Understanding Understanding Surety Concerns Surety Concerns

with the AIA A312 with the AIA A312 Payment Bond FormPayment Bond Form

Presenter:Presenter:

[Insert Name][Insert Name]

AIA A312 BackgroundAIA A312 Background

Commonly-used bond forms for private Commonly-used bond forms for private and for local public workand for local public work

First published in 1984 by the American First published in 1984 by the American Institute of ArchitectsInstitute of Architects

Successor to AIA A311 (1970)Successor to AIA A311 (1970) Comprised of a performance bond and a Comprised of a performance bond and a

payment bondpayment bond Surety industry provided comments and Surety industry provided comments and

input in the development of the forms but input in the development of the forms but is not the publisher of the forms. is not the publisher of the forms.

A312 Payment BondA312 Payment Bond

Bond form covering contractor’s Bond form covering contractor’s obligations to pay subcontractors obligations to pay subcontractors and others for labor and materialsand others for labor and materials

More procedurally detailed, with More procedurally detailed, with more elaborate notice provisions, more elaborate notice provisions, than A311than A311

A312 Payment Bond:A312 Payment Bond:Claimant NoticeClaimant Notice

Important Provisions to Understand:Important Provisions to Understand: Paragraph 4 – Paragraph 4 – “The Surety shall have no obligation to Claimants under this “The Surety shall have no obligation to Claimants under this

Bond until:Bond until:4.1 Claimants who are employed by or 4.1 Claimants who are employed by or have a direct contracthave a direct contract with the with the

Contractor have Contractor have given notice to the Surety…and sent a copy, or given notice to the Surety…and sent a copy, or notice thereof, to the Owner, stating that a claim is being made notice thereof, to the Owner, stating that a claim is being made under this Bondunder this Bond and, and, with substantial accuracy, the amount of with substantial accuracy, the amount of the claim.the claim.” ”

4.2 Claimants who do 4.2 Claimants who do not have a direct contractnot have a direct contract with the Contractor: with the Contractor:.1 Have furnished written notice to the Contractor and .1 Have furnished written notice to the Contractor and

sent a copy, or notice sent a copy, or notice thereof, to the Owner, within thereof, to the Owner, within 90 days90 days after after having last performed labor or having last performed labor or last furnished materials or last furnished materials or equipmentequipment included in the claim included in the claim stating, with stating, with substantial substantial accuracy, the amount of the claim and the name of the party accuracy, the amount of the claim and the name of the party to whom the materials were furnished or supplied or for whom to whom the materials were furnished or supplied or for whom the labor the labor was done or performedwas done or performed; and; and

.2 Have either received a rejection in whole or in part .2 Have either received a rejection in whole or in part from the Contractor, or from the Contractor, or not received within 30 days of furnishing the not received within 30 days of furnishing the above notice any communication above notice any communication from the Contractor by which the from the Contractor by which the Contractor has indicated the claim will be Contractor has indicated the claim will be paid directly or indirectly; paid directly or indirectly; andand

.3 Not having been paid within the above 30 days, .3 Not having been paid within the above 30 days, have sent a written notice to have sent a written notice to the Surety…and sent a copy, or the Surety…and sent a copy, or notice thereof, to the Owner, stating that a notice thereof, to the Owner, stating that a claim is being made under claim is being made under this Bond and enclosing a copy of the previous this Bond and enclosing a copy of the previous written notice written notice furnished to the Contractor.”furnished to the Contractor.”

A312 Payment Bond:A312 Payment Bond:Surety ResponseSurety Response

Important Provisions to Understand:Important Provisions to Understand: Paragraph 6 – Paragraph 6 – “When the Claimant has satisfied “When the Claimant has satisfied

the conditions of Paragraph 4, the Surety shall the conditions of Paragraph 4, the Surety shall promptly and at the Surety’s expense take the following promptly and at the Surety’s expense take the following actions:actions:

6.1 Send an answer to the Claimant, with a copy 6.1 Send an answer to the Claimant, with a copy to the Owner, to the Owner, within 45 days after receipt of within 45 days after receipt of the claim, stating the amounts that are the claim, stating the amounts that are undisputed and the basis for challenging any undisputed and the basis for challenging any amounts that are disputedamounts that are disputed..

