In Arch Insurance Co. v. Clark Construction, Inc., a prime contractor initiated an arbitration proceeding against the subcontractor and subcontractor’s performance bond surety filed suit seeking declaratory judgment. The prime contractor moved to stay the federal action. The surety argued that resolution of the federal action would not impact the arbitration proceeding, which was based on whether the prime contractor complied with conditions precedent under the bond and not the substantive dispute, and that waiting would hinder judicial efficiency. The court granted the motion to stay, explaining that allowing litigation to proceed simultaneously with arbitration could create a risk of inconsistent and duplicative litigation.
In Key Construction, Inc. v. Western Surety Co., a subcontractor default on a project in Washington resulted in a project-wide shut down. The prime contractor brought suit in Kansas state court under the subcontract’s forum-selection clause, which provided that to the extent the contractor did not elect arbitration, the “Eighteenth Judicial District, District Court Sedgwick County, Kansas is the court of exclusive jurisdiction and venue” to resolve disputes between the prime contractor and subcontractor. The surety removed to federal court and sought transfer to Washington. The prime contractor moved to remand back to Kansas state court. The court denied both motions. As to the motion to transfer, the court explained that the balance of factors did not strongly favor transfer as required under precedent. The court noted that the prime contractor’s choice of forum and court congestion weighed against transfer, whereas conflict of laws and allowing a local court to decide localized issues favored transfer. In denying the motion to remand, the court explained that the subcontract only applied to disputes with the subcontractor, and that the performance bond did not specify that the surety assumed all obligations undertaken in the subcontract.
In Jackson Contractor Group, Inc. v. Travelers Casualty & Surety Co. of America, a subcontractor ceased working on an Idaho project. The prime contractor sued the subcontractor’s performance bond surety in federal court in Washington. The surety moved to dismiss under the performance bond’s forum-selection clause, which designated Idaho. The surety also moved to transfer to federal court in Idaho on forum non conveniens grounds. The prime contractor argued that the forum-selection clause was void ab initio under a Washington statute that provides that insurance contracts may not “depri[ve] the courts of this state of the jurisdiction of action against the insurer” and that venue transfer was inappropriate as private and public interest factors weighed in favor of staying in Washington.
The court denied the surety’s motion, explaining that the forum-selection clause was void ab initio because the performance bond was subject to Washington law as it was signed in Washington, work was partially performed in Washington, and the prime contractor and subcontractor were located in Washington. The court further explained that transfer was inappropriate because relevant witnesses were located in Washington.
In Sterling & Wilson Solar Solutions, Inc. v. Fidelity & Deposit Co. of Maryland, a prime contractor default-terminated a subcontract and sent the subcontractor’s performance bond sureties written notice in which it advised the sureties that the subcontractor had “defaulted” on the subcontract. The notice further advised the sureties that the notice was being provided pursuant to section 3 of the AIA A312-2010 performance bond. The sureties lost the notice and did not respond, and the prime contractor obtained a completion contractor and filed suit against the sureties. The sureties moved for summary judgment, arguing that the notice failed to satisfy the express conditions precedent of section 3, which required pre-termination notice and a post-termination agreement to pay the balance of the subcontract price. In denying the sureties’ motion, the court held that violation of a notice requirement exonerates a surety only to the extent of resulting prejudice even when notice is an express condition precedent to liability.
In Hanover Insurance Co. v. Binnacle Development, LLC, the surety completed three projects in a municipal utility district for a defaulted prime contractor. The prime contracts were with three separate private developers and the district was not a party. The surety sued the developers to recover the contract balances. The developers sought an offset based on the contracts’ liquidated damages provisions. A governing statute allowed for economic disincentives for delayed projects only for “district contract[s].” The court found that the contracts could not be district contracts absent the district’s inclusion as a party. Therefore, the court held that the liquidated damages clauses were unenforceable penalties under Texas law.
In Apex Development Co. v. Rhode Island Department of Transportation, after substantial completion of an interstate highway project a property owner sued the DOT, claiming trespass and damage to property during construction. The DOT sought to enforce the contract’s indemnification claim against the prime contractor’s sureties. The sureties argued that the bond only applied to direct construction costs and that their obligations were conditioned on the prime contractor’s default and notice to the sureties. The supreme court affirmed summary judgment in favor of the sureties, finding the performance bond was null and void without a declaration of default and notice. The court further held that it would be unreasonable to extend liability to the sureties where the failure to provide notice prevented them from intervening to minimize their liability for damages.
In E&I Global Energy Services, Inc. v. United States, after prime contractor’s termination on a federal project the performance bond sureties retained a completion contractor under a contract in which the sureties were responsible for paying pre-default debts owed to subcontractors and suppliers. The completion contractor had difficulty retaining subcontractors and suppliers and paid some of prime contractor’s outstanding debts to retain their performance. The completion contract was terminated for default for untimely performance. The completion contractor sued the government seeking damages and a conversion of the termination to a termination for convenience. On appeal, the Federal Circuit concluded that the factual allegations were sufficient to support the completion contractor’s theory of excusable delay. The court explained that the sureties’ failure to pay subcontractors and suppliers could constitute an adequate excuse for delay if it substantially impaired the completion contractor’s performance. The court further explained that the sureties’ alleged failures and the government’s failure to enforce the sureties’ payment obligations could also constitute an adequate excuse for delay under federal law.
