Virginia Surety Co Inc

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					  Understanding Surety
 Concerns with the AIA
A312 Payment Bond Form
         Presenter:
       [Insert Name]
           AIA A312 Background
   Commonly-used bond forms for private and for local
    public work
   First published in 1984 by the American Institute of
    Architects
   Successor to AIA A311 (1970)
   Comprised of a performance bond and a payment bond
   Surety industry provided comments and input in the
    development of the forms but is not the publisher of
    the forms.
            A312 Payment Bond

   Bond form covering contractor’s obligations to
    pay subcontractors and others for labor and
    materials
   More procedurally detailed, with more elaborate
    notice provisions, than A311
                    A312 Payment Bond:
                     Claimant Notice
   Important Provisions to Understand:
       Paragraph 4 – “The Surety shall have no obligation to Claimants under this Bond until:
               4.1 Claimants who are employed by or have a direct contract with the Contractor
                  have given notice to the Surety…and sent a copy, or notice thereof, to the
                  Owner, stating that a claim is being made under this Bond and, with
                  substantial accuracy, the amount of the claim.”
               4.2 Claimants who do not have a direct contract with the Contractor:
                    .1 Have furnished written notice to the Contractor and sent a copy, or notice
                    thereof, to the Owner, within 90 days after having last performed labor or
                    last furnished materials or equipment included in the claim stating, with
                    substantial accuracy, the amount of the claim and the name of the party
                    to whom the materials were furnished or supplied or for whom the labor
                    was done or performed; and
                    .2 Have either received a rejection in whole or in part from the Contractor, or
                    not received within 30 days of furnishing the above notice any communication
                    from the Contractor by which the Contractor has indicated the claim will be
                    paid directly or indirectly; and
                    .3 Not having been paid within the above 30 days, have sent a written notice to
                    the Surety…and sent a copy, or notice thereof, to the Owner, stating that a
                    claim is being made under this Bond and enclosing a copy of the previous
                    written notice furnished to the Contractor.”
                 A312 Payment Bond:
                   Surety Response
   Important Provisions to Understand:
      Paragraph 6 – “When the Claimant has satisfied the conditions of
       Paragraph 4, the Surety shall promptly and at the Surety’s expense take
       the following actions:
              6.1 Send 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.
              6.2 Pay or arrange for payment of any undisputed amounts.”
         The Crux of the Concern:
         3 Recent Legal Decisions
   National Union Fire Insurance Co. of
    Pittsburg v. David A. Bramble, Inc., 879 A.
    2d 101 (Md. 2005)
   Casey Industrial, Inc. v. Seaboard Surety
    Co., 2006 WL 2850652 (E.D. Va. Oct. 2, 2006)
   J.C. Gibson Plastering Co., Inc. v. XL
    Specialty Insurance Co., 2007 WL 2916399
    (M.D. Fla. Oct. 8, 2007)
                  Bramble Decision
   Maryland decision in which highest Maryland state
    court found that a surety’s non-response to a
    Claimant’s notice under the terms of Paragraph 6
    of the A312 payment bond constituted a complete
    waiver of all procedural and substantive defenses
    by the surety.
       The Court rejected surety’s arguments that: (1) if the
        non-response constituted a breach, the claimant should
        receive any damages caused by that breach, not
        payment of the entire claim, valid or invalid, and (2) the
        surety’s non-response should be treated as a denial of
        the claim, rather than an admission of liability.
      Casey Industrial, Inc. Decision
   Virginia decision in which federal district
    court, looking to Bramble Decision for
    guidance, ruled that a surety’s failure to
    identify all fact-based defenses within the
    45-day response period of A312 acted as a
    waiver of any new fact-based defense raised
    outside of the 45-day period.
    J.C. Gibson Plastering Co. Decision
   Florida decision in which federal district court, following
    the Bramble and Casey decisions, held that an untimely
    surety response (one given in 48 days) constituted a
    complete waiver of the surety’s defenses.
        The Court reasoned that the 45-day response period begins to run
         from receipt of Claimant’s notice that (1) a claim is being made on
         the bond and (2) which states the amount of the claim with
         substantial accuracy.
        The Court rejected the surety’s contention that the 45-day response
         period should commence to run from when the surety receives proof
         of loss/substantiating documentation of the claim, since this was
         not stated explicitly in the bond form.
        The Court noted, that under Florida law, bond language must be
         strictly construed against the surety.
                           Implications
   45 days is not a long evaluative period given the complexities of today’s
    construction projects.
   According to the Gibson decision, the 45-day period runs from receipt of a
    notice simply identifying that it is a claim on the payment bond and stating an
    amount due with “substantial accuracy”; the absence of supporting
    documentation does not delay the running of the surety’s response period!
   How can the surety make a proper determination as to the merits of the claim
    and the range of appropriate defenses in the absence of relevant facts and
    documentation? Principal must provide the surety with all claim information
    promptly and expeditiously!
   An untimely or non-response has harsh consequences for principal and surety
    alike!
   Remember the principal indemnifies the surety for amounts paid out, so the
    Principal ultimately bears the risk of paying unsubstantiated claims!
   Please note that EJCDC C-615, Payment Bond, is predicated on AIA A312
    bond form language and likewise is problematic!
          Surety Company Responses
   Each surety company will make its own decision
    on whether and how to write the A312 payment
    bond form.
       Given the import of recent legal developments and increased
        risks to contractors and sureties, sureties are reticent to write
        an unmodified A312 payment bond form.
       Many sureties have created their own custom modifications
        to the A312 payment bond form; the language and approach
        of such modifications vary among surety companies.
       Some sureties seek use of alternative payment bond forms
        such as A311.
       Some sureties may write an unmodified A312 bond form, but
        only for particular accounts.
            Surety Industry Response
   The National Association of Surety Bond
    Producers (NASBP) and The Surety & Fidelity
    Association of America (SFAA) have taken
    immediate actions to address concerns:
       Initiated dialogue and meetings with AIA
       Working toward a consensus modification to A312 payment
        bond form that can be considered by owners, design
        professionals, contractors, and sureties
       Seeking development and issuance by AIA of a “stopgap”
        amendment to Paragraph 6 of the A312 payment bond form
       Seeking to expedite the revision cycle for AIA A312 and to
        discuss with AIA the development of alternate bond forms
    What Can You Do As A Contractor?
   Educate owners and design professionals about the implications
    of specifying an unmodified A312 payment bond form! Make
    sure they understand that unmodified A312 payment bond
    forms will be harder to obtain.
   Work with your local contractor associations to bring awareness
    to and understanding of these issues!
   Cooperate with your bond producer and surety on any payment
    bond claims under A312 and provide all relevant information to
    the surety as promptly as possible.
       For More Information
National Association of Surety Bond Producers (NASBP)
202-686-3700
www.nasbp.org

The Surety & Fidelity Association of America (SFAA)
202-463-0600
www.surety.org

Surety Information Office (SIO)
202-686-7463
www.sio.org

				
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