The Surety’s Salvage Efforts: Equitable Subrogation v. Contractual Assignment Rights

It was an honor and pleasure to speak at last week’s surety and fidelity claims conference in Philadelphia hosted by the American Conference Institute.  Mark Oertel, a surety attorney from Los Angeles, and I closed out the conference on Thursday, October 18 with a presentation entitled “The Interplay Between Equitable Subrogation and the General Agreement of Indemnity’s Assignment Clause.”

Our remarks focused on two of the tools sureties use to minimize loss after satisfying claims made under payment and performance bonds.  One of those tools, equitable subrogation, allows the surety to step into the shoes and assert the rights of those entities to whom or on whose behalf the surety has performed or made payment.  That means after it performs its bond obligations, a surety becomes “subrogated” to the owner’s right to apply contract funds to completion costs, to the bond principal’s right to recover against poor-performing and/or late-performing subcontractors, and to the subs’ and suppliers’ rights to payment.  Since the courts have held that the surety’s equitable rights trump the rights of bankruptcy trustees, lenders and taxing authorities, equitable subrogation is undoubtedly the most powerful weapon in the surety’s salvage arsenal.

That’s MOST powerful.  Not ALL powerful.

On occasion, the general indemnity agreement (“GIA”) might provide a more suitable salvage tool than equitable subrogation.  Mark and I focused our attention on the GIA’s assignment clause, which typically provides that the moment the surety receives claims under a contract bond, the bond principal assigns to the surety all of the principal’s interest in the contract funds due or to become due; all project materials, supplies, equipment and plant; all subcontracts; and all of the principal’s claims against other project participants.  Such an assignment can serve as a powerful supplement to the surety’s assertion of its equitable subrogation rights.

Mark and my presentation fleshed out the pro’s and con’s of these two salvage tools and highlighted a number of judicial decisions from the last 15-20 years that illustrate how the assignment clause has increasingly found favor with the courts.  For a taste of our discussion, I invite you to thumb through the PowerPoint presentation above.