In U.S. Specialty Insurance Co. v. Trawick Contractors, Inc., following a subcontractor default, its surety filed a declaratory judgment action against the prime contractor who counterclaimed for completion costs. After discovery, the surety issued payment to the prime contractor that excluded legal and consulting expenses. The surety then moved for summary judgment, arguing that it was not obligated for such costs because the performance bond did not reference legal or consulting fees and did not otherwise incorporate the subcontract by reference. The court denied the surety’s motion, explaining that the subcontract and bond must be “read together” because the bond described the subcontract and the work required thereunder, and the subcontract required the bond at issue. The court then found that the subcontract and bond, as read together, required the surety to reimburse the prime contractor for legal and consulting expenses up to the penal sum of the bond.
In L&C Expedition, LLC v. Swenson, Hagen & Co., a performance bond obligee filed suit outside of the bond’s limitation period. The obligee argued that the limitations period was invalid under a North Dakota state law that prohibited parties from modifying the statute of limitations by contract. The court disagreed and found that another state statute provides that a surety cannot be held beyond the express terms of the bond. The court further found that a bond provision limiting the amount of time to bring a claim was an acceptable “express provision” under the statute. Accordingly, the limitations period was valid and the obligee’s claims were barred.
In Posterity Scholar House v. FCCI Insurance Co., the court held the duty of good faith in performing obligations under an insurance policy did not apply in the context of contract bonds. The obligee argued that sureties owe a duty of good faith because Indiana state law classifies bonds as a type of insurance. The court disagreed, first noting the difference between bilateral insurance contracts and the tripartite relationship inherent to suretyship. Second, the court determined that whether sureties are governed by the same rules as insurance companies was irrelevant because an insurer’s duty of good faith arises from the special relationship between insurer and insured. Finally, the court found that the surety-obligee relationship was distinguishable from the “special relationship” between insurers and their insureds, because sureties, unlike insurers, bear no responsibility to defend an obligee from third party claims, and an obligee has remedies against the principal as well as the surety.
In GEC, LLC v. Argonaut Insurance Co., an obligee sued the surety for violation of the implied covenant of good faith and fair dealing for denying a performance bond claim. The surety moved to dismiss, arguing that no bad faith claim was available to the obligee for breach of the surety’s obligations under the bond due to the differences between suretyship and insurance. The court rejected the surety’s argument on the grounds that Virgin Islands’ law qualifies a bad faith claim as a claim in contract, rather than a claim in tort. Because the bond was governed by Virgin Islands’ law, the implied duty of good faith and fair dealing applied.
In United States ex rel. EWS Texas, Inc. v. Robins & Morton Group, a subcontractor sued a surety and the prime contractor for payments due on a government project. The prime contractor sought to stay the case and compel arbitration pursuant to the subcontract. The subcontractor argued that Miller Act claims could not be arbitrated and the claims were outside scope of the arbitration clause. The court compelled arbitration and stayed the action, finding that other courts have overwhelmingly concluded that the Miller Act does not prohibit the enforcement of arbitration agreements. The court also held that the claims were within the scope of the type of claims to which the arbitration clause applied.
In Herman Goldner Co. v. Noresco, LLC, a subcontractor completed performance on a state construction project and sued the prime contractor and its payment bond sureties to recover the remaining balance. The sureties moved to compel arbitration under the subcontract’s arbitration provision, which was not limited to specific parties. The subcontractor argued that the payment bond’s forum selection clause required litigation and that the sureties lacked standing. The court granted the sureties’ motion, finding that the forum selection clause was compatible with arbitration because it only specified where arbitration-related litigation (e.g., “validity, scope, and enforceability of an arbitration clause”) must occur.
In Total Environmental Concepts, Inc. v. Federal Insurance Co., a payment dispute arose between a prime contractor and subcontractor on a federal construction project. The subcontractor filed a Miller Act claim against the prime contractor’s payment bond surety. The surety moved to dismiss or stay under the subcontract’s arbitration provision. The subcontractor argued that there was no arbitration agreement between the subcontractor and surety, and that the payment bond did not incorporate, reference, or otherwise refer to the arbitration agreement. The court denied the surety’s motion, explaining that the subcontractor did not agree to arbitrate disputes with the surety.
In HC&D, LLC. v. DCK Pacific Construction, LLC, the court was asked to determine whether a pay-if-paid clause in a purchase order subcontract conflicted with a provision added by the concrete supplier requiring payment no later than thirty days following the last day of the month in which the concrete was purchased. There was no dispute that the concrete supplier subcontractor’s terms would prevail in the event of a conflict. The court held that the provisions were in conflict, and the contractor and its surety were liable.
In U.S. ex. rel. RME Ltd. v. Intact Insurance Group USA, LLC, the surety’s motion to alter judgment was granted, reducing the judgment based on partial recovery by the claimant of garnished funds from the principal’s bank accounts and payment by the surety. The court noted that the claimant was not precluded from filing a future Miller Act claim if garnished funds were returned due to the principal’s bankruptcy proceeding. Further, the court determined that the fee shifting provision between the subcontractor and prime contractor was enforceable against the surety under the Miller Act, and the claimant was entitled to recover reasonable attorney fees in part on the basis that the surety acted vexatiously and in bad faith when it continued to improperly defend the claim after the final arbitration award was entered.
