In Lexon Insurance Company v. City of Cape Coral, 2017 WL 5759059 (Fla 2d DCA Nov. 29, 2017), the court held that the five-year statute of limitations on a surety bond contract begins to run once the bond principal (typically a contractor) breaches the bonded contract, not when the bond obligee (typically the owner) demands that the surety cure the principal’s default and not when the surety denies the bond claim.
In January of 2005, the City of Cape Coral adopted an ordinance for a commercial and residential development. The ordinance required the developer, Priority Developers, Inc., to provide a performance bond naming the City as obligee, with the bond to be for the estimated cost to complete all required site improvements. Lexon Insurance Company was the surety that issued the bonds totaling $7.7 million.
In March 2007, the developer stopped paying the general contractor, work on the project ceased, and the City stopped performing inspections. In 2009, the construction lender, BankAtlantic, obtained a foreclosure judgment against the developer.
On October 27, 2010, the City contacted the surety, informing that it wanted “to place a claim to have the outstanding work on this project completed” and to inquire as to the next steps. The surety responded by requesting further information. The City did not respond. On July 23, 2012, the City demanded that the surety cure the principal’s default. On October 23, 2012, the City filed suit against the surety.
In November 2015, the matter went to trial. The trial judge ruled against the surety, finding that that the surety breached its obligations to the City when the surety wrongfully denied the City’s claim. The surety appealed.
On appeal, the surety argued that the City’s claim was barred by the statute of limitations which began to run when the principal, Priority Developers, Inc., abandoned the project in March 2007. The City apparently took the position that its right to sue on the bond only began to run when the City made demand upon the surety to cure the developer’s default.
A surety’s liability is generally co-extensive with and based upon the bond principal’s liability. Consistent with that rule, the appellate court held that the statute of limitations on a performance bond claim begins to run when the bond principal breaches the underlying construction contract. As a result, the trial court’s judgment against the surety was reversed.