the contractor (principal), and public agency (obligee). The dissenting opinion argued that the critical difference between a bond and a take-it-or-leave-it insurance policy is that the obligee (in this case, the County) dictates the terms of the bond, so there can be no disparity in bargaining power between the surety and the public obligee. However, the majority of the court disagreed and found that the County was entitled to its attorneys’ fees under the equitable remedy provided in Olympic Steamship. The Court’s allowance of attorney fees’ for coverage disputes in performance bonds is significant because it could have the unintended consequence of making bonds more difficult to obtain for contractors as well as making bond premiums on public projects cost prohibitive. Many small contractors have difficulty obtaining bonds on projects, thus, this decision can make it even more problematic for those smaller contractors trying to perform more public contracting work. The Vinci court’s second key holding may have more far-reaching consequences in the construction industry. The Court found that the attorney fee provisions of the public works statute is not the exclusive remedy for awarding fees. The majority in Vinci found that there was no language in RCW 39.04. et. al. suggesting that the statutory fee provision excludes all other means of recovering attorney fees. It emphasized that the state legislature, in its final bill report acknowledged that attorney fees may be awarded as authorized by statute, contract, or other equitable common law grounds. Therefore, the prevailing party in a public works dispute, may pursue attorney fees based on contract, statute, or other equitable principles (such as the one delineated in Olympic Steamship). Prior to this ruling, the only way a prevailing party could recover its attorneys’ fees was to comply with RCW 39.04.240, which requires the party seeking to recover its fees to make a settlement offer. If the offer is not accepted then, at trial, the party making the offer has to do as well or better than the offer it made to settle the dispute. The statute is intended to encourage parties to public contracts to resolve their disputes before engaging in a costly and time consuming trial—in Vinci, the trial lasted nearly three months and the County’s attorneys were financed with public funds. Now, the Vinci Court’s ruling opens the door to other approaches for contractors and public owners to obtain their attorneys’ fees. It may deter parties from making offers to settle disputes that arise under a public works contract—causing parties to engage in costly litigation at the tax payers’ expense instead of reaching a resolution. It is also important to note that Olympic Steamship fees are an equitable remedy that are awarded to an insured seeking to enforce an insurance contract. This remedy is not necessarily reciprocal, meaning that contractor and sureties defending a bond coverage claim may not be entitled to their fees if they prevail. Thus, in cases where a court finds that the surety properly denied a bond claim does not necessarily mean that the surety or contractor will recover its attorneys’ fees for defending that claim. Arguably, the public agency has no risk in having to pay the opposing party’s attorneys’ fees for litigating the

EAST ST. LOUIS – A Godfrey corporation and two individuals are accused of failing to provide indemnity per the terms of their agreement with a surety company. Travelers Casualty and Surety Co. of America filed a complaint on Aug. 3 in the U.S. District Court for the Southern District of Illinois against Heafner Contracting Inc., Michael Heafner and Sally Heafner alleging breach of contract. According to the complaint, the plaintiff executed bonds on behalf of Heafner Contracting Inc. and the Heafners were indemnitors. The plaintiff alleges that numerous claims have been made against the bonds and that it has paid $423,622.70 to resolve such claims. The plaintiff holds Heafner Contracting Inc., Michael Heafner and Sally Heafner responsible because the defendants allegedly failed to reimburse the amounts plaintiff has paid on claims against the bonds and in connection with its investigations of claims. The plaintiff requests a trial by jury and seeks judgment against defendants to indemnify plaintiff’s losses in the amount of $423,622.70, plus interest. It is represented by Mark R. Osland of Law Office of Stephen H. Larson in St. Louis. U.S. District Court for the Southern District of Illinois case number 3:17-cv-00828 https://madisonrecord.com/stories/511176567-travelers-casualty-and-surety-alleges-godfrey-corporation-failed-to-provide-indemnity