In United States ex rel. Terry Bedford Concrete Construction, Inc. v. Argonaut Insurance Co., the surety after paying some Miller Act claims in full received additional claims which exceeded the penal sum on the bond. The surety sought to interplead the remaining penal sum funds but did not seek a discharge of liability. The remaining claimants objected and argued that the surety should have ensured a pro rata distribution of the entire penal sum before settling the initial claims. The court permitted the surety to deposit the remaining penal sum funds because the surety was not seeking a discharge of liability or a dismissal.
In Chowns Group, LLC v. Liberty Mutual Insurance Co., the court determined that venue based on the fabrication of materials was improper under the Miller Act, and transferred the case to the district court where the public project’s jobsite was located, the appropriate venue under the Miller Act.
In TJ Sutton Enterprises v. Citadel Recovery Services, LLC, venue was transferred from the U.S. Virgin Islands to Louisiana based on: (i) the contract forum selection clause; (ii) the deposit of monies at issue and pending related litigation in Louisiana; (iii) both parties’ ability to absorb the costs of litigating in either forum; and (iv) the ease and expense of trial in Louisiana. These factors outweighed plaintiff’s original choice of forum and the local interest in deciding local controversies.
In MJM Electric, Inc. v. National Union Fire Insurance Co. of Pittsburgh, a subcontractor sued its prime contractor’s surety, but not the prime contractor itself. The surety filed a motion to join the prime contractor as a compulsory party. The court denied the motion because the prime contractor was not a required party and the surety did not argue that the case should be dismissed. The surety then filed a motion to join the prime contractor under the permissive joinder rule. The court denied the motion, finding that the prime contractor was not a required party because no right to relief was asserted against the prime contractor.
In United States ex rel. American Civil Construction, LLC v. Hirani Engineering & Land Surveying, PC, the court held that a subcontractor could pursue a Miller Act claim for quantum meruit even where there exists an express subcontract and remanded to the district court to avoid any impermissible double recovery by determining whether any part of the Miller Act award against the surety was for work performed beyond that specified in the subcontract. The court also determined, as a matter of first impression, that because the construction work at issue had to be supervised and inspected for conformance with the subcontract and other requirements, such as government quality control standards, the superintendent’s on-site supervisory work constituted compensable “labor” within the meaning of the Miller Act.
In Hayes Pipe Supply, Inc. v. Aegis Security Insurance Co. (In re Pinnacle Constructors, Inc.), the court awarded partial summary judgment to the surety, determining that because the payment bonds were common law bonds, the contractual terms regarding sufficiency of notice must be applied without substitution of statutory terms. The payment bonds were common law bonds because they extended past the statutory minimums, including by: (i) extending coverage to equipment and defining “labor, materials and equipment” to include utilities; (ii) extending the notice period for claimants who were employed by or had a direct contract with the contractor by not setting a deadline to give notice of their claim; and (iii) extending the six-month statutory period for filing suit to a one-year contractual limitations period for filing suit. The court further determined that a clause included to assure compliance with minimum state standards was a “savings clause” that did not eliminate contractual provisions that expanded on those minimum statutory requirements or convert the payment bond into a statutory bond.
In McLean Contracting Co. v. Great American Insurance Co., the surety’s motion for summary judgment was denied based on the court’s determination that claimant’s standby costs were incurred by furnishing materials, labor, or equipment for use in the performance of the contract, and thus fell within the scope of the payment bond terms.
In Greenup Industries, LLC v. Five S Group, LLC, the court permitted the subcontractor and the subcontractor’s surety’s counterclaim for breach of contract to proceed against contractor and the contractor’s surety for the contractor’s failure to provide sufficient transport trucks to maintain necessary production levels and related standby time. The court found an ambiguity in the subcontract as to whether the terms regarding trucks and standby time in the bid proposal were additional to or conflicting with those of the subcontract. The court further determined that same ambiguity, combined with the Fifth Circuit’s holdings that parties can sue under the Miller Act for daily expenses incurred due to contractor delays, including standby time, also permitted the counterclaim to proceed against the contractor and the contractor’s surety. The subcontractor’s separate counterclaim under the state prompt payment statute, however, was dismissed against the contractor’s surety, because the prompt payment statute does not allow suppliers to recover against sureties under a Miller Act theory.
In Nature-Tech, LLC v. Hartford Fire Insurance Co., judgment was entered in favor of the surety and the subcontractor against a sub-subcontractor. The court determined the sub-subcontractor had failed to prove entitlement to additional payment under the payment bond for items fabricated pursuant to purchase orders issued by the subcontractor prior to termination, but fabricated after the subcontractor’s termination, where the prime contractor directly arranged for claimant to fabricate items outside of the performance of the terminated contract and after the termination. The court also denied the sub-subcontractor’s claim for immediate payment of retainage and permitted the subcontractor to continue to withhold retainage until the separate litigation of claims by and between the prime contractor and subcontractor were resolved.
