Availability of Surety and Insurance Upon Completion and Beyond

Transcription

1 American Bar Association Forum on the Construction Industry Availability of Surety and Insurance Upon Completion and Beyond F. Malcolm Cunningham, Jr. Cunningham Law Firm, P.A. 400 Australian Avenue, Suite 700 West Palm Beach, FL (561) (561) Fax April 18-19, 2002 The Palace Hotel, San Francisco, CA 2002 American Bar Association

2 WHEN DOES SURETY S LIABILITY END A. Language of Bond Determines the Surety s Liability A bond is a contract subject to the general law of contracts. 1 The clear and unambiguous terms of a contract are the best evidence of the parties intent, and the meaning and legal effect of such clear and unambiguous contracts are questions of law for the court's determination. 2 When the terms of the contract are unambiguous, the parties intent must be determined from the four corners of the document. 3 If the provisions of the performance bond are clear and unambiguous, a court must enforce the bond as written. 4 In interpreting an unambiguous contract term, the court cannot give it any meaning beyond that expressed by the language used and must construe the provision in accordance with the ordinary meaning of the language. 5 Moreover, parties to a surety contract are not presumed to have included in their agreement a provision different from that indicated by the language used. 6 B. Are Default and Termination and Notice of Same to Surety Preconditions to Performance by the Surety? As set forth above, the answer to this question should depend on the language of the bond. But performance bond sureties, often argue that general surety law requires that an obligee must promptly default and terminate an allegedly non-performing contractor and thereafter notify the surety, citing to the case. 7 In L&A, the performance bond obligee, L&A Contracting, wrote a series of letters to the subcontractor complaining of inadequate performance and threatening termination. L&A copied two of these letters to the subcontractor s surety. L&A, however, never terminated the subcontractor, and the subcontractor completed its work. L&A then sued both the subcontractor and the surety for damages arising from the subcontractor s defective performance. 8 The trial court awarded damages against both the

3 subcontractor and the surety. On appeal, the Fifth Circuit reversed the award against the surety. Finding that the language of the bond imposed liability on the performance bond surety only if the subcontractor was in default of its performance obligations and L&A had declared the subcontractor in default, the court did not view the complaint letters as sufficient notice to trigger the surety s performance obligation under the bond. The court noted that, in the construction context, default is a term of art which means: a (1) material breach or series of breaches (2) of such magnitude that the obligee is justified in terminating the contract. 9 Additionally, the Court observed that tort liability attended a surety s involvement in its principal s contract unless a default had been declared and the principal had been terminated which further militated in favor of a sufficiently clear, direct, and unequivocal declaration of default. In light of these principles, the court concluded that the declaration [of default] must inform the surety that the principal has committed a material breach or series of material breaches of the subcontract, that the obligee regards the subcontract as terminated, and that the surety must immediately commence performing under the terms of its bond. 10 On the basis of the L&A case, sureties argue a default, a declaration of a default and termination of the bonded contract are all necessary before the surety is required to perform under the contract. A close reading of the L&A case, however, suggests that the Court s opinion is limited to interpreting a series of letters and determining whether the letters satisfy the requirement of the language of the bond that required the obligee to declare a default to the surety rather than determining if termination is a precondition to performance by the surety under

4 general suretyship principles. Of course, if this argument were upheld, a surety would never have liability under its performance bond once completion of the project occurred as the principal could not be terminated after completion. In rejecting the surety s argument that termination of the bonded contract is a prerequisite to performance by the surety pursuant to the L&A case, a Florida Court, 11 held just that --that the L&A case stands for the unremarkable proposition that notice under the language of the bond had to be clear in order to inform the surety of the existence of a material breach. In DCC Contractors, DCC, a general contractor notified its HVAC subcontractor, Randall and its surety American Alliance of deficiencies that appeared in the completed HVAC system installed by Randall under a subcontract with DCC. DCC demanded correction of the deficiency by Randall or its surety American Alliance. Both refused and DCC initiated a lawsuit against the subcontractor and its surety. The trial court granted summary judgment against DCC on DCC s claim against American Alliance on the basis that the surety s duty to perform under the performance bond was never invoked because DCC never terminated Randall's contract, citing to the L&A case. The appellate court reversed. Citing to the language used in the bond, the appellate court observed that American Alliance's obligation as surety was to perform Randall's obligations upon DCC's declaration of a default under the subcontract assuming a valid act of default had occurred. Finding that DCC had repeatedly notified both Randall and American Alliance in writing that Randall was in default and that Randall had failed to cure the default, DCC had properly invoked the provisions of the bond. The Court rejected the notion that L&A held that "liability under a performance bond only occurred when the general contractor actually terminates the subcontract." 12 3

