Surety Hit with Substantial Punitive Judgment

Sureties play a vital role in public construction projects.  As a result, many states have enacted statutory guidelines regulating how insurance companies and sureties administer claims made on their policies or bonds.  Massachusetts is one such state that has enacted a legislative framework under which sureties can face substantial punitive damages if they do not fairly investigate and settle valid bond claims.  That framework includes Massachusetts’ Little Miller Act (G.L.c. 149 § 29), its claims settlement statute (G.L.c. 176D), and its Consumer and Business Protection Act (G.L.c. 93A).

On September 6, 2001, in R.W. Granger & Sons, Inc. v. J&S Insulation, Inc.; United States Fidelity & Guaranty, SJC-08338 (Mass. 2001), the Massachusetts Supreme Judicial Court unanimously affirmed a trial court’s substantial punitive judgment against a surety that had forced a claimant to litigate a valid bond claim.  In reaching its decision, the court made clear that in Massachusetts, sureties who force claimants to litigate bond claims where liability is reasonably clear will be harshly punished for such conduct.

In J&S Insulation, which arose out of construction work performed at Logan International Airport, the surety failed to effectuate settlement of a $203,000.00 payment bond claim even after the bond claimant, an insulation subcontractor, obtained a jury verdict against the project’s general contractor.  After the verdict was issued, but before the subcontractor’s request for statutory attorneys’ fees was resolved, the subcontractor demanded the surety pay the undisputed portion of the judgment (principal and interest).  The surety, however, ignored the subcontractor’s demand, raised what the court later described as “insincere defenses” and forced the subcontractor to litigate collection of the judgment.  The bond claim judgment, which was finally entered some ten months after the jury verdict, included the base claim for the subcontract balance,  ($203,867.31), interest ($86,835.02), and the attorneys’ fees ($119,543.50) the subcontractor spent pursuing its claim.  The general contractor ultimately paid the entire bond judgment to the subcontractor.

As a result of the surety’s dilatory conduct, the subcontractor asserted a claim against the surety for unfair and deceptive insurance practices.  The trial court agreed with the subcontractor and found that the surety’s “cavalier” attitude toward its legal obligations “manifestly” violated the Massachusetts statues in question.  In rendering its decision on the unfair practices claim, the trial court found it particularly egregious that the surety could not explain why it waited more than four months to respond to the subcontractor’s original demand, or why its only offer to settle the claim ($230,000.00 of $373,206.17) was “wholly inadequate” in light of the damages known to be due the subcontractor at the time of the offer.  Pursuant to the Consumer and Business Protection Act (the “Act”), the surety was found liable for twice the amount of the underlying bond judgment plus interest and the attorneys’ fees the subcontractor spent to recover the punitive damages award.  Accordingly, the judgment against the surety arising out of the original $203,000.00 bond claim totaled $966,284.94 after the application of the Act.  The surety appealed.

On appeal, the surety argued that since the underlying bond judgment had been fully paid, it was not liable for any amount at all.  Alternatively, the surety argued that at the very least it was entitled to reduce the punitive damages judgment by $410,245.83 as a “credit” for the amount the subcontractor had already been paid directly by the general contractor.

The Massachusetts Supreme Judicial Court, however, rejected the surety’s arguments and affirmed “in all respects” the trial court judgment.  The court noted that the surety’s “unreasonable settlement practices” clearly denied the subcontractor prompt recovery of the money it was owed, a direct violation of the law.  In addition, the court rejected the surety’s argument that it was entitled to reduction of its punitive damages liability by a “credit” for the amount paid by the surety’s principal.  In rejecting this argument, the court stated that the insurance practice statutes were expressly designed to deter unfair and deceptive acts or practices by imposing an “in terrorem” sanction on defendants who violate the statute.  The court stated that allowing the surety a credit against its punitive damage liability would undermine the plain language of, and legislative intent behind the applicable statutory framework.

The J&S decision represents an important victory for bond claimants in Massachusetts and provides significant incentive for sureties in that state to take an active role in assuring that proper claims are promptly and fairly resolved.  Bond claimants and sureties alike would be well-advised to familiarize themselves with the applicable claims settlement and insurance practices statutes and how these statutes may impact their rights and obligations.

About the Author: Katz & Stone represented the bond claimant in the appeal before the Massachusetts Supreme Judicial Court.  For further information contact Katz & Stone at 8230 Leesburg Pike, Vienna, VA 22182; 703-761-3000; http://www.katzandstone.com. Jerry Katz is a nationally recognized attorney whose practice emphasizes construction law.  He is a prolific writer and frequent speaker on matters of construction law, construction risk management, risk transfer, insurance, and numerous related subjects.

ConstructionRisk.com Report, Vol. 3, No. 8 (Nov 2001)