Performance Bonds and Surety Bonds: Response to Mold Related Claims
January, 2002
A performance bond guarantees that a principal/contractor will complete a construction project in accordance with the contract. When there is a failure to complete construction or a defect in construction, the bond may be called upon to pay the cost to complete or correct work that does not conform to the client’s specifications. The surety may also be liable for breaches of warranties that have been extended to the owner, as well as for latent defects (work not in accordance with the contract of which the owner was not aware at acceptance of the project) subject to applicable limitations periods.
There are a plethora of factual scenarios that may implicate a performance bond in mold- related litigation, and sureties need to be cognizant about the increased risks now arising from mold contamination. Moisture damage to projects under construction, the use of building materials which provide conditions optimal for the growth of molds, and various below and above ground construction defects allowing for the introduction of moisture may all require a response by the surety.
Although third parties do not generally have direct recourse against a performance bond surety, since they are neither parties to nor third party beneficiaries of the bond, to the extent the contract obligates the principal/contractor to indemnify the obligee for damages to third parties, such damages may be recoverable from the surety by the obligee. For example, in Capua v. W.E. O’Neil Construction Co., 367 N.E.2d 669 (1977), the Illinois Supreme Court held that construction workers injured on the job may recover damages for their personal injuries from the surety where the premises owner and the injury plaintiff’s employer are unable to pay:
[A] worker injured on a construction project may look to the owner of the building and the contractor, his employer, for compensation. However, there will be times when the worker will be unable to recover, as when the defendant is insolvent or the damages simply too large for him to satisfy. If the contractor were required by the owner to post a construction bond in which he agreed to indemnify or hold harmless the owner, the injured worker may look to the surety for satisfaction of his claim if the owner is unable to satisfy his liability.
In other jurisdictions, general liability insurance would normally cover property damage and personal injury suffered by third parties. Clean-up, repair or corrective work required by the existence of mold relating to defects in construction or violations of warranties are items for which the surety would potentially be liable.
Sureties can reasonably anticipate attempts in the form of lawsuits brought by subrogees or assignees of an owner/ obligee to recover for mold-related losses due to some alleged failure to comply with construction specifications and procedures. Also, actions for breach of warranty of habitability, or fitness for a particular purpose brought by an owner/obligee damaged by the existence of mold could fall squarely on the surety’s shoulders. If facts indicate some causal relationship between the bonded construction process and the existence of mold and damage that flows therefrom, the performance bond surety may take on a significant role in such disputes. The key technical issue will be whether, as a practical matter, an actionable mold problem arises and is discovered before contractual or warranty limitations periods expire. Centex-Rooney Construction Company v. Martin County, 706 So.2d 20 (Fla. Ct. App. 4th Dist. 1997), is instructive on the point. There, the appellate court affirmed a jury verdict of approximately $14 million for plaintiff Martin County against the defendants, a construction company and performance bond surety. Plaintiff filed suit after it was forced to evacuate the courthouse/office building complex constructed and bonded by defendants when construction defects caused the growth of toxic mold that sickened the building’s occupants. Because the bond obligated the surety “to ensure the proper performance of the construction management agreement,” and it was undisputed that construction defects caused the mold growth, the appellate court found that the surety was jointly liable for the verdict. •
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