5 C. But are there Consequences to Permitting the Non-Performing Contractor to Limp to Completion Without Terminating? 1. Cardinal Change Doctrine. To the extent that a non performing contractor is permitted to complete its work, thereby exceeding the time for performance set forth in the subcontract, sureties will often invoke the cardinal change defense to limit its liability. A cardinal change is one which, because it fundamentally alters the contractual undertaking of the contractor, is not comprehended by the normal changes clause. 13 A surety is discharged where the bonded contract is materially changed without its knowledge or consent and it also was prejudiced as a result of the changes Surety's Extension of Time Defense: Extension as Cardinal Change Extending the time of the principal s performance has long been considered a cardinal change to a contract that discharges the surety. The surety's "extension of time defense," as first formulated over two hundred years ago, provided for the total discharge of the surety upon the granting of any extension to the principal. 15 The adoption and adaptation of surety's extension of time defense into American common law is reflected in the RESTATEMENT (THIRD) OF SURETYSHIP AND GUARANTY 40 (1996) (the Restatement ). The Restatement recognizes time extensions granted by the obligee to the primary obligor 16 discharges the liability of a surety, as secondary obligor, to the extent it is prejudiced: 40. Extension of Time If the obligee grants the principal obligor an extension of the time for performance of its duties pursuant to the underlying obligation: * * * (b) to the extent that the secondary obligor has not performed its duties pursuant to the secondary obligation, it is discharged from those duties to the extent that 4

6 the extension would otherwise cause the secondary obligor a loss. The Restatement comments explain how an extension can prejudice a surety or cause a loss that will discharge a surety from further liability. Comment d explains that an extension prevents a surety from enforcing its rights against a principal before the extension expires, when the surety might have been able to avoid loss had it been permitted to enforce its rights earlier. Loss may also arise from the adverse "motivational impact" of the extension on the principal. Comment e explains that the principal owes the surety a duty of performance; if a surety cannot compel a principal to perform due to an extension, any loss to the surety during the extension is deemed caused by the extension. One commentator describes the "paradigm" of such a loss "is the principal that is solvent when the performance is originally due but becomes insolvent by the time the extension expires." 17 With payment and other bonds involving repayment of sums, "if the principal becomes insolvent during the extension period, the surety is prejudiced and the defense should come into play." 18 Comment f describes the prejudice to the performing surety that stymies its recovery through reimbursement, restitution, or subrogation. Comment l reiterates the cardinal change doctrine in the context of time extensions: an extension that is "so disproportionate to the original time for performance" as to impose "fundamentally different risks" on the surety, may constitute a change to the contract giving rise to a total discharge. Thus, the surety's time extension defense as formulated by most American courts 19 provides that only a time extension that materially changes the risk that a surety incurs discharges a surety s further obligation. 20 Consistent with Comment l to the Restatement, the surety is discharged because the extension increases the risk that the surety agreed to undertake. 5

7 The surety is discharged by a time extension that constitutes a cardinal change even where a contract specifically allows alterations to the contract during the course of the work. For example, in In Re: Liquidation of Union Indem. Ins. Co. of N.Y., 21 although the construction contract contained a clause allowing alterations during the course of the work, the court found that the surety was nonetheless discharged: A creditor and debtor may not alter the surety s undertaking to cover a different obligation without the surety s consent, and if they do so, the surety is discharged... Under construction contracts specifically making allowances for alterations during the progress of the work, changes not fairly within the contemplation of the parties at the time the original contract was made, constituting a material departure from the original undertaking, will therefore release the surety from its obligations under the bond. 22 Thus, bond provisions waiving notice of alterations or time extensions do not permit cardinal changes to the underlying contract that substantially extend the time for performance beyond that which was contemplated by the parties. 3. Surety s Interest in Contract Proceeds and Obligee s Duty to Preserve Collateral To the extent that an obligee permits a non performing contractor to execute the work in a defective manner and pays him for such non conforming work without declaring a default, terminating the contract and demanding that the surety perform, the surety may have a defense of impairment of collateral. Under this defense, a surety has a special interest in the proceeds due to the principal under a bonded construction contract and is entitled to the benefit of such collateral held by the obligee as collateral or security for the debt. 23 The RESTATEMENT (THIRD) OF SURETYSHIP AND GUARANTY 31 (1996) (the Restatement ) explains the surety s right to collect contract proceeds payable on the underlying bonded contract as one facet of the surety s right to return performance : 24 6

