Be sure you're paid

Recent court cases benefiting bond claimants have prompted the continued use of AIA's A312 form


Since its promulgation in 1984, The American Institute of Architects' (AIA's) A312 payment bond form has been widely used throughout the construction industry. However, three recent court decisions in Florida, Maryland and Virginia interpreting A312's claim response requirements have prompted the bonding industry to campaign against A312's continued use.

The heart of the controversy concerning A312 is the language that requires a surety to "[s]end an answer to the Claimant, with a copy to the Owner, within 45 days after receipt of the claim, stating the amounts that are undisputed and the basis for challenging any amounts that are disputed."

Although the three court cases differ in many respects, in each of them the subcontractor was able to recover against the surety because the surety waived certain defenses to the subcontractor's claim by failing to provide the required response within the 45-day period prescribed in A312. Had the sureties responded as required or raised these defenses within the 45-day period, they would have been able to raise them in opposition to the subcontractors' claims.

Relevant court decisions

The first of these three court cases, National Union Fire Insurance Company of Pittsburgh v. David A. Bramble Inc., was handed down by the Maryland Court of Appeals in July 2005. In the case, David A. Bramble, Chestertown, Md., entered into a subcontract with the general contractor, Clark Construction Group, Bethesda, Md., to provide water and sewer piping in connection with the construction of a golf course.

After completing its work, David A. Bramble sought to collect the contract balance and payment for extra work performed in connection with the project. After Clark Construction Group failed to pay David A. Bramble the $455,511.53 allegedly owed, on June 14, 2002, David A. Bramble submitted a claim to the three surety companies that had jointly issued the project's payment bond. The payment bond had been written on an A312 form.

About a month later, David A. Bramble received a single response referring its claim to American International Group (AIG), New York, the project's lead surety. AIG later requested a proof of claim from David A. Bramble detailing the claim along with supporting documentation. David A. Bramble submitted the requested materials April 22, 2003.

Shortly thereafter, David A. Bramble received notice from AIG that the claim should be reduced by more than $100,000. As the other sureties had done before, AIG failed to state the amounts of David A. Bramble's claim that were disputed and the basis for challenging these amounts as required by A312. No other response was received by David A. Bramble, so it filed suit against the sureties.

In response to David A. Bramble's motion for summary judgment, the court held that because the sureties had failed to comply with A312's claim response requirements, they were now barred from disputing David A. Bramble's claim. On appeal, the Maryland Court of Appeals affirmed the trial court's decision. The sureties argued their failure to respond within the 45-day period amounted to a denial of the claim.

According to the Maryland Court of Appeals, because there was "no evidence that the sureties attempted to comply with the language of the bond," the sureties were required to promptly pay the claims submitted by David A. Bramble.

A little more than a year later, the U.S. District Court for the Eastern District of Virginia extended the David A. Bramble ruling to bar certain defenses not raised within the 45-day period in its October 2006 decision in Casey Industrial Inc. v. Seaboard Surety Co.

In this case, Casey Industrial, Broomfield, Colo., a subcontractor, entered into two subcontracts with Ragnar Benson Inc., Park Ridge, Ill., a general contractor, to perform work in connection with the construction of an electrical power generation facility. During construction, Casey Industrial was forced to demobilize because of delays Ragnar Benson allegedly caused. The owner subsequently terminated its general contract with Ragnar Benson, and Ragnar Benson's surety, Sea­board Surety Co., St. Paul, Minn., was charged with completing the project pursuant to Ragnar Benson's performance bond.

Casey Industrial remobilized to complete its obligations on the project. Because of increased costs and delays associated with this work, Casey Industrial made successive claims on the A312 payment bond Ragnar Benson and Seaboard Surety issued with the last claim being made Sept. 20, 2005.

On Nov. 4, 2005, Seaboard Surety responded, denying Casey Industrial's claim on a number of factual bases. Seaboard

Surety's Nov. 4 letter also contained a "reservation of rights" clause that stated it reserved "all rights and defenses that it or … [Ragnar Benson] may have at law, equity, or under the bond" that may be identified during further review of Casey Industrial's claim. Shortly thereafter, Casey Industrial sued Seaboard Surety seeking payment allegedly owed under Ragnar Benson's A312 payment bond.

After Casey Industrial filed suit, Seaboard Surety raised certain factual and legal defenses to Casey Industrial's claim that had not been included in Seaboard Surety's Nov. 4 letter. Casey Industrial filed a motion in opposition to these new defenses asking the court to find that Sea­board Surety had waived all defenses that were not raised in its Nov. 4 claim denial letter.

Highlighting the "plain meaning" of A312's claim response requirements and relying on the reasoning of the David A. Bramble case, the court found in favor of Casey Industrial. In doing so, the court held that Casey Industrial's claims on the A312 bond were factually "disputed as they were in the November 4, 2005 letter, and other [factual] bases for challenging the amount in question are waived." Moreover, the court held Seaboard Surety should not be permitted "to rely upon a 'reservation of rights' clause to delay offering [factual] disputes" to Casey Industrial's payment bond claim.

