Sureties that issue contractors payment and/or performance bonds obtain indemnity agreements with the contractor, or bond principal, prior to issuing such bonds. These indemnity agreements, besides requiring the bond-principal contractor to indemnify, defend, and hold harmless the surety in the event a claim is submitted on the bonds, are designed to fully protect the surety in the event the contractor fails to do so.
There are situations where a surety needs to protect its own interests and comply with the terms of the bond and pay a claim on a performance or payment bond (such as if the contractor gets into financial trouble, walks off a project, is not paying subcontractors, etc.). If the surety pays a claim, they typically assert a claim against the bond-principal contractor for breach of the indemnity agreement along with any person that personally guaranteed the agreement (which is often the case). The indemnity agreement will include a provision that provides that the bond-principal assigns certain collateral to the surety in the event the principal is in default of the agreement. Among those rights that are collaterally assigned to the surety would be all of the principal’s contract rights and causes of action for accounts receivable.
The case of Guarantee Co. of North America v. Mercon Construction Co., 2012 WL 1232104 (M.D.Fla 2012), exemplifies a surety’s rights under the indemnity agreement. This case involved a situation where a surety paid a performance bond claim on behalf of its principal contractor and sued the contractor, as well as others, under the indemnity agreement. The surety also exercised its right under the indemnity agreement and settled a claim the contractor had against another payment bond (issued by a different surety). In other words, the surety’s position was that the claim for an account receivable under the other payment bond was collaterally assigned to the surety due to the contractor’s default. The contractor asserted a counterclaim arguing, among other things, that the surety did not have the authority to settle its account receivable payment bond claim. The Middle District disagreed and dismissed the contractor’s counterclaim with prejudice!
If a bonded contractor is involved in a situation where its surety either paid a claim or will pay a claim, it is important for the contractor to consult an attorney to understand the surety’s rights under the indemnity agreement. Again, surety’s oftentimes have the indemnity agreement personally guaranteed so that the obligations under the agreement could not only impact the bond-principal contractor but also the guarantors to the agreement.
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.