{"id":30243,"date":"2023-06-26T17:10:00","date_gmt":"2023-06-26T17:10:00","guid":{"rendered":"https:\/\/www.dinsmore.com\/?post_type=publications&p=30243"},"modified":"2025-10-03T17:10:54","modified_gmt":"2025-10-03T17:10:54","slug":"when-to-allow-or-intervene-in-problematic-principal-claim-settlement-negotiations","status":"publish","type":"publications","link":"https:\/\/www.dinsmore.com\/publications\/when-to-allow-or-intervene-in-problematic-principal-claim-settlement-negotiations\/","title":{"rendered":"When to Allow or Intervene in Problematic Principal Claim Settlement Negotiations"},"content":{"rendered":"\n

Krysta Gumbiner is a litigation partner at Dinsmore. She co-wrote this article for DRI’s June issue of For The Defense.<\/em><\/p>\n\n\n\n

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A surety may allow its bond principal to negotiate settlements with claimants after the surety has received a payment or performance bond claim. The surety must, however, avoid certain pitfalls that may expose it to liability, because the surety has a simultaneous obligation of good faith to the obligee and intended beneficiaries of its bonds as well as to the principal and indemnitors of its indemnity agreements. This article will explore the surety\u2019s added and altered involvement in claims handling when a bond principal\u2019s ability to do so may be impaired as a result of a lack of willingness or ability to exercise sound business judgment and\/or poor or inadequate accounting practices. These issues can compromise the surety\u2019s best interests as to adequate collateral and completion.<\/p>\n\n\n\n

The Surety\u2019s Independent Obligation, and Unique Opportunity, to Investigate Claims:<\/strong><\/p>\n\n\n\n

The Principal Must Not Act on Behalf of the Surety, and the Surety Must Be Cautious About Acting on Behalf of or Giving Deference to the Principal<\/strong><\/p>\n\n\n\n

The principal must not misrepresent to a claimant that it is negotiating on behalf of the surety, or vice versa; and neither party may indicate that the principal is the ultimate authority as to the merits of a bond claim. In instances where contract balances are deposited into a funds control account, the principal is generally allowed greater control over to whom it makes payment and the amount of that payment. The surety must be careful not to exert \u201cdomination and control\u201d over the principal\u2019s operations, as doing so could expose the surety to a claim of tortious interference or potentially provide an indemnitor with a defense in a subsequent indemnity action. Such interference may also arise when a surety voluntarily investigates and acts on an alleged performance issue before notice from an obligee or a proper claim is asserted pursuant to the terms of the bond. In so doing, a surety may forfeit in full or pro tanto <\/em>its right for indemnification from the principal and indemnitors for those actions (although it may not necessarily forfeit the surety\u2019s receipt of contract balances for those efforts if the owner is pleased to have the surety involved). Investigation is one thing and generally unassailable; however, the surety must exercise caution to avoid inviting claims, when acting, and\/or when actually proceeding to take over the principal\u2019s work.<\/p>\n\n\n\n

The surety may allow a bond principal to represent that it remains in control of its own finances while negotiating a settlement; however, the surety should not imply blind deference to the bond principal as to the merits of a claim. Based on the regulated nature of the surety industry, such conduct may expose the surety to liability under breach of fiduciary duty and bad faith claims involving unfair dealing and deception. These fiduciary duties tend to speak to actions, recommendations, representations, prompt service, and denial of coverage, all of which are affirmative<\/em> acts. <\/em>R.W. Granger & Sons v. J & S Insulation, 435 Mass. 66 (2001); see also <\/em>Fla. Admin Code Ann. R 69B-220.201 (Ethical<\/p>\n\n\n\n

Requirements for All Adjusters and Public Adjuster Apprentices); Fla. Stat. 626.9541 (2017) (Unfair Claims Settlement Practices Act). When you get into unfair claims settlement practices by omission<\/em>, that may not be a breach of fiduciary duty but includes examples like failing to use proper standards and procedures to handle claims, failing to promptly communicate, or failing to provide a clear or reasoned explanation of the basis for denial or need for more information. W. Sur. Co. v. Cooper River Constr.<\/p>\n\n\n\n