8 For purposes of a subrogated secondary obligor s right to enforce for its benefit the obligee s rights against property securing the underlying obligation... performance owed by the obligee to the principal obligor pursuant to the contract creating the underlying obligation ( return performance ) is security for the underlying obligation. Restatement at 31. Thus, a surety that undertakes performance of the bonded contract is entitled to return performance under that contract as security. Thus, the return performance owed to a surety that completes work required under the bonded construction contract is the payment of the contract balance. Conversely, the surety has a defense to liability under a performance bond when the beneficiary of the bond, i.e. the obligee, takes actions that impairs the surety s ability to perform and its claim to return performance under the bonded contract. The obligee impairs the surety s (i.e. the secondary obligor s ) collateral and its right to return performance when it impairs the value of contract balances on the underlying bonded contract (i.e. the primary obligation ): (1) If the obligee acts to increase the secondary obligor s risk of loss by increasing its potential ability to cause the principal obligor to bear the cost of performance, the secondary obligor is discharged as described in subsections (2) and (3), and the secondary obligor has a claim against the obligee as described in subsection (4). An act that increases the secondary obligor s risk of loss by increasing its potential ability to cause the principal obligor to bear the cost of performance is an impairment of suretyship status. * * * * (3) If the obligee impairs the secondary obligor s recourse against the principal obligor by:... (d) impairing the value of an interest in collateral securing the underlying obligation ( 42) the secondary obligor is discharged from its duties to the extent set forth in those sections in order to prevent the impairment of recourse from causing the secondary obligor a loss. Restatement at 37. Restatement Section 42 includes release of collateral without an equivalent 7

9 reduction of the underlying obligation as an impairment to the surety s collateral that discharges the surety to the extent of the impairment: 42. Impairment of Collateral (1) If the underlying obligation is secured by a security interest in collateral and the obligee impairs the value of that interest, the secondary obligation is discharged to the extent that such impairment would otherwise increase the difference between the maximum amount recoverable by the secondary obligor pursuant to its subrogation rights... and the value of the secondary obligor s interest in the collateral (2) Impairing the value of a security interest in collateral includes:... (b) release of collateral without substitution of collateral of equal value or equivalent reduction of the underlying obligation. 25 The obligee s pre-payment or overpayment of contract sums to the principal impairs the surety s collateral and compromises the surety s position because the overpayments reduce the contract balance remaining that is payable to the surety to complete the work. At common law, any prejudicial changes in the underlying primary obligation discharged the surety entirely from any obligation to perform the underlying contract; however, the Restatement, along with the majority of jurisdictions no longer discharge the surety completely, but only pro tanto, i.e. to the extent of the surety s injury. 26 Florida is among the majority of jurisdictions adopting this view that affords the surety a pro tanto discharge liability to the extent that its security is compromised. 27 Thus, if the obligee overpays for the work in place, and reduces the contract balance remaining on the primary obligation, the surety ( secondary obligor ) would be prejudiced to the extent of the overpayment and concomitant reduction in its collateral, the contract balance remaining. 4. Notice and Other Prerequisites to Surety s Performance Post Completion 8

