The General Agreement of Indemnity a principal executes with its surety is the most–and certainly one of the most–powerful documents in construction. Consider this when executing a General Agreement of Indemnity in order to procure bonds.

In a recent case, the surety sought indemnity from its indemnitors (including the bond principal) after resolving a termination claim against its principal. One of the defenses the indemnitors raised was “bad faith,” i.e., the surety engaged in bad faith in settling the obligee’s performance bond claim.

A principal arguing bad faith against its own surety is a difficult defense. I fully understand why it is raised at times but, nevertheless, it is still difficult because here are the elements that must be proven in order to prevail on the bad faith claim claim against your own surety: “1) the surety lacked a reasonable basis for paying the claims; and 2) the surety knew or recklessly disregarded its lack of a reasonable basis for doing so….Bad faith can also be demonstrated by a showing of recklessness or improper motive such as self-interest or ill will.”  Travelers Cas. & Sur. Co. of America v. Bunting Graphics, Inc., 2025 WL 1665595, *4 (W.D.Pa. 2025) (internal citations and quotations omitted). 

In this recent case, the district court found the bad faith argument unpersuasive because the indemnitors could not show the surety lacked a reasonable basis in paying the obligee’s performance bond claim:

As outlined above, indemnity contracts, like the one here, grants [the surety] broad discretion in settling claims. Such express discretion is consistent with construction and surety industry practices in order to prevent indemnity claims from becoming mired in litigation. The “under belief it was liable” phrasing permits sureties to evaluate and resolve claims without the necessity of litigation to determine the merits of a claim or to establish an indemnitor’s liability to the surety. Thus, [the surety’s] actions and decision to pay the claim were within its contractual discretion and [the principal] has not met its burden to produce evidence sufficient to establish bad faith.
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The record does not support a lack of reasonableness or slipshod evaluation by [the surety]. Such conduct does not comport with [the principal’s] bad faith narrative.

Bunting Graphics, Inc., supra, at *5.

Remember, the General Agreement of Indemnity grants your surety power to exercise rights if a claim is made against your bonds, even if you think the claim is bogus. Countering that the surety acted in bad faith in resolving or paying an obligee’s bond claim has proven to be a difficult hurdle largely based on the discretion granted to a surety in the General Agreement of Indemnity.

 

  

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.