Surety claims litigation sometimes seems to exist in an alternative universe. Recent cases in Texas and New Jersey bear this out.

Continental Casualty Co. claims in a lawsuit that it lost $14 million fulfilling obligations on one payment bond and four performance bonds, all issued around July 2011, following the default of Brownsville, Texas-based Leal Construction Inc.

The claim is contained in Continental's lawsuit against Leal in federal court in Brownsville, Texas, and it names Cesario Leal as the first defendant.

While the complaint does not elaborate on the cause of Leal Construction’s default, an attorney for the general contractor says it ceased operations just prior to Cesario Leal's death in October, 2013.

“Mr. Leal was in declining health probably for six to eight months prior to his death, so the operations started slowing down dramatically,” says the attorney, Rick Schell. “Bottom line is, the company is gone. All of its assets were foreclosed upon by its bank.”

The lawsuit names Leal and his wife, Corina Leal, as defendants alongside the defunct business. According to Schell, the five projects named in the lawsuit are either completed or have brought in a replacement contractor.

Leal "and the surety have been working together for months, maybe for a year, on all these different claims and cooperating, of course,” says Schell. “We still haven’t gotten to the point where we understand the dollar figures in the complaint. We don’t think they’ve paid as much as they say they’ve paid,” but he adds that details will be provided as the court case proceeds.

On top of Casario Leal's declining health, Schell says, other factors contributing to the decades-old firm’s default included "real difficulty getting paid" and some too-low bids.

The next scheduled court meetings occur in January of next year.

Who Pays for a Mistake?

In the New Jersey case, a surety said it had no obligation to fulfill a prime contractor's claim for poor work by a subcontractor because the surety wrongly named the project owner, not the prime contractor, as the obligee in the bond form.

Dobco Inc., based in Wayne, N.J., had in 2011 won a contract to work on an addition to a science hall at William Paterson University in Wayne. Dobco in turn hired J. Strober & Sons LLC to handle roofing work, and Dobco and Strober's agreement called for Strober to provide Dobco an $890,000 performance and payment bond prior to starting work. Colonial Surety Co., which bills itself on its website as Colonial Surety Direct, selling directly without broker involvement, has been incorporated in Pennsylvania since 1930 and is based in Montvale, N.J. Colonial agreed to provide the bond for Dobco to Strober.

When Strober prepared the bid bond, according to a judge's opinion in the case, using Colonial's online system, the bond misidentified the university as the obligee instead of Dobco. Dobco rejected the bond because of the error, as well as a second set of bonds  issued without Colonial's certification.

Dobco pursued a claim with Colonial in state court after the contractor terminated Strober for poor work performance. The trial court judge dismissed Dobco's claims, saying the bond documents designate the university as the obligee and relieves Colonial of its obligation.

But a panel of three appellate court judges said Colonial must honor the claim.

The appelate judges wrote that Strober had tried to get Colonial to revise the bond and make it the obligee, but the change never got done. As a matter of practice, the judges wrote, Colonial didn't review the contracts for which it provided bonds.

Nevertheless, Colonial was obligated to honor the obligation or pay under the bond in the "form provided under the contract," not strictly by the names on the bond forms.

"That Colonial chose not to review the contract it bonded cannot relieve it of obligations voluntarily undertaken," the judges concluded.