10 Once a project is completed, the performance surety continues to be liable under its performance bond provided the obligee invokes the provisions of the bond in asserting its claim. Simply because the project is complete does not render the terms of the bond meaningless. This was the holding of the Court in Dragon Constr., Inc. v. Parkway Bank & Trust. 28 In Dragon, the owner terminated the contractor and the same day, hired a completion contractor. The performance bond reserved to the surety the right to either complete the project or obtain bids for completion, upon the principal s default. The owner, however, did not notify the surety of the default termination, and simultaneous retention of a replacement contractor, until four days after the fact. After completion, the owner sued the surety for the costs of completion. The trial court entered summary judgment in favor of the surety, holding the bonds null and void due to the owner s failure to notify the surety in advance of retaining the replacement contractor. The appeals court affirmed. The obligee argued that it had no obligation to provide notice of the termination to the surety because the bond did not state so on its face. The court, however, recognized that: The [owner s] argument ignores their own obligations under the performance bond and the construction contract, which was incorporated by reference into the bond. In order to terminate [the contractor]... the [owners] were required to provide seven days written notice to the [surety]. An obvious reason for this requirement was to allow the [surety] to exercise its right under the performance bond to participate in the selection of a successor subcontractor... [The surety] was stripped of its contractual right to minimize its liability under the performance bond by ensuring that the lowest responsible bidder was selected to complete the job. 29 The court held that the owner s conduct constituted a material breach of the bond sufficient to completely discharge the surety. 30 The Dragon holding became Florida law in the case of Insurance Co. of North America 9

11 v. Metropolitan Dade County. 31 The County claimed that certain roofs built in 1984 were defectively installed. The County allegedly did not discover these defects until the roofs were blown off the County buildings during Hurricane Andrew. The County made demand on the defunct contractor, who was no longer around to defend and thereafter obtained a default judgment against the contractor. The County then replaced the roofs. Thereafter, the County sued the surety, claiming that the default judgment made the surety automatically liable. The Court of Appeals reversed the trial court s summary judgment in favor of the County. The Court held that INA... was discharged from liability by the County s failure to notify the surety when the defects had been discovered. 32 The court reasoned that as in Dragon, Dade s failure to comply with the INA bond s notice provisions stripped the surety of its bargained for right [to minimize damages] and relieved the surety of liability for the instant claim. 33 Thus, completion of the project does not obviate the need to comply with the provisions of the bond. Compliance is essential, especially so that the surety retains its right to minimize its damages. 5. Statute of Limitations At Completion Generally, a surety s liability is coextensive with the liability of its principal. 34 Thus, it would seem to follow that the statute of limitations applicable to one is similarly applicable to the other. This proposition was specifically rejected in the case of Federal Ins. Co. v. Southwest Fla. Retirement Center, Inc. 35 At issue in that case was whether the statute of limitations for latent defects was the same for the surety as for the principal. The obligee, Southwest Florida Retirement Center, had discovered latent defects in the project in 1993, while investigating water 10

12 damage to the facility caused by a storm. The defects in the facility, completed some ten years earlier in 1984, caused Southwest to file suit against the general contractor for breach express warranty and against the surety for breach of the performance bond for failure to cure the general contractor s warranty violation. The trial court found that the claim against the general contractor was not barred in light of the fact that a tolling provision in the four year statute of limitations applicable to the general contractor tolled the running of the statute of limitations until the discovery of the defective condition. Yet, the trial court found the five-year statute of limitations applicable to actions on contracts specifically applicable to the surety and dismissed the claim against the surety as being time-barred. The five year statute of limitation contained no tolling provision. The Court of Appeals reversed finding that a valid claim against the general contractor should of necessity be valid against the surety on the basis that a surety s liability is co-extensive with that of the general contractor. The Supreme Court of Florida reinstated the trial court s decision. The Supreme Court observed that the tolling provision that exists in the four-year statute of limitations applicable to the general contractor did not exist in the statute of limitations applicable to performance bonds. Finding no comparable deferral of accrual of a cause of action for latent undiscovered defects in the statute of limitations applicable to performance bonds, the Supreme Court found that the statute of limitations applicable to the performance bond accrues on the date of acceptance of the project as having been completed according to the terms and conditions set out in the construction contract. As such, the court found that the claim against the surety was time barred. AVAILABILITY OF INSURANCE COVERAGE AT COMPLETION A. Builder s Risk vs. Permanent Liability Coverage 11

