Surety Law Update Spring 2018

In recent years, some sureties have waived the need for a signed indemnity agreement usually for smaller, commercial bond accounts. This decision usually is based on underwriting and business considerations designed to make the bonding process easier for the producing agent. This article briefly discusses considerations of this industry movement and the reliance on the doctrine of equitable subrogation for recovery of the surety’s loss, costs and expenses.

Both Washington and Oregon recognize the common law right of equitable subrogation where the surety “steps into the shoes” of its principal should a payment be made from the bond. In such cases, Washington courts have held that an “implied promise to indemnify or reimburse the surety comes into being on part of the principal, which implied obligation, as such, is enforceable by the surety against the principal”. See Leuning v. Hill, 79 Wn.2d 396, 486 P.2d 87 (1971). Oregon courts describe such subrogation as an equitable device used “to compel ultimate discharge of a debt by the person who in equity and good conscience ought to pay it.” Maine Bonding v. Centennial Ins. Co., 298 Or 514, 521, 693 P2d 1296 (1985); see also Ochoco Lumber Co. v. Fibrex & Shipping Co., Inc., 164 Or App 769, 994 P.2d 793 (2000) (equitable subrogation applies to sureties as well as issuers of standby letters of credit). Indeed, this common law equitable right has been codified in Washington under RCW 19.72.070. Oregon’s statute applies only when a surety is subject to a judgment severally with the principal. ORS 18.242. It must be noted, however, that equitable and statutory rights, are largely ineffective when the surety’s principal is a corporate entity that is defunct and/or without assets. From a practical standpoint, without individual indemnity, the surety’s subrogation and indemnity rights are severely limited. Although our numbers are anecdotal, we estimate that more than 50% of the commercial bonds executed under the Washington State Contractor’s Registration Act involve corporate entities and, therefore, equitable or statutory subrogation is not a viable mechanism to mitigate loss.

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