Co., No. 2:12-cv-2561-PMD, 2013 U.S. Dist. LEXIS 91753 (D.S.C. July 1, 2013); see also, e.g. O.C.G.A \u00a710-7-30 (2020) (Georgia Commercial Code\u2019s 60-day bad faith provision for Surety failure or refusal to perform); but see Ch. 2 Liability to Indemnify and Reimburse the Surety in THE SURETY\u2019S INDEMNITY AGREEMENT \u2013 LAW & PRACTICE 66-67 (Marilyn Klinger, Gary Judd & George J. Bachrach eds., ABA 2002) (citing Hartford v. Tanner, 910 P.2d 872, 881, Ct. App. An. 1996) (Holding the surety\u2019s reimbursement may be reduced or eliminated if its failure to mitigate damages constituted unreasonable conduct and practically eliminating the principal\u2019s ability to raise defenses to obligee claims). Unfair settlement practices may carry fines even for unintentional violations, and bad faith can result in punitive damages if found to be willful, wanton, and malicious or in reckless disregard. K-W Indus. v. Nat’l Sur. Corp., 231 Mont. 461, 754 P.2d 502 (1988).<\/p>\n\n\n\n

Practical Approaches to Preserve the Surety\u2019s Independence and Claim Defenses<\/strong><\/p>\n\n\n\n

A sureties should protect itself by affirming that it cannot tacitly commit any wrongdoing or commit to any position, other than through its express written statements waiving its rights. Rather than stating a position on what portion of a claim is undisputed or disputed, the surety can in the interest of litigation avoidance and prompt resolution, identify potential disputes and their potential worth (citing ambiguities in the contract, applicable law, or proof of claim documentation) and invite the claimant to propose a fair resolution within that range of possibilities.<\/p>\n\n\n\n

Alternatively, a surety can and often does announce the results of its investigation by stating that it is not a final finder of fact (e.g., not a judge, jury, or arbiter) and does not determine whether the principal\u2019s defenses are true, only whether they appear to be made in good faith, as the standard on which the surety can rely for subrogation purposes. In either approach, the surety can add that the position taken is open for further review and comment if the claimant supplies proof of claim documentation or applicable contract or legal standards to the contrary. Notwithstanding the above, a surety should not knowingly rely on a disingenuous contract interpretation or circumspect legal standards in denying a valid claim.<\/p>\n\n\n\n

Surety Non-Intervention in Principal Claim Handling; Some Reasons and Examples:<\/strong><\/p>\n\n\n\n

A Surety May Not Rely on a Principal\u2019s Defense It Knows Not to Be Offered in Good Faith<\/strong><\/p>\n\n\n\n

Sureties are not required to intervene in a principal\u2019s negotiations with a bond claimant to disabuse the claimant of its own ignorance or even where the bond principal may be acting in bad faith. The principal\u2019s bad faith standing alone does not impute bad faith to the surety based on the surety\u2019s unique\/higher standards; however, the surety may not expressly incorporate the principal\u2019s defenses by subrogation unless those defenses appear to be asserted in good faith by the surety\u2019s standards. The exception to this occurs when the surety has knowledge of a material misrepresentation, whereby the principal cites the surety as support for a position which the surety has not overtly supported. See THE<\/p>\n\n\n\n

SURETY\u2019S INDEMNITY AGREEMENT \u2013 LAW & PRACTICE at 87 (citing Barr\/Nelson, Inc. v. Tonto\u2019s, 336 N.W. 2d 46 (Minn. 1983); Premier Elec. Const. Co. v. American Nat. Bank Trust Co. of Chicago, 603 N.E.2d 733 (Ill. App. 1 Dist. 1992)). The surety may <\/em>intervene when the principal makes<\/p>\n\n\n\n

material representations or statements that are or may be false or against the surety\u2019s interests; and the surety need not <\/em>intervene in instances where the principal is exhibiting poor judgment, is needlessly argumentative, or is staking out a suspect or inflammatory position for which the surety cannot reasonably be held directly accountable. The principal\u2019s legal standard for bad faith may not be known by the surety\u2019s representative, and a claim investigation does not require the surety to go so far as to investigate and conclude about the legal rights and obligations of other parties. The surety\u2019s investigation need only be germane to the surety\u2019s rights and duties. A surety representative need not go out of their way to investigate bad faith laws as they may apply uniquely to the principal.<\/p>\n\n\n\n

Limits on the Reliability of the Principal\u2019s Book and Records<\/strong><\/p>\n\n\n\n

Should the surety be in possession of the bond principal\u2019s accounts payables report, the surety\u2019s duty to resolve discrepancies may depend on the type of accounting in the A\/P reports. While not a recommended<\/p>\n\n\n\n

practice, some contractors post all invoices received to their accounts payable, while others only post amounts that they believe are due and owing. Accordingly, reports analogous to accrual-basis accounting (as opposed to cash-basis accounting) will more likely provide the surety with actual knowledge of what the principal believes is owed. Similarly, bond principals often post deductive change orders, credits, or offsets against otherwise valid invoices. In a perfect world, a principal would always be there to back up it deducts or disputes with evidence. Often, however, this is not the case, and the surety must investigate these offsets. Frequently, however, in the case of a failing or winding-down principal, where the principal is not communicating with the surety or cooperating with the investigation, the payables report may be the best evidence the surety can obtain reflecting the principal\u2019s position on what is owed.<\/p>\n\n\n\n

