Payment Bond - Lack of Written Basis for Dispute From Surety

Payment Bond - Lack of Written Basis for Dispute from Surety

By: Larry R. Leiby, Esq.

Two recent cases have "stirred the pot" with respect to how sureties may be transacting business in the future. There is also a current movement to submit a bill to the Florida Legislature that would require certain information from payment bond claimants along with the notice of nonpayment.

We all know that in most instances where a surety has a viable contractor principal, that the payment bond claimant gives the required notices (either under the applicable statute for a statutory bond, or the notices required in the bond) to make the bond claim. The surety then sends the claim (hopefully) to the bonded contractor and asks for a response. This is one of the things that the surety does to comply with its duty to investigate the claim. (A surety does have a statutory duty to investigate claims and to pay valid claims in Florida.) Once notice of a claim is received the surety also sends out a request to the claimant asking for a sworn proof of the claim along with all potential documents that may have some relevance to the claim, so that the surety may investigate the claim from the claimant's viewpoint. So, with the viable contractor, the surety historically took those two steps and waited to hear back from the contractor.

If the contractor did not get back with the surety and tell the surety that it was OK for the surety to pay the claimant, the surety typically sat back and waited for the claimant to sue (or allowed the statute of limitations to run). The surety would demand that the contractor defend the surety. Thus it seemed a waste of time for the bond claimant to send in all the paperwork that the surety requested for proof of the claim. Rarely was a payment bond claim paid based on the paperwork submitted unless the contractor/bond principal agreed that the claim should be paid. The information sought was viewed by the bond claimant as a time consuming effort to give the surety information that the surety may later use to defend the inevitable law suit. On the other hand, if the surety was to pay a claim to which the contractor principal had a viable defense, then the surety would be acting as a volunteer rather than as a surety, and would face a defense to the surety's indemnity from its indemnitors.

If the contractor was in financial trouble about which the surety was aware when the payment bond claim(s) came in, then the situation would likely be handled differently. When the surety understood that the indemnitor(s) of the bond may not be collectable, then the surety would be truly required to investigate the claim for merit and attempt to pay or settle the claim as a reasonable business decision without the safety net of collectible indemnity.

Many payment bond forms (and this is not a statutory requirement) set forth the time within which notice of a claim was required, and went further to say that the surety would promptly respond in writing within 45 days after receipt of the claim and state the undisputed amounts as well as the basis for challenging any disputed amounts. Counsel for bond claimants began to argue that with such a requirement written in the bond, there was a waiver of the surety's right to dispute the claim if the surety did not respond with the reasons for the dispute within the 45 days.

Courts began to listen. A decision was issued by the U.S. District Court, Middle District of Florida, on October 8, 2007: J.C. Gibson Plastering Co., Inc. v. XL Specialty Insurance Co., 2007 WL 2916399 (U.S.D.C. M.D. Fla. 2008), which granted the bond claimant summary judgment on its bond claim, in part on the basis of the failure of the surety to timely (within the 45 days) issue a letter stating the undisputed amounts and stating the basis for challenging any disputed amounts. The decision was also based in part on two Maryland cases holding the same way. [1] A Virginia case held that the failure to timely respond in writing with the basis for challenging disputed amounts was a waiver of defenses other than "legal defenses". [2] Thus, where the language of the payment bond requires the surety to identify in writing the undisputed amounts and the basis for challenging any disputed amounts within a particular time, the failure to timely identify the basis for the disputed amounts will be considered a waiver of the right to dispute the claim. Going a step further, the surety may be precluded from asserting any basis for defense of the claim that was not disclosed in writing within 45 days of the notice on nonpayment where the bond contains the 45 day response requirement (unless something perhaps later arose).

Coincidentally, there is a movement in late 2007 to enact a Florida Statute in 2008 that would require, as attachments to the notice of nonpayment, copies of many supporting documents in proof of the amount claimed as unpaid in the notice of nonpayment for statutory payment bonds (Fla. Stats. 255.05, 337.18 and 713.23).


¹National Union Fire Ins. Co. v. Wadsworth Golf Constr. Co., 863 A.2d 347 (Md. Ct. Spec. App. 2004), which was affirmed on appeal in National Union Fire Ins. Co. v. Bramble, 879 A.2d 110 (Md. 2005).

²Casey Industrial v. Seaboard Surety Co., 2006 WL 2850652 (U.S.D.C. E.D. Va., 2006), and 2006 WL 3299932 (U.S.D.C. E.D. Va., 2006).