Structures v. Insurance Co. of the West

• Decision Date: 20 September 2007
• Docket Number: No. 76973-7.,76973-7.
• Citation: 167 P.3d 1125,161 Wn.2d 577
• Court: Washington Supreme Court
• Parties: COLORADO STRUCTURES, INC., a Colorado corporation, licensed to do business in Washington d/b/a CSI Construction Company, Respondent, v. INSURANCE COMPANY OF THE WEST, a California corporation; Star Insurance Company, a Michigan corporation; Action Excavating and Paving, Inc., an inactive Oregon corporation; and Marlowe Heinz, personally, Petitioners.

167 P.3d 1125

161 Wn.2d 577

COLORADO STRUCTURES, INC., a Colorado corporation, licensed to do business in Washington d/b/a CSI Construction Company, Respondent, v. INSURANCE COMPANY OF THE WEST, a California corporation; Star Insurance Company, a Michigan corporation; Action Excavating and Paving, Inc., an inactive Oregon corporation; and Marlowe Heinz, personally, Petitioners.

No. 76973-7.

Supreme Court of Washington, En Banc.

Argued May 23, 2006.

Decided September 20, 2007.

Joseph C. Calmes, Magnus Rune Andersson, Hanson Baker Ludlow Drumheller PS, Bellevue, WA, for Petitioners.

Jeffrey Kenneth Hanson, Yazbeck Cloran & Hanson LLC, Portland, OR, Nell Anne Oram, Attorney at Law, Tigard, OR, Joseph A Yazbeck Jr., Attorney at Law, Portland, OR, for Respondent.

Jerret E. Sale, Deborah Lynn Carstens, Bullivant Houser Bailey PC, Seattle, WA, Amicus Curiae on behalf of The Surety Association of America.

CHAMBERS, J.

¶ 1 Colorado Structures, Inc. (Structures) contracted with Wal-Mart to build a store in Vancouver, Washington. Structures subcontracted¹ with Action Excavating and Paving, Inc. (Action) to help build the sewer system for the Wal-Mart store. Insurance Company of the West, Inc. (West), acting as a surety, issued both a payment bond and a performance bond,² the latter guaranteeing Action's sewer work. Unfortunately, Action failed to perform satisfactorily and breached the subcontract. As a result of the breach, Structures asked West to pay as provided by the performance bond. West refused on the ground that Structures did not formally declare Action in default before Action had substantially completed the sewer work. This suit followed.

¶ 2 We affirm the decision of the Court of Appeals that Structures was not required to formally declare Action in default before West's liability on the performance bond was triggered. We also affirm the Court of Appeals' holding that Olympic S.S. Co. v. Centennial Ins. Co., 117 Wash.2d 37, 811 P.2d 673 (1991), applies to surety bonds and to this case.

FACTS

¶ 3 Wal-Mart planned a grand opening of its store on October 14, 1998, and Structures agreed to finish construction by September 8, 1998. Under the contract, Structures faced enormous financial penalties if the construction work was not completed in time for this grand opening. Action was hired for the offsite sewer work. Because this work was substantial, Structures required Action to secure a performance bond in the amount of the contract. West issued the bond in the penal amount of $472,290 for a premium of $8,034, with West as the surety, Action as the principal, and Structures the obligee. The bond West issued was the American Institute of Architects' Form A311, which has been in use since 1958 and is one of the most commonly used performance bonds. Edward H. Cushman, Surety Bonds on Public and Private Construction Projects, 46 A.B.A.J. 649, 651 (1960).

¶ 4 Under the subcontract, Action was to begin the sewer work in May 1998 and finish in July 1998. By the end of June, Action was, in the opinion of Structures, "seriously behind schedule." Ex. 9. Structures granted several extensions to Action but required that Action's work be fully completed before September 1, 1998. It was critical to complete the sewer system by September 1, 1998, because it was necessary to test and hook up the sewer before an occupancy permit could be issued for the Wal-Mart store. Despite the extensions, Action continued to face difficulties in completing its work. On August 11, 1998, Structures informed West in writing that it was a "little concerned with Action completing by [the] scheduled completion date." Ex. 13. On August 23, 1998, Structures and Action representatives met to discuss Action's performance. Because of its pressing deadline, Structures decided that instead of incurring the delays associated with terminating Action's subcontract and bringing in a new sewer contractor, Structures would supplement Action's crews in an effort to complete the sewer work as scheduled.³ On August 25, 1998, Structures faxed West a letter setting forth Action's "breaches and the remedy to be employed by Structures," which included supplementing Action's crews with "additional manpower and equipment," in an effort to complete the subcontract and project as scheduled. Clerk's Papers (CP) at 526; Ex. 15. On that same day, Structures asked West's surety manager to attend an on-site meeting in an attempt to discuss Action's difficulties and Structures' supplementation of Action's crews. However, despite Structures' multiple pleas to the bonding company, West refused to send a representative to visit the site and discuss the situation.⁴ West refused to participate in discussions regarding Action's performance or to comment on Structures' chosen remedy. Structures continued to supplement Action's crews to minimized cost and delay and complete the project on time.