In Diamond Services Corp. v. Travelers Casualty & Surety Co. of America, the district court dismissed a Miller Act payment bond claim as time barred under the statute of limitations, and the Fifth Circuit affirmed. The issue on appeal was whether the claimant could assert equitable estoppel, where it contended that it relied upon the surety’s request for information letter advising of its investigation. The court held that equitable estoppel did not apply, as the claimant failed to show that it was misled to its detriment because it failed to plead that the surety’s letter requesting additional information was a representation that the claimant reasonably relied on in deciding not to bring suit within the statutory limitations period.
In United States ex rel. Krane Development, Inc. v. Gilbane Federal Co., the district court granted the surety and its principal’s motion for judgment on the pleadings where the claimant failed to comply with the Miller Act’s notice of nonpayment requirements. The claimant argued that it was not required to provide written notice because a lower-tier bond, where the principal served as a dual obligee and the claimant served as a principal, created contractual privity between the parties. The court found this relationship insufficient to create contractual privy under the Miller Act’s notice requirement. The court also disagreed with the claimant’s argument that its notice of nonpayment was timely. The claimant sent two notices of nonpayment before the claimant completed its work on the project, which the court held as being premature and untimely pursuant to the Miller Act.
In Five Rivers Carpenters District Council v. Covenant Construction Services, LLC, the claimant served as a multi-employer fringe benefit funds organization. A lower-tier subcontractor signed a collective bargaining agreement that required it to make contributions to the claimant based on the number of hours of work performed by union employees. The subcontractor failed to pay these contributions for work performed by twenty-one employees. The surety argued notice to the surety’s principal’s attorney, rather than sending notice directly to the principal, was insufficient. The court disagreed and found that the notice to the principal’s attorney satisfied the Miller Act. The surety also argued that the claimant’s notice was untimely as to eighteen of the twenty-one employees. This dispute centered around whether the claimant must provide notice within 90 days of each employee’s last day or whether notice is measured from the last date on which any employee performed work. The court found the latter, and accordingly held the claimant was entitled to recover.
In United States ex rel. Colorado Custom Rock Corp. v. G&C Fab-Con, LLC, the court granted in part a payment bond claimant’s motion for sanctions for spoliation of evidence against a prime contractor and its surety. The court found that the prime contractor owed a duty to preserve two buildings at issue where it became foreseeable that the parties would be unable to resolve their dispute without litigation. The potential litigation was foreseeable prior to the destruction of the buildings. The prime contractor, however, demolished the buildings before giving the claimant an opportunity to inspect. The court held that the prime contractor spoliated relevant evidence and sanctioned the defendants with an adverse inference at trial.
In Penn Hydro, Inc. v. B.V.R. Construction Co., a claimant sought additional compensation for demolishing concrete, which was of greater strength than originally anticipated in the claimant’s proposal. The court agreed with the surety that the proposal, which was attached to the executed subcontract, provided only one estimate of pricing, and, therefore, the price established in the subcontract was a set price, not contingent on the concrete strength. The court held that where a contract establishes a set price, and a party assumes responsibility for inspecting the construction project to determine what conditions could affect the work, that party is charged with the knowledge such an inspection would reveal. Accordingly, the surety met its burden of establishing that claimant was not entitled to any additional compensation.
In Immigrant Rights Defense Council, LLC v. Hudson Insurance Co., the bond claimant was a self-described “watchdog association” that brings actions for injunctive relief against immigration consultants. Claimant prevailed in its suit against two bonded consultants and filed suit against the bonds to recover its attorney fees and costs. The court explained that a surety issuing a statutory bond is liable only to the extent indicated in the code section under which the surety executes the bond, and, under the plain language of the bond statutes, a non-aggrieved person who suffers no damages is not entitled to recovery from the subject statutory immigration consultant bond. The relevant statute was designed to protect the class of people most vulnerable to fraud and deceit by unscrupulous consultants, and the court found that the claimant did not fall within the class of persons the statute was designed to protect. Accordingly, the court held that claimant did not suffer damages under the applicable statutes and affirmed the ruling that claimant was not entitled to attorneys’ fees and costs.
In Legg v. Liberty Mutual Insurance Co., the court denied the surety’s motion to dismiss based on lack of subject matter jurisdiction. The plaintiff sued the principal in an underlying action, alleging the origination of a loan above the fair market value. Plaintiff had issues serving the principal, but eventually obtained service through a statute governing withdrawn corporations. The court in the underlying action entered a judgment against the principal. The surety argued that the judgment was void due to improper service, and therefore, the surety’s obligations under the bond had not yet been triggered. The court found that the bond was a “judgment bond,” and that a surety is limited to contesting judgment bonds obtained via fraud or collusion. Accordingly, the court held that the surety’s argument that the court lacks subject matter jurisdiction due to improper service fails.
