Article by: Brian M. Streicher
The U.S. Court of Appeals, Second Circuit, recently reiterated that a surety has broad rights to settle bond claims and retains its ability to pursue indemnification from its indemnitors irrespective of the indemnitors’ defenses against the bond obligee. In Berkley Insurance Company v. FG-PH Corp.,1 the Second Circuit restated and affirmed several important tenets of contractual surety indemnification law in New York: (1) the General Agreement of Indemnity (“GAI”) affords the surety exclusive discretion to settle claims arising out of a performance bond; (2) the surety is entitled to indemnification upon documented proof of payment; (3) upon such proof, the surety is entitled to summary judgment unless a triable issue of fact as to good faith or reasonableness is raised; and (4) only specific proof of unreasonableness or bad faith will prevent summary judgment for the surety.
In an unpublished summary order, the Second Circuit reviewed an order from the U.S. District Court of the Eastern District of New York2 that granted summary judgment to the surety on its claim for contractual indemnification against the indemnitors under a GAI. In the case, FG-PH, the bond principal and indemnitor under the GAI, was the general contractor on an apartment renovation project in Brooklyn secured by a performance bond issued by Berkley. The owner terminated FG-PH and made a claim on the performance bond. The surety and owner reached a settlement where the surety paid the owner $10.5 million. The surety then sued the indemnitors under a single-count complaint for contractual indemnification.
The trial court granted summary judgment to the surety, and the indemnitors appealed, arguing that FG-PH was not in default, that the termination was wrongful, and that the surety settled the claim in bad faith. On appeal, the Second Circuit issued a summary order affirming summary judgment and rejecting the indemnitors’ bad faith defense because it was not supported by sufficient evidence.
The trial court had disposed of the indemnitors’ bad faith argument because the indemnitors made only conclusory allegations, such as: (1) the surety abused its discretion by settling the claim “without fair warning or notice;” (2) the surety willfully, recklessly, or negligently failed to ascertain the true facts and conduct a proper due diligence investigation; (3) the principal had valid defenses to the obligee’s claims which the surety failed to raise; and (4) “under the circumstances, it was imprudent and in bad faith” to settle the claims. The trial court correctly pointed out that none of this amounted to evidence of bad faith, i.e. collusion or fraud, or of surety unreasonableness. The Second Circuit agreed. It reasoned that the indemnitors’ allegations amounted to “speculative and conclusory assertions” insufficient to defeat summary judgment.
As a summary order, the Second Circuit’s determination does not have precedential effect, but it does serve as a useful tutorial on the basics of a surety indemnity claim. A surety proves its right to summary judgment by submitting documentation of its payment of a settlement on behalf of the principal and an itemized list of expenses paid in connection with them. Payments are deemed to be made in good faith if the surety pays the claims with the honest belief that it was liable for such claims. Whether the bond principal actually breached the construction contract is typically irrelevant to whether the surety is entitled to indemnification under the GAI. Finally, speculative and conclusory assertions will not sustain a bad faith defense. The Second Circuit reaffirmed these principles.
For the surety, FG-PH provides reassurance that the surety can confidently negotiate and settle bona fide claims without adjudicating the merits of the disputes between the principal and obligee. In instances where the indemnitors are solvent and their indemnity obligation is adequately collateralized, the surety can mitigate the risk of litigation with the obligee by settling claims and relying on its strong indemnification rights for its recourse.
- Berkley Ins. Co. v. FG-PH Corp., No. 25-1053, 2026 WL 682316 (2d Cir. Mar. 11, 2026) (Summary Order).
- Berkley Ins. Co. v. FG-PH Corp., 22-CV-02109 (DG) (TAM), 2025 WL 929469 (E.D.N.Y.
Mar. 26, 2025).
