SURETIES DO NOT ISSUE BONDS RISK-FREE TO THE BOND-PRINCIPAL

shutterstock_4091836If your construction company is bonded, then you have signed a General Agreement of Indemnity with your surety / bonding company.  Stated another way, if a surety issued an obligee on behalf of your construction company, as the bond-principal, a payment or performance bond, then you have signed a General Agreement of Indemnity with your surety.  

 

The General Agreement of Indemnity is NOT to be taken lightly.  Without the General Agreement of Indemnity, the surety is NOT issuing the bonds you need to work on a certain project.  A bond is not insurance and sureties do not issue the bonds under a risk-free premise. Oh no!  If a surety has to pay-out claims under a bond, the surety will be looking to recoup that loss from the indemnitors that executed the General Agreement of Indemnity.

 

The General Agreement of Indemnity will generally require not only the construction company, but individuals (both husband and wife) and, potentially, other affiliated companies to indemnify the surety in the event a claim is made against a bond (the indemnitors).  Thus, there will be multiple indemnitors the surety will look towards if they perceive risk under the bond.  If you take the General Agreement of Indemnity lightly, then you could find yourself, for lack of a better expression, up “s#*#*t’s creek without a paddle!”  This is no joke.

 

In a recent example, Great American Ins. Co. v. Brewer, 2017 WL 3537577 (M.D.Fla. 2017), a subcontractor furnished a general contractor with a performance bond.   The subcontractor was defaulted and then terminated and a claim was made against the subcontractor’s performance bond.  The surety, to mitigate its exposure, entered into a settlement agreement with the general contractor.

 

Before the surety entered into a settlement agreement with the general contractor, it demanded that the subcontractor (bond-principal) and other listed indemnitors post $1.5M in collateral pursuant to the General Agreement of Indemnity.  The subcontractor (and the other indemnitors) refused.   After the surety entered into the settlement agreement with the general contractor, it demanded that the subcontractor (and the other indemnitors) post approximately $2.8M in collateral representing amounts covered in the settlement and additional amounts constituting the surety’s exposure to the general contractor.  The subcontractor (and other indemnitors) again refused. 

 

The subcontractor’s refusal was predicated on the argument that it was improperly defaulted and terminated.  And this argument is where the subcontractor’s problem lies.  The subcontractor’s belief is largely irrelevant if the surety operates in good faith (and proving bad faith in this context is very, very challenging).    But, in order to even argue that the surety did not act in good faith, the subcontractor (and its indemnitors) would need to post collateral per the terms of the General Agreement of Indemnity.

 

In Florida, a construction performance bond surety like Plaintiff is “entitled to reimbursement pursuant to an indemnity contract for any payments made by it in a good faith belief that it was required to pay, regardless of whether any liability actually existed.”  Further, where—as here—an indemnity agreement gives the surety discretion to settle a claim brought under a bond, “the only defense to indemnity for [such a] settlement is bad faith on the part of the surety.”

 

 

A bad faith defense is not available to indemnities like Defendants who do not post collateral in accordance with a demand under an indemnification agreement.  When a bad faith defense is available, it requires proof of “an improper motive or dishonest purpose on the part of the surety.” Standing alone, evidence of a surety’s “lack of diligence,” negligence, and even “gross negligence,” is not evidence of bad faith.

 

Great American Ins. Co, supra, at *7 (internal citations omitted).

 

 

Importantly, disagreeing with a surety’s investigation is not evidence of bad faith by the surety. Great American Ins. Co, supra, at *8.  It requires, as stated, a truly improper motive or dishonest purpose — very, very difficult to prove.

 

General Agreements of Indemnity tend to have the same fundamental provisions.  Before you refuse a demand made by your surety, consider the ramifications. 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

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