Serving Payment Bond Claims

Serving Payment Bond Claims

January 1, 2014

By Kristine Kroenke & Gregory T. Spalj

SERVING PAYMENT BOND CLAIMS: GETTING CLOSE IS NOT ENOUGH –
THIS ISN’T HORSESHOES

AND

ANOTHER ONE BITES THE DUST – INSURERS LOSE A COMMON ARGUMENT FOR WHY THERE IS NO COVERAGE FOR CONSTRUCTION DEFECT CLAIMS

Payment Bond Claims

Lawyers do not often talk about their losses. We will make an exception in this case because every subcontractor that works on public construction projects needs to be aware of this legal decision; and because the action that caused the loss predated our involvement in the case. In a recent decision from the Minnesota Supreme Court on the subject of service of public contractors’ payment bond claims, the court determined thatstrict compliance with statutory mandates is required.

No matter how unfair, substantial compliance is not enough. The Court held that if you serve the payment bond claim notice by certified mail, you must address the notice to the address listed for the contractor in the bond. If you do not, you lose. You lose even if you are owed the money, even if the contractor received actual notice of the claim, even if you sent the notice to a regular business address of the contractor, and even if the money you are owed was paid over to the surety. In short, no matter how close you come to complying with Minnesota’s payment bond claim statute (and in this case, the claimant could not have come any closer), if your paperwork does not perfectly comply with the statute, you lose.

The Bond Claim and The Court’s Decision

This case illustrates the danger of relying on common sense when it comes to fulfilling statutory requirements. The payment bond claimant in this case, a subcontractor on a public construction project, served the payment bond claim itself, without the assistance of a lawyer. The statute requires that notice of a claim against a payment bond on a public construction project must be served within 120 from the claimant’s last day of work, and if served by certified mail, must be sent to the addresses of the contractor and the surety as they are listed in the bond. While the bond claimant timely served its payment bond claim notice on both the surety and the contractor by certified mail; and, while it served the surety at the surety’s address listed on the payment bond, unfortunately, it served the contractor at the contractor’s regular address, which was different from the address listed on the payment bond.

The Minnesota Supreme Court held that the payment bond claim was defective because it was not sent to the address for the contractor listed on the payment bond, as the statute requires. When the bond surety and contractor addresses are listed on the payment bond, Minn. Stat. § 574.31, subd. 2(a) strictly requires that the payment bond claimant serve the bond claim notice on the surety and the contractor at their addresses as they are listed on the payment bond.1 The Court determined that if a bond claimant fails to use the addresses as listed on the bond, the claimant may not commence a legal action to recover against the payment bond surety.

Therefore, even though the claimant used a valid business address, it was out of luck because the payment bond statute states that “no action shall be maintained on the payment bond unless, within 120 days after completion, delivery, or provision by the person of its last item of labor and materials, for the public work, the person serveswritten notice of claim under the payment bond personally or by certified mail upon the surety that issued the bond and the contractor on whose behalf the bond was issued at their addresses as stated in the bond…” The court determined that the provision of the payment bond statute on service of the payment bond was unambiguous.

Close Is Not Enough on Payment Bond Claim Notices

The court’s decision leaves no room for error when deciding what address to use to serve a payment bond claim under the public contractors’ bond statute. The address that the claimant uses to serve a payment bond claim notice must be the precise address listed on the payment bond. In this case, the address used by the claimant to send its payment bond claim notice to the contractor was the address for the contractor listed on the subcontract; it was the address listed for the contractor on its website; it was the address to which the claimant sent all of its invoices and other correspondence to the contractor on the project; and, it was the address used the by surety to correspond with the contractor about the bond claim. But the use of a valid business address was not good enough for the Minnesota Supreme Court, because it was not the address that the contractor listed on the bond.

It should be noted that the court’s opinion only applies if the claimant serves the bond claim notice by certified mail – the bond claim statute also permits the claimant to personally serve the contractor or the surety with the notice. Most claimants go the route of service by certified mail, but if you choose to personally serve either the surety or the contractor, make sure that you also strictly follow the requirements for personal service.

The Surety Has The Right To Complain if Service on the Contractor Does Not Strictly Follow the Bond Statute

Even though the surety was served with the bond claim notice at its address listed in the bond, and even though the surety corresponded with the contractor about the bond claim at the same address used by the bond claimant, the court allowed the surety to object to service on the contractor that did not strictly follow the statute. This is true even though the contractor and the surety had actual notice of the bond claim. Here, the contractor was well aware of the claimant’s claim and was in contact with the surety about the claim. The court stated that because the right to sue on a payment bond is entirely statutory, the surety has the right to object to the failure of the contractor to meet the statutory requirements. (The contractor never made an appearance in the case, and its liability to the claimant was established in the case. Unfortunately, the contractor appears to have no financial wherewithal to pay the claim.)

Matters of Fairness Are Irrelevant

The court’s opinion has cut off all arguments of unfairness or substantial compliance with the statutes requirements. In this case, the surety received nearly $300,000 in payments directly from the project owner after the claimant served its bond claim. These payments included amounts that were owed to the claimant. In other words, although the surety cut off any possibility that the claimant could be paid directly by the project owner (because the surety was paid these amounts by the owner), the claimant still could not recover from the surety because the address it used to mail the notice to the contractor was not the address listed in the bond.

