The GIA and Obligation to Indemnify, Hold Harmless and Exonerate
Any analysis of claims by a principal or indemnitor against a surety must begin with the General Indemnity Agreement or GIA. The GIA is the fundamental contract between the parties that defines the rights of the surety and the obligations of the indemnitors. The heart of the GIA is found in its indemnity provision which typically states:
INDEMNITY
The contractor and Indemnitors shall exonerate, indemnify, and keep indemnified the Surety from and against any and all liability for losses and/or expenses of whatsoever kind or nature (including, but not limited to, interest, court costs and counsel fees) and from and against any and all such losses and/or expenses which the Surety may sustain and incur:
- By reason of having executed or procured the execution of the Bonds,
- By reason of the failure of the Contractor or Indemnitors to perform or comply with the covenants and conditions of this Agreement or
- In enforcing any of the covenants and conditions of this Agreement.
Payment by reason of the aforesaid causes shall be made to the Surety by the Contractor and Indemnitors as soon as liability exists or is asserted against the Surety, whether or not the Surety shall have made any payment therefor. Such payment shall be equal to the amount of the reserve set by the Surety. In the event of any payment by the Surety the Contractor and Indemnitors further agree that in any accounting between the Surety and the Contractor, or between the Surety and the Indemnitors, or either or both of them, the Surety shall be entitled to charge for any and all disbursements made by it in good faith and about the matters herein contemplated by this Agreement under the belief that it is or was liable for the sums and amounts so disbursed, or that it was necessary or expedient to make such disbursements, whether or not such liability, necessity or expediency existed; and that the vouchers or other evidence of any such payments made by the Surety shall be prima facie evidence of the fact and amount of the liability to the Surety.
Although entitled "Indemnity", this provision encompasses the indemnitor's obligations of holding the surety harmless and exoneration.
Traditionally, to indemnify is to pay or reimburse damages that an indemnitee is found responsible to pay. Hence, liability for damages and payment must occur before the obligation to indemnify arises. The above GIA provision not only requires indemnification but also requires the indemnitor to hold the surety harmless for all "losses and/or expenses of whatsoever kind or nature (including, but not limited to, interest, court costs and counsel fees)". Hence, the indemnitor's obligation goes beyond simple indemnification for damages paid and instead covers all damages plus related costs.
Moreover, the indemnitors must exonerate. To exonerate is to make payment to the surety "as soon as liability exists or is asserted against the surety, whether or not the surety shall have payment thereof. Such payment shall be equal to the amount of the reserve set by the surety." Hence, unlike and in addition to indemnification, the indemnitors must advance funds in an amount set by the surety, to cover the costs of defense and payment of any damages. The indemnitor's refusal to indemnify, hold harmless or exonerate the surety is a breach of the GIA.
Assignment of Rights by Principal
In addition to the obligations under the Indemnity provision of the GIA, the principal typically assigns all rights in the underlying construction contracts to the surety upon breach of the GIA. This contingent assignment provision typically reads:
ASSIGNMENT
The Contractor, the Indemnitors hereby consenting, will assign, transfer and set over, and does hereby assign, transfer and set over to the Surety, as collateral,... to become effective as of the date of the bond covering such contract, but only in the event of:
- any abandonment, forfeiture or breach of any contracts referred to in the Bonds or of any breach of any said Bonds; or
- any breach of the provisions of any of the paragraphs of this Agreement;...
(a) All the rights of the Contractor in, and growing in any manner out of, all contracts referred to in the bonds, or in, or growing in any manner out of the Bonds;... (e) Any and all percentages retained and any and all sums that may be due or hereafter become due on account of any and all contracts....
Hence, upon default by the contractor, the surety not only has a contract based right to retainage and unpaid but earned contract balance, but also has all other rights "in and growing in any manner out of, all contracts referred to in the Bonds". The assignment of these rights when coupled with express authority to act on such rights, theoretically gives the surety a free hand to act. Such authority is commonly found in a power of attorney clause such as:
ATTORNEY IN FACT
The Contractor and Indemnitors hereby irrevocably nominate, constitute, appoint and designate the Surety as their attorney-in--fact with the right, but not the obligation, to exercise all of the rights of the Contractor and Indemnitors assigned, transferred and set over to the Surety.... The Contractor and Indemnitors hereby ratify and confirm all acts and actions taken and done by the Surety as such attorney-in-fact.
