Supreme Court of New York, Appellate Division Upholds Summary Judgment in Favor of Surety in Indemnity Suit

In a case decided on March 18, 2008 and styled Prestige Decorating and Wallcovering, Inc. v. United States Fire Insurance Company, 2008 N.Y. App. Div. LEXIS 2398, the appellate division of the Supreme Court of New York upheld a trial court’s grant of summary judgment in favor of the United States Fire Insurance Company, the surety for IDI Construction Company, Inc. on a project in New York. In the lower court, several claimants presented claims to the surety under bonds issued for IDI Construction. The surety paid claims and incurred costs in excess of $500,000, and sought indemnity for those losses. In its motion for summary judgment, the surety submitted a sworn affidavit providing an itemized statement of its loss and expenses. In opposition, the indemnitors provided “conclusory affidavits” contending, in part, that the surety had not properly processed the claims or had paid the claims in “bad faith.” The trial court rejected these arguments and awarded the damages to the surety.

In a very short opinion, the appellate division upheld the right of the surety to recover under a written indemnity agreement that permitted recovery “upon proof of payment, unless payment was made in bad faith or was unreasonable in amount, and this rule applies regardless of whether the principal was actually in default or liable under its contract with the obligee.” Such language is found in many indemnity agreements and, in essence, enables the surety to recover payments made under the terms of a surety bond unless the indemnitors can affirmatively show that the payment was made in bad faith. In this particular case, the indemnitor merely submitted conclusory affidavits without evidence to support a claim of bad faith or unreasonable claim handling practices. Without such facts, the court of appeals concluded that the judgment was properly entered against the indemnitors. Based on the record before it, the appellate court held that the opposition submitted by indemnitors was based on the “mere hope” of a defense which is not sufficient to avoid summary judgment.

This case illustrates the rights given to sureties under the terms of written indemnity agreements to settle and adjust claims and thereafter seek indemnity from the principal and individual indemnitors. In the event that an indemnitor asserts a defense based on the lack of good faith claims handling, there needs to be affirmative proof of such actions to preclude the granting of summary judgment in favor of the surety.

Posted by: David C. Olson