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Term “Arrange” in Performance Bond Held Ambiguous

Caravousanous v. Kings County Hospital, et al
74 AD3d 716 (2nd Dep’t., June 1, 2010)
The owner, Dormitory Authority of the State of NY (DASNY) contracted with AWL Industries (AWL) to renovate a hospital. AWL subcontracted the mechanical work to Cole Mechanical (Cole) and required Cole to provide a performance bond which was issued by Nova Casualty Co (Nova).

Cole defaulted and Nova agreed to complete Cole’s work using Nelson Air Device (Nelson) as its completing subcontractor. The decision does not refer to a takeover agreement between AWL and Nova, so apparently there was none. In the completion agreement between Nova and Nelson, Nelson agreed to furnish the general liability insurance specified in the AWL/Cole subcontract. It appears that Cole was required to name AWL as an additional insured under its liability insurance policy.

An employee of construction consultant retained by Nova to monitor completion brought an action for personal injury sustained at the job site naming AWL as one of the defendants. AWL demanded a defense and indemnity from Nelson’s CGL carrier which was denied. AWL then commenced a third-party action against Nova and Nelson seeking contractual indemnification and damages for breach of contract for failure to obtain liability insurance coverage for AWL.

Nova moved to dismiss AWL’s suit arguing that it was not obligated to either indemnify AWL or provide it with insurance coverage on the grounds that it was only liable under the performance bond to ensure completion of the physical work required by Cole’s subcontract. Nova and AWL disagreed over the meaning of the word “arrange” in the sentence in the performance bond which stated: “Surety upon demand of Obligee may arrange for the performance of Principal’s obligation under the subcontract.”

The trial court held, which was affirmed on appeal, that the word “arrange” as used in the bond was susceptible to two different interpretations and therefore ambiguous. The ambiguity had to be resolved by the trier of fact, therefore Nova’s motion was denied.

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