6.2 6.2 Pay or arrange for payment of any Pay or arrange for payment of any undisputed amountsundisputed amounts.”.”

The Crux of the Concern: The Crux of the Concern: 3 Recent Legal Decisions3 Recent Legal Decisions

National Union Fire Insurance Co. National Union Fire Insurance Co. of Pittsburg v. David A. Bramble, of Pittsburg v. David A. Bramble, IncInc., 879 A. 2d 101 (Md. 2005)., 879 A. 2d 101 (Md. 2005)

Casey Industrial, Inc. v. Seaboard Casey Industrial, Inc. v. Seaboard Surety CoSurety Co., 2006 WL 2850652 (E.D. ., 2006 WL 2850652 (E.D. Va. Oct. 2, 2006)Va. Oct. 2, 2006)

J.C. Gibson Plastering Co., Inc. v. J.C. Gibson Plastering Co., Inc. v. XL Specialty Insurance CoXL Specialty Insurance Co., 2007 ., 2007 WL 2916399 (M.D. Fla. Oct. 8, 2007)WL 2916399 (M.D. Fla. Oct. 8, 2007)

Bramble DecisionBramble Decision Maryland decision in which highest Maryland decision in which highest

Maryland state court found that Maryland state court found that a surety’s a surety’s non-response to a Claimant’s notice under non-response to a Claimant’s notice under the terms of Paragraph 6 of the A312 the terms of Paragraph 6 of the A312 payment bond constituted a complete payment bond constituted a complete waiver of all procedural and substantive waiver of all procedural and substantive defenses by the suretydefenses by the surety. . The Court rejected surety’s arguments that: (1) The Court rejected surety’s arguments that: (1)

if the non-response constituted a breach, the if the non-response constituted a breach, the claimant should receive any damages caused by claimant should receive any damages caused by that breach, not payment of the entire claim, that breach, not payment of the entire claim, valid or invalid, and (2) the surety’s non-valid or invalid, and (2) the surety’s non-response should be treated as a denial of the response should be treated as a denial of the claim, rather than an admission of liability.claim, rather than an admission of liability.

Casey Industrial, Inc. Casey Industrial, Inc. DecisionDecision

Virginia decision in which federal Virginia decision in which federal district court, looking to Bramble district court, looking to Bramble Decision for guidance, ruled that Decision for guidance, ruled that a surety’s failure to identify all a surety’s failure to identify all fact-based defenses within the fact-based defenses within the 45-day response period of A312 45-day response period of A312 acted as a waiver of any new fact-acted as a waiver of any new fact-based defense raised outside of based defense raised outside of the 45-day periodthe 45-day period..

J.C. Gibson Plastering Co. J.C. Gibson Plastering Co. DecisionDecision

Florida decision in which federal district court, Florida decision in which federal district court, following the Bramble and Casey decisions, held following the Bramble and Casey decisions, held that that an untimely surety response (one given in an untimely surety response (one given in 48 days) constituted a complete waiver of the 48 days) constituted a complete waiver of the surety’s defensessurety’s defenses. . The Court reasoned that the 45-day response period The Court reasoned that the 45-day response period

begins to run from receipt of Claimant’s notice that (1) begins to run from receipt of Claimant’s notice that (1) a claim is being made on the bond and (2) which states a claim is being made on the bond and (2) which states the amount of the claim with substantial accuracy. the amount of the claim with substantial accuracy.

The Court rejected the surety’s contention that the 45-The Court rejected the surety’s contention that the 45-day response period should commence to run from day response period should commence to run from when the surety receives proof of loss/substantiating when the surety receives proof of loss/substantiating documentation of the claim, since this was not stated documentation of the claim, since this was not stated explicitly in the bond form. explicitly in the bond form.

The Court noted, that under Florida law, bond language The Court noted, that under Florida law, bond language must be strictly construed against the surety.must be strictly construed against the surety.

ImplicationsImplications 45 days is not a long evaluative period given the complexities of 45 days is not a long evaluative period given the complexities of

today’s construction projects.today’s construction projects. According to the Gibson decision, the 45-day period runs from According to the Gibson decision, the 45-day period runs from

receipt of a notice simply identifying that it is a claim on the receipt of a notice simply identifying that it is a claim on the payment bond and stating an amount due with “substantial payment bond and stating an amount due with “substantial accuracy”; the absence of supporting documentation does not accuracy”; the absence of supporting documentation does not delay the running of the surety’s response period!delay the running of the surety’s response period!