In In re Fieldwood Energy III LLC, the sureties’ principal, an oil and gas exploration and production company, filed for Chapter 11 bankruptcy relief. The subrogation rights of the sureties were a point of contention during the process of approving the Chapter 11 plan. The confirmation order allocated the sureties subrogation rights to post-merger entities. Certain sureties sought, but did not obtain, a stay of the confirmation order. The district court, acting as the appellate court for the bankruptcy court’s decision, held that the appeal was statutorily moot because the statute protects an authorized sale from later modification on appeal where the purchaser acted in good faith and the sale was not stayed pending appeal. The court found the provisions challenged by the sureties were integral to the sale of debtors’ assets. The court rejected the sureties’ argument that the statute did not apply because the credit bid purchaser was not a good-faith purchase under that provision. Lastly, the court found that the sureties failed to meet the elements for equitable mootness to apply.
In Akins Construction, Inc. v. North American Specialty Insurance Co., a subcontractor filed construction liens after the owner and prime contractor refused to pay for its work. The surety filed a release of lien bond to remove the liens. The subcontractor filed a motion to enforce arbitration relying on a mandatory arbitration provision in its contract. The surety opposed arbitration claiming that as a non-signatory to the contract it could not be forced to arbitrate. The court held that the surety must arbitratebecause it stands in the shoes of its principal.
Fidelity & Deposit Co. of Maryland v. TRG Venture Two, LLC (In re Kimball Hill, Inc.) involved subdivision bonds the surety executed in the early 2000s. In the principal’s subsequent bankruptcy, the surety participated in the confirmation proceedings and voted in favor of the plan, which specifically prohibited the surety from seeking payment on claims that they agreed to extinguish. The surety later attempted to seek indemnity from the entity that purchased the development rights. Due to this violation, the bankruptcy court imposed civil contempt sanctions on the surety totaling $9.5 million. In a prior proceeding, the district court vacated and remanded. The bankruptcy court then reinstated its original contempt findings and reimposed its sanctions award. The surety appealed again, and the district court affirmed the sanctions award. Ultimately, the Seventh Circuit also affirmed the sanctions, finding they were calculated based on actual damages incurred as a result of the indemnity claims.
In Frankenmuth Mutual Insurance Co. v. National Bridge Builders, LLC, the indemnitors filed a motion for summary judgment asserting that the indemnity agreement was invalid and unenforceable because it was not signed by both managers of the company. An employee had executed the indemnity agreement by electronically signing it on behalf of one of the named managers. Neither manager executed, reviewed, or received the indemnity agreement prior its execution, an apparent violation of the principal’s operating agreement, in addition to the fact that the employee did not have actual authority. The surety issued 35 payment and performance bonds to the principal over three years, and there were other instances where the same employee executed documents binding the company. The court found that the principal received the benefit of the indemnity agreement and thus ratified its execution, even if it was technically defective. The principal intended to be bound, and the indemnity agreement was enforceable.
In Travelers Casualty & Surety Co. of America v. Bunting Graphics, Inc., the indemnitors sought to compel production of certain communications and documents the surety asserted to be privileged in connection with the payment and settlement of claims. The court recognized that “[t]he surety contract language and prevailing case law entitles [the surety] to a certain degree of deference to pay and settle claims.” While the indemnitors may have defenses to the surety’s payment and settlement of claims, they do not have carte blanche into the surety’s decision without some initial showing regarding whether the [disputed] claim should have been paid or paid for a lower value. The court held the indemnitors failed to meet their initial burden of showing that the claims either should have not been paid or paid for a lower value.
In North American Specialty Insurance Co. v. Arch Concept Construction, Inc., the court granted in part and denied in part the surety’s motion for summary judgment seeking to recover under the indemnity agreement. The court found that the surety was entitled to summary judgment as to liability, but it had not sufficiently established the specific amount of damages. Due to inconsistencies in payments made to claimants, the surety had to clarify the discrepancy before judgment could be entered. The court further stated that it could not reduce to judgment an unspecified loss adjustment expense amount, and thus, the surety had to clarify the sum it seeks, supported by appropriate itemization, before judgment could be entered. The court held that the prima facie clause in the indemnity agreement was enforceable and shifted the burden to defendants to show that a rational factfinder could determine that liability has not attached.
In Westchester Fire Insurance Co. v. Edge Electric, LLC, the court granted the surety’s motion for partial reconsideration of a prior order denying the surety’s request for attorneys’ fees and costs incurred in defending a bond claim. The court noted that the state supreme court has long refused to enforce contractual provisions providing for the award of attorneys’ fees for the prevailing party, instead holding to the American Rule that each party pay its own costs. The surety asserted that state law recognized a small exception to the American Rule, which permitted a surety to recover attorneys’ fees and costs incurred in defending a dispute underlying the indemnity agreement, rather than in an indemnity enforcement action. The court predicted that the state supreme court would adopt the exception relied on by the surety and allowed the surety to recover its reasonable attorneys’ fees and costs incurred in defending an underlying bond claim.
In United States Fire Insurance Co. v. FineMark National Bank & Trust, the surety sued a bank for taking contract funds from the principal’s bank account. The court denied the bank’s motion to dismiss because the funds may have been a special deposit, and the bank may have owed a duty to the surety. The court held that the bank owed a duty to the principal and the principal assigned its rights, title, and interest in the funds to the surety. The court also held that the funds deposited into the principal’s account could qualify as a special deposit.
