In a recent 1st Circuit case, a surety bonding company sued a contractor and its principals for indemnification when the surety bonding company paid claims on a bond issued to the contractor for a project involving construction of a parking lot. Although the contractor had required its subcontractor, which performed the work on the parking lot, to provide a bond for the benefit of the contractor, the bonding company that provided the subcontractor’s bond became insolvent and could not pay the contractor’s claim. This triggered protections under the Maine Insurance Guarantee Act, an Act designed to protect policy holders from insolvent insurers, and the contractor was not liable for indemnification to its surety bonding company because the contractor was an obligee on the bond issued to the subcontractor by the insolvent bonding company.
The 1st Circuit held, however, that the principals of the contractor, who had not been named as individual obligees on the subcontractor’s bond, but who had agreed individually to indemnify the surety bonding company, were still liable to the contractor’s bonding company for indemnification. The court noted that the contractor and its principals could have avoided liability under the Maine Insurance Guaranty Association Act if the individual principals had been named as obligees on the subcontractor’s bond.
In Maryland, a similar insurance guarantee act exists - the Maryland Property and Casualty Insurance Guarantee Act - and a similar situation could arise. Therefore, a contractor should make sure that any bonds, provided by a sub-contractor for the benefit of the contractor, name as obligees the contractor, as well as all individuals liable under the contractor’s indemnification agreement with its surety bonding company. If individuals liable under an indemnification agreement are not named as obligees and the sub-contractor’s bonding company becomes insolvent, the Maryland Property and Casualty Insurance Guarantee Act will offer no protections for those individuals because they would not be considered protected third party obligees on the bond.
In sum, a contractor should be certain that the contractor and any individuals liable on an indemnification agreement with the contractor’s surety bonding company are named as obligees on a sub-contractor’s bond issued for the contractor’s benefit.
For more information, please contact Vincent M. Guida, Jr. at 410-583-2400.
The 1st Circuit held, however, that the principals of the contractor, who had not been named as individual obligees on the subcontractor’s bond, but who had agreed individually to indemnify the surety bonding company, were still liable to the contractor’s bonding company for indemnification. The court noted that the contractor and its principals could have avoided liability under the Maine Insurance Guaranty Association Act if the individual principals had been named as obligees on the subcontractor’s bond.
In Maryland, a similar insurance guarantee act exists - the Maryland Property and Casualty Insurance Guarantee Act - and a similar situation could arise. Therefore, a contractor should make sure that any bonds, provided by a sub-contractor for the benefit of the contractor, name as obligees the contractor, as well as all individuals liable under the contractor’s indemnification agreement with its surety bonding company. If individuals liable under an indemnification agreement are not named as obligees and the sub-contractor’s bonding company becomes insolvent, the Maryland Property and Casualty Insurance Guarantee Act will offer no protections for those individuals because they would not be considered protected third party obligees on the bond.
In sum, a contractor should be certain that the contractor and any individuals liable on an indemnification agreement with the contractor’s surety bonding company are named as obligees on a sub-contractor’s bond issued for the contractor’s benefit.
For more information, please contact Vincent M. Guida, Jr. at 410-583-2400.
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