I have often discussed construction payment bond claims from the perspective of the subcontractor or supplier making the claim. However, a recent case (that I only have the Virginia Lawyers Weekly link for) discusses the potential dire consequences of such a claim for a payment bond principal and any guarantor under that bond.
In Hanover Ins. Co. v. Warren Flynn Construction Co., (subscription required) the Eastern District of Virginia considered the motion for summary judgment/default filed by Hanover Insurance against the defendant and Mr. Flynn himself. In this case, the insurance company, Hanover sued WFC for indemnity for money that it paid out under its payment bond. Despite being served with the suit, WFC failed to appear or file an answer and was therefore held in default.
While under many circumstances, Hanover would only have obtained a judgment against WFC, in this matter, Mr. Flynn had (like the principals of most bonded companies) signed a personal guarantee of the indemnity agreement under the bond. Because of this personal indemnity, the Court entered default judgment against both WFC and Mr. Flynn in the amount of a little over $1.6 million dollars, reasoning:
Because Flynn personally signed the indemnity agreement, the Agreement obligates him to indemnify Hanover for losses Hanover sustained in conjunction with WFC’s failure to pay subcontractors on WFC construction projects. Therefore, the court recommends granting summary judgment in favor of Hanover and against Flynn in the requested amount.
In short, when his company failed to file an answer to the Complaint, Mr. Flynn lost the ability to defend himself from the indemnity claim. Whether WFC or Mr. Flynn himself would have had defenses was never explored by the Court.
Why? Because his company did not show up. Failing to do so, or to hire a construction attorney to do so for you, is generally a recipe for disaster in the best of circumstances. Couple a failure to appear with a personal promise to indemnify and you can see the dire result.
If any of you have a copy of the magistrate’s or district court’s opinion, I will be happy to add it to this post so that we can all read this lesson first hand.
UPDATE: The link above now goes to a .pdf of the full text opinion.
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