Conclusion

The court acknowledged that its decision “creates a trap for the unwary,” but it determined that the unambiguous statute prevented it from making any decision other than strict compliance. Before you stake your claim on a payment bond claim, make sure that you have two things in front of you: (1) the payment bond, and (2) Minn. Stat. § 574.31, Subd. 2 and follow the requirements strictly. If you have any concerns about compliance with the payment bond statute, it would be a good idea to consult with your attorney. If you do not timely serve your payment bond claim to the surety and the contractor using the addresses listed for them on the bond, you don’t just lose a turn – you’re out of the game.

Recent CGL Coverage Case – Score One For The Contractors

  

Score One for the Contractors

In a January 17, 2014 Opinion, the Supreme Court of Texas, held that a general contractor who contractually agrees to perform its construction work “in a good and workmanlike manner” without more specific provisions enlarging this obligation, does not lose its commercial general liability (“CGL”) coverage under the contractual liability exclusion, which eliminates coverage for liabilities assumed in a contract.  This means that the insurance company may not use the contractual liability exclusion as a reason for not providing a defense or indemnity for damages caused by a construction defect arising from the breach of a contractual duty to perform in a workmanlike manner.  While this is not the only exclusion insurers typically rely upon in denying coverage for construction defect claims, it is one of the regularly cited exclusions upon which insurers rely.  The reasoning should be persuasive to courts in other states.

Background

In 2008, Ewing construction Company, Inc. (“Ewing”) entered into an AIA contract with a school district to provide services as a general contractor to renovate and build additions to a school in Texas.  The contract states that Ewing would perform its services in a good and workmanlike manner.  Shortly after construction was completed, the owner complained of the quality of workmanship and sued Ewing (and others).  The owner’s claims were based on faulty construction and theories of liability were based upon breach of contract and negligence.

Insurance Coverage Lawsuit

Ewing tendered the defense of the underlying suit to its CGL insurer, Amerisure, who denied coverage both for defense and indemnity.  Amerisure argued that because the workmanship obligation was contractual, coverage was excluded by the contractual liability exclusion that eliminates coverage for damages caused by breach of contract.  Ewing then filed a lawsuit seeking a declaration that its insurer had breached its duties to defend and indemnify it for any damages awarded to the owner in the underlying suit.  The district court agreed with the insurance company and reasoned that the contractual liability exclusion precluded coverage for the claims because they were based on workmanship, a liability Ewing “assumed” in its contract.

Ewing appealed the district court opinion to the Court of Appeals for the Fifth Circuit, who in turn certified two questions to the Supreme Court of Texas.  The important question was whether a general contractor who enters into a contract in which it agrees to perform its construction work in a good and workmanlike manner, without more specific provisions enlarging this obligation, “assumes liability” for damages arising out of the contractor’s defective work so as to trigger the contractual liability exclusion.

The Contractual Liability Exclusion

The contractual liability exclusion in a CGL policy typically excludes coverage for claims that are based on contract liabilities, which are liabilities assumed in a contract or agreement, unless the insured would have liability absent the contract or agreement.  It is a common defense raised by insurers of construction contractors as a basis for denying coverage for construction defect claims.  it is the last portion of this exclusion at issue; what does it mean when it says “unless the insured would have liability in the absence of the contract?

Arguments

In the case before the Supreme Court of Texas, Ewing argued that its express agreement to perform construction ini a “good and workmanlike manner” did not enlarge its obligations under the common law to act in a non-negligent manner.  In other words, a suit for poor workmanship is nothing more than a suit for negligent construction.  Thus, Ewing reasoned, it assumed no liability under the contract which it would not have otherwise had under the common law.

The insurer argued that because Ewing was sued for poor workmanship and because the standards of workmanship were set out in the contract, this was a contractual liability and no coverage was provided under the policy.

The Decision

The Texas Supreme Court agreed with Ewing and held that if a contractor “assumes liability” under a contract that is the same as the liability it would have under the general common law, the contractual liability exclusion does not apply.

Allegations that a contractor failed to perform in a good and workmanlike manner are the same as claims that the contractor negligently performed its work under the contract.  the Texas Supreme Court concluded that a general contractor does not enlarge its duty to exercise ordinary care in fulfilling its contract work if it merely agrees to perform work in a good and workmanlike manner.

The court did not determine whether other exclusions or coverage limitations under the CGL policy might apply.  But, this case should provide support to contractors seeking to challenge its insurer’s argument that there is no coverage for construction defects because of the contractual liability exclusion.      

1The holding of Safety Signs, LLC v. Niles-Wiese Constr. Co., __ N.W. __ (Minn. 2013) would not apply if the addresses of the contractor or the surety are not listed on the payment bond. If the payment bond does not include both the surety’s and contractor’s addresses, then the claimant is not required to provide either the contractor or the surety with notice. Minn. Stat. § 574.31, Subd. 2(b). 

This discussion is generalized in nature and should not be considered a substitute for professional advice.© 2014 FWH&T

 

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