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SURETY’S
GOOD FAITH SETTLEMENT OF
SUBROGATION
AND
ASSIGNED CLAIMS
OF ITS PRINCIPAL APPROVED
Jack W. Plowman*
A contractor’s undertaking to
indemnify an owner was construed broadly so as to extend to a
statutory liability that did not come in existence until after the
contract was performed, in County of Delaware v. J.P. Mascaro &
Sons, Inc., 2003 Pa. Super. 284.
An interesting decision, handed up by
the United States District Court for the Eastern District of New York,
came into my possession at the recent National Bond Claims
Association, held in Scottsdale, Arizona.
The decision, as yet unreported, was
General Insurance Company of America v. Mezzacappa Brothers, Inc. In
that case, it appeared that General had been surety to Mezzacappa
Brothers (MBI) on a number of public construction jobs and, as such,
paid a number of payment bond claims, totaling in excess of
$1,000,000. General then sued MBI for indemnification, and MBI
asserted offsets arising out of General’s settlement of affirmative
claims which MBI had against the owner-obligee and against a supplier
to MBI, and a surety of a subcontractor to MBI. MBI contended that
General had improperly settled these affirmative claims of MBI, by
failing to act with “commercial reasonableness.”
The issue raised by the pleadings was
whether General’s settlement of claims was to “be measured by the
standard of good faith under general principles of surety law…or by
the standard of commercial reasonableness under Article 9 of the
Uniform Commercial Code…” The Court held that the standard applicable
to the settlement of claims made against a surety also applied to
claims made by a surety as subrogee to the principal’s claims against
the owner-obligee and subcontractors and their sureties and,
presumably other claims to which the surety is subrogated, or which
came to the surety as assignee in the indemnity agreement.
The right of the surety to succeed to
the rights of a bonded principal, i.e., subrogation, arises as a
matter of common law from the surety’s discharge of the principal’s
obligation. However, the standard for the surety’s resolution and
discharge of claims made under the bond is set forth in the indemnity
agreement entered into by the principal as a condition precedent to
the surety’s execution of the contract bonds. Such was true in the
General-MBI case, although the Court seemed to imply that the standard
arose out of decisional law, rather than from the indemnity agreement.
In any event, the Court had no
difficulty in applying the same standard in respect to the surety’s
settlement of affirmative claims of the principal, to which the surety
was subrogated, or which were assigned to the surety under the
indemnity agreement. The Court might very well have chosen to apply a
different standard, a higher standard of “commercial reasonableness,”
to those claims which came to the surety by way of the assignment,
from those to which the surety was subrogated. Instead, the Court
rejected the standard of “commercial reasonableness” advocated by MBI,
as established by the Uniform Commercial Code. Accordingly, the Court
held that, in resolving all of the affirmative claims, the surety was
held to a lesser standard, namely “good faith.” Certainly, a uniform
standard is preferable.
*Of counsel, Bentz Law Firm, P.C.; fellow, American
College of Trial Lawyers; member, American Bar Association Forum on
the Construction Industry; member, American Bar Association Fidelity
and Surety Committee; Member, National Bond Claims Association;
Adjunct Professor, Emeritus, Duquesne University School of Law,
Author, Pennsylvania Mechanics’ Liens (Professional Education Systems,
1989); Author, with K.W. Lee, Construction Contracting for Public
Entities in Pennsylvania (Lorman Education Services, 2002).
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