¶ 5 Unfortunately, even with the assistance of additional crews provided by Structures, Action did not timely complete its work. On September 18, 1998, Structures notified West that the city of Vancouver had rejected some of Action's work because the sewer pipe had been installed at the wrong slope and the sewage would not flow properly. Structures also said that it would "be looking to [West] for compensation of costs which exceed Action['s] subcontract." Ex. 21.⁵ Then, on October 9, 1998, Structures contacted West and told it that the cost of supplementing Action's crews exceeded the subcontract and that Structures would be asking West to pay the difference.

¶ 6 After West was first notified of Action's problems in August 1998, the record suggests that its response was limited. First, on September 15, 1998, apparently in response to a letter faxed by Structures on September 9, 1998, West opened up a monitoring file and requested a laundry list of documents from Structures, including the bond number in question. Second, on October 9, 1998, West decided that it would write no more bonds to Action. Finally, it appears that West sought and obtained a judgment against the owners of Action for an amount that included potential payment to Structures on the performance bond.⁶ West explains that it did not contact Structures because it did not want to interfere with Structures' subcontract with Action.

¶ 7 Structures sued West, Action, and Action's owner. Action and its owner subsequently defaulted and went out of business. They are not a party to this suit. Structures had not formally declared Action to be in default before Action had substantially completed its work. West refused to honor its bond based upon its interpretation of the bond language. A bench trial was held in Clark County Superior Court. The trial court ruled that Action was in material breach,⁷ that Structures, as a matter of law, was not required to formally declare Action in default before West was liable on the performance bond, and that Structures had given West adequate notice of Action's performance problems throughout the project. Additionally, the trial court awarded Structures reasonable attorney fees under the subcontract but denied Structures' claims for attorney fees under Olympic Steamship.⁸ Further, the trial court ruled that since the bond incorporated the terms of the subcontract, the combination of damages and fees could not exceed the amount of the bond. In all, the trial court awarded Structures $472,290.⁹

¶ 8 The Court of Appeals affirmed the trial court's ruling on the performance bond on slightly different grounds,¹⁰ holding that, by the plain language of the bond, West's liability was not conditioned on Structures declaring Action in default, and reversed the trial court's denial of Olympic Steamship attorney fees to Structures, holding that Olympic Steamship applied. The Court of Appeals directed the trial court to award Structures' attorney fees without regard to the penal amount of the bond. Colorado Structures, Inc. v. Ins. Co. of the W., 125 Wash.App. 907, 106 P.3d 815 (2005). We accepted review and affirm. Colorado Structures, Inc. v. Ins. Co. of the W., 155 Wash.2d 1021, 126 P.3d 1279 (2005).

ANALYSIS

DECLARATION OF DEFAULT

¶ 9 First we must decide whether West's obligations as a surety was conditioned upon Structures having declared a default in writing before Action, the principal, substantially completed the work. Resolution of this issue requires an interpretation of the surety contract. The undertakings of compensated sureties are regarded as "in the nature" of insurance contracts, Nat'l Bank of Wash. v. Equity Invs., 86 Wash.2d 545, 553, 546 P.2d 440 (1976) (quoting Ore-Ida Potato Prods., Inc. v. United Pac. Ins. Co., 87 Idaho 185, 199, 392 P.2d 191 (1964)), and subject to the rules "applicable to simple contract law." Nat'l Bank, 86 Wash.2d at 551, 546 P.2d 440. Interpretation of an insurance contract is a question of law, reviewed de novo. Roller v. Stonewall Ins. Co., 115 Wash.2d 679, 682, 801 P.2d 207 (1990) (overruled in part by Butzberger v. Foster, 151 Wash.2d 396, 89 P.3d 689 (2004)). We also must determine whether Olympic Steamship attorney fees may be awarded on a performance bond. A party's entitlement to attorney fees is an issue of law, also reviewed de novo. McGreevy v. Or. Mut. Ins. Co., 90 Wash.App. 283, 289, 951 P.2d 798. 90 Wash.App. 283, 951 P.2d 798 (1998).

¶ 10 We agree with the Court of Appeals that by the plain terms of the bond, the obligee was not required to formally declare the principal in default and that, regardless, adequate notice of default was given to the surety. Because we can neither improve upon nor add to the analysis of the Court Appeals, we explicitly adopt the Court of Appeals' analysis of this issue as our own. We quote the relevant portions in full:

¶ 11 The performance bond [at issue] here ... reads as follows:

[A] Action Excavating & Paving, Inc...., hereinafter called Principal, and Insurance Company of the West ..., hereinafter...