TO TENDER OR NOT TO TENDER

POTENTIAL PITFALLS IN TENDERING THE SURETY’S DEFENSE TO ITS PRINCIPAL IN NEVADA

This law firm recently encountered several situations where a surety’s tender counsel failed to properly protect the surety’s interest in litigation, resulting in adverse results which the surety would not have suffered had it retained its own counsel. Among others, tender counsel failed to advise the surety of pending discovery and pending dispositive motions, and/or failed to properly evaluate the claim, and/or withdrew from the case with discovery and motions pending or shortly before a scheduled trial. In a couple of those cases, this forced the surety to pay the adverse party’s attorney’s fees in amounts above and beyond the penal sum of the bond. All of this exemplifies the dilemma facing the surety when it is sued buy a bond claimant on whether to tender its defense to the principal.

The advantages of tendering are obvious, as the surety will not incur attorney’s fees and cost and will hopefully not suffer any losses at all. It will also strengthen the surety’s indemnity demand should it seek recovery from the principal for losses incurred after its defense had been tendered. However, tendering also may involve risks which the surety probably would not face had it retained its own counsel.

The first risk in tendering is being exposed to paying a bond claimant’s fees and cost, even in amounts above the penal sum of the bond. In Trustees of Plumbers & Pipefitters v. Developers Sur. & Indem. Co., 120 Nev. 56, the Nevada Supreme Court held that if a surety engages in litigation with a bond claimant and loses, it may have to pay the prevailing party’s fees and cost, if a Nevada statute allows the awarding of such fees, and even if that results in paying an amount above the penal sum of its bond. The following statutes provide for an award of fees and cost:

NRS 18.010(2)(a): When the prevailing party has not recovered more than $20,000.

NRS18.010(2)(b): When the court finds that the claim, counterclaim, cross-claim or third-party complaint or defense of the opposing party was brought or maintained without reasonable ground or to harass the prevailing party.

NRCP 68: When a party offers in writing to allow judgment taken, the surety does not accept that offer and fails to obtain a more favorable judgment at trial.

NRCP 37: A party fails to participate in good faith in the discovery phase of the litigation.

While the award of fees and cost is discretionary with the judge in all four instances, judges in Nevada tend to award such fees if they find significant violations of any of the above statutes. Thus, for example, if it becomes clear at trial that neither the principal nor the surety had any valid defenses to the bond claim, the trial judge will probably award fees pursuant to either NRS 18.010(2)(a) or (b) or both. The same will probably happen if a reasonable offer of judgment was made by the claimant and not accepted. Similarly, if tender counsel fails to answer interrogatories or requests for production of documents or fails to notify the surety of pending depositions, a judge will likely award sanctions to the claimant even if tender counsel never notified the surety of the pending discovery.

The second potential risk involved in tendering the surety’s defense derives from the fact that tender counsel may put the interests of his principal client above those of the surety. He may also be inexperienced in surety law and may therefore not know about defenses specific to the surety, such as the different statute of litigation for bond claims, the fact that the claimant is not a proper bond claimant, etc. There are also situations where the principal is out of business or about to lose its license, and where the attorney is not getting paid. Accordingly, he may well do little or nothing to defend either the principal or the surety.

How can the surety protect itself from these potential pitfalls?  In situations where the claim was asserted by the claimant before litigation and the claim was denied, resulting in litigation, the surety may well be already aware of valid defenses before it tenders its defense. If the claim was denied for reasons specific to the principal, the surety should have insisted on a delineation of those defenses by the principal and on evidence supporting the defenses. If the claim was denied for reasons specific to the surety, the surety should make sure that tender counsel is aware of those defenses and that he effectively defends the surety based on those defenses. Here the surety may want to check if tender counsel and his firm have any background in surety law.

If a complaint is the surety’s first notice of a claim, the surety should do some basic investigation before tendering its defense, even if an answer to a complaint is pending. Plaintiff’s counsel will generally be willing to grant at least a short extension to answer. Does the principal have valid defenses to the claim and are they supported by proper evidence. The surety should insist on getting those defenses in writing and on getting the supporting evidence. Second, the surety should investigate the financial status of the principal. Does it still have a license? Are there are other claims against the bond? Has the principal or have the indemnitors filed for bankruptcy? Will the principal be able to pay any judgment against it and the surety? What is the background of tender counsel? Does he or she have any background in surety law? If construction bonds are involved, is there any record of discipline against the principal on the Nevada State Contractors Board web site? The surety should probably not tender its defense if there are some significant issues with one or more of these questions.

Once the defenses has been tendered, the surety should insist on frequent updates from tender counsel concerning not only the status of the litigation but also on whether there is pending discovery, whether there are pending motions, and on whether the previously asserted claim defenses have weakened or strengthened during the course of the litigation. If these regular reports are not forthcoming or are merely perfunctory, the surety should consider withdrawing the tender and retaining its own counsel. Even if tender counsel is properly reporting, the surety may want to check the court file periodically if it is available online, and the surety will want to keep apprized of the principal’s financial status by checking, for example, whether it is still licensed, whether there is pending discipline against it, or whether there are other filed lawsuits. Following these steps should generally protect the surety from the risks delineated above.