• Company
• Industries
• Staff
• Resources
• Forms
• Speaking Engagements
• Video Library

NEGOTIATION CONSIDERATIONS:
SURETY AS OPPOSED TO INSURER

In the construction industry, there are two Adeep pockets@ which may serve as security for payment to contractors and material suppliers for work performed on certain projects. The first is a Asurety@ which generally is a bonding company providing a payment or performance bond on a project. Often, these bonds are required by federal or state law for work performed on public projects, though there can be payment or performance bonds on private projects. The second is a Atitle insurance company providing title insurance for a private residence or non-public facility. Many people do not recognize or understand the legal distinction between a Asurety@ and an Ainsurance company. This article seeks to explore the distinctions and the implications of those distinctions of entities making claims pursuant to a bond or title insurance.

In the construction context, the legal distinctions described above have a decided impact on the negotiation process in a claim situation.

Suretyship is a unique legal relation, contractual in nature, whereby one party, the surety, undertakes an obligation to be held answerable for the debt, default, or miscarriage of another party, the principal. Hart,B.C., Bad Faith Litigation Against Sureties, Tort & Insurance Law Journal (1988). A surety has a three-party relationship involving any party secured by the bond, the bond principal, and the surety.

An insurer bears an indemnification relationship with the insured. This is a contractual relationship in which the insurer agrees to indemnify the insured against certain risks in exchange for valuable consideration. Hart, B.C. , Bad Faith Litigation Against Sureties, Tort & Insurance Law Journal (1988).

The surety owes a duty of good faith to the claimant who is owed the funds, but also owes a duty of good faith to the principal on the bond. This requires a thorough investigation of the claim and a determination of whether there are defenses to the claim. Generally, this process involves receipt of a timely demand upon thebond which is served on the surety. The surety will then contact its principal to ascertain their view of the matter. Usually, the surety will send an Affidavit of Claim to the claimant at the same time requesting copiesof invoices and proof of delivery, along with certain detailed information regarding the claimant=s ties to the project subject to the claim.

If the principal claims defenses, then the surety must investigate those defenses in order to ascertain their merit. This may involve depositions, the use of interrogatories and/or requests for the production of documents from the claimant in order to develop a full picture of the events. This is often the point at which alawsuit becomes necessary to perfect the bond claim while the investigation continues.

It may be that the principal, whose officers in many cases will have signed personal indemnification agreements in order to receive the bond, is trying to delay payment by the surety in order to avoid the implications of the underlying indemnification agreement. If the surety determines that there are no meritorious defenses, then they have a duty of good faith to the claimant to go ahead and pay the debt. Whether the surety owes a duty of good faith to the indemnitors of the bond is a question which has not been answered by the courts in North Carolina.

In any event, if the claimant presents clear evidence of the validity of the debt, then the surety is under a dutyto pay the debt. If, as is not uncommon, the principal acknowledges the debt and the claimant=s documentation is in order, then a bond may get paid without ever reaching litigation.

In a title insurance scenario, it is important to remember that the insurer has no duty to the claimant. Theyinstead have an absolute duty to defend their insured. To that end, they will generally not be in a position to simply look at the paperwork, make a quick decision, and pay 100% of the principal to the claimant.

The first thing to remember is the fact that if you are making a title insurance claim, there is probably an Ainnocent third party involved. The insured will not be the contractor to whom goods were sold or for whom work was performed. The insured is the homeowner who purchased the house secure in the belief thattheir title was clear. Now, a party with whom the insured likely had little or no contact has appeared and clouded the title. At closing, not only did the homeowner pay the purchase price for the home or building, butalso paid an additional sum for title insurance just in case a claim is made after closing.

Given the circumstances, the insurance company is in no particular hurry to pay and may well wish to wait to have an order from the court to pay. They have an absolute duty to the insured to fully and vigorously defendthe claim. The insurer will probably do so under a Areservation of rights meaning that if the investigation uncovers information which indicates that the claim does not fall within the terms of the policy, then the insurer may refuse to pay and the liability will return to the insured. This provides another reason for the insurer not to rush to pay.

In order to prove a Abad faith refusal to settle claim, a claimant must demonstrate that there was (1) a refusal to pay after recognition of a valid claim, (2) bad faith, and (3) aggravating or outrageous conduct by the insurer. Lovell v. Nationwide Mutual Insurance Co., 108 N.C. App. 416, 424 S.E.2d 181 (1993). ABad faith means >not based on honest disagreement or innocent mistake.=@ Id. at 421. A failure to conduct a full and complete defense might be found to be bad faith on the insurer=s part as to its duty to the insured. In this instance, Abad faith@ requires the demonstration of some egregious acts by the insurance beyond simplyrefusing to settle.

