Public entities have a duty to ensure the sufficiency of a surety executing a payment bond in connection with a public contract, the California Court of Appeal has held. Walt Rankin v. City of Murrieta, 00 C.D.O.S. 4128 (May 24, 2000).
In this case, after soliciting bids for the construction of a playground park project the City of Murrieta awarded the contract to a general contractor. On May 3, 1995, the plaintiff entered into a contract with the general contractor to install the playground equipment. When the general contractor failed to pay, the plaintiff initiated a stop notice procedure but was not able to collect the entire amount due. The plaintiff’s demands under the general contractor’s payment bond were unsuccessful. As it turned out, the entity that had executed the payment bond was not licensed as a surety and was not solvent.
The plaintiff initiated an action against the City for negligent breach of a mandatory duty. The trial court ruled the City had no duty under Civil Code sections 3247 and 3248 to require a surety providing a payment bond to be an admitted surety insurer or to confirm the solvency of the surety even though those sections do require the public entity to “approve” the payment bond. The plaintiff appealed.
The Appellate Court examined the City’s duty under the California Tort Claims Act (Gov. Code secs. 810 et seq.), specifically section 815.6, which provides: “Where a public entity is under a mandatory duty imposed by an enactment that is designed to protect against the risk of a particular kind of injury, the public entity is liable for an injury of that kind proximately caused by its failure to discharge the duty unless the public entity establishes that it exercised reasonable diligence to discharge the duty.”
Although the Appellate Court agreed that the City did not have such a mandatory duty under sections 3247 and 3248 alone, the Court determined that these sections must be read in conjunction with the Bond and Undertaking Law, Code of Civil Procedure section 995.010, et seq. These sections of the Bond and Undertaking Law are necessary to explain certain provisions in sections 3247 and 3248. Furthermore, legislative history indicated that the two laws were intended to be read together.
Section 995.310 of the Bond and Undertaking Law requires that a bond be executed by two or more sufficient personal sureties or by one sufficient admitted surety insurer or a combination. The Appellate Court concluded that, since under sections 3247 and 3248 the public entity must approve the payment bond, the public entity must also require compliance with section 995.310. The Court concluded that section 995.310 imposes a mandatory duty on the City to require that the surety be an admitted insurer.
In addition, section 995.660 imposes a mandatory duty on the City to investigate the sufficiency of the surety prior to approving the payment bond. Section 995.660 requires the insurer to submit specified documents “if the bond is to be approved.” According to the Court, approval cannot properly be given by a public entity without requiring the corporate insurer to submit the documentation mandated by Code of Civil Procedure section 995.660. In this case, the City ignored these provisions by failing to require a certified copy of the certificate of authority of the insurer or from the clerk of the county and by failing to require copies of the insurer’s financial statements.
The Court concluded that the statutes were intended to protect against the harm suffered by the plaintiff, i.e., nonpayment by a nonqualified surety. Furthermore, the City’s failure was the proximate cause of the plaintiff’s injury. An admitted corporate insurer is subject to regulation and supervision by the Insurance Commissioner and must maintain certain paid-in capital and surplus that would guard against insolvency. Had the City withheld its approval unless and until the surety demonstrated that it was admitted, the plaintiff would have been protected against nonpayment by an insolvent surety.
Finally, the Court concluded the plaintiff in this case was entitled to attorney fees under Civil Code sections 3248 and 3250. Section 3248(b) requires a payment bond to include a provision for attorney fees, and section 3250 provides that “in any action, the court shall award to the prevailing party a reasonable attorney’s fee.” According to the Court, this language was broad enough to encompass this action.
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