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Bond Deemed Ambiguous and Surety Company Suffers

June 7, 2010

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On a construction project, AWL Industries was the general contractor. They hired Cole Mechanical as a subcontractor to do some of the work. The subcontract contained a promise by Cole that it would indemnify AWL under certain circumstances. AWL also required that Cole secure a performance bond and Cole secured the bond from Nova Casualty Company. The bond contained the following language: "Surety [i.e., Nova] upon demand of Obligee [i.e., AWL] may arrange for the performance of Principal's [i.e., Cole's] obligation under the subcontract."
Cole defaulted on its contract and Nova stepped in and hired Nelson Air Device Corp to complete the work. Nova also hired a consultant to oversee Nelson's work. An employee of the consultant was injured at the job site and filed suit against AWL.
AWL commenced a third party action against Nova, with claims for contractual indemnity and failure to obtain general liability insurance for the benefit of AWL. Nova moved to dismiss the third party action, saying that it had met its obligation under the bond by arranging for Nelson to step in and finish the work.
The court denied Nova's motion, saying that the language of the bond was ambiguous. While Nova read the word "arrange" to mean that they only had to arrange to complete the work, the court said that another reading of the bond was that Nova had to "arrange" to take on all of Cole's responsibilities under the subcontract, including the obligation to indemnify AWL.
Now a jury will decide what is a fair reading of the bond that Nova drew up.
Posted by Georgia Stagias.
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