Unforeseen issues drove the cost to overhaul Encanto Elementary 30 percent over budget. The project’s contractor was facing financial problems at the same time of the cost increases; but the district is adamant that there’s no link between the company’s issues and the cost overruns. Encanto Elementary needed a lot of work. And last month, the San Diego Unified School District wrapped up the school’s comprehensive upgrade, replacing windows, retrofitting for air conditioning, updating the building for disability and accessibility compliance and planting trees to add shade on the playground. In the end, the project cost the district more than $2.5 million over its original $8.6 million contract and finished more than a year past its scheduled completion date. That unforeseen 30 percent cost increase in the project is an extreme outlier among the district’s construction projects. But the contractor responsible for the project has another big job with the district at Crawford High, and that one is on the cusp of reaching its budget, too. Many of the cost increases and delays came from unforeseen construction issues, like termites and asbestos. But the timeline coincided with a culmination of financial problems faced by the project’s general contractor, T.B. Penick & Sons. The district is adamant that there’s no link between the company’s financial issues and the cost overruns with the Encanto Elementary project. The district and T.B. Penick initially agreed to a contract to modernize Encanto Elementary in July 2014 for $8.6 million. But over three years, the contractor requested – and the district approved – changes to the project totaling another $2.5 million. Whenever contractors need to exceed the agreed upon price of a project, they submit a request change. If the district approves, it’s called a change order. A project’s change order rate measures the percentage increase in a project’s cost based on all those adjustments. Encanto Elementary’s change order rate of 29.4 percent is far and away the highest of the district’s active bond projects – the districtwide average rate is just 2.2 percent – according to the district’s latest construction report. The next highest rate for active bond-funded projects is 9.2 percent, for upgrades to the athletic facilities at Crawford High School. T.B. Penick is the contractor on that project, too. “Considering the district has 60 construction projects under way, it is not unusual for one or two projects to encounter unforeseen issues that necessitate above-average change orders,” said the district in a statement. Unforeseen conditions led to many of the change orders. For example, the contractor discovered termite damage inside walls during renovation, and the change orders allowed workers to restore the building’s structural integrity. William Savidge, the former chair of the Coalition for Adequate School Housing, the largest coalition of school district facilities professionals in the country, said good practice calls for districts to budget for a 10 percent change order rate in building upgrade and modification projects, because sometimes older buildings offer surprises that weren’t found during pre-construction surveys. The district heeds to that 10 percent budget cushion for project changes. Encanto’s nearly 30 percent rate is much higher than that, and Crawford’s is creeping toward its limit. Since that specific change order pushed the rate over the 10 percent threshold, it had to go to the school board for approval. None of the subsequent changes went to the board, because no individual change exceeded $200,000. At the time the asbestos-related change went to the board, the project was already nearly $1 million over budget and the asbestos only cost an additional $19,902. While the project was edging forward, T.B. Penick was having issues of its own. At recent bond oversight committee meetings, district staff disclosed that a surety – a third party in bond contracts that ensures that all obligations are completed in case something goes wrong – would be guaranteeing the projects’ completion. “On nearly all projects the general contractor completes the construction project without needing assistance of their surety (insurance company),” the district said. “The insurance is only seldom needed when a financial or other operational issue arises that prevents the general contractor from completing the project, such as the case with T.B. Penick.” Because T.B. Penick is experiencing financial challenges the surety is directly issuing payments to subcontractors on the company’s behalf for the Encanto and Crawford projects. “T.B. Penick & Sons is having financial problems that have impacted the project schedules at Crawford High School and Encanto Elementary School,” the district said in a statement. “The San Diego Unified School District requires contractors to submit performance bonds on all construction projects to guarantee performance and ensure completion. The district is working with the performance bond surety to complete and closeout both the Encanto and Crawford projects. … Now that both projects are being overseen by the surety we expect satisfactory completion.” T.B. Penick did not respond to multiple requests for comment. The contractor has been slapped with several lawsuits alleging failure to pay subcontractors across the country. Several this year alleged nonpayment on projects on a military base in San Bernardino County. Doug Flaherty, an attorney who represented two subcontractors in lawsuits regarding payment issues on projects in San Bernardino County against T.B. Penick, said it’s hard to gauge the relation between the lawsuits and the company’s financial issues. Often, he said, payment disputes aren’t reflective of a company’s cash flow. And sometimes subcontractors have to file lawsuits before they’re paid for simple legal reasons. They have a limited window to file a suit, in case they aren’t ultimately paid, so they’ll do so early as a precaution. Both of Flaherty’s lawsuits were dismissed and the subcontractors he represented were paid. A member of the district’s Independent Citizen’s Oversight Committee, William Ponder, said he has concerns over potential links between the contractor’s financial issues, the lawsuits alleging it didn’t pay subcontractors and the projects it’s working on in the district. “One of my major concerns is when you don’t pay subcontractors you start to look at

Allied World Specialty Ins. Co. v. Abat Lerew Constr., 2017 U.S. Dist. LEXIS 61794 (D. Neb. Apr. 24, 2017) Abat Lerew Construction (“ALC”) entered into multiple construction projects which required it to obtain surety bonds guaranteeing its performance. ALC obtained the bonds from Allied World Specialty Insurance Company (“Allied”) and also entered into an indemnity agreement with Allied. In that agreement ALC agreed to indemnify and hold Allied harmless from and against all liability and to deposit with Allied collateral in an amount determined by Allied to be sufficient to cover liability for any claims under the bonds. During ALC’s performance of the bonded contracts, Allied received claims on the bonds in excess of $300,000. Invoking the terms of its indemnity agreement with ALC, Allied demanded that ALC post collateral security in the amount of $400,000 to cover liability for the claims. ALC refused and Allied commenced an action seeking equitable relief requiring ALC to deposit the demanded collateral security. Upon commencement of the litigation, Allied asked the court to issue a preliminary injunction requiring ALC to post the $400,000 security and restraining ALC from transferring assets. The court surveyed case law from several jurisdictions and noted that money damages are generally inadequate to a surety whose demand for collateral security is refused. The court thus found that sureties are often entitled to specific performance enforcing a principal’s promise to post collateral. However, the court held that a surety’s entitlement to specific performance of the collateral obligation does not also automatically include the right to have the obligation enforced at the outset of proceedings by way of preliminary injunction. Most critically, the court found that the surety had not shown that it would be irreparably harmed in the absence of the requested relief. To make such a showing, the surety would have had to demonstrate that it lacked sufficient funds to investigate or pay the bond claims without the security, or that the principal is insolvent or secreting assets. Absent such proof, the surety’s investigation and payment of claims from its own accounts does not constitute irreparable harm because the surety can be made whole in an action for money damages against the principal. Although the absence of irreparable harm was dispositive, the court further noted other elements for injunctive relief were lacking. It found that Allied did not clearly establish that its claim for specific performance would succeed on the merits because ALC raised colorable affirmative defenses of equitable estoppel and unclean hands. The court further found that the balance of harms favored ALC because its ability to continue its operations would be put in peril if it were required to post the $400,000 collateral. Allied, on the other hand, did not contend that it lacked sufficient funds to investigate and pay the bond claims, or otherwise continue its operations, without the security. http://www.jdsupra.com/legalnews/federal-court-in-nebraska-denies-surety-21968/