How can the surety make a proper determination as to the How can the surety make a proper determination as to the merits of the claim and the range of appropriate defenses in the merits of the claim and the range of appropriate defenses in the absence of relevant facts and documentation? Principal must absence of relevant facts and documentation? Principal must provide the surety with all claim information promptly and provide the surety with all claim information promptly and expeditiously! expeditiously!

An untimely or non-response has harsh consequences for An untimely or non-response has harsh consequences for principal and surety alike!principal and surety alike!

Remember the principal indemnifies the surety for amounts Remember the principal indemnifies the surety for amounts paid out, so the Principal ultimately bears the risk of paying paid out, so the Principal ultimately bears the risk of paying unsubstantiated claims!unsubstantiated claims!

Please note that EJCDC C-615, Payment Bond, is predicated on Please note that EJCDC C-615, Payment Bond, is predicated on AIA A312 bond form language and likewise is problematic!AIA A312 bond form language and likewise is problematic!

Surety Company ResponsesSurety Company Responses Each surety company will make its own Each surety company will make its own

decision on whether and how to write the decision on whether and how to write the A312 payment bond form.A312 payment bond form. Given the import of recent legal developments and Given the import of recent legal developments and

increased risks to contractors and sureties, increased risks to contractors and sureties, sureties are reticent to write an unmodified A312 sureties are reticent to write an unmodified A312 payment bond form.payment bond form.

Many sureties have created their own custom Many sureties have created their own custom modifications to the A312 payment bond form; the modifications to the A312 payment bond form; the language and approach of such modifications vary language and approach of such modifications vary among surety companies.among surety companies.

Some sureties seek use of alternative payment Some sureties seek use of alternative payment bond forms such as A311.bond forms such as A311.

Some sureties may write an unmodified A312 Some sureties may write an unmodified A312 bond form, but only for particular accounts. bond form, but only for particular accounts.

Surety Industry ResponseSurety Industry Response The National Association of Surety Bond The National Association of Surety Bond

Producers (NASBP) and The Surety & Producers (NASBP) and The Surety & Fidelity Association of America (SFAA) have Fidelity Association of America (SFAA) have taken immediate actions to address taken immediate actions to address concerns:concerns: Initiated dialogue and meetings with AIAInitiated dialogue and meetings with AIA Working toward a consensus modification to A312 Working toward a consensus modification to A312

payment bond form that can be considered by payment bond form that can be considered by owners, design professionals, contractors, and owners, design professionals, contractors, and suretiessureties

Seeking development and issuance by AIA of a Seeking development and issuance by AIA of a “stopgap” amendment to Paragraph 6 of the A312 “stopgap” amendment to Paragraph 6 of the A312 payment bond formpayment bond form

Seeking to expedite the revision cycle for AIA A312 Seeking to expedite the revision cycle for AIA A312 and to discuss with AIA the development of alternate and to discuss with AIA the development of alternate bond formsbond forms

What Can You Do As A What Can You Do As A Contractor?Contractor?

Educate owners and design professionals about the Educate owners and design professionals about the implications of specifying an unmodified A312 implications of specifying an unmodified A312 payment bond form! Make sure they understand that payment bond form! Make sure they understand that unmodified A312 payment bond forms will be harder unmodified A312 payment bond forms will be harder to obtain.to obtain.

Work with your local contractor associations to bring Work with your local contractor associations to bring awareness to and understanding of these issues!awareness to and understanding of these issues!

Cooperate with your bond producer and surety on Cooperate with your bond producer and surety on any payment bond claims under A312 and provide all any payment bond claims under A312 and provide all relevant information to the surety as promptly as relevant information to the surety as promptly as possible.possible.

For More InformationFor More Information

National Association of Surety Bond Producers National Association of Surety Bond Producers (NASBP)(NASBP)

202-686-3700202-686-3700www.nasbp.orgwww.nasbp.org

The Surety & Fidelity Association of America The Surety & Fidelity Association of America (SFAA)(SFAA)

202-463-0600202-463-0600www.surety.orgwww.surety.org

Surety Information Office (SIO)Surety Information Office (SIO)202-686-7463202-686-7463www.sio.orgwww.sio.org