On a Little Miller Act Payment Bond, the Surety Cannot Be Sued for Bad Faith
By failing to file suit before the statute of limitations expired, one subcontractor forfeited its Little Miller Act collection remedies.
Arizonas Little Miller Act, which is modeled after
the federal Miller Act, protects the payment rights of people and companies that
supply labor or materials on public projects. Because mechanics and
materialmens liens cannot attach to public property, the Act requires
contractors on public works projects to furnish payment bonds on which a
claimant who is not paid in full can sue.
The case discussed in this
article, S&S Paving v. Berkley,
raises practical issues that stem from the Little Miller Act and the
payment remedies it provides.
S&S Paving and Construction performed paving
work on a City of Prescott project under a contract with the general contractor,
Spire Engineering. Berkley Regional Insurance Company issued a payment bond
for the project.
When Spire failed to pay $23,763 that S&S claimed was
owed, S&S sent a demand letter to the surety, Berkley. In acknowledging S&Ss
claim, Berkley requested additional information that S&S provided along with a
proof of claim. Two months later, Berkley acknowledged receipt of the
documentation and advised S&S that Berkley would be back in touch after checking
That was the extent of the communication between S&S and
Berkley until May 2013, when S&S sent another demand letter to Berkley in
connection with its breach of contract suit against Spire. When Berkley denied
S&Ss claim, for failure to meet the one-year statute of limitations for claims
against public works payment bonds, S&S sued Berkley for breach of contract and
The trial court dismissed both of S&Ss claims against
Berkley, noting the expiration of the statute of limitations and, further, the
absence of a contract between S&S and Berkley.
S&S appealed the dismissal of its bad faith
claim, arguing before the Arizona Court of Appeals that sureties issuing payment
bonds have a duty to undertake an investigation adequate to determine whether a
claimants claim is tenable or valid and that sureties owe the same duty of
good faith to claimants as insurance companies owe to insureds.
The Court rejected S&Ss argument and upheld the
dismissal of the bad faith claim, noting that the Little Miller Act dictates
the procedures that claimants must follow in order to recover against payment
But for its failure to timely file suit, S&S had a
complete and valid remedy under the Act, the Court found. By failing to take
legal action within the statute of limitations, S&S forfeited its recovery
rights granted by the Act.
The Court also rejected S&Ss argument that Berkley had
a duty to investigate the validity of S&Ss claim, finding that such a duty does
not exist in statute.
It is standard practice, after a
claim has been presented, for a surety company to request information from both
the claimant and the contractor. However, this standard practice will not excuse
a claimant from filing a lawsuit in a timely fashion to preserve its collection
rights under the Little Miller Act.