The Indemnity provision entitles the surety "...to charge for any and all disbursements made by it in good faith... under the belief that it is or was liable for the sums and amounts so disbursed, or that it was necessary or expedient to make such disbursements, whether or not such liability, necessity or expediency existed...". The Assignment provision gives the surety any rights the contractor may have under the construction contract, which would include any claims the contractor may have against the owner or a subcontractor. The Attorney In Fact provision gives the surety the right to act on such rights. With such all encompassing rights and authority, can the surety then settle any claim on a bond? The answer to this question again starts with the GIA.
The Surety's Right to Settle
The GIA typically provides:
SETTLEMENTS
The Surety shall have the right to adjust, settle or compromise any claim,...unless the Contractor and the Indemnitors shall request the Surety to litigate such claim or demand, or to appeal from such judgment, and shall deposit with the Surety, at the time of such request, cash or collateral satisfactory to the Surety in kind and amount, to be used in paying any judgment or judgments rendered or that may be rendered, with interest, costs, expenses and attorneys' fees, including those of the Surety.
The arrangement is then simple. If the indemnitor posts collateral satisfactory to the surety then the surety will defend or more typically tender the defense to the principal. If the indemnitor fails to post collateral satisfactory to the surety, then the surety may settle the claim on the bond for which the indemnitor is ultimately responsible under the indemnity provision of the GIA. Can the surety then settle any claim after the principal and indemnitors have refused to post collateral? The answer to this question goes to whether or not the surety acted in good faith.
Bad Faith Settlement by the Surety
Despite the clear language of the GIA, one of the more common claims of bad faith against a surety is asserted by an indemnitor which insists on controlling settlement but refuses to pay for that privilege by posting collateral. This scenario is familiar to all sureties. A payment bond claim is made by a subcontractor; the contractor denies the debt or asserts there are valid back charges in excess of the debt; the surety demands collateral; the contractor refuses; the surety settles and the contractor then refuses to indemnify claiming bad faith settlement. Under a performance bond claim, the owner declares the contractor in default or terminates the contractor and demands performance by the surety; the surety demands collateral; the contractor claims wrongful termination, asserts claims against the owner and refuses to post collateral; the surety settles and the contractor claims bad faith settlement.
Claims of bad faith settlement as a defense to enforcing the GIA are usually not successful. For example, indemnitors have been found liable under the GIA when the surety not only settles the bond claim but also settles the principal's affirmative claims against the owner over the objection of the principal. In Hutton Construction Co., Inc. v. County of Rockland, 52 F3d 1191 (2nd Cir. 1995) the U.S. Court of Appeals found that INA and International Fidelity had the right to settle both the bond claim and Hutton's affirmative claims against the County when Hutton failed to make indemnity payments to the sureties. By breaching the GIA, the Court concluded that Hutton's claims became assigned to the sureties under the GIA's assignment clause thereby allowing the sureties to settle. Indemnitors have also been held liable under the GIA when a surety settles for reasons other than the merits of the bond claim. In Fidelity and Deposit Company of Maryland, et al. v. Bristol Steel & Iron Works, 722 F2d 1160 (4th Cir. 1983), the U.S. Court of Appeals held that payment by certain sureties to the Pennsylvania Department of Transportation in order to remain qualified to do business on Penn DOT projects were not made in bad faith and are recoverable from the indemnitors. Penn DOT had declared the principal in default on certain construction contracts which the contractor disputed. The sureties, relying on the contractor's position denied liability under the bonds. Penn DOT then sought to disqualify the sureties from doing business on any future Penn DOT projects which brought about a change of heart on behalf of the sureties. The sureties settled with Penn DOT and sought indemnity for the settlement costs. The indemnitors refused to indemnify claiming bad faith settlement. The Court disagreed finding such settlement reasonable under the circumstances and within those costs recoverable under the GIA.
Clearly, a principal's dispute over whether a surety should settle is not enough to support a defense of bad faith. The 5th Circuit Court of Appeals has gone even further. In Transamerica Insurance Co. v. Avenell, et al., 66 F3d 715 (5th Cir. 1995), Transamerica settled a payment bond claim after judgment was entered in favor of a subcontractor and the contractor appealed. When seeking to recover under the GIA, the contractor alleged that the surety's settlement was in bad faith because the judgment, which was settled by the surety, was then on appeal by the contractor. The Court, noting that the contractor had not posted the security required by the Settlement Clause, found for the surety. As a general rule, an indemnitor can't refuse to post the collateral required by the GIA and then successfully claim bad faith settlement in defense of an action on the GIA. An indemnitor can "purchase" the right to control settlement by exoneration, but in the absence of such exoneration faces an uphill battle to convince a court that an ultimate settlement was made in bad faith.
