A recent case out of Missouri emphasizes the importance of providing notice to a surety when a bonded subcontractor is in default. When the question of whether a surety will be obligated under the bond is in the balance, notice is crucial.
In CMS v. Safeco Insurance Company, Safeco provided a performance bond to a subcontractor for the benefit of CMS. The bond specifically provided:
PRINCIPAL DEFAULT. Whenever the Principal [Subcontractor] shall be, and is declared by the Obligee [CMS] to be in default under the Subcontract, with the Obligee having performed its obligations in the Subcontract, the Surety [Safeco] may promptly remedy the default, or shall promptly:
4.1 COMPLETE SUBCONTRACT. . . .
4.2 OBTAIN NEW CONTRACTORS. . . .
4.3 PAY OBLIGEE. . . .
4.4 DENY LIABILITY. . .
Several months into the project, CMS informed Safeco, through a Contract Bond Status Query, that the subcontractor’s work had not progressed satisfactorily, that the contract was 9 months past due and that liquidated damages would be assessed. Importantly, as least according to the court, CMS did not declare that the subcontractor was in default. A few months later, the subcontractor walked off the job and the president of the subcontractor filed for bankruptcy. CMS completed the work and submitted a Notice of Claim on Subcontract Bond to Safeco, demanding $65,449.93, the amount CMS incurred as a result of the subcontractor’s default. Safeco refused to pay the demand, asserting that it was not provided with timely notice of the default.
CMS sued Safeco, asserting that it was not obligated to provide notice of default, and even if a notice of default was required, the Contract Bond Status Query was sufficient notice.
The court disagreed. Reviewing the language in the Principal Default section, the court fund that CMS was obligated to provide specific notice of the subcontractor’s default. In essence, CMS had to specifically inform the surety that the subcontractor was in default. Because CMS never informed Safeco that the subcontractor was in default, Safeco’s duties under the bond were never triggered.
Take Away: When your subcontractors provide a bond on a project, you should be reviewing the bond to determine whether it contains any notice obligations. Otherwise, you run the risk of losing your claim under the bond.