Court Rules Surety had Right to Settle Principal’s Claims Against Owner, Grants Motion for Summary Judgment

Liberty Mutual Ins. Co. v. Aventura Eng’g & Constr. Corp., 534 F. Supp. 2d. 1290 (S.D. Fla. Jan. 8, 2008)

The U.S. District Court for the Southern District of Florida has interpreted Florida law as allowing a surety to settle not only an owner’s claims on a performance bond, but also the principal’s claims against the owner.  In Aventura Eng’g, a surety completed construction of a project pursuant to an owner’s demand against a performance bond.  The principal, a general contractor, had allegedly defaulted on its contract with the owner, and thereafter refused the surety’s demands for indemnification.  The surety eventually executed a settlement agreement with the owner, whereby the surety exercised its power of attorney to execute a release of all claims that the contractor had against the owner growing out of the bonded contract. 

The contractor argued that the surety did not have the right to settle its claims against the owner because:  (i) the owner did not have a proper claim under the performance bond due to the owner’s default; (ii) the settlement provisions of the indemnity agreement was limited to claims against the bond, and (iii) the attorney-in-fact provision was limited to rights assigned elsewhere in the surety’s indemnity agreement.

Neither Florida courts nor the Eleventh circuit had previously addressed the question, but the Southern District held that “a right-to-settle clause provides a surety with wide discretion in settling claims,” even where the principal is not liable for the underlying claim.  A principal’s breach of its indemnity agreement with a surety triggers the assignment clause and causes assignment of all the principal’s rights growing out of the construction contract.  That assignment, together with the attorney-in-fact provision, gives a surety the right to settle the principal’s claims against the owner.