Massachusetts appears to articulate an even higher burden on indemnitors who claim bad faith settlements. For example; Hartford Accident and Indemnity Co. v. Millis Roofing and Sheet Metal, 11 Mass. App. Ct. 988, 418, NE 2d 645 (1981) (Appendix 1) Millis was a subcontractor which installed a roof that later failed. Hartford furnished a performance bond on Millis' work and paid $79,000 in settlement for the failure of the roof. When Hartford sought recovery from Millis (and its president) under the GIA, Millis defended claiming that the cause of the roof failure was not due to Millis, and that Hartford had not properly investigated or defended the claim. In reviewing the GIA language, the Appeals Court concluded that Millis' assertions were only material as to whether Hartford settled in good faith and that:
Want of good faith involves more than bad judgment, negligence or insufficient zeal. It carries an implication of a dishonest purpose, conscious doing of wrong, or breach of duty through motive of self-interest or ill will. 11 Mass. App. Ct. 998, 999
Since Millis did not and could not allege such dishonest purpose on behalf of Hartford, the indemnitor's liability was affirmed.
What then constitutes sufficient bad faith on behalf of a surety that frees the indemnitors of liability under the GIA? There are no Massachusetts appellate decisions which address this question but there is a Superior Court Memorandum of Decision on certain Motions for Summary Judgment made during litigation that considers a particularly troubling settlement by a surety.
Transamerica Insurance Co., Inc. v. New Eastern Contracting, Inc. and Others
Suffolk C.A. No. 92-0580-B (Memorandum of Decision and Order on Cross Motions for Summary Judgment - January 27, 1995) (Appendix 2)
In the New Eastern litigation, Transamerica provided a performance bond to New Eastern, a subcontractor to the general contractor, Tocci Building Corp., on a public school renovation project. In return for furnishing this bond, New Eastern and two other indemnitors, Roxanne C. Pratten and Mary C. Zaik executed a GIA. The original subcontract was for painting and totaled $74,123.00. Ten months after the project was completed, the school district made a demand on Tocci to correct certain defective painting work under the warranty provisions of the general contract. Tocci in turn notified Transamerica of these deficiencies.
As is common practice, Transamerica then sought documentation from Tocci regarding these deficiencies. Transamerica simultaneously notified Eastern of Tocci's and the school's claim. It was five months before Transamerica finally heard from the indemnitors who had discussions with Tocci but had failed to take any corrective action. After nearly a year had past since the school first made its demand, Tocci advised Transamerica that it would cost approximately $10,000 to correct the defective work. Transamerica did not solicit its own bids, nor arrange for the work to be completed directly. Instead, Transamerica paid to Tocci $37,000 based on bids that Tocci claimed it had received bids for correcting the work. Tocci, in turn, executed a release in favor of Transamerica. Two months after receiving the check for $37,000, Tocci then had the corrective work performed by another contractor for $7,835.
Transamerica brought suit against the indemnitors to recover the $37,000 paid to Tocci. The indemnitors not only defended this action by claiming that Transamerica acted in bad faith by paying Tocci this amount, but also asserted an unfair and deceptive claim action against the surety. On various cross-motions for summary judgment, the Court found that Transamerica had breached the terms of the performance bond, thereby losing its right to recover from the indemnitors under the GIA. In particular, the Court found that Transamerica's failure to obtain bids, determine the lowest responsible bidder and arrange for a contractor to correct the work was a breach of the specific requirements of the bond form; thereby causing Transamerica to lose its rights against the indemnitors.
Transamerica contented that its only obligation was to act in good faith as established by the Millis Roofing decision. The Superior Court responded:
Given the tremendous disparity between the initial $10,000.00 estimate and $37,000.00 claimed, Transamerica's nonfeasance was well-beyond bad judgment, negligence or insufficient zeal. New Eastern at p. 12.
Hence the Court concluded that the surety's nonfeasance not only represented a breach of the bond terms causing the surety to lose its rights to recover from the indemnitors under the GIA but also could rise to a level of bad faith.
The New Eastern Superior Court then allowed the question as to whether Transamerica's nonfeasance constituted an unfair and deceptive trade practice under M.G.L. ch. 93A to be determined at trial. More specifically, the Court decided that it was a question for trial to determine whether Transamerica's conduct arose to:
A level of rascality that would raise an eyebrow inured to the rough-and-tumble world of commerce. New Eastern at p. 13.