In Arch Insurance Co. v. FVCbank, the principal obtained a revolving line of credit from the bank, wherein the bank was granted the right to access the principal’s general funds to repay credit used. The surety’s indemnity agreement required that contract funds be held in a separate trust account. The principal attempted to open a trust account, but when the bank declined the principal deposited all funds into its general accounts. After the principal’s default on the credit line, the bank used the deposited funds to resolve the outstanding balance and froze the accounts. The surety and the principal sued the bank for conversion and unjust enrichment. The trial court granted the bank’s motion to strike the surety’s claims, holding that there was no legal claim for unjust enrichment or conversion because the bank had a priority. The judgment was affirmed because the law of equitable subrogation did not permit the surety to have greater rights than that of the principal.
In Liberty Mutual Insurance Co. v. Biltmore General Contractors, Inc., the court granted the surety’s summary judgment motion seeking specific performance to pay the surety’s costs and expenses and deposit collateral pursuant to the indemnity agreement. The court rejected the indemnitors’ argument that the surety retaining lawyers and accountants to investigate the various claims involving the underlying bonds was excessive and wholly unnecessary because the indemnitors had already retained their own lawyers. The indemnity agreement, however, expressly provides for the surety to be indemnified without any limitation to cases in which an indemnitor had not itself retained counsel. The court found that the declaration of the surety’s senior claims counsel was satisfactory proof of payment for the claims.
In Atlantic Specialty Insurance Co. v. Landmark Unlimited, Inc., the court affirmed an order granting a preliminary injunction requiring the indemnitors to deposit collateral. The indemnitors asserted that the signatures on an indemnity agreement were forged. Because the signatures were notarized, the court found that, without more, the indemnitors could not overcome the presumption of due execution, especially considering that certain of the indemnitors had issued and signed checks for the bonds as representatives of the principal. The court also found that proof of the indemnitors’ substantial assets negated concerns regarding financial hardship or inability to provide collateral.
In Frankenmuth Mutual Insurance Co. v. Firefly Builders, Inc., the court entered a preliminary injunction requiring its indemnitors to post collateral in the amount of the surety’s anticipated loss plus attorneys’ fees. Although the surety’s claim had a monetary aspect, the surety demonstrated irreparable harm in losing its security interest and priority level, essentially becoming an unsecured creditor. Absent the opportunity for the surety to secure the debt, the surety lacked an adequate remedy at law and would suffer irreparable harm.
In Capital Indemnity Corp. v. United States, following the surety’s completion of its principal’s scope of work and payment of subcontractors, the surety sued the government seeking damages under the theories of equitable subrogation, equitable adjustment, and under the Contract Disputes Act. The court granted the government’s motion for summary judgment because (i) the government’s notice to the surety of potential payment bond claims was insufficient to trigger the notice requirement that the surety was required to send the government; and (ii) the government’s receipt of the surety’s request for joint checks did not put the government on notice of the default because the surety did not direct the government to withhold payments until more than a month after making the ninth progress payment.
In United States ex rel. M. Frank Higgins & Co. v. Dobco Inc., the court held that although a common interest privilege may apply to communications between the principal and surety, it does not automatically apply to every communication exchanged between them. The court noted that the party invoking the work-product protection bears the burden of establishing its essential elements. The court also held that the principal and surety cannot conceal prior communications with professionals engaged in the ordinary course of business by transforming them into non-testifying experts. The court must examine the particular facts to determine whether the experts were retained or specially employed in anticipation of litigation.
In Great American Insurance Co. v. Lexington Insurance Co., the indemnity agreement gave the surety a security interest in the principal’s assets. An insurer issued various liability policies on behalf of the principal. The principal prevailed on a wrongful termination action and was awarded damages including attorney’s fees and costs. The surety demanded the award from the principal via its security interest rights. The insurer demanded the award based on its subrogation rights as an insurer. The surety sued the insurer, alleging claims of tortious interference with a contractual relationship, declaratory judgment, trespass to chattels, and seeking attorneys’ fees under the state’s general recovery rule. The insurer filed a motion to dismiss all four counts. The court held that because the surety does not satisfy the definition of a person in possession, the surety cannot state a claim for trespass to chattels and granted the motion as to that claim. The court allowed the surety to pursue the other claims.
In Merck & Co. v. Ace American Insurance Co., the insured’s computer systems were infected by malware known as “NotPetya,” which impacted tens of thousands of systems in the insured’s network. The insured and its captive insurer had purchased $1.75 billion in “all risks” property insurance which provided coverage for loss or damage from destruction or corruption of computer data and software. The insured filed a claim against the policy, which was denied. The insurers stated that it had been determined that the NotPetya attack was likely orchestrated by actors working for the Russian Federation as part of ongoing hostilities with Ukraine and that the insured’s loss was, therefore, excluded under the hostile/warlike action exclusions contained in the policies. The insured argued that the attack was not an official state action, but a form of ransomware, and even if instigated to harm Ukraine, the exclusion still would not apply. The court held that the plain language of the hostile/warlike exclusion did not support the insurers’ position. The court found that “the NotPetya attack is not sufficiently linked to a military action or objective as it was a non-military cyberattack against an accounting software provider.”