For the reasons set out herein, it may be anticipated that a title insurance company will not settle Aup front in most, if not all, cases. They may offer to settle for a Adiscounted@ amount of 50%-90% of its value depending on their initial evaluation of the claim, using a time value of money theory based upon their initial perception of a claim=s merit and the costs involved in proceeding with a full investigation and litigation. Generally, such an offer would come in a case where it is likely that some liability will be found and they do not have a third party (the builder) available against whom they may bring a crossclaim. If the builder executed a fraudulent lien waiver and is available (i.e. not in bankruptcy or not judgment proof), then the attorney retained by the insurer to represent the insured will likely bring a claim against the builder, further complicating the litigation. Reminder: In any litigation where the title insurer is involved, the actual defendant is the homeowner and the Rules of Civil Procedure bar mention of the fact that an insurance company is involved. You may anticipate that a jury trial will be requested so that the jury will see only the insured sitting at the defendant=s table and not the builder.

There is generally recognition on the insurance company=s part that they may ultimately have to pay some or all of the claim, but they will rely heavily upon their insured=s right to make the Plaintiff prove its claim.Through discovery and investigation, every effort will be made to reduce the amount of the claim. If the claimant has a history of claims, the insurance company will rely to some extent on experience in determining the likelihood that they will ferret out errors in the claimants documentation and lien claim. This is part and parcel of their duty to their insured and, in some respect, their duty to the general public since payment of claims is reflected in the setting of rates for future policies.

Essentially, negotiations with a surety and a title insurance company come down to the relationship between the claimant relative to the surety/insurer and the duties imposed on the surety/insurer. While bonding companies are not looking to throw money at claimants, they also do not seek litigation where the claim is clear and undisputed. They have a direct duty to the claimant. A title insurance company has only one duty,to its insured, and therefore will generally take a stronger stand against paying the debt. They have an absolute duty to their insured to make sure the amount paid out is no more than is due.

The question of attorney=s fees is frequently raised in line with Chapter 44A of the North Carolina General Statutes, which clearly state that attorney=s fees may be awarded to the prevailing party in a bond claimshould litigation occur, but there is no contractual obligation for attorney=s fees to be paid. Attorney=s fees awards are left to the sound discretion of the trial court. Realistically, judges have rarely awarded attorney=s fees in title insurance claims. A survey of case law and antidotal evidence shows that in title insurance claims, the court virtually never awards attorney=s fees. Again, they are looking at the Ainnocent third party@ sitting in the defendant=s chair and are not inclined to heap further loss on this person who has alreadybeen grossly inconvenienced by this entire proceeding.

Conclusion

No lawyer would ever suggest that a client take the first offer of an insurance company, unless that offer was 100% of the principal. However, most attorneys would suggest that based on the law and history, it is advisable to take a firmer stance with a surety than with an insurer. If the documentation supporting your bond claim is solid and there are no gray areas, payment in full is likely without involving litigation. If there is a dispute or a defense raised, then the costs of litigation must be considered. If the dispute is frivolous in a surety claim, then a bad faith claim by the claimant may be pursued based upon the surety=s duty to the claimant.

In the title insurance scenario, the insurance carrier has a duty to protect its insured and has no duty to settle as long it avoids Abad faith.@ The cost of litigation and the time value of money should determine the courseof settlement negotiations. Because of the insurer=s duty to its insured, it is likely that the only way 100% of principal (no interest and probably no attorney=s fees) will be recovered is through a Summary Judgment. Summary Judgment generally is not attainable until discovery is completed and possibly after depositions have been taken. The other means of recovering 100% of principal is through a trial in which the trier-of-fact(judge or jury) is convinced that the claim is valid, that there are no defenses and that the claimant has proven that it is entitled to everything it seeks in terms of the principal.

Remember: While a guarantor is providing a guaranty that the debt will be made good, an insurer is simplyindemnifying a third party, they are not guaranteeing that anyone will be made whole.

Contributed by
VANN & SHERIDAN, LLP
Attorneys at Law
1720 Hillsborough Street, Suite 200 (27605)
Post Office Box 2445
Raleigh, North Carolina 27602-2445
Telephone (919) 510-8585
Facsimile (919) 510-8570
www.vannattorneys.com