Violation of this standard would cause the surety to be liable to the Indemnitors for punitive damages under M.G.L. ch. 93A. Transamerica, Tocci and the Indemnitors ultimately reached settlement at trial before the Court could address this question.
Claims that the surety acted in bad faith in settling can be an effective defense for the indemnitor when the surety fails to follow the terms of the bond. Additionally, and as demonstrated by New Eastern, claims that that surety acted in bad faith in reaching settlement may also be an affirmative cause of action against the surety for which the indemnitors may recover punitive damages. The question presented to the Court is whether that bad faith reaches the "level of rascality" required to violate M.G.L. ch. 93A. Although this is a difficult standard to prove, the Court will generally leave that determination to a jury.
Bad Faith Refusal to Finance
The GIA clearly obligates the indemnitors to finance the surety in defending and ultimately paying bond claims. Does the surety have any companion obligation to finance the principal? The GIA typically disclaims any such obligation. For instance;
ADVANCES
The surety is authorized and empowered to guaranty loans, to advance or lend to the contractor any money which the surety may see fit, for the purpose of any contracts referred to in or guaranteed by the bond; ... and all costs and expenses incurred by the surety in relation thereto, unless repaid with legal interest by the contractor to the surety when due, shall be presumed to be a loss by the surety for which the contractor and indemnitors shall be responsible, notwithstanding that said money or part thereof should not be so used by the contractor. The GIA then gives the surety the option but not the obligation to finance the principal's business operations.
Given the language of the GIA, can a surety's refusal to finance nevertheless constitute bad faith subjecting the surety to punitive damage liability? A Montana jury thought so.
In Seaboard Surety Company v. Felton Construction Company, Inc., No. CV-90-10-M-CCL (Missoula Div.), Seaboard was found liable to the indemnitors for $2.5 million arising from Seaboard's denial of its principal's request for financing. The principal, Felton, entered into two public works construction projects with the City of Portland, Oregon. Seaboard provided the performance and payment bonds on these projects. The GIA contained the standard language that Seaboard had no obligation to advance funds similar to that shown above. During the course of the projects, Felton experienced cash-flow problems and requested that Seaboard provide certain financing. Seaboard declined the request and shortly thereafter, Felton's job progress ceased resulting in termination by the City of Portland. Seaboard then took over the projects and hired two completion contractors.
When Seaboard brought suit against Felton and other indemnitors under the GIA, Felton counterclaimed against Seaboard for damages contending that Seaboard breached a duty of good faith when it failed to conduct an investigation before denying Felton's request for financing. In effect, Felton argued that Seaboard's failure to exercise its discretion to finance funds constituted a breach of the implied covenant of good faith.
After initially dismissing Felton's claims, the Trial Court reversed itself and submitted the question of bad faith to a jury, which then found in Felton's favor. Seaboard moved to reverse the jury's verdict which was granted as part of a settlement agreement. Given the settlement, this case was never appealed and like the New Eastern case, the ultimate question of the surety's liability for bad faith was never reached. Nevertheless, the Felton case demonstrates the great risks a surety faces if questions of bad faith are allowed to proceed to a jury.
Once a surety elects to finance a principal, can the surety be liable for punitive damages when it elects to discontinue financing? The Louisiana Supreme Court thought not in its Lambert decision.
Sharon W. and Donald G. Lambert, et al. v. Maryland Casualty Co.,
418 So.2d 533 (1992) (Appendix 3)
The Lamberts were the sole stockholders of Donald G. Lambert Contractor, Inc., a road and highway construction company. Maryland acted as surety on Lamberts' bonds and was indemnified through a GIA by the corporation and the Lamberts' individually. In the Spring of 1974, Lambert was in a severe cash-flow problem and had $22 million of unfinished construction contracts underway. There was also a $2.2 million outstanding and unsecured loan from The Bank of New Orleans. In order to continue in business and meet the immediate need for financing, the Lamberts, The Bank of New Orleans and Maryland reached a financing agreement by which Maryland agreed to guarantee a further loan from The Bank of New Orleans of $2 million. That agreement expressly recognized that Maryland was not bound to issue any further bonds and confirmed that the GIA was still in force. The Lamberts in turn pledged and assigned all of the stock in their company as well as other security.
