It was an honor and pleasure to speak at last week’s surety and fidelity claims conference in Philadelphia hosted by the American Conference Institute. Mark Oertel, a surety attorney from Los Angeles, and I closed out the conference on Thursday, October 18 with a presentation entitled “The Interplay Between Equitable Subrogation and the General Agreement of Indemnity’s Assignment Clause.”
Our remarks focused on two of the tools sureties use to minimize loss after satisfying claims made under payment and performance bonds. One of those tools, equitable subrogation, allows the surety to step into the shoes and assert the rights of those entities to whom or on whose behalf the surety has performed or made payment. That means after it performs its bond obligations, a surety becomes “subrogated” to the owner’s right to apply contract funds to completion costs, to the bond principal’s right to recover against poor-performing and/or late-performing subcontractors, and to the subs’ and suppliers’ rights to payment. Since the courts have held that the surety’s equitable rights trump the rights of bankruptcy trustees, lenders and taxing authorities, equitable subrogation is undoubtedly the most powerful weapon in the surety’s salvage arsenal.
That’s MOST powerful. Not ALL powerful.
You’re the authorized agent of a North Carolina county that has entered into an $8 million contract with a general contractor for the construction of a new administrative building. The performance bond issued on behalf of the GC is in the statutory form, and therefore applies not only to base scope, but also to “any and all duly authorized modifications of said contract…notice of which modifications to the Surety being hereby waived[.]” N.C. Gen. Stat. § 44A-33(a). The penal sum of the bond corresponds to the contract’s original value — i.e., $8 million.
As the GC begins mobilization, you’re informed that the county has obtained the funding necessary to build an additional wing to the building. That work had been an alternate in the bidding process, but was rejected by the county when the bids came in higher than the architect’s estimate, leading the county to award a contract to the GC for base bid work only. Now that the additional funding has been appropriated to the project, the $500,000 additional wing can be added to the GC’s scope of work by change order.
You discuss the scope change with the GC, who’s excited about the additional work. A change order is executed, and requires the GC to provide notice of the change to the surety. You’re told such notice has been given. The County now has $8.5 million in protection under the performance bond, right?
Not so fast, Sparky.