13 A builder s risk policy is the mechanism used by property owners to insure a structure during the course of construction. 36 It must be distinguished from permanent casualty insurance, which insures the building upon completion. 37 Disputes frequently arise between these two carriers regarding who bears the burden of insuring a loss in which it is unclear whether construction of the building has been completed. In general terms, completion means whatever the parties to that particular construction contract intend the term to mean, pursuant to the provisions of the contract itself. 38 Several courts have addressed the issue of what constitutes completion of construction of a new building and have come to various conclusions, impacting whether the permanent liability insurer will be called upon to insure the loss. In one frequently cited case, the Tenth Circuit found that because a building under construction was occupied at the time of a fire, it was completed, thereby terminating coverage under the builder s risk policy. 39 In Hendrix, the builder s risk policy stated that it was in effect while in the course of construction. The evidence at trial established that the building, without the consent of the insurer, was rented to prospective buyers and was regularly occupied for two and one half months prior to the fire. The owner argued that the builder s risk policy was reinstated by virtue of the vacating of the premises prior to the fire. In rejecting this argument, the Tenth Circuit observed stated that where the builder s risk policy is issued upon the condition that the building shall not be occupied before completion of the building without consent of the insurer, coverage terminates upon failure of insured to comply with that condition. Furthermore, the vacating of the premises was based upon nothing more than punchlist work that had to be completed by the contractor. The Tenth Circuit held that the work of merely repairing defects 12

14 or remedying inferior workmanship did not preclude a determination that the building had been completed for purposes of the policy. 40 As the owner s occupancy of the structure terminated coverage of the builder s risk policy, the court upheld the trial judge s entry of summary judgment in favor of the insured. 41 In another case, the New Jersey Supreme Court addressed the question of whether a builder s risk policy covered damaged to a newly-constructed building. 42 The trial court held that because the building was substantially complete at the time of the loss, the risk of loss had passed to the owner, as coverage under the builder s risk policy had lapsed. The appellate court reversed, stating that the risk of loss during construction is borne by the contractor, absent contrary contractual language. In affirming the appellate court, the New Jersey Supreme Court noted that the trial judge applied the wrong standard in finding that builder s risk coverage lapses upon substantial completion of the structure. The proper test is whether the building is ready for the use or occupancy for which it was intended. 43 The court defined occupancy as putting the structure to the practical and substantial use for which it was designed. 44 The structure in question was a school and although there was some pre-completion occupation by employees, the court found that the building was not fit for its intended purpose at the time of the fire; namely, for use as an educational facility. As the building was not complete at the time of the fire, the court held that the builder s risk policy was still in effect at that time. One court addressed the question of whether renovations to a residence constituted construction within the meaning of a builder s risk policy. 45 The homeowner purchased a vacant home and intended to renovate it into a convenience store. In furtherance of this venture, he obtained a builder s risk policy which protected against damages to the building while in the 13

15 course of construction. A fire subsequently destroyed the residence, and the insurer denied coverage on the grounds that the renovations undertaken did not constitute construction. In finding that construction is susceptible to varying interpretations, the court held that ambiguities in an insurance contract are reasonably construed in favor of the insured. As the parties understood that the owner intended to renovate the residence, the Court found that it was reasonable to construe construction to encompass alterations and renovations. Accordingly, the court denied the insurer s motion for summary judgment. B. Commercial General Liability vs. Permanent Liability Coverage Commercial General Liability ( CGL ) policies are obtained by the general contractor and subcontractors on a project to cover the contractor for its tort liability. 46 The policy is not meant to substitute for a contractor s performance bond, and the policy therefore contains numerous exclusions from coverage. 47 Pertinent to this discussion is the completed operations hazard exclusion contained in most CGL policies, as this exclusion precludes coverage for damages that occur after the project is completed. 48 As this exclusion specifically bars coverage for injuries subsequent to completion of the building, the owner is forced to look to the permanent liability insurer to defend all negligence claims by third parties. Where completed operations are expressly excluded from coverage, losses that occur subsequent to completion are not covered by the CGL policy. 49 In Avant, a homeowner brought suit against the brick mason who built the fireplace in his home which was defectively designed and constructed. Two years after the residence was completed, a fire caused by the defective fireplace resulted in $40,000, in property damage, and the owner and its fire insurer sued to recover the loss from the contractor and his CGL carrier. In affirming the trial judge s grant of 14

