OBLIGEE CANNOT IGNORE ITS CONTRACT
The United States District Court for the Middle District of North Carolina recently decided Cincinnati Insurance Company vs. Centech Building Corp., et al. 286 F. Supp 2d 669 (M.D.N.C. 2003) Cincinnati was represented by Thomas E. Crafton and Gene F. Zipperle, Jr. of Alber Crafton, PSC.

Factual Background
This case involved the execution of fraudulent bonds by a former agent of Cincinnati. Approximately 2 1/2 years after the agent was terminated, the agent executed fraudulent performance and payment bonds for one of its contractor accounts. The agent provided the fraudulent bonds to the contractor to present to the project owners and obligees. While the agent possessed outdated powers of attorney in his dead files, he did not attach powers of attorney to the fraudulently executed bonds, even though the project owners had required this as a condition to the construction contract.

Upon receiving several performance and payment bond claims, Cincinnati discovered the bonds were executed without authority and filed suit in Federal Court seeking a declaratory judgment concerning the validity of the bonds. Cincinnati was faced with counterclaims of bad faith, deceptive trade practices, negligent misrepresentation and bond validity.

After the close of discovery, various motions for summary judgment were filed by the parties prior to trial. The Court issued orders with respect to various motions for summary judgment. In particular, the Court ruled as follows:

The bad faith and deceptive trade practices claims against Cincinnati were dismissed. The Court, citing North Carolina precedent, pointed out the distinctions between suretyship and insurance stating that the mere fact that there are similarities between insurance and suretyship “no more justifies the conclusion that sureties are insurers and performance bonds are contracts of insurance than does the commonly known fact that sheep are somewhat like goats justify the conclusion that sheep are goats.” Henry Angelo & Sons, Inc. v. Property Development Corp., 63 N.C. App. 569, 306 S.E.2d 162 (1983). The Court went on to hold that surety bonds are not subject to these bad faith type claims.

The bond validity issue proceeded to trial by jury. The Court essentially directed a verdict for Cincinnati that the bonds were fraudulently issued when the Court found that there was no evidence that the bonds were procured other than by fraud. The jury returned a verdict in favor of Cincinnati finding that the agent did not have apparent authority to bind Cincinnati on the fraudulently executed bonds. It is believed that the jury was persuaded by Cincinnati’s argument that the obliges could not ignore the provisions of their own contract that mandated that a power of attorney be attached to the bonds and that the conduct of the ex-agent was too remote from the time he was terminated by Cincinnati for Cincinnati to have been bound by his actions.