The surety, in a lawsuit filed in federal district court in San Antonio in July, 2013, claims Skanska’s payments to the sub deprived the surety of the funds, leaving it short of assets possibly needed to dispose of the surety’s obligation under the bond.

The rights and duties in surety agreements are often litigated, but this case may be another example of a prime contractor’s dilemma of whether to make payments to a subcontractor in financial trouble before giving up on the sub and notifying the surety of the sub's default.

Skanska USA Buildling originally filed a claim on subcontractor PAC Glazing Solutions' surety bond after PAC filed for bankruptcy, in May, 2013, while working on a medical facility for the Air Force at Lackland Air Force Base in San Antonio.

Star Insurance Co., the Southfield, Mich.-based surety, claims in its complaint that its obligation under the bond has been discharged, in part because Skanska allegedly made “substantial overpayments” to PAC for materials that were not delivered, for labor not performed, and for a “commercially unreasonable” percentage of the subcontract allocated to calculations, submittals, and shop drawings.

The insurer's estimate of alleged overpayments on the subcontract is $1.3 million, more than a quarter of its total conract value.

Skanska argued in a response to the complaint that Star Insurance “led Skanska to believe” that it would retain the services of another subcontractor to finish the bankrupt subcontractor's obligations. Only later did Star refuse Skanska's claim.

A representative from Skanska stated that it is the company's policy not to comment on ongoing litigation. Representatives of the insurer and subcontractor did not respond to requests for comment.

The legal circumstances related to PAC’s default involve its parent company.

PAC Glazing Solutions was working on the Lackland Air Force Base Ambulatory Care Center when its parent company, FBLN, filed a Chapter 11 voluntary petition in the bankruptcy court of Washington States's western district. At the time, FBLN was also under subcontract with Walsh Pacific for the Veterans Affairs Multi-Specialty Care Outpatient Clinic in Walla Walla, Wash.

Star Insurance claimed in an adversary proceeding during the bankruptcy that FBLN executed and delivered irrevocable payment delivery authorizations to Skanska and Walsh before the subcontractor filed for bankruptcy, directing the general contractors to pay all contract funds to Star Insurance rather than FBLN.

The complaint alleges that both Skanska and Walsh continued to make payments to the subcontractor, and that the subcontractor did not send those funds to Star Insurance or hold them in trust for project obligations. Star Insurance later voluntarily dismissed the adversary proceeding.

 The Lackland project is still in progress. The lawsuit between Star Insurance and Skanska is scheduled for a jury trial in early 2016.

The last filing in the case was an order granting both parties' motion for extension of time to complete mediation, on Sept. 29th. Both parties have filed motions for summary judgement.