Saturday, June 28, 2008

AIA Amends A312 Payment Bond

The American Institute of Architects (AIA) recently announced interim amendments to their popular A312 Payment Bond form that has been required by many owners from construction contractors since 1984.

Due to a series of court cases about certain provisions of the bond, some sureties have been hesitant to use the A312 Payment Bond without amendments to it in order to protect their interests. At issue are decisions by courts in Maryland, Virginia, and Florida that have strictly held the sureties to the time requirements of the bond for the bonding company to respond to claims.

Paragraph 6 of the A312 Payment Bond imposes certain requirements on the surety to respond to a claimant within 45 days after the surety receives the claim. The surety is further required to state the amounts of the claim that are undisputed and their basis for challenging any amounts of the claim that are disputed.

The courts essentially ruled that when a surety fails to provide the appropriate response within the 45 day period, they waive their defense against the claim and become liable for the full amount of the claim.

In response to the court cases, the AIA has developed interim amendment language to the A312 Payment Bond until they are able to meet with all of the major stakeholders and make appropriate permanent changes in the bond form. The revised language adds the following paragraph:

“The Surety’s failure to discharge its obligations under this Section 6 shall not be deemed to constitute a waiver of defenses the Surety or Contractor may have or acquire as to the claim. However, if the Surety fails to discharges its obligations under this Section 6, the Surety shall indemnify the Claimant for the reasonable attorney’s fees the Claimant incurs to recover any sums found to be due and owing to the Claimant.”

Owners should not be surprised when they receive an A312 Payment Bond with amendments to Paragraph 6, limiting the surety’s liability in the event they fail to provide the notice within the time period specified.

For reference, the following are the three court cases that have triggered this recent activity of changing the Payment Bond:

  • National Union Fire Insurance Co. of Pittsburg v. David A. Bramble, Inc., 879 A. 2d 101 (Md. 2005)
  • Casey Industrial, Inc. v. Seaboard Surety Co., 2006 WL 2850652 (E.D. Va. Oct. 2, 2006)
  • J.C. Gibson Plastering Co., Inc. v. XL Specialty Insurance Co., 2007 WL 2916399 (M.D. Fla. Oct. 8, 2007)

The National Association of Surety Bond Producers (NASBP) has a useful PowerPoint presentation with additional background on the court cases and the problems with the A312 Payment Bond. Obviously, this is written from the perspective of sureties, but it seems fairly balanced.

In addition Construction WebLinks also has a good article about the issue.

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