Builders and Contractors Exchange
Weekly Bulletin: 30 May 2005
The Insolvent Surety: Nothing But Hardship
By: Tom Berkley
We previously submitted an article about the limited protection the Virginia Property and Casualty Insurance Guaranty Association Act (VPCIGA) provides insured entities from the insolvency of their insurance companies. The VPCIGA acts as a guaranty fund that applies to worker's compensation, personal injury, liability and other types of insurance. However, the VPCIGA specifically exempts surety/bonding companies from its provisions. This exemption affects many in the construction industry and the Virginia Bureau of Insurance has confirmed that no legislation currently exists to change this exemption.
The Code of Virginia does not provide a separate guaranty fund to protect principals or those working with/for the principal from the insolvency of their surety/bonding companies. Without the benefit of a state guaranty fund, an injured party must often resort to the Bankruptcy Courts of the United States. This long process can offer little to no relief when the surety/bonding company has numerous secured creditors that take precedent over the injured party. Therefore, when obtaining a bond or working with a bonded entity, one should exercise due diligence to determine the financial strength of the surety/bonding company before work begins. A failure to perform this due diligence can result in severe economic hardship.
If an individual or company finds that the primary surety company has become insolvent, one possible solution still exists - additional surety. If more than one surety remains to provide coverage for a problem, and a lawsuit against the remaining sureties becomes necessary, the plaintiff should bring suit against every remaining solvent surety at the outset of the case. The failure to bring suit against every remaining solvent surety can result in the dismissal of the lawsuit. The Code of Virginia makes it clear that a plaintiff cannot pick and choose which surety he wishes to sue. If the defendant surety discovers the identity of another relevant surety during the lawsuit, the defendant surety can move to dismiss the litigation after a simple notice to the plaintiff. A plaintiff, who fails to timely join the other sureties after receipt of the notice, will lose his chance to recover against any solvent surety.
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.