Mistakes On Bid Bond Lands an Agency in Court
- August 20, 2019
Insurance and surety contracts are precise documents. The details must be accurate or the whole contract falls apart.
In 2016, a real estate development company in Wisconsin launched a project to reconstruct apartment buildings. A manufacturer of structural building components submitted a proposal to the developer for the project’s framing components. The bid was for $1,035,009 and included work on various building systems.
A construction company then contacted the manufacturer about acting as a subcontractor on the job to install these components. The two companies commenced negotiations.
A few months later, the manufacturer emailed the subcontractor proposed specifications for the job, including a schedule, a checklist of the job’s scope, site plans and exterior elevations. The email offered the contractor $337,147 for the work, and the contractor informally accepted.
The following day, the subcontractor contacted its insurance agency, which was located in Minnesota, requesting that the agency issue a certificate of insurance showing evidence of liability coverage to the manufacturer. They also forwarded documents related to the project. The sub also sent the manufacturer references and a completed pre-qualification form.
Three days later, the manufacturer emailed the sub and the agency to inquire about “bond progress.” In a separate email to the agency, the manufacturer asked for an update and stated that it would not sign a contract with the developer until “we have this piece squared away,” apparently referring to the insurance requirements.
The agency emailed the subcontractor and the manufacturer a copy of a bid bond for the project. A bid bond guarantees that, if awarded the contract based on the bid submitted, the contractor will enter into a contract to perform the work at the price quoted. If the contractor fails to do so, the surety reimburses the obligee (the person to whom an obligation is owed) the difference between the defaulting contractor's bid and the next lowest bid, up to the amount of the bond.
The amount of this bond was $360,000, almost $23,000 more than the price the manufacturer and sub agreed on. It also erroneously named the local county government as the obligee rather than the manufacturer. Despite the errors, the sub, agency and surety signed it.
The following month, the manufacturer signed contracts with the developer for a higher contract price. The sub signed a contract with the manufacturer, who did not sign.
Over the next few months, the manufacturer twice inquired with the agency about the status of a performance bond for the sub. A performance bond guarantees that the contractor will perform the work in accordance with the contract. The surety reimburses the obligee if the contractor fails to perform as agreed. The second time, the agency replied that it was awaiting information from the sub and asked the manufacturer to re-send project documents. The manufacturer did so.
Eventually, the manufacturer removed the sub from the project for failing to provide the performance bond. The manufacturer made a claim under the bid bond but received only partial recovery. They then sued the agency for $275,000, claiming that the agency misrepresented the terms of the bond.
The judge disagreed and ruled in the agency’s favor. He found no evidence that the agency made false statements and that the manufacturer had not relied on any statements as a basis for the contract it signed with the developer. Lastly, he ruled that, even if the manufacturer had relied on the agency’s statements, they could have discovered the problems with the one-page bond by simply reading it. “The question,” he wrote, “is whether Blenker could have discovered through the exercise of ordinary observation that it was not the obligee on the bond. Blenker identifies no reason it could not have.”
The manufacturer’s sloppy handling of this situation bailed out an agency that issued a bond incompetently. The judge’s opinion does not state how or why the agency issued the bond in the wrong name and amount. These are basic pieces of information for any insurance contract. The agency should have confirmed with its client that it had the correct information.
The devil is in the details. The agency won this case, but it made costly mistakes over the details.