The Claimant Ultimately Bears the Burden of Proving Up its Claim<\/strong><\/p>\n\n\n\n

The surety is unlikely to expose itself to unfair claims settlement practices stemming from willful blindness should it choose not to seek out all documentation which may be available regarding a claim. The claimant bears the burden of proving its claim, unless the burden has been specifically shifted by law or arguably shifted due to the weight of evidence already given. E.g.<\/em>, Addison Urban Dev. Partners, LLC v. Alan Ritchey Materials Co., LC, 437 S.W.3d 597 (Tex. App. 2014) (Delivery tickets and invoices identifying the project for which materials were furnished provided sufficient evidence to support a construction materials lien under Tex. Prop. Code Ann. \u00a7 53.021 (Supp. 2013)). (Note, eg. <\/em>under the Maryland Little Miller Act, invoicing alone creates a prima facie case and presumption of materials delivery, shifting the burden of disproof or of defective\/rejected materials onto the Principal or Surety. State Finance and Procurement Code \u00a717-101, et seq.(2019)). Additionally, the surety\u2019s relationship to the owner\/obligee does not require or even suggest the surety involve the obligee in a payment bond claim investigation, except to the extent the bond form says the obligee is to merely receive a copy of the surety\u2019s written position on the claim. Further, because the payment bond claim investigation does not mandate discovery by the surety into the obligee\u2019s records, the claimant and surety in such an instance are on equal footing as far as the right and capability to seek information from third parties such as the oblige (even to the extent of a FOIA request), and thus the claimant is free to seek out information to present as evidence if its claim, whereas the surety is not compelled to seek out information, regardless of what the outcome may be.<\/p>\n\n\n\n

Surety Intervention in Claim Settlements due to the Principal\u2019s Unreliability and its Impact on Surety Defenses:<\/strong><\/p>\n\n\n\n

The Surety and the \u201cFriendly\u201d Claimant<\/strong><\/p>\n\n\n\n

When a contractor is going out of business, it tends to wind down operations in one of a few ways: (a) being meticulous and stingy so as to mitigate any loss and indemnity obligations and shut down its operations in an orderly fashion; (b) being careless or inattentive owing to a lack of resources (time, personnel, or sophistication of methods) or lack of incentive (positive incentives like retention pay, negative incentives like loss of retirement accounts or indemnity obligations); or (c) favoring the interests of valued claimants over those of the failing company or the surety. In this last instance, the surety may determine that the bond principal is benefitting claimants who are \u201cfriendly\u201d claimants in less than an arms lengths relationship, to the surety\u2019s detriment, often where the principal\u2019s personnel are overly cozy with vendors who it wants to leave pleased, whether for reasons of personal satisfaction or who may potentially employ\/burnish the reputation of the principal\u2019s personnel in the industry going forward. In such a situation, the surety can always assert any defenses available to the bond principal (through right of subrogation), not merely what the principal has asserted or is willing to assert. Great Am. Ins. Co. v. N. Austin Mun. Util. Dist. No. 1, 908 S.W.2d 415, 419 (Tex. 1995). In addition or alternatively, if the principal has still technically been left in charge of making payments, the surety can require that the principal obtain its consent to any payments to claimants or even all bonded payable vendors due to the likelihood of default.<\/p>\n\n\n\n

The Surety\u2019s Discretion Whether to Subrogate to Certain Principal Defenses<\/strong><\/p>\n\n\n\n