In 2007, the U.S. District Court for the Middle District of Florida again equated a surety's failure to provide the requisite response within 45 days as a waiver of the surety's right to dispute the payment bond claim.

In J.C. Gibson Plastering Co. Inc. v. XL Insurance Co., J.C. Gibson Plastering, Windermere, Fla., entered into a subcontract with The Auchter Co., South Jacksonville, Fla., as general contractor in connection with the construction of a housing development. The Auchter Co. failed to pay J.C. Gibson Plastering more than $730,000 allegedly owed for the project.

Consequently, on Feb. 9, 2007, J.C. Gibson Plastering made a claim to XL Insurance, Hamilton, Bermuda, on The Auchter Co.'s and XL Insurance's payment bond and provided XL Insurance with a follow-up letter detailing the bases for its claim shortly thereafter. The bond had been written on an A312 form.

On Feb. 22, 2007, XL Insurance requested copies of certain financial records from J.C. Gibson Plastering to support its claim. These records were received March 21, 2007.

By a subsequent letter dated April 3, 2007, J.C. Gibson Plastering alleged XL Insurance had breached its duty under the A312 payment bond's claim notice requirements by failing to provide an appropriate response within 45 days of receipt of its claim.

By a return letter dated April 5, 2007, XL Insurance claimed the 45-day requirement was not triggered until after its March 21, 2007, receipt of J.C. Gibson Plastering's financial documents. XL Insurance went on to deny J.C. Gibson Plastering's claim in this letter, advising J.C. Gibson Plastering to "resolve the matter directly with Auchter."

The following day, J.C. Gibson Plastering filed suit against XL Insurance. Before trial, J.C. Gibson Plastering submitted a motion to the court, arguing XL Insurance failed to meet its obligations under the A312 bond's language by neglecting to provide a timely response following J.C. Gibson Plastering's Feb. 9, 2007, claim.

J.C. Gibson Plastering argued that, because of this failure, XL Insurance was now barred from challenging J.C. Gibson Plastering's claim. XL Insurance argued J.C. Gibson Plastering's notice of its claim did not comply with A312 requirements until the requested financial documents (including a proof of loss form) were provided on March 21, 2007. These documents were necessary to "provide sufficient details to substantiate the claim."

XL Insurance also argued that through its April 5, 2007, letter, it had "substantially complied" with A312's claim-response requirements under Florida law in providing its response within 48 days of J.C. Gibson Plastering's claim.

Upon examining A312's claim notice requirements, the court determined J.C. Gibson Plastering's Feb. 9, 2007, letter fully complied with the bond's language. In drawing this conclusion, the court found the bond's claim notice requirements were devoid of any language "which required evidentiary support for the claim."

Therefore, XL Insurance's 45-day response period began Feb. 9, 2006, and not, as the company had argued, when it received additional supporting financial documentation.

In response to XL Insurance's claims of "substantial compliance," the court held as follows: "In this case, forty-eight days may as well have been a hundred days. Under Florida law, bond language must 'be strictly construed against the surety and in favor of the obligee.' Under such a construction, the forty-five-day period set forth in … [AIA A312] means forty-five days. XL could not comply with … [this requirement] by answering within forty-eight days."

The court then turned to the waiver issue. Relying on the David A. Bramble and Casey Industrial cases, the court agreed with J.C. Gibson Plastering's assertions that XL Insurance's failure to provide J.C. Gibson Plastering with a response stating the undisputed amounts and the basis for challenging disputed amounts within the 45-day period resulted in a wavier of the insurance company's right to challenge the bond claim.

Any other response, including a request for additional supporting documentation, was insufficient under the payment bond's terms. According to the court, A312's claim response requirements "prevent claimants from suffering extensive delays in payment of their claims."

The bonding industry

These three court decisions have prompted the bonding industry to action in hopes of protecting itself against the strict enforcement of what are thought by most sureties to be unrealistic claim notice obligations contained within A312. In doing so, many major sureties, including Travelers Casualty & Surety Co. of America, Hartford, Conn., now refuse to write payment bonds using A312 in most situations unless suggested modifications are included. Not surprisingly, these suggested modifications ease the strict claim notice demands placed on sureties.

For instance, Travelers Casualty & Surety Co. of America now requires a modification to A312 so the surety is only obligated to respond within a "reasonable time" and states that failure to respond within this period "shall not be deemed a forfeiture or waiver" of the surety's right to dispute the payment bond claim.

Surety industry groups, including the National Association of Surety Bond Producers (NASBP) and The Surety & Fidelity Association of America (SFAA), are now pressuring AIA for a similar revision of or amendment to A312.

