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State v. Kentucky Insurance Guaranty Association5/30/1997
ute included surety bonds issued by Travelers Indemnity Company and bonds secured by letters of credit issued by a bank. Neither Travelers nor the bank was insolvent. The mining permits expired at various times between 1979 and 1989 and notices of non-compliance were later issued for deficient reclamation activities. Administrative proceedings for bond forfeiture were instituted in 1991. The circuit court held that the Cabinet's claims were barred by KRS 413.220(3) because the Cabinet did not institute bond forfeiture proceedings against Travelers or the bank within seven years of the dates upon which the right to institute such actions accrued. The circuit court concluded that an action against a surety "necessarily accrues on the date upon which the underlying permit expires, with the result that an action to enforce the surety's contractual obligation on such a bond must either be filed within seven years of that date or be barred by limitations." This court rejected that position, reasoning that an action does not accrue until the surety refuses to honor its obligation:
Clearly, a surety cannot be deemed to be in default prior to the date upon which it is asked by appropriate demand to meet the contractual suretyship obligation. Thus, no action could have accrued against Travelers or Farmers until the date upon which they refused to honor their obligations as sureties after being called upon to do so, which was well within the seven-year statutory limitations period. Indeed, the record shows that no claims were asserted against Travelers or Farmers until after they were first notified by letter in May 1993 both that Whitley had been cited for noncompliance, and that they were entitled to undertake completion of the required reclamation work in lieu of bond forfeiture. Thereafter, the secretary of the cabinet entered final orders forfeiting the performance bond at issue, and Travelers paid the amount due on the forfeited bonds pursuant to KRS 350.032(3), while Farmers failed to honor the letters of credit presented to it for payment even though said drafts expressly provided that they would be "duly honored on due presentation to the drawee." Obviously, therefore, pursuant to the express provisions of its contract, no cause of action accrued against Farmers until the cabinet presented the drafts to Farmers for payment and payment was refused.
940 S.W.2d at 907.
The Whitley Development court noted that the Cabinet "filed an action against [the bank] by way of cross-claim within seven years of the date on which its claims accrued ... ". As for Travelers, its payment of the bond amount into escrow was apparently a waiver of any statute of limitations defense. Given the facts in that case, it was unnecessary for the court to decide whether the statute of limitations applied literally or by analogy to administrative proceedings.
In any event, Whitley Development is distinguishable from this case because it involved solvent sureties against whom the Cabinet's claims did not accrue until those sureties failed to honor their respective obligations. Insolvent sureties, such as those whose bonds form the basis for the claims against KIGA in this case, are incapable of honoring their obligations. In essence, notice of their insolvency serves as notice of their "refusal" to honor their performance bond obligations. However, given the holding in KIGA II it is clear that KIGA's liability arises and a cause of action accrues only where the surety is insolvent and substantive mining reclamation violations exist. This requirement of substantive reclamation violations is not discussed in Whitley Development simply because a claim would not be asserted against a solvent surety in the fir
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