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Insurer wins surety bond litigation with construction firm

Insurer wins surety bond litigation with construction firm

A Safeco Corp. unit has prevailed in long-running litigation with a construction company over dismissal of the policyholder’s bad faith claims in connection with the insurer’s issuance of three surety bonds.

MES Inc. was hired by the U.S. Army Corps of Engineers for three construction projects including one that was a joint venture, according to Friday’s ruling by the 2nd U.S. Circuit Court of Appeals in New York in M.E.S. Inc., M.C.E.S. Inc. and George Makhoul v. Safeco Insurance Co. of America et al.

Safeco Corp. unit Boston-based Safeco Insurance Co. of America issued performance and payment bonds for all three projects, and MES agreed to indemnify Safeco for any losses resulting from its issuance of the bonds for two of the projects, according to the ruling. The bonds totaled $35.4 million, according to court documents.

In 2008, the Corps issued “cure notices” for each project, notifying MES and the joint venture “of their respective failures and requiring them to cure all failures within 14 days,” according to the ruling.

“The Corps subsequently terminated each contract for default and made a bond demand on Safeco to complete the remaining work for each project,” the ruling said. Safeco incurred total losses of $8.8 million, according to court documents.

Both Safeco and MES filed suit in the U.S. District Court in Brooklyn over the issue, with Safeco charging breach of contract, among other charges, and MES charging the insurer with charges including bad faith. The court granted Safeco summary judgment in the case, which was affirmed by a unanimous three-judge appeals court panel.

“After nine years of litigation, including five years of discovery, MES fails to articulate any support for its accusations that Safeco breached its contractual obligations or engaged in bad faith or tortious conduct,” said the ruling.

“MES has failed to identify any good faith basis, in law or on the basis of the agreements at issue, for its assertion that Safeco had no right to take steps to meet its obligations under the surety bonds. 

“The contention that Safeco somehow was motivated to induce MES to fail obviously makes no sense, for MES’s failure to meet its obligations would have triggered Safeco’s liabilities as surety,” said the ruling, which granted the insurer double costs in the case.





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