In National Union Fire Insurance Co. of Pittsburgh v. Cargill, Inc., the insured, an international marketer, processor, and distributor of agricultural products, claimed that it incurred losses of approximately $32 million as a result of an employee misrepresenting the price of corn and sorghum. The claimed loss consisted of approximately $29 million in freight costs paid by the insured to ship the grain, plus approximately $3 million that the employee had allegedly diverted to personal bank accounts. The commercial crime policy provided coverage for employee “theft,” defined as “the unlawful taking of property to the deprivation of the insured.” Additionally, the policy required that the insured’s loss must have resulted “directly from” employee theft to be covered. In addition, the policy contained an investigative settlement clause that allowed the insured and insurer to jointly appoint an investigator to “investigate the facts and [definitively] determine the quantum of loss” being claimed.
On appeal the key issue was whether the employee’s control over the grain sales was a “taking” under the “theft” definition. As the policy did not define a “taking,” both parties adopted the dictionary definition of the term: “[t]he act of seizing an article, with or without removing it, but with an implicit transfer of possession or control.” The court, applying Minnesota law, found that the employee had taken implicit control over the grain because she “exercised her authority to direct the transfer and sale of the grain” and “lied to [the insured] and manipulated its financial records to induce the company to ship its grain to Albany.” The court reasoned that there was an “implicit transfer” of control to the employee, as she “controlled the pricing and recordkeeping elements of the sale” of the grain, and if not for her misrepresentations, the insured would have sent only a minimal amount of grain. Thus, the court held that this exercise of control amounted to an “unlawful taking” under the employee theft provision, and affirmed judgment on the pleadings for the insured.
In Ryan LLC v. National Union Fire Ins. Co. of Pittsburgh, PA, the insured provided various tax services to entities and was compensated using a percentage of the savings. In turn, the insured compensated its employees via commissions based on their role in the reductions for the clients. Taking advantage of this structure, an employee submitted fraudulent tax submissions resulting in millions of dollars of phantom savings for the clients and increased commissions for the insured and employees, including the fraudulent employee. The court concluded that the “extra” commissions paid to the fraudulent employee was a direct loss from the employee’s “Theft,” which was defined using the phrase “unlawful taking.” The court disregarded an earlier decision that required seizure or direct control over the transferred item. Instead, the court agreed with out-of-state cases to find that “an ‘unlawful taking’ includes taking by deception.” The case was remanded for consideration of additional issues and remains pending in the trial court.
In Westlake Chemical Corp. v. Berkley Regional Insurance Co., the insured, a manufacturer of chloride products, purchased plastic shipping bags from a supplier who was authorized to place orders for shipping supplies and manage insured’s inventory. The supplier submitted fraudulent invoices via email that led to payments of more than $16 million for fictitious bags that were never delivered. The insured discovered the fraud and tendered coverage under its commercial crime policy. The trial court had agreed with the insurer that the supplier was an authorized representative, so that the authorized representative exclusion applied. The appellate court affirmed, finding that the term “authorized representative” did not require an agency relationship, but that “the phrase “authorized representative” can be commonly understood to mean someone who has permission to speak or act for another, or someone who is empowered to act on another’s behalf. The court stated further that to the extent the insured “attempts to augment the definition of ‘authorized representative’ to encompass a legal or technical definition of agent, such an interpretation is inconsistent with the commonly understood meaning of the term and is thus unreasonable.”
In Cachet Financial Services v. Berkley Insurance Co., the insured entered into written agreements with clients that allowed the clients to upload ACH batch files into the insured’s computer system. The clients uploaded various forms of fraudulent ACH batch files causing losses of approximately $40 million. The insured sought coverage under its crime insurance policy under the forgery or alteration or computer and funds transfer fraud insuring agreements. Granting the insurer’s motion to dismiss, the court found that the complaint did not adequately allege a claim because a fraudulent entry was not made into the insured’s computer system since the clients were authorized to upload the ACH batch files. Similarly, the court found that the complaint did not adequately allege a claim under the forgery or alteration insuring agreement as the insured could not show an “alteration” under the plain and ordinary meaning of that term.
In Veneman v. Travelers Casualty Insurance Co. of America, the insureds, an accounting provider and an electronic payroll company, entered a contract with an individual to provide payroll services through a company. The insureds hired a clearinghouse bank to make the transfers. The payroll services provider furnished bank account information and directed the insureds to transfer money to accounts purportedly belonging to the provider’s employees. However, the other accounts belonged to the contracting individual, an imposter, or persons working with him. Once the transfers had taken place, the imposter withdrew large sums of money. The imposter also contacted his bank to report the outgoing transfers as fraudulent. Under clearinghouse rules for banks, this report of fraud triggered a “claw back” of various transactions such that the clearinghouse bank bore the risk of loss, which it then shifted to the insureds by contract.
