On a Little Miller Act Payment Bond, the Surety Cannot Be Sued for Bad Faith

Arizona’s “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 materialmen’s 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.

Background. 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&S’s 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 with Spire.

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&S’s 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 bad faith.

The trial court dismissed both of S&S’s claims against Berkley, noting the expiration of the statute of limitations and, further, the absence of a contract between S&S and Berkley.

Appeal. 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 claimant’s 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&S’s 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 bonds.”

“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&S’s argument that Berkley had a duty to investigate the validity of S&S’s claim, finding that such a duty does not exist in statute.

Practical Lessons. 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.