In most cases, the liability of a surety for damages is co-extensive with that of its principal. However, an exception exists as it relates to calculating prejudgment interest. As explained in a decision by the United States District Court for the Eastern District of Virginia, a surety cannot be liable for prejudgment interest before a claim is filed against its bond. Attard Industries v. United States Fire Ins. Co. 2010 U.S. Dist. LEXIS 119119 (E.D. VA 2010).
Facts
Jett Mechanical, Inc. (“Jett”) entered into a subcontract with Attard Industries, Inc. (“Attard”) in January 2003 for work at Dulles International Airport. Jett’s payment obligations on the project were secured by a payment bond issued by USFIC. Disputes arose between Jett and Attard leading to the termination of Attard in June 2008. On October 20, 2009, Attard filed a bond claim against USFIC. In February 2010, Attard filed suit against the surety based on its payment bond claim. At the subsequent trial, a jury returned a verdict in favor of Attard including an award of prejudgment interest commencing on January 18, 2007, more than two and a half years prior to filing of its bond claim.
USFIC filed a post trial motion in part disputing the date from which the jury awarded prejudgment interest. The Court granted the surety’s motion and set October 20, 2009, the date Attard filed its claim, as the date from which prejudgment interest could accrue against USFIC.
Analysis
In tackling the question of whether a surety could be liable for prejudgment interest prior to the date it received a claim, the Court looked to decisions from the 1st, 2nd, and 10th Circuits, as well as various other federal district courts, to conclude that interest against a surety can begin to run “only from the time of a demand upon the surety, or notice to him to pay, or by suit, or by something equivalent to demand or notice.” United States v. Quinn, 122 F. 65, 66 (2d Cir. 1903). The Court noted that under Virginia law, an award of prejudgment interest rests “on notions of fairness” and, in that context, it is “intended to compensate the plaintiff, not penalize the defendant.” Attard, 2010 U.S. Dist. LEXIS *13 (citations omitted). Likewise, the Court also remarked that until the surety received a demand, it had “no contractual duty to satisfy any obligations on its part under the Bonds.” Id. at *16. The Court therefore concluded as a matter of law “an award of prejudgment interest cannot be assessed earlier than the date on which a demand for payment has been made against the surety.” Id.
Practical Considerations
Although in many cases prejudgment interest is a lesser component of overall damages, on larger claims prejudgment interest can be substantial, particularly where the claim has been outstanding over several years. It is important for both sureties and claimants alike to be aware of the above considerations regarding when prejudgment interest can validly be claimed against a surety and to take these principles into account in claim pricing and valuation.
