Although a surety’s right to reimbursement is implied by law, performance bond sureties often condition their issuance of bonds to contractors upon receipt of a written indemnity agreement. Typically, these written indemnity agreements provide the surety additional rights that pose increased (and sometimes hidden or unknown) risks to all who sign the indemnity agreement. The recent decision in Hanover Ins. Co. v. Atlas Elec. Co., 2013 U.S. Dist. LEXIS 33742 (D. Tenn. Mar. 12, 2013) is instructive.
1) The Indemnitors shall exonerate, indemnify, and save harmless [Hanover] from and against every claim, demand, liability, cost, charge, suit, judgment, and expense which [Hanover] may pay or incur . . . .
2) The Indemnitors were expressly liable to Hanover for all payments it made under the bonds, plus interest thereon at the maximum rate permitted by law, from the date such payments were made under [Hanover]’s belief that liability for the payments existed or that payment was necessary or expedient, whether or not such liability, necessity or expediency existed.
3) The [v]ouchers or other evidence of payment by [Hanover] shall be conclusive evidence of the fact and amount of each such liability, necessity, or expediency and of the Indemnitors’ liability to [Hanover] therefor.
Hanover paid for losses as a result of bad faith or improper motives.
In Hanover, the Indemnitors did not oppose Hanover’s motion for summary judgment. Instead, some of the Indemnitors indicated their intent to file for bankruptcy which would have stayed the court action. Unfortunately, none of the Indemnitors ever filed a bankruptcy petition. Therefore, the Court granted Hanover judgment against the Indemnitors, jointly and severally, in the amount of almost one-half million dollars.
In some instances, a contractor may dispute whether or not it defaulted under the bonded contract in the first place. A contractor may also have a basis to dispute the reasonableness of the funds paid to complete the project. The Hanover case’s indemnity agreement language strongly favored the surety and left the contractor without a lot of defense options. Do not put yourself in a situation where you are surprised by hidden risks included in your performance bond indemnity agreements.
All contractors should take the time to review an indemnity agreement before signing it. They should also shop around with different surety companies and compare the indemnity terms. A contractor should also attempt to negotiate revised terms when the indemnity agreement language is unfavorable. A contractor should also make sure the the indemnity agreement obligates the surety to exercise its duties according to good faith standards.