It is well known that on public projects, contractors must obtain performance and payment bonds, which protect owners from contractors who fail to complete a job or fail to pay subcontractors and suppliers. It is common practice for bonding companies to require the owner of a contracting company to sign an indemnity agreement that would hold the owner personally liable to the bonding company against losses paid out on the bond in addition to holding the contracting company liable. This adds an extra layer of protection for the bonding companies to collect in the event of a default.
Bonding companies will often require both a husband and wife to also sign the indemnity agreement, even when only one of them individually owns the contracting company. Married couples should think very carefully before agreeing to sign such an indemnity agreement. Both husband and wife signing the indemnity agreement puts all of the couple’s joint assets, including their home, at risk in the event of a default on the project.
Where there is a valid, signed indemnity clause, the courts will enforce it against the parties who signed, as illustrated by a recent decision by the U.S. District Court for the Eastern District of Michigan. In Hartford Fire Insurance Company v. ABC Paving Company, Thomas Morrison, and Donna Morrison, the court held that where there is a valid, enforceable indemnity agreement, the signing parties are contractually obligated to indemnify the bonding company for all losses it incurred as a result of issuing the bonds.
In Hartford, the bonding company required both the owner-husband and his wife to sign an agreement to personally reimburse Hartford for all claims paid out on the bond. When the project went south, Hartford had to pay out on the performance bond, and sued to enforce the indemnity agreement. The court found ABC Paving and the owner-husband liable. However, there was a factual dispute over whether the wife’s signature had been forged – an issue for the jury to decide.
The controversy in Hartford reminds us to be extremely cautious about signing such an indemnity agreement. If the jury finds that the signature on the agreement is the wife’s, then all of the couple’s personal assets will be at risk. If the signature is deemed to be a forgery, then the couple’s joint assets will be much better protected.
Contractors should think carefully before signing such an indemnity agreement. If possible, negotiate with the bonding company so that only the construction company’s owner will sign the agreement, not the spouse. Also, consider placing a limitation on the amount that the owner will be personally liable. For example, the indemnity clause might limit the owner’s personal liability to $100,000. Many public construction projects cost millions – to hundreds of millions – of dollars. An indemnity clause that limits a contractor’s personal liability will still serve as incentive to complete the project as required, while also protecting some of his or her personal assets.