Surety Bonds Cover Warranties Arising from Underlying Construction Contracts
Is a surety liable for post-completion guarantees on its principal’s work? If the bond contains language like the language in Milwaukee Board of School Directors v. Bitec (Sept. 9, 2009), the answer is yes. In a much-needed piece of good news for anyone remotely connected with Milwaukee’s school system, the District 1 Court of Appeals concluded that Atlantic Mutual’s surety bond covered warranty obligations arising from its principal’s (Specialty Associates) construction contract with the MBSD.
A roof system installed by Specialty Associates failed within the five-year warranty established in its construction contract with the MBSD. Among other things, Atlantic Mutual argued that the surety bond’s one-year limitation trumped the warranty, precluding liability. The court disagreed:
“The rule in Wisconsin is that a surety’s obligation is derived from its principal and the liability of the surety is measured by the liability of the principal.” Waukesha Concrete Prods. Co. v. Capitol Indem. Corp., 127 Wis. 2d 332, 339, 379 N.W.2d 333 (Ct. App. 1985); see also Riley Constr. Co. v. Schillmoeller & Krofl Co., 70 Wis. 2d 900, 905, 236 N.W.2d 195 (1975) (“Because the surety’s obligation is derived from that of the principal debtor, the liability of the surety is ordinarily measured by the liability of the principal. If the principal is not liable to the claimant, then the surety is not liable either.”). “The bond issued by the surety and the contract which it secures should be construed together.” Waukesha Concrete, 127 Wis. 2d at 339.
The court also pointed to the plain terms of the bond language, which voided the bond only after Specialty Associates “faithfully performed all of the terms of the contract and has indemnified MBSD for all costs suffered due to any failure on the part of [Specialty Associates] to fully perform the contract.” Because the five-year warranty was part of the contract, it was covered by the bond.
For those of you who work with surety bonds or construction, this case is a must read.
