Florida: Fortune Construction Distinguishes Larkin
June 2, 2003
American Home Insurance Company v. Larkin General Hospital Limited has long stood for the proposition that, in Florida, a surety cannot be held liable for delay damages due to the contractor’s default unless the bond specifically provides coverage for delay damages. 593 So. 2d 195 (Fla. 1992). The Larkin case has been an important example of the maxim that the surety should suffer no loss. In a default termination situation, it is the surety lawyer’s favorite case and bound to appear in at least one letter from the surety in the days following the default. The Larkin case has also been the obligee’s nemesis. The obligee, the owner in the case of defaulting general contractor or the general contractor in the case of a defaulting subcontractor, has an obligation to allow the surety reasonable time to investigate the claim of its defaulted principal. During this time the job may come to a virtual halt. Even if the contract between the obligee and the defaulting principal allowed for recovery of delay damages, if the bond did not explicitly state on its face that delay damages were covered, the surety could not be held liable. The general contractor or owner is left in the unenviable position of being required to permit the surety time to investigate while incurring damages that accrue daily and for which no solvent party may be held liable. However, a recent U.S. Court of Appeals for the Eleventh Circuit case, National Fire Insurance Company of Hartford v. Fortune Construction Company, distinguishes and undermines the protection to sureties afforded in Larkin. 203 WL 256961 (11th Cir. 2003)
In Fortune the general contractor, the obligee on the bond for a defaulted subcontractor, attempted to set off liquidated damages that were incurred by the defaulting subcontractor prior to the default. The court distinguished Larkin by recognizing that the bond incorporated by reference the subcontract with the defaulted party, and that the subcontract included a provision for assessment of liquidated damages. The court held that the incorporation by reference was effective to allow enforcement of the liquidated damage provisions against the surety, notwithstanding the general proposition from Larkin that the surety is not liable for delay damages.
While the impact of the Fortune case appears encouraging (for everyone except sureties) its ultimate effect on Larkin will turn on two issues: the extent to which Florida state courts are willing, or feel obliged, to follow an Eleventh Circuit case distinguishing a long-standing Florida Supreme Court case; and the extent to which Florida state courts will expand Fortune and allow setoff of damages, which accrue after the default of the principal while the surety is investigating or performing its obligations under the bond. Footnote 2 in Larkin leaves the door wide open for this latter possibility when it stated that the court did not reach the issue of whether a surety could be held liable for consequential delay damages necessary from a surety’s failure to fulfill its obligations set forth in the bond.
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