U.S. Court of Appeals for the Second Circuit

Case no.: 25-1053
Date filed: March 11, 2026

A federal appeals court has allowed the performance surety of a terminated contractor to recover indemnification from the company’s individual owners. The surety had settled with the project owner without the contractor’s consent and without a formal determination the contractor had breached the construction contract.

The Casa Pasiva Housing Development Fund Corporation awarded a contract to FG-PH Corporation to renovate eight apartment buildings in Brooklyn, New York. The contract required FG-PH to provide Casa Pasiva with a $21.2 million performance bond for the protection of the project owner, which the contractor obtained from Berkley Insurance Company.

To obtain the bond, FG-PH was required to enter into a General Agreement of Indemnification (GAI) with Berkley. The contractor agreed to indemnify and hold harmless the surety against any loss incurred on the performance bond. The individual shareholders of FG-PH, along with their spouses, had to co-sign the GAI, making them jointly and severally liable for any loss.

The project experienced significant delays, and Casa Pasiva terminated the construction contract. The parties disputed responsibility for the delay and the question of whether there had been a valid termination for default. Nonetheless, the project owner asserted a claim against the performance bond. Several months later, Berkley and Casa Pasiva settled the claim for $10.5 million. Berkley then sued the contractor and its individual owners in federal district court for indemnification against the loss.

The defendants argued FG-PH had not breached the construction contract and that there was no valid termination for default. They had neither been allowed to participate in the claim settlement against the bond nor agreed to the settlement. The district court was unswayed and entered summary judgment in favor of Berkley Insurance. The defendants appealed.

The U.S. Court of Appeals for the Second Circuit said the district court had properly applied New York law regarding a surety’s right to indemnification. A surety establishes entitlement upon proof it had made payment under the performance bond and documentation of the costs it had incurred. It is irrelevant whether the contractor was actually in default or had breached the construction contract. All that is required is the surety’s good faith and honest belief that it was liable for the project owner’s claim against the performance bond.

“Appellants’ argument that Berkley had no obligation to perform pursuant to the bond because Casa Pasiva was in breach of the construction contract is unavailing. The GAI unambiguously gave Berkley exclusive discretion to settle claims arising out of the performance bond… And as New York courts have consistently held, whether FG-PH was actually in breach of the construction contract is irrelevant to whether Berkley is entitled to indemnification under the GAI.”

The appeals court rejected the contractor’s argument that its exclusion from the settlement process raised questions of bad faith. This was speculative and conclusory. “[N]othing in the record suggests Berkley settled the surety claim in bad faith…. Thus, Berkley is entitled to summary judgment on its claim for contractual indemnification.”

The detailed investigation of bond claims commonly performed