During the last years, one of the open questions affecting the Florida construction industry was the extent of a performance bond surety's potential liabilities after substantial completion of the work. In 1998, the Florida Supreme Court clarified this issue to the extent that it addressed surety liability for latent defects discovered after completion of the project. Federal Insurance Co. v. Southwest Florida Retirement Center, Inc., 707 So.2d 1119 (Fla. 1998).
Factual Background
In 1981, Southwest Florida contracted for the construction of a retirement center. The surety issued a performance bond on AIA Document A311 (1970) that incorporated the terms of the construction contract by reference. Construction was completed in 1984. In 1994, Southwest Florida sued the general contractor and the surety based upon allegations that in 1993, while investigating water damage caused by a storm, Southwest Florida discovered latent defects in the project. The claim against the contractor was based on a theory of breach of a warranty provided in the construction contract. The claim against the performance bond surety alleged a breach of the performance bond for failure to cure the contractor's warranty violation.
Prior Florida Law
Relying on an earlier decision by the Fifth District of the Florida Court of Appeals in School Board of Volusia County v. Fidelity Co. of Maryland, 468 So.2d 431 (Fla. 5th DCA 1985), the trial court granted the surety's motion to dismiss the action on the grounds that the claim was time barred. In the trial court's view, the five year statute of limitation on actions the surety began to run with the acceptance of completion of construction.
Upon appeal to the Florida Supreme Court, that court first addressed the issue of whether a performance bond surety was liable for latent defects discovered after substantial completion. In the court's view, this question had to be resolved prior to considering the questions of the statute of limitations. In that regard, the Florida Supreme Court rejected the performance bond surety's argument that its decision in American Home Assurance Co. v. Larkin General Hospital, 593 So.2d 195 (Fla. 1992) should be extended to foreclose any surety liability for post-completion discovered latent defects. In Larkin, the Florida Supreme Court had held that a performance bond surety could not be held liable for delay damages due to a contractor's default absent language in the bond specifically providing coverage for delay damages.
The court declined to extend the logic of the Larkin decision to defective work. In the court's view, the intent of the performance bond was to place the surety's financial standing behind the contractor's completion obligation, that included completion of the work without defects. Accordingly, the surety was liable for defective work performed by the contractor regardless of whether the defect was discovered before or after substantial completion. The Florida Supreme Court stated that it saw "no logical reason to distinguish between patent defects and latent defects in respect to the coverage of the performance bond." In that regard, the court rejected a prior Florida Court of Appeals decision, Florida Board of Regents v. Fidelity & Deposit Co. of Maryland, 416 So.2d 30 (Fla.5th DCA 1982) to the extent that the court of appeal's decision had held that a performance bond surety's responsibilities ended upon substantial completion of the project.
Different Statute of Limitation Applicable to Surety
In Southwest Florida, the Florida Supreme Court held that any claim against the surety for latent defects was controlled by the five year statute of limitation "in Section 95.11(2)(b), Florida Statutes (1981)." Moreover, the court rejected the argument that the cause of action against the surety would begin to accrue at any time other than the date of acceptance of construction. The court was not persuaded that the surety's liability arose from the contractor's failure to cure the latent defects discovered in 1994 and was a continuing obligation. In that context, the court recognized that the tolling period in Section 95.11(3)(c), Florida Statutes (1981) for the discovery of latent defects did not apply to actions against the surety. Consequently, the contractor could remain liable for latent defects due to the operation of the tolling period while the action against the surety was time-barred.
Comment
The Southwest Florida decision is both good news and bad news for those seeking to assert post-completion claims against Florida performance bond sureties. The question of a surety's post-substantial completion liability for defective work in Florida is now resolved. However, the difference in statutes of limitations presents a coverage gap when the contractor that performed the work is financially defunct. Possibly, the inclusion of specific language in the performance bond might convince a Florida court to conclude that the periods of liability of the contractor and the surety were co-extensive. However, the Florida Supreme Court did not address that possibility in its decision.