Absent specific indemnity language, it is unlikely that a surety would have a duty to invoke defenses on behalf of the bond principal. THE SURETY\u2019S INDEMNITY AGREEMENT \u2013 LAW & PRACTICE at 64 (citing <\/em>Employers Ins. Of Wausau v. Able Green, Inc., 749 F.Supp. 1100, 1103 (S.D. Fla. 1990) (holding the surety was not required to litigate claims by the principal unless the principal complied with its indemnity agreement by requesting litigation and posting collateral for litigation costs). In rare cases, such defenses may in fact be manifestly \u201cpersonal\u201d to the principal in that they conflict with a surety\u2019s claim response obligations or preferences, such as enforcing the exhaustion of a contract\u2019s dispute resolution procedures or the terms of a joint-check agreement. The surety generally does not or cannot require mandatory meetings, mediation, or arbitration between parties other than itself (the principal and claimant or obligee) as a precondition to answering the claim on its own merits or suit on such a claim as the bond provides, and the surety which is typically not a party to a joint-check agreement involving the principal has no business enforcing such extra-contractual obligations, unless it were stepping into the principal\u2019s shoes by assignment. On the other hand, as mentioned in the previous section, a surety may assert defenses to a bond claim available to the bond principal which the principal was unwilling or unmotivated to assert. Connelly Constr. Corp. v. Travelers Cas. & Sur. Co. of Am., 788 F. App\u2019x 122 (3d Cir. 2019) (credit Michael Stover & George Bachrach, A 2019 Surety Case Law Review 8-9 (\u201cSurety Today Presentation\u201d by Wright, Constable & Skeen, LLP, Jan. 13, 2020). Waivers provide a common opportunity for such defenses. Oftentimes, progress waivers will require that vendors specifically list any claims or extras unresolved through the effective date of the waiver or else lose the right to assert them. Similarly, unconditional waivers presume the claimant\/vendor has received the relevant funds in advance of or contemporaneously with the signing of the waiver. In some instances, even a conditional waiver will be presumed fulfilled after passage of time. See, e.g.<\/em>, O.C.G.A \u00a7 44-14-366(c) (2018) (Georgia public works Code will convert a conditional waiver to unconditional after 60 days, conclusively deeming payment to have been made, if a conspicuous statutory notice to that effect is added to the bottom of waivers.) Although the bond principal may have direct knowledge that a waived item has not in fact been paid, or have customer-relations reasons for not enforcing the terms of a valid waiver, there is nothing prohibiting a surety from raising actual, constructive, or statutory waiver as a partial or complete claim defense.<\/p>\n\n\n\n

The Surety\u2019s Discretion to Intervene Due to Impasse, Delay, or Increased Risk<\/strong><\/p>\n\n\n\n

Since the surety is always secondarily liable after the principal, intervention may be prudent if the claimants face difficulty or impasse from the principal. If the reason for impasse or delay is primarily the principal\u2019s cash-flow problems, rather than substantive disputes, then the surety should reconsider waiting for the principal to resolve on its own, much less tendering defense to the principal in a lawsuit (whether in defense of a claim or pursuing an affirmative claim) which principal\u2019s business may not be capable of mounting or maintaining. Sureties have also been known to directly pay or reimburse key personnel of the principal with intimate knowledge of the project or claim and\/or access to the principal\u2019s records for helping them sustain affirmative claims or mount their own defense. Although sureties tend to avoid the<\/p>\n\n\n\n

appearance of volunteering their efforts, it can be opportune to intercept this situation before the claimants are completely frustrated, to avoid their lawsuit, lien (perhaps requiring a separate release bond or else holding up multiples of contract funds) or walking off the job. Further, the surety\u2019s role in resolution and responsibility to communicate with the claimant increases after the claimant has provided proof of claim documents and time is passing without the principal\u2019s response. In instances where sureties do pay claimants directly, they commonly require releases that exclude the release of the principal and instead give the claimant\u2019s assignment of rights against the principal to the extent of payment by the surety. This allows the surety to be \u201cdouble-breasted\u201d in its actions against the principal, both on indemnity rights and assigned subcontract or purchase order rights.<\/p>\n\n\n\n

The Surety\u2019s Discretion to Waive Strict Proof of Claim and its Possible Results<\/strong><\/p>\n\n\n\n

Whether there exists a duty for the surety to require that claimants prove their claims will depend on the jurisdiction\u2019s position on what constitutes good faith. Some courts require that the surety act in a \u201creasonable manner,\u201d a more lenient standard. Philip L. Bruner & Patrick J. O’Connor, Jr., Bruner & O’Connor on Construction Law \u00a7 10:107 (2002, supp. ann.). The other standard, more favorable to sureties, is one in which the surety is only denied indemnity upon a showing of bad faith, which requires an \u201cimproper motive\u201d or \u201cdishonest purpose.\u201d PSE Consulting, Inc. v. Frank Mercede & Sons, Inc., 267 Conn. 279, 838 A.2d 135 (2004); Fireman’s Ins. Co. v. Todesca Equip. Co., 310 F.3d 32 (1st Cir. 2002).<\/p>\n\n\n\n

