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Make the Surety Pay Safety Signs Claim

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Even if you are in the surety business, you may not have heard of the Safety Signs case. If you have, you probably hope it will be resolved soon and go away. The case involves a subcontractor, Safety Signs LLC, that made a claim under a payment bond the surety refused to pay. Under the technical details of Minnesota state law, the surety's refusal to pay was entirely legal.

The American Subcontractors Association filed an amicus curiae brief in January urging the Supreme Court of Minnesota to reverse an appeals-court decision last year that upheld the surety's refusal to pay. Let's hope the state supreme court listens.

Here is the background about what happened. Safety Signs had a payment bond from Niles-Wiese Construction Co. for Safety Signs' work on the local airport in Owatonna, Minn., performing traffic-control and pavement marking. Westfield Insurance Co., an A.M. Best-rated surety, provided the bond.

Even after it had been paid by the city, Medford, Minn.-based Niles-Wiese failed to pay Safety Signs, and Safety Signs sought payment from Westfield in a claim made in February 2009. Safety Signs sent its notice to Westfield's main office and to the contractor's main office (listed on the contract and its website), but not to the address on the bond, and Westfield paid. Safety Signs made another bond claim in Jan. 7, 2010, and sent it to the same addresses, but this time the notice was returned as undeliverable.

Westfield argues that Safety Signs' service of notice—which was mailed but not received within 120 days after the completion of Safety Signs' work—is untimely because service is effective upon receipt rather than upon mailing. A lower-court judge agreed, but the appeals court reversed the decision.

To his credit, the Minnesota appeals-court judge went by the book. He ruled that the Minnesota bond law requires strict compliance, or the bond claim is no good.

Timely notice is an important principal in bond claims. It gives sureties a window in which to investigate a claim before mounting delays inflict more economic damage. Without timely notice, sureties cannot conduct a proper investigation without incurring costs. Westfield's acceptance of Safety Signs' initial bond claim, however, is an important mitigating circumstance that shows substantial compliance is all that is needed. We don't suggest that courts rewrite state laws as a matter of routine. We do suggest that courts re-examine any statute's intent to find out what the policymakers were thinking. And what they were thinking in Minnesota no doubt included timely notice and the need to protect honest contractors.

Strict adherence to the letter of the statute would be a disservice to the public and to the intent of the lawmakers to protect the public through surety guarantees.

 

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