Claim Against Surety Bonds Sufficient To Trigger Duty To Post Collateral And Indemnify Surety Bond Insurer.

The Seventh Circuit Court of Appeals rejected a contractor’s argument that it only has collateral and indemnity obligations to its bonding agent if it is actually found liable for a breach of the surety bonds.

The court upheld summary judgment in favor of Hanover Insurance Co. for approximately $200,000 in damages and attorneys’ fees against a contractor who failed to perform a project at Midway Airport.  Northern Building Company won a contract to perform various work at Midway.  Hanover issued surety bonds to Northern for the project, in exchange for Northern entering into an indemnity agreement.  The project fell into disarray, resulting in subcontractor claims against Hanover and the FAA withholding funds due under the contract.  As allowed under the surety bonds, Hanover paid the subcontractor claims and agreed to replace Northern as general contractor (resulting in Hanover receiving the funds withheld by the FAA).  Northern, however, refused to post collateral or indemnify Hanover for the claims, as contemplated by the bonds.  Hanover sued Northern to settle its right to the withheld FAA funds and for attorneys’ fees and costs.  Northern argued that it only had to indemnify Hanover if it was actually found liable for a breach of the surety bonds.  The court disagreed:  “The plain language says that it is the claim against the surety bonds, not the existence of any actual liability on Northern’s part, that triggers [Hanover’s] rights and responsibilities.”  The case is Hanover Ins. Co. v. Northern Building Co., No. 13-2675 (7th Cir. May 8, 2014).


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