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Court answers question on subcontractors' ability to recover

January 1, 2007
The Indiana Supreme Court today delved into the meaning of "subcontractor" and determined that performance bond coverage for third parties only goes so far.

Stemming from a certified question from the U.S. District Court for the Northern District of Indiana, justices considered: "Does a performance bond required by and issued in accordance with Ind. Code §8-23-9-9 afford coverage to a third-tier claimant?"

Chief Justice Randall T. Shepard wrote the opinion saying the statute does not afford that coverage, noting that a subcontractor is "any person or organization entering into a contract with a contractor to furnish labor and materials used in the actual construction of a state highway project."

Further in the decision, he wrote: "Accordingly, a claimant who does not share privity of contract with the contractor or a subcontractor is not entitled to the coverage of a performance bond issued under §8-23-9-9."

Justice Brent Dickson dissented without a separate opinion. The 4-1 decision came down in Alberici Constructors, Inc. v. Ohio Farmers Insurance Co. http://www.in.gov/judiciary/opinions/pdf/05220701rts.pdf, 94S00-0612-CQ-488, which involved a federal contract dispute relating to an Indiana Department of Transportation bridge project near Bluffton.

Contractor Primco secured a performance bond with defendant Ohio Farmers Insurance Co. and later entered purchase agreements with three other companies for needed materials. The third, Hillsdale Fabricators or Alberici Constructors, delivered bridge pieces but was not paid by the second company, Gateway Bridge. The insurance company rejected a claim by Alberici, saying it was "too far removed to have standing." Alberici ultimately sued the insurance company in federal court, arguing that it could recover under the state's performance bond statute.

"Without a bright line defining where surety coverage extends, contractors would face an incalculable risk of liability for claims made by distantly remote suppliers or laborers on contracts made without contractor approval," the chief justice wrote, later adding that the statute doesn't extend coverage under a performance bond to any entity more remote than a second-tier laborer or material supplier.

However, he added that this holding doesn't mean parties working on state highway projects are left without any way to ensure payment. Advance payments or some other "financial understanding" could be reached, as well as additional contract arrangements to extend that coverage, the chief justice wrote. The General Assembly could also amend the statute, he wrote.
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