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The Principles of Suretyship

In conjunction with a presentation in a construction course sponsored by the Maryland Institute for the Continuing Professional Education of Lawyers, we authored a comprehensive article entitled "Principles of Suretyship." In order to emphasize the practical over the theoretical, we also prepared a case study to consider a hypothetical payment bond claim and the similarities and differences among the bodies of law that may govern a given claim.

The article begins with a discussion of the background of surety bonds, including the evolution of the principles that govern the arena of suretyship in today‘s world. We continue our discussion with a review of the principal factors that a surety would consider in deciding whether to issue surety bonds for a given individual or company. The importance of these principles of "underwriting" cannot be overemphasized, as the character and resources of a contractor at the outset is often determinative of the success or failure of a surety‘s relationship with its bond principal. Our primer continues with a comprehensive discussion of the rights and obligations of the three parties to a suretyship agreement. We move on to review the options and rights of a surety, including a discussion of the surety‘s options upon the default of the bond principal and the often misunderstood doctrine of equitable subrogation. Finally, we consider the principal aspects of a payment bond claim and some of the nuances of governing law. We conclude our paper with a bullet point review of the practical considerations of each party in a default situation.

Our case study presents a hypothetical payment bond claim of a material supplier. We include a checklist to point out the important questions a surety must answer in its investigation of a given claim. Next, we answer these questions in each of three situations, among which we vary the "type" of owner on the construction project. In the first situation, our hypothetical owner is the Department of the Army, or a department within the federal government. Our second example involves the case of a local school board as the owner, a state entity. Finally, our third example considers the case of a private company as the owner. In each of these situations, the governing law varies and dictates the answers to a variety of issues, including whether a claim may be asserted, who must be provided notice of a claim, where suit can be brought, and when a lawsuit may be filed on the one hand and when a claim expires on the other. We conclude our materials with a review of the prime components of common performance bonds, the AIA Document A311 (1970) and the AIA Document A312 (1984).

The full text of the above title is available to insurers, their representatives and independent adjusters. For a copy please contact Craig D. Roswell at cdroswell@nilesbarton.com or 410-783-6341.

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