By the next spring, the Lamberts' financial conditions had deteriorated and various trade creditors made extensive claims and filed liens causing Maryland to bond out such liens and increase its exposure. During the same period, Lambert was pursing in excess of $10 million in claims against the State of Louisiana which remained unresolved.
By the fall of 1975, Maryland concluded that Lamberts' financial situation was hopeless and decided not to write any further bonds or make any further cash advances. Maryland further notified the public agencies of its rights to subrogation, all of which caused the financial collapse of Lambert. The Lamberts then brought suit for $33 million against Maryland alleging that its actions caused the bankruptcy and financial collapse of Lambert Corporation. The Trial Court found in favor of the indemnitors which was appealed by Maryland.
The Supreme Court of Louisiana noted that Maryland had the legal right under the GIA to take the actions it did in the fall of 1975 and that Maryland did not breach its obligation of good faith to the indemnitors. The Supreme Court noted:
Good faith did not, however, require that Maryland continue to support the corporation by the advancing of additional funds or by continuing to forbear in the exercise of its rights contracted at arm's length for its own protection against further liability and loss as surety guarantor and creditor. It is certain from the evidence that the corporation could not have completed performance of the contracts and payment of expenses arising out of the contracts without additional financial support from Maryland, which support Maryland as surety had no obligation to provide. Lambert at 560 (emphasis added).
The Court went on to state that:
Maryland had a legitimate and serious interest in the exercise of its legal right at the time and in the manner it did so, reasonably believing that the corporation could not meet its obligations under its contracts and that continued financial support of the corporation will not prevent or reduce the ultimate loss to either the corporation or Maryland. Lambert at 560.
Hence the Louisiana Supreme Court found that so long as the surety had the right to exercise the security measures provided under the GIA, it could not be held in bad faith when it chose to exercise such rights to protect itself. This decision was not unanimous. The dissenting opinion concluded that having a right to discontinue financing does not exclude bad faith liability arising from the manner in which that right may be exercised. In other words, the GIA by itself should not protect a surety from punitive damages even when the surety is acting within the terms of the GIA.
Bad Faith Refusal to Continue Bonding
As noted in Lambert, Maryland not only refused to continue financing but also refused to continue furnishing bonds. The GIA provides the surety with a specific contract right to decline execution of additional bonds.
DECLINE EXECUTION
Unless otherwise specifically agreed in writing, the surety made to decline to execute any bond and the contractor and the indemnitors agree to make no claim to the contrary in consideration of the sureties receiving this agreement; and if the sureties shall execute a bid or proposal bond, it shall have the right to decline any and all bonds that may be required in connection with any award...
One would think that the declination to provide bonding would be a basic right of any surety and could not form the basis for a bad faith claim. The St. Paul Fire case, which is presently on appeal and the largest punitive damage award against a surety, proves how a jury can turn this most basic of right on its head.
Arntz Contracting Co., et al. v. St. Paul Fire & Marine Insurance Co.;
Superior Court of Contra Costa County,
Consolidated Action No. 266700 (1975)
This case arose from a $4.6 million construction project for the Richmond Housing Authority. Arntz was the construction contractor on the project and St. Paul provided the performance and payment bond. The Richmond Housing Authority dissatisfied with Arntz's work terminated the construction contract and demanded that St. Paul perform under the performance bond. St. Paul elected to complete the project after Arntz and St. Paul agreed that Arntz would post $1 million in collateral and St. Paul would hire a completion contractor approved by Arntz. Additionally, St. Paul agreed to provide bonds to Arntz so that it can continue bidding other projects. Like Arntz, the completion contractor was also terminated as its performance was unacceptable to the Richmond Housing Authority. St. Paul then hired a second completion contractor which completed the project.
During the course of this work, St. Paul sought to confirm its rights under the GIA and to pass through its costs of completion to Arntz. When Arntz refused to pay certain costs, St. Paul in turn refused to execute any further bonds. Arntz was unable to secure bonds from other bonding companies and found itself unable to compete for more work causing serious financial repercussions to Arntz.
Litigation ensued between the various parties. In one trial, the Richmond Housing Authority's termination of Arntz was found wrongful. Based on this finding, and in a later trial, the jury found that St. Paul breached its agreement to provide surety bonds, causing $16 million in lost profits to Arntz, $9 million in interest and $100 million in punitive damages. In total, St. Paul was found liable for $125 million in damages. The Trial Court dismissed the punitive damage aspect of the award when it concluded that there was no clear and convincing evidence of "oppression." California law requires proof of oppression for the punitive damages much like Massachusetts requires proof of "rascality."
