In prior postings, I have discussed the all-powerful General Agreement of Indemnity (click here and here). This is the document a bond-principal executes to obtain bonds (e.g., performance and payment bonds). Not only does the bond-principal execute this General Agreement of Indemnity, but typically, so do other indemnitors such as the company’s principals and their spouses, other related companies, etc. The objective is that the surety has financial comfort that if a claim is made against the bond, there are avenues where it will get reimbursed and indemnified for any cost it incurs, or payment it makes, relative to that claim against the bond. When a surety issues bonds, the objective is that all losses it incurs gets reimbursed because the bonds are NOT insurance policies.
One of the powerful tools the surety can exercise in the General Agreement of Indemnity is to demand the bond-principal and other indemnitors to post collateral in an amount the surety deems sufficient to cover any losses it may incur. This is a right in any General Agreement of Indemnity I have seen and is a right the surety can rightfully exercise.
A recent example is shown from the opinion in Philadelphia Indemnity Ins. Co. v. Quinco Electrical, Inc., 2022 WL 1230110 (M.D.Fla. 2022), which pertains to the surety’s motion for preliminary injunction.
An electrical subcontractor obtained bonds for a project in Orlando. In obtaining these bonds, the electrical subcontractor executed a General Agreement of Indemnity that allowed the surety to require the bond-principal and indemnitors to post collateral to cover losses and potential losses the surety may incur. The provision read as follows (and is similarly worded in many General Agreements of Indemnity):
Indemnitors agree to deposit immediately upon demand by Surety an amount equal to the greater of: (a) the amount of anyreserve established by Surety in its sole discretion to cover any actual or potential liability for any Loss or potential Loss for whichIndemnitors would be obliged to indemnify Surety hereunder; or (b) the amount of any Loss or potential Loss (including legal,professional, consulting, and expert fees and expenses) in relation to any claim or claims or other liabilities asserted against Surety as a result of issuing any Bond, as determined by the Surety in its sole discretion.
The general contractor declared the electrical subcontractor in default and made a claim against the subcontractor’s bond. The surety hired a consultant to monitor the subcontractor’s progress. A few months later, the surety demanded for the bond-principal and indemnitors to submit $1.8 Million in collateral or relieve it from its obligations (which really means for the subcontractor to resolve the dispute with the general contractor that gives the surety a release. Typically, this is not a valid option when the default and/or termination is contested). Almost a year later, the general contractor notified the surety that the electrical subcontractor remains in default and owes its supplier significant money. The surety then notified its bond-principal and indemnitors that they were in default of the bond. At this point, the surety demanded $600,000 in collateral.
The surety filed a lawsuit against the bond-principal and indemnitors and moved for a preliminary injunction to require them to post collateral in the amount of $600,000 and refrain from transferring or encumbering any assets until collateral was posted.
After a hearing on the surety’s motion for injunction, the court ordered the bond-principals and indemnitors to post collateral in the amount of $521,250.84. The amount represented legal fees and consulting fees that had been incurred, and pending supplier claims including a portion of a claim paid to a supplier. (The order included other components regarding the transferring of assets until the collateral was posted.)
Here is the key because parties oftentimes want to dispute the surety’s right, despite that right existing in the General Agreement of Indemnity and this General Agreement of Indemnity CONTROLS. Quinco Electrical, supra, at *3. “This obligation [to require collateral] applies ‘regardless of whether [The Principals or Indemnitors] dispute their liability for any Loss or potential Loss or assert any defenses to the validity or enforcement’ of the [General agreement of Indemnity].” Id. at *2.
Please contact David Adelstein at firstname.lastname@example.org or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.