16 summary judgment for the insured, the court found that the loss fell squarely under the clear language of the completed operations exclusion. Thus, the CGL policy provided no coverage for the loss sustained by the homeowner. Despite the clear and unambiguous language of the exclusion, several owners have sought coverage under a CGL policy for damages sustained subsequent to completion of the project. For example, in one case, a general contractor brought suit for its CGL insurer to defend it in a suit brought by an owner for a defectively installed swimming pool. 50 In finding that the CGL insurer had no duty to defend, the court invoked the completed operations exclusion in the policy, which specifically excluded from coverage all claims arising from breach of contractual warranties. Noting that CGL policies are not performance bonds, the court held that the CGL insurer had no duty to defend, as the homeowner s suit was premised upon breach of a contractual warranty. In another case, the owner argued that the completed operations exclusion in a CGL policy issued for the installation of an alarm system was inapplicable, as prior to the loss, the contractor had to return to the building two times to repair the system. 51 In rejecting this argument, the court found that the portion of work out of which the damage arose had been put to its intended use by the owner. The contractor s subsequent servicing and adjustment of the otherwise completed system did not render the project incomplete. Accordingly, the court upheld the trial judge s grant of summary judgment in favor of the CGL insurer. One party made the clever argument that the completed operations exclusion did not apply because the complaint did not allege that the work had been completed, so as to bring it within the exclusion. 52 The court, however, was unpersuaded by this argument, holding that the 15

17 requisite establishment of completion could be readily inferred from the allegations set forth in the complaint. Furthermore, the policy defined completion as when that part of the work done at a job site has been put to its intended use by any person. As the allegations of the complaint satisfied this requirement, the insurer properly pled completion, thereby bringing the claim within the scope of the completed operations exclusion. C. Liability Insurance for Design Professionals On a construction project, design professionals typically obtain insurance which covers their negligent acts, called errors and omissions insurance. Such coverage protects the design professional from claims arising out of negligent acts, error or omissions and breach of the owner/design professional contract during the performance of the design professional s services. 53 In general, it insures the design professional against lawsuits premised upon the design professional s negligence in the course of carrying out his/her work. 1. Design Professional s Standard of Care In determining the standard of care to which the design professional s work must conform, the majority of jurisdictions have utilized the locality rule. Under this rule, the design professional is expected to perform with the same degree and care and skill exercised by others in the profession in the same general area. 54 Other courts have applied the locality rule, but have defined locality to include the entire state. 55 Irrespective of the size of the locality, the design professional is obligated to possess a minimum standard of special knowledge and ability and to exercise reasonable care in a manner consistent with the knowledge and ability possessed by members of the profession in good standing. 56 Other jurisdictions, however, have rejected the locality rule and have subjected the design 16

18 professional to a much broader scope of liability. For example, one court has subjected design professionals to a national standard of care, finding that architects are held to a standard of performance that requires them to employ that degree of skill and care ordinarily used by their colleagues. 57 Thus, the court found that the trial judge erred in applying a local standard of care for design professionals. The error was harmless, however, as there was no evidence that the local standard of care differed in any significant way from the national standard. 2. Insurer s Duty to Defend The professional liability insurer has the duty to defend if any allegation indicates potential coverage, and all doubts as to coverage are resolved in favor of the insured. 58 An insurer can justifiably refuse to defend only when the allegations clearly show on their face that the claim is beyond coverage, as the duty to defend is broader than the duty to pay. 59 In order to initiate coverage under a professional liability policy, however, the design professional s negligence must be the direct cause of the resulting damages Occurrence vs. Claims Made Policies Under an occurrence policy, the coverage is effective if the negligent act or omission occurred within the policy period, regardless of the date of its discovery. 61 A claims made policy provides coverage for negligent acts for which a claim is made and communicated to the carrier within the policy period. 62 Thus, where the claim is not made while the claims made policy is in effect, there is no coverage for such claim, irrespective of whether the action giving rise to the claim occurred while the policy was in effect. In determining whether a professional liability policy insures a particular claim, therefore, courts must frequently determine whether the 17