It should be no surprise that both St. Paul and Arntz are appealing the verdict to the Court of Appeals. Because of the magnitude of the damages and the affirmative obligation imposed on St. Paul to continue to issue bonds despite language to the contrary in the GIA, the American Insurance Association has joined this appeal and filed a brief in support of St. Paul (Appendix 4). That brief addresses the troubling duty imposed on the surety by the trial court. In effect, the trial court found that St. Paul had a duty of good faith to protect the interest of the principal at the expense of the surety. There is no duty set forth in the GIA to this effect and traditionally, sureties have not been keepers of their principals. Nevertheless, St. Paul found itself in the untenable position of breaching a duty to protect the interests of the principals when it responded to a demand on the bond by the obligee and sought to protect its own interests as St. Paul had the right to do under the GIA.
The Surety's Dilemma
In Arntz, St. Paul elected to complete the project after termination of the principal and the posting of collateral by the indemnitors. That termination was later found to be wrongful which contributed to the jury's finding that St. Paul engaged in bad faith. Had St. Paul denied coverage under the bond, St. Paul would likely be subject to claims of bad faith by the owner. Another California case, also on appeal, demonstrates this dilemma.
Cates Construction, Inc. v. Talbot Partners
Superior Court of Los Angeles, Action No. BC023655
Talbot contracted with Cates to build certain condominium units in Malibu. Transamerica furnished performances and payment bonds for the project. During the course of the project, Talbot and Cates disputed certain payments resulting in Cates securing approximately $650,000 in mechanics' liens against Talbot's property. Cates ultimately abandoned the project over this dispute and in turn, Talbot made demand on Transamerica to complete the work. Transamerica declined to perform relying on the payment dispute of Cates.
Cates sought financing from Transamerica, which Transamerica refused after it concluded Cates' business records were unreliable. Cates then defaulted on all Transamerica bonded projects and assigned its contract rights, including the mechanics' lien to Transamerica.
Having refused to complete Talbot's project and after discovering Cates' business records were unreliable, Transamerica nevertheless exercised its right under the GIA and brought suit against Talbot to enforce the mechanics' lien. Talbot cross-claimed against Transamerica claiming not only breach of surety bond but also bad faith.
Like Arntz, the Cates Court held two trials, the first to address the contract based actions and the second to consider bad faith and punitive damages. After the first trial, Cates was found in breach of contract and Transamerica was found to have breached the bonds. Hence, while St. Paul had completed a contract that was later found to have been wrongfully terminated by the owner, Transamerica refused to complete a project that was later found to have been wrongfully abandoned by the principal. Both sureties made initial determinations that a court later found to be error. Having lost the first trial, Transamerica faced a jury in the second punitive damage trial which found in favor of Talbot for $28,000,000. This award coupled with the $4,000,000 found as compensatory damages in the first trial subjected Transamerica to a $32,000,000 judgment which has been appealed.
Short of becoming clairvoyant as to later jury decisions, what can a surety do?
Recommendations
- Don't rely on the claimant or the principal/indemnitor. Both the claimant and indemnitors have strong vested interests in convincing the surety of the righteousness of their opposing clauses. Very often, neither is telling the full story.
- Investigate early, often and comprehensively. An "independent" investigation of the claim is essential. Take whatever information the owner, principal, claimant or subcontractors may make available but do not exclusively rely on that information. Have your consultant or lawyer check out the claim and make a recommendation. Even if a court later finds that the surety was wrong, at least a claim of bad faith because of failure to investigate should fail.
- Decide promptly. Don't procrastinate. The wrong decision after an investigation is better than no decision at all. Delays in taking action only make claims of bad faith from either indemnitor or claimant more viable.
- Avoid a jury. This is near impossible to do if settlement remains out of the question. Nevertheless, courts are actively promoting ADR, mediation and other programs that cause settlement. Use these techniques. Also, consider requesting principals to include arbitration provisions in their contracts. A panel of arbitrators is less likely to be moved to award punitive damages than a jury.
- Follow bond language. This recommendation seems elementary. If the bond form requires the surety to take specific actions, take those actions and meet the details of all bond requirements.
- Clearly communicate with indemnitors. Confusing language in the GIA or correspondence from the surety leads to misunderstanding and confusion.
- Carefully communicate both internally and externally. Assume everything written will be disclosed and write accordingly. Use attorney/client confidentiality when appropriate.