Why Signatories Should Fear Indemnity Obligations Under Construction Surety Bonds?

If you have ever been a signatory seeking a Construction Surety Bond, you understand you must pledge almost “everything you own” to the Surety in exchange. Such sacrifices are generally  mandatory in order to induce a Surety to furnish any bond, but especially P&P Bonds relative to  “Payment and Performance” obligations under a construction contract.  Sureties routinely require both the principal, or entity seeking the P&P Bonds, its parents and subsidiaries, as well as each officer and their spouse to sign a GIA or “General Indemnity Agreement”.  The GIA requires all signatories thereto, or indemnitors, to protect and hold the Surety harmless against any and all losses and expenses, incurred by the Surety on behalf of the principal under the P&P Bonds.  

No other agreements in the construction industry routinely require a legal entity, be it a corporation, LLC, or LLP, to subject itself, its affiliated entities, and the individuals in their C Suites, including their spouses, to personal liability.  But this is just the “tip of the iceberg” when it comes to the “nasty one-sided” provisions imposing risks upon signatories to the GIA required to obtain construction Surety bonds.

All GIAs contain extremely broad language requiring the indemnitors to “indemnify” the Surety, or its assignees, from and against any and all claims, liabilities. or losses, including costs, damages, losses, attorney’s fees, consultant fees, expert fees, or interest whether arising from enforcement of the GIA or a third-party claim, lawsuit or judgment against the P&P Bonds.  Courts typically allow Sureties to seek and recover from the Indemnitors without regard whether the liability of the Surety under the P&P Bonds has been established, the claim paid, or even an actual loss incurred.  Even States adopting “anti-indemnity” statutes, invalidating indemnity provisions if the loss results solely from sole negligence of the indemnified party, do not prohibit recovery against Indemnitors under a GIA.

Most GIAs also allow the Surety to demand and require the Indemnitors to provide “additional collateral and security” to satisfy any potential claims, liabilities or losses under the P&P Bonds, in amounts satisfactory to the Surety.  Such security may take many forms, including promissory notes from the Indemnitors, mortgages upon the Indemnitors homes and real estate, or assignment of the proceeds under all Indemnitors contracts, both bonded and unbonded.  Since most contractors, and their affiliates, have a mix of both bonded and unbonded contracts, the security demanded by a Surety may extend far beyond the scope of the Surety's exposure under the P&P Bonds.

One of the least understood, but nastiest provisions under a typical GIA is the “prima facie evidence” clause governing what the Surety must show to establish Indemnitor liability.   This provision entitles the Surety to use, vouchers, invoices, or even payment summaries verified by the Surety, to establish the amounts owed by the Indemnitors.  A single  spreadsheet can be used to support the recovery  of millions of dollars of damages against Indemnitors by the surety - without any supporting documentation whatsoever.  The burden then shifts to the Indemnitors to establish that the Surety acted in bad faith and in violation of the the terms of the GIA, a nearly impossible task.  Based upon this type of clause, Sureties often seek and frequently obtain summary judgment against all Indemnitors without regards as to whether the Surety was responsible for the alleged losses sought to be recovered.

Sureties are given very broad rights to resolve or prosecute any claims against P&P bonds under the typical GIA.  In doing so, Indemnitors are bound to cooperate with the Surety in handling claims and to provide any and all documents requested by the Surety at any time or place requested, including financial records.  GIAs typically give the Surety unfettered authority to settle, pay, prosecute, or appeal any claims if it is deemed expedient, prudent, or necessary to do so, without regard as to whether liability under the P&P Bonds exists or was established.  Absent fraud or bad faith, Sureties have sole discretion as to the handling claims against P&P Bonds under a GIA and such discretion is seldom questioned by the Courts. 

Last but not least, most GIA’s entitle the Surety to file a lawsuit against any or all Indemnitors based upon a breach of any term of provision of the GIA, without regard as to whether the Surety has suffered actual damages.  The onerous nature of the duties and obligations undertaken by the Indemnitors under the standard GIA, and the litigious nature of the construction industry, has caused many a client to question whether the Sureties are given far too much power over the handling of claims against P&P Bonds?