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Surety's Right To Indemnification

Tuesday, September 02, 2003 05:23 pm

Surety's Right To Indemnification

The role of payment and performance bonds is widely understood within the construction industry. Payment bonds protect subcontractors and suppliers against a contractor's failure to make full payment, while shielding the project owner from mechanic's liens. Performance bonds protect project owners and their lenders against a contractor's failure to complete the work.

Many parties assume that once a bond claim is paid, the matter is concluded. The surety, having accepted certain risks in exchange for a bond premium, takes its lumps and moves on. Nothing could be further from the truth.

In order to obtain bonding, a construction company and its owners - typically individual shareholders and their spouses - must sign a blanket indemnification agreement. The company and the individuals promise the surety that if there is a claim against a bond, they will reimburse the surety for the resulting costs and losses. The construction company pledges its assets and the individuals pledge their personal holdings as collateral. The scope of this indemnification obligation is far reaching, although not unlimited.

Attorney Fees

The blanket indemnification agreement typically refers to all costs and expenses incurred by the surety as a result of the surety's execution of the bond. This clearly includes attorney fees. In one case, a subcontractor was required to furnish a performance bond naming the prime contractor as the obligee. The prime brought a claim against the performance bond and the surety settled the claim for $12,000. The surety then demanded reimbursement [...]

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