In order to procure bonds (payment and performance bonds), you need to sign a General Agreement of Indemnity (referred to as the “GAI”) with the surety (bonding company). It does not matter the surety issuing the bonds, the terms and conditions in the General Agreement of Indemnity are largely consistent. These terms and conditions are one-sided written in favor of the surety. This is because bonds are not insurance. When a surety issues such bonds, it is doing so under the premise that it will get reimbursed every penny that it incurs relative to its exposure- whether incurred in attorney’s fees, consulting costs, or remediating a default or claim under the applicable bond. The General Agreement of Indemnity is one of the most powerful contracts in construction and is a contract that is not to be taken lightly. It provides the surety numerous rights in the event of a claim.
A recent case, Travelers Casualty and Surety Co. of America v. Hemmer Construction, 2026 WL 2164439 (M.D.Fla. 2026), serves as an example. A bonded contractor was terminated for default on a construction project. The surety entered into a takeover agreement and assessed its exposure at north of $15 Million. The surety demanded that the contractor post collateral with the surety in the amount of north of $15 Million. The contractor refused and the surety filed a lawsuit that included a preliminary injunction requiring the contractor to post collateral security and furnish financial records. There were other asserted claims such as indemnification. The contractor and its indemnitors countered arguing that its affirmative defenses should apply to bar the preliminary injunction, with the key defense being that the surety engaged in bad faith in assessing exposure and entering into the takeover agreement.
The contractor lost and the court granted the preliminary injunction. Here is why. These are important considerations if you are ever in a situation where your surety is demanding collateral:
(1) The contractor and its indemnitors bore the burden of proof as to its affirmative defenses and, in particular at the preliminary injunction stage, the likelihood of success. “So Indemnitors must demonstrate their likelihood of success on such defenses. They fail to do so.” Hemmer Construction, supra, at *3.
(2) The key defense of bad faith was irrelevant at the preliminary injunction stage. “Collateralization and indemnification are distinct concepts. The sole issue before the Court is whether [surety] is entitled to collateral security; [surety] does not seek indemnification in its motion for preliminary injunction. And courts have held that ‘[w]hile issues of bad faith may be relevant to Plaintiff’s claim for indemnification under the [Indemnity] Agreement, they are not relevant to Plaintiff’s contractual right to collateral security.” Hemmer Construction, supra, at *3 (citation omitted).
(3) The defense of bad faith won’t apply unless the contractor and its indemnitors post the collateral security. “Courts routinely hold that ‘defendants’ failure to post collateral precludes the defendants’ relying on the defense of bad faith.’” Hemmer Construction, supra, at *3 (citation omitted).
(4) And as an aside, the contractors and its indemnitors did not substantiate bad faith. “ ‘To show bad faith, an indemnitor must show that the surety acted with ‘deliberate malfeasance,’ which is an intentional wrongful act that the actor has no legal right to do or any wrongful conduct which affects, interrupts, or interferes with the performance of official legal duty.’ ‘[A] lack of diligence or negligence is not the equivalent of bad faith, and even gross negligence is not the same as bad faith.” Hemmer Construction, supra, at *3 (citations omitted). Stated differently, proving that the surety acted in bad faith is a very difficult burden of proof!
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.
In prior postings, I have discussed the all-powerful