The insurer denied coverage, and the insureds filed a complaint alleging coverage under both the forgery or alteration and computer fraud provisions of the policy. The court held that the subject funds were not “covered property” in that the electronic funds were not located on the insureds’ building premises, nor were they “money” or “securities” in that the funds in the imposter’s account were intangible and incapable of being physically possessed. Second, the forgery or alteration coverage was not triggered as the emails sent by the imposter directing the insureds to initiate the transfers of electronic funds did not constitute “checks, drafts, promissory notes, or similar written promises, orders, or directions to pay,” nor did the scheme involve a check being “drawn by or drawn upon” the Insured. Third, in finding no direct connection between the imposter’s use of a computer to send emails and the subsequent transfer of the funds, the court held that the computer fraud coverage was not triggered as the scheme did not involve a hacker gaining access to the insureds’ computer system to fraudulently cause a transfer of funds. Rather, the imposter used a computer to send emails to the insureds directing them to process payroll, and then insureds sent the information to the third party clearinghouse, who actually transferred the funds from the imposter’s bank account to the imposter’s fictitious employees.
In Discovery Land Co. v. Berkley Insurance Co., the court found no coverage and no improper claims handling for a purported loss submitted under a crime policy involving schemes perpetrated by an attorney at a UK law firm hired by insureds to assist in their acquisition of a Scottish castle. As to the first scheme, which concerned misappropriation of purchase funds, the court found no coverage for: (i) employee theft as the attorney was not an “employee” due to a lack of direct compensation and control, or (ii) outside premises coverage as the attorney was not a “partner” of the insured entities merely because of his indirect role in the castle acquisition process. As to the second scheme, which concerned a fraudulent loan for the attorney’s benefit using the castle as security, there was no forgery coverage because the forged loan application was not an enumerated document in the insuring agreement. Moreover, the loss did not directly result from the loan application itself. Finally, the court rejected claims of improper claim handling that were largely premised on the insurer’s use of an outside “attorney investigator.”
In Yoshida Foods International, LLC v. Federal Insurance Co., the insured sought coverage for losses sustained from a ransomware attack where the president of the insured paid the ransom from his personal funds and was subsequently reimbursement by the insured. The insurer denied based on the absence of a “direct loss” because the insured did not directly make the ransom payment. Further, the insurer argued that insured did not sustain a loss until it reimbursed the company’s president more than one year after the ransomware attack. The court noted that under Oregon interpretation of “direct loss,” only a proximate causal relationship is necessary between the act covered under the policy and the resulting loss.
The court reasoned that regardless of when the insured reimbursed its president, the loss was still a direct and foreseeable consequence of the computer fraud perpetrated by the hacker. The passage of time did not break the causal chain because there was always an understanding that the ransom payment was a liability to the insured. Reasoning that the hacker’s entry into the insured’s computer system was central to the scheme to extort money from the insured, the volitional ransom payment did not negate the fact that the insured suffered a direct loss. The court also rejected the insurer’s arguments that the Fraudulent Instructions Exclusion applied to preclude coverage for the reimbursement payment or, alternatively, the president’s payment of cryptocurrency for the ransom.
In EMOI Services, LLC v. Owners Insurance Co., the insured, a computer software company, sought coverage for damage caused by a ransomware attack that encrypted files and data. The insurer denied coverage for the ransom and costs associated with investigating and remediating the attack and upgrading its security systems under a “Data Compromise” endorsement and an “Electronic Equipment” endorsement, which, among other things, excluded ransom payments from coverage. The Ohio Supreme Court found that (i) a policy that requires “direct physical loss of or damage to” property does not cover losses from a ransomware attack; (ii) software is an intangible item that cannot experience direct physical loss or direct physical damage; and (iii) a court cannot read a ransomware coverage into an all risk property policy by reading key ransomware exclusions out. Thus, the court held that because the ransomware attack caused no “direct physical loss of or damage to” the software, a requirement for coverage under the policy, the insurer was not responsible for covering the resulting loss.
In Blue Star Sports Holdings, Inc. v. Federal Insurance Co., the insured sports media business brought an action against its commercial crime insurer, seeking to recover losses from employee embezzlement of more than $6 million of company funds through illegal wire transfers. The insurer moved for partial dismissal citing the insured’s alleged failure to state a claim. The district court held that the insured stated a claim that it was entitled to recover for common law and statutory bad faith from the insurer, but the policy’s employee theft provision constituted a “fidelity bond” and, thus, the insured’s claims against the insurer were exempted from Texas Prompt Payment of Claims Act.
In Montachem International Inc. v. Federal Insurance Co., a hacker with access to the insured’s computer system caused a customer service agent for the insured to change the banking information on a customer invoice resulting in the customer sending more than $200,000 to the hacker’s bank account. The insurer argued that the insured could not claim coverage under the policy unless it could establish that it either “owned” the stolen funds, “held” the stolen funds, or “was legally liable for” the stolen funds pursuant to the policy’s “Ownership Provision.” The court denied the insurer’s motion to dismiss, finding that the language in the insured’s policy was broad in that it used the language “held . . . in any capacity,” which is broader than policies which merely use the terms “own” or “hold.”
In Kem Krest LLC v. Hanover Insurance Co., the insured transferred more than $3.2 million by electronic means to an escrow agent for the purchase of sterile medical gloves that the supplier never delivered. The insured sought coverage under the policy’s Transit Coverage. The insurer argued that the Transit Coverage provision only provided coverage for the loss of physical property and not of money that is transferred by electronic means. In granting the insurer’s motion for summary judgment, the court found that the policy’s definition of “money” only suggests that it covers physical money and did not incorporate “electronic money” within the Transit Coverage provision.