According to recent statements issued by Mark H. McCallum, NASBP's general counsel and director of government relations, NASBP "reiterated its interest in participating in the revisions" of A312 following the J.C. Gibson Plastering decision, stating recent decisions show "a judicial cast on suretyship that, at best, can be said to be unsettling to the surety industry."

Moreover, according to McCallum, NASBP and SFAA representatives met with AIA representatives in February "to assess AIA's ability to expedite its revision process for A312 and, if for political, practical, or other reasons AIA was not able to expedite revision of A312, to seek an interim … measure through the issuance by AIA of a standardized amendment to the A312 payment bond form."

Thus far, the bonding industry's campaign seems to have been effective. AIA's Documents Committee has formulated a proposed amendment to A312 that it believes is fair to all interested parties.

According to an AIA representative, the proposed amendment would include language stating the surety's failure to provide a claim response including the amounts that are undisputed and the basis for challenging any disputed amounts within 45 days will not operate as a waiver of defenses to a claim.

However, under the proposed amendment, if the surety fails to provide an appropriate response within the 45-day time period and the claimant is required to hire an attorney, the surety will be required to pay the claimant for any attorney's fees incurred.

According to AIA, this proposed amendment would be published immediately. Additionally, a full revision of A312 will begin this year and be published sometime during 2009. However, until the proposed amendment is finalized and published, bonding industry groups are advocating the use of alternative payment bond forms, such as AIA A311 or ConsensusDOCS 261, which do not contain specific claim-related procedural requirements.

Implications

Ultimately, the three court decisions I mentioned will act as a double-edged sword for roofing contractors depending on whether a roofing contractor is the principal on an A312 payment bond or an A312 bond claimant.

The bonding industry's response to these cases may make it virtually impossible for contractors to obtain an unmodified A312 payment bond if required under project bid documents. Additionally, given that contractors are universally required to execute a general agreement of indemnity, which makes them responsible for all the surety's liability that arises from the issuance of bonds, contractors will ultimately bear the risk of a surety's waiver of defenses because of the surety's failure to provide a timely response to a claim.

Indeed, many sureties argue the 45-day claim response requirement provides for too short a period for a surety to evaluate a complex payment bond claim, and, therefore, they are unable to provide a comprehensive response within this period as required by A312. Given that A312 only requires a bond claimant to state its claim with "substantial accuracy" to commence the running of the 45-day period, many sureties may have to decide whether and on what grounds to contest claims without the claimant submitting supporting documentation.

According to sureties, these factors together greatly increase the risk that sureties will be forced to pay unsubstantiated claims or at least will be greatly disadvantaged in defending these claims. In the end, it is likely sureties will attempt to pass these costs and liabilities to bonded roofing contractors through the terms of a contractor's general agreement of indemnity with surety.

To prevent this, you should work closely with your surety to ensure you receive the required response within the 45-day time frame. Additionally, be sure to promptly identify and provide your surety with all documents and information that substantiate any defense to payment you may have.

On the other hand, the court decisions should serve as encouragement for those who are tired of spending excess time and money prosecuting valid payment bond claims. If other courts display a similar tendency to strictly enforce A312 claim response requirements, sureties will be forced to investigate payment bond claims faster and more thoroughly than before.

But to ensure this result, you must be sure to comply with the claim requirements found in Paragraph 4 of A312, which differ depending on your relationship with the project's contractor.

If you are employed directly by or have a direct contract with the general contractor, you are required to provide the surety and owner with notice that a claim is being made under the payment bond. In this notice, you must state the claim's amount with "substantial accuracy."

In practice, this means including information necessary to justify the claim and demonstrate its accuracy. Although documentation ultimately will be needed, it is not essential to provide the supporting documentation to start the running of the surety's 45-day claim response period.

If you do not have a direct contract with a general contractor, you are required to take the following steps to trigger A312's 45-day claim response period:

  1. You must provide written notice to the general contractor and owner detailing the amount of your claim with "substantial accuracy." Make sure you have documents and information necessary to support your claim. The notice must be provided to the general contractor and owner within 90 days of the last day on which labor, materials or equipment included in the claim were provided on the project. This notice must also identify the party to whom the labor, materials or equipment were provided.
  2. If, after 30 days, you receive a denial from the general contractor or the general contractor fails to respond, you must send a final notice to the surety and owner that a claim is being made under the payment bond. This notice should include a copy of the original notice sent to the general contractor and owner.

If these claim requirements are met, you will be entitled to a substantive response to a properly submitted claim within 45 days or, if the surety fails to respond as required, the surety may find itself in the precarious position of not being able to rely on legal and factual defenses that otherwise would have been available to it.

Good with the bad

As you can see, the bonding industry's reaction to the three recent state court decisions discussed will result in additional challenges to roofing contractors. Despite this, the benefits of these pro-claimant court decisions should outweigh the challenges by ensuring sureties investigate and respond to properly substantiated payment bond claims more rapidly than before.

Brian P. McCormick is an attorney with the Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.

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