Equitable Subrogation and Miller Act Claims

When filing claims against the government, under the theory of equitable subrogation, there are some tricky rules of law in place. For example, in a recent Court of Federal Claims case, Fidelity and Guaranty Insurance Underwriters, et al. v. United States, No. 14-84 C (Nov. 19, 2014), the court ruled that under the theory of equitable subrogation and the Miller Act, the general liability insurer is not an equitable subrogee who can sue on behalf of government contractor).

The plaintiffs in that case were Fidelity and Guaranty Insurance Underwriters, Inc., and United States Fidelity and Guaranty Company (“USF&G”).  They sought reimbursement from the government for legal expenses and settlement costs incurred in its capacity as general liability insurer for Gibbs Construction, L.L.C. f/k/a Gibbs Construction Co. The government agency in this case was the United States Postal Service.

USF&G argued that it was “Gibbs’s equitable subrogee in the amount of $1,560,583.34, and acceded to all claims Gibbs might have with respect to the underlying legal expenses and loss up to that amount.” The Court simply disagreed. 

What is Equitable Subrogation?

The doctrine of equitable subrogation, in government contract law and under the Miller Act, include scenarios when the surety is called upon to comply with the performance of a contract. In government construction, this typically the case when a termination for default is in play.

As mistaken by many commercial contract law lawyers, when it comes to government construction under the Miller Act, there is belief that bonding is also insurance. However, under the Miller Act, a performance bond is merely a guaranty of performance.

When applying equitable subrogation theories in government construction, [a] surety bond creates a three-party relationship, where the surety becomes liable for the principal’s debt or duty to the third party oblige.

If the surety fails to perform, then the government can sue on the performance bond. By operation of law, when the agency calls upon the surety to perform, it assumes the remaining obligations of performance; it may also assume the rights of the contractor to obtain payment from the government. Here is the critical part missed. Under the equitable subrogation theory, the surety steps into the shoes of the original prime contractor and now becomes a party to the contract.

• The surety ‘is subrogated to the [principal obligor’s] property rights in the contract balance.’

Only in this situation is the surety sheltered under the immunity provisions in the Tucker Act, 28 U.S.C. § 1491. Under the equitable subrogation theory, the surety can now sue the government.

When Can a Person Sue the Government?

As in the USF&G case ruling, equitable subrogation does not apply when the suing party is not in privity of contract with the government. Under the Tucker Act, the “government consents to be sued only by those with whom it has privity of contract.” Erickson Air Crane Co. v. United States, 731 F.2d 810, 813 (Fed. Cir. 1984). Without this critical requirement, a third-party that sues the government under the equitable subrogation theory has no standing to bring the lawsuit.

Exceptions to Equitable Subrogation in Miller Act Claims

As stated in the USF&G case, the Federal Circuit has recognized “limited exceptions” to the requirement that parties seeking relief for breach of contract against the government under the Tucker Act must be in privity of contract with the United States.

The limited exceptions include:

1. Actions against the United States by an intended third-party beneficiary;
2. Pass-through suits by a subcontractor where the prime contractor is liable to the subcontractor for the subcontractor’s contract damages; and
3. Actions by a Miller Act surety for funds that the government improperly disbursed to a prime contractor.

When filing a claim against the federal government based upon equitable subrogation, make sure you are either in privity of contract with the government or fall under one of the limited exceptions to the government’s sovereign immunity defense.

For help with claims against the government call our contract claims and disputes attorneys at 1-866-601-5518.