19 design professional is insured by a claims made or occurrence policy. In one case, where the negligent act occurred outside the term of coverage of an occurrence policy, the court held that the insurer had no duty to defend the design professional. 63 The court noted that pursuant to an occurrence policy, coverage is effective if the negligent act or omission occurs within the policy period, regardless of the date of discovery. Under the policy in question, however, the definitions of bodily injury and property damage precluded coverage for completed operations, as the loss and resulting damages did not occur within the policy term. As the insurer provided an occurrence policy and the loss did not manifest itself during the term of the policy, the insurer had no duty to defend the design professional. 18

20 1. Crabtree v. Aetna Cas. & Sur. Co., 438 So. 2d 102 (Fla. 1st DCA 1983). See also RESTATEMENT THIRD, SURETY & GUARANTY 14; John H. Gregory and Michael Jay Rune II, Liability of the Performance Bond Surety, in The Law of Performance Bonds 123, 124 (Lawrence R. Moelmann & John T. Harris eds., ABA Tort and Insurance Practice Section, 2d ed. 2000)(performance bond, as with any contract, should be construed by courts to effectuate parties' intentions); R Critchlow v. Williamson, 450 So. 2d 1153 (Fla. 4th DCA 1984). 3. Barakat v. Broward County Hous. Auth., 771 So. 2d 1193 (Fla. 4th DCA 2000). 4. Gregory, supra note 4, at pp ("Where the provisions of the performance bond are clear and unambiguous, a court must enforce the terms of the bond as written"); R Paoli v. Natherson & Co., P.A., 750 So. 2d 46 (Fla. 2d DCA 1999). 6. Westinghouse Elec. Supply Co. v. Wesley Constr. Co., 316 F. Supp. 490, 497 (S.D. Fla.1970) (citing 30 Fla. Jur. 400, 9 on Suretyship and Guaranty for proposition that in interpreting surety contracts, courts "will not presume that the contracting parties intended to include in their agreement a provision other than, or different from, those indicated by the language used."). 7. L&A Contracting v. Southern Concrete Services, 17 F.3d 106 (5th Cir 1994). 8. Id. at Id. at Id. 11. DCC Constructors, Inc., v. Randall Mechanical, Inc., 791 So. 2d 575 (Fla. 5th DCA 2001). 12. Id. at p Edward R. Marden Corp. v. United States, 442 F.2d 364 (Ct. Cl. 1971). 14. United States v. Reliance Ins. Co., 799 F.2d 1382, 1385 (9th Cir. 1986); In Re: Gene, 207 B.R. 861 (W.D. Mich. 1997). 15. See J. Knox, "The Surety's Extension of Time Defense," Tort & Ins. Law Journal, Spring 1998 at p.891 (referenced as "Knox") citing Nisbet v. Smith, 29 Eng. Rep.317 (1785) (extension of time of performance by three years, contrary to surety's "express assent," discharges surety). 16. The Restatement uses the term secondary obligor to refer to a party, such as a surety, whose duty is secondary, derivative, or arising from a bond or other contract of suretyship. Primary obligor refers to the principal. Thus, in Restatement parlance, the Bond surety is the secondary obligor, and the principal would be the primary obligor. The Obligee on a performance bond issued on a general contract is generally the owner of the construction project; the Obligee on a bond issued to secure performance by a subcontractor, would be the general contractor. 17. Knox at p Id. at Some courts adhere to the common law formulation of the extension of time defense and afford the surety a discharge of liability by the extension of time, without requiring a showing of prejudice. Schwartz v. American Surety Co. of New York, 121 N.E. 424 (Mass. 1919). These courts are admittedly in the minority. 19

