Illinois state court ruling on a dispute involving a construction project in North Carolina relies on California law relating to the distinction between the obligations of sureties as opposed to insurers. This begs the question why California law would apply to such a situation. The answer is quite simple: the contract controlling the transaction identified California law as the substantive law to be used as the basis for resolving certain disputes.
In this instance, a contractor, BE&K Building Group LLC (“BE&K”), was the general contractor building an annex to the dental school at the University of North Carolina-Chapel Hill. US Surety Company issued the necessary bonds for the project. It entered in to a General Indemnity Agreement with BE&K in 2008 to serve as the surety and, under such agreement, it was stated that California law would control substantive resolution of any disputes. The Agreement also gave US Surety “right in its sole and absolute discretion to determine whether any claims under any Bond or Bonds shall be paid, compromised, adjusted, defended, prosecuted or appealed.”
When a subcontractor which terminated participation in the project and defaulted under its agreement with the contractor led to US Surety to pay out a surety claim which it sought to recoup, certain parties (jointly referred to as “Indemnitors”) attempted to block this recoupment by claiming that it had an affirmative defense not to indemnify US Surety. The Indemnitors argued that US Surety had a duty to act in good faith and fair dealing in its performance and its enforcement. If it breached those duties, it abrogates its right to recoupment.
But, in applying California law distinguishing the role of sureties from insurers, it cast doubt on the argument. “California courts have consistently held that insurance contracts and surety agreements are inherently different and therefore require a different analysis on the grounds that liability insurance policy is written for the [financial] protection of the insured . . . a [surety agreement] does not protect the principal by insuring him against liability,” Accordingly, a surety is not required to give a heightened degree of consideration to the interests of the indemnitor as it does not stand as a fiduciary on behalf of the indemnitors. As a result of this choice of law analysis performed by the court in Illinois, California law protects the surety company’s chances of recovery.
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