Communication on construction projects can go a long way to ensuring a smooth operation from start to finish. When it comes to construction payment, communication is even more important. While it may seem like public projects would have heightened requirements for transparency and communication, this is not necessarily the case. The Miller Act and subsequent state-level Little Miller Acts provide for certain safeguards protecting laborers and material providers on public projects. However, just because a surety is involved does not mean all problems go away. We’ve discussed that sentiment in recent posts about an insolvent surety and bonds on a private project. In a recent Arizona case, an appellate court decided that bad faith tort remedies are not available in an action against a surety regarding a claim for payment. Here’s the full text on S&S Paving and Construction, Inc. v. Berkley Regional Insurance Company.
The City of Prescott, Arizona hired a Spire Engineering for a public project in Arizona, and that contractor brought on S&S Paving and Construction (S&S) as subcontractor. After S&S completed its work on the project, the subcontractor went unpaid to the tune of $23,763. The subcontractor sent a demand letter to the surety on the project, Berkley Regional Insurance Company (Berkley). Berkley acknowledged the claim and asked for additional information on the claim. In correspondence, the surety included that the time it used to review S&S’s demand would not toll any statute of limitations regarding claims. S&S then provided the information requested, and Berkley acknowledged it’s receipt of the information. Berkley then communicated that it needed to contact Spire about the claim, and that further communication would follow. The surety again reminded S&S that no tolling would take place as a result of their investigation. S&S would be left waiting for a reply for nearly a year and a half.
The parties had no further communication until S&S sent another demand letter in May of 2013, 17 months after the follow up with Berkley. The surety responded by saying the claim was untimely. As a result, S&S filed suit for breach of contract and bad faith in November of 2013. Berkley moved for summary judgment on both claims. The trial court granted both, stating that the contract claim was barred by the statute of limitations and that subsequently there was no relationship on which the bad faith claim could survive. S&S appealed the bad faith claim.
On appeal, S&S contended that the bad faith claim should stand, noting that under Arizona’s Little Miller Act, a surety has a duty to “undertake an investigation adequate to determine whether a claimant’s claim is tenable or valid.” S&S likened the relationship between a claimant and a surety to the relationship between an insurance company and an insured. The appellate court expanded some on the bad faith claim, but ultimately affirmed the trial court’s ruling.
The Court found that because a specific statutory remedy was provided for (claim on the surety), a common law remedy in the form of a bad faith tort claim would be improper. While the Court noted that the purpose of requiring a surety on public projects is to protect laborers and material providers, the Court found that S&S needed to follow the procedure provided by Arizona’s Little Miller Act to have any recourse against the surety beyond being a general creditor. The Court likened Arizona bond claims to mechanics liens, and discussed the strict nature of procedure in attaching and enforcing liens. The Court also found that sureties have no duty to investigate whether or not a claim on the surety is valid prior to litigation.
The Court found that a surety has great incentive to handle a bond claim without litigation while also stating that subcontractors have no right to payment from a surety without taking them to court. This result seems to encourage sureties to act like Berkley did here, so those subcontractors and suppliers that may file Arizona bond claims in the future should take note. Whether or not Berkley intended to mislead S&S, the subcontractor lost its right to the payment bond because it waited for the surety to do the right thing. Apparently bad faith claims, as well as other remedies not contemplated in the state’s Little Miller Act, are now off the table. Considering attorneys’ fees are mandatory for successful litigants and prompt payment acts afford them interest, those subcontractors making Arizona bond claims shouldn’t hesitate to litigate, even if a surety seems to be cooperating. If S&S asserted it’s claims instead of waiting on a response from Berkley, this could have been avoided.