21 20. Varick Drywall, Inc. v. Aniero Concrete Co., Inc., 654 N.Y.S. 2d 815 (N.Y. App. Div. 1997) N.Y.S. 2d (N.Y. App. Div. 1995), 22. Id. at Prairie State Bank v. United States, 164 U.S. 227 (1896). 24. See Footnote four, supra. 25. Restatement 42; see also United States v. Continental Cas. Co., 512 F. 2d 475 (5th Cir. 1975). 26. Phillip L. Bruner, et al., The Surety s Analysis of Investigative Results: To Perform Or Not To Perform--That is the Question, in BOND DEFAULT MANUAL 57, 108 (2d ed. 1995) (Duncan L. Clore, ed.). 27. Gibbs v. Hartford Acc. & Indem. Co., 62 So. 2d 599 (Fla. 1953) N.E. 2d 55 (Ill. App. 3d 1997). 29. Id. 30. Id So. 2d 33 (Fla. 3d DCA 1998). 32. Id. at Id. at American Home Assurance Co. v. Larkin General Hospital, 593 So. 2d 195 (Fla. 1992) So. 2d 1119 (Fla. 1998). 36. Burdett Oxygen Co. of Cleveland, Inc. v. Employers Surplus Lines Ins. Co., 419 F. 2d 247 (6th Cir. 1969). 37. Fireman s Fund Ins. Co. v. Millers Mut. Ins. Assoc., 451 F. 2d 1140 (10th Cir. 1971). 38. St. Paul Fire & Marine Ins. Co. v. Stewart Warner Corp., 379 F.Supp Hendrix v. New Amsterdam Cas. Co., 390 F.2d 299 (10th Cir. 1968). 40. Id. at In a later case, the Tenth Circuit again faced the question of whether the builder s risk or permanent liability insurer bore the burden of insuring damage to a newly constructed building. Fireman s Fund Ins. Co. v. Millers Mut. Ins., 451 F.2d 1140 (10th Cir. 1971). The Tenth Circuit defined occupancy as when a building is put to a practical and substantial use for the purpose for which it was designed. The owner s oral acceptance of the structure, coupled with the acquisition of permanent liability insurance, caused the court to find that the building was 20

22 formally accepted, thereby terminating coverage under the builder s risk policy. 42. Hartford Fire Ins. Co. v. Riefolo Constr. Co., 410 A. 2d 658 (N.J.S. Ct. 1980). 43. Id. at Id. 45. Patton v. Aetna Ins. Co., 595 F. Supp. 533 (N.D. Miss. 1984). 46. Deutsch, Kerrigan & Stiles. CGL Insurance, Construction Industry Insurance Handbook, pg. 174, John Wiley & Sons, Korossy v. Sunrise Homes, 653 So. 2d 1215 (La. App. 5 Cir. 1995). 48. R.A. Owens Constr. Co., Inc. v. Employers Ins. Co. of Alabama, 392 So. 2d 1180 (Ala. 1981). 49. State Farm Fire & Cas. Co. v. Avant, 404 So. 2d 1311 (La. App. 2 Cir. 1981). 50. Western World Ins. Co., Inc. v. Paradise Pools & Spas, Inc., 633 So. 2d 790 (La. App. 5 Cir. 1994). 51. St. Paul Ins. Co. v. Bischoff, 389 N.W. 2d 443 (Mich. App. 1986). 52. Flint v. Universal Machine Co., 679 A. 2d 929 (Conn. 1996). 53. Annotation, Responsibility of One Acting as Architect for Defects or Insufficiency of Work Attributable to Plans, 25 A.L.R. 2d 1087 (1952). 54. Crawford v. Gray & Associates, 493 So. 2d 734 (La. App. 2 Cir. 1986). 55. Corcoran v. Sanner, 854 P. 2d 1376 (Colo. App. 1993). 56. Id. at Bell v. Jones, 523 A. 2d 982 (D.C. App. 1986). 58. Gibraltar Cas. Co. v. Sargent & Lundy, 214 Ill. App. 3d 768 (1990). 59. Id. at Bell Lavalin, Inc. v. Simcoe & Erie Gen. Ins., 61 F.3d 742 (9th Cir. 1995). In Bell Lavalin, the Ninth Circuit found that because the defendant s liability was caused by its refusal to make 21

23 payment for sums due, rather than its professional negligence, the professional liability insurer had no duty to defend the architect. The insurer s duty to defend would be initiated only if the damages to the plaintiff directly resulted from the design professional s negligence. 61. Prudential Property Cas. Ins. v. Stuckey, 486 So. 2d 352 (La. App. 3 Cir. 1986). 62. Hodge v. Garrett, 263 N.J. Super.278 (1993). 63. Prudential Prop. Cas. Ins. v. Stuckey, 486 So. 2d 352 (La. App. 3 Cir. 1986). 22