In addition to the GAI controlling these terms and the surety\u2019s self-interest to investigate proof of claims, it is possible that if the surety\u2019s payment triggers an event of default under the GAI, thereby impairing or eliminating the principal\u2019s future bonding or credit with that surety or more broadly with other sureties, vendors and\/ or project owners by damage to reputation, the principal could assert, as mentioned at the beginning of this article, (affirmatively) tortious interference of contract, domination and control, or the like by the surety for paying claims over the principal\u2019s objection or at least without evidence of the principal\u2019s default (a defensive, GAI argument). Selective Ins. Co. of Am. v. Moseley, No. 19-cv-01054 (APM), 2021 U.S. Dist. LEXIS 142147 (D.D.C. July 30, 2021). Most modern GAIs are well-written enough to the surety\u2019s benefit to avoid loss of indemnity over such defenses by the principal, but sureties should anticipate these defenses regardless.<\/p>\n\n\n\n

The Surety\u2019s Right to Thwart or Intervene in a Principal-Negotiated Settlement<\/strong><\/p>\n\n\n\n

Lastly, should the surety have advance notice that a settlement attempt by the principal may impair the surety\u2019s rights to a mitigated loss and the principal\u2019s obligation to mitigate it, the surety can intervene by attaching the bond principal\u2019s assets or obtaining a mandatory preliminary injunction forcing the bond principal to post collateral. A principal owes three equitable duties to its surety, whether or<\/p>\n\n\n\n

not expressly found in the GAI: exoneration, reimbursement, and indemnification. Exoneration is the proverbial \u201chold harmless\u201d obligation \u2013 the principal\u2019s obligation to keep the surety from getting into its mess in the first place. When sureties see certain signs of a principal\u2019s failure, such as outsize or multiple claims relative to the project or principal\u2019s business, a surety can demand to be \u201cput in funds\u201d by a collateral demand in advance of anticipated losses for some amount correlating to those anticipated losses. If the principal does not do so willingly, sureties can and have sued for Quia Timet <\/em>(apprehension of loss), an equitable and injunctive remedy to be granted collateral the surety can prove is reasonably necessary under the circumstances.<\/p>\n\n\n\n

Conclusion<\/strong><\/p>\n\n\n\n

The goal of this article has been to discuss the inviolable rights of the surety in payment bond claims, and to a lesser extent affirmative claims, and investigations, while also exploring when the surety may choose not to involve itself in the principal\u2019s handling of claims and potential claims. Nevertheless, for numerous reasons, the surety will often be better off resolving claims directly, rather than deferring to its principal, and when doing so, a cautious and thorough surety claims representative may substantially mitigate the surety\u2019s risks and rely on the more predictable protections of its indemnity agreement.<\/p>\n","protected":false},"excerpt":{"rendered":"

Krysta Gumbiner is a litigation partner at Dinsmore. She co-wrote this article for DRI’s June issue of For The Defense. A surety may allow its bond principal to negotiate settlements with claimants after the surety has received a payment or performance bond claim. The surety must, however, avoid certain pitfalls that may expose it to liability, because the surety\u2026<\/p>\n","protected":false},"author":8,"featured_media":0,"menu_order":0,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"tags":[],"publication-type":[8],"class_list":["post-30243","publications","type-publications","status-publish","format-standard","hentry","publication-type-articles"],"acf":[],"yoast_head":"\nWhen to Allow or Intervene in Problematic Principal Claim Settlement Negotiations - Dinsmore & Shohl<\/title>\n<meta name=\"description\" content=\"When to Allow or Intervene in Problematic Principal Claim Settlement Negotiations Read insights and legal analysis from attorneys at Dinsmore & Shohl LLP.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.dinsmore.com\/publications\/when-to-allow-or-intervene-in-problematic-principal-claim-settlement-negotiations\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"When to Allow or Intervene in Problematic Principal Claim Settlement Negotiations\" \/>\n<meta property=\"og:description\" content=\"When to Allow or Intervene in Problematic Principal Claim Settlement Negotiations Read insights and legal analysis from attorneys at Dinsmore & Shohl LLP.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.dinsmore.com\/publications\/when-to-allow-or-intervene-in-problematic-principal-claim-settlement-negotiations\/\" \/>\n<meta property=\"og:site_name\" content=\"Dinsmore & Shohl\" \/>\n<meta property=\"article:modified_time\" content=\"2025-10-03T17:10:54+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.dinsmore.com\/wp-content\/uploads\/2026\/02\/social-media-share.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1200\" \/>\n\t<meta property=\"og:image:height\" content=\"675\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data1\" content=\"17 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.dinsmore.com\/publications\/when-to-allow-or-intervene-in-problematic-principal-claim-settlement-negotiations\/\",\"url\":\"https:\/\/www.dinsmore.com\/publications\/when-to-allow-or-intervene-in-problematic-principal-claim-settlement-negotiations\/\",\"name\":\"When to Allow or Intervene in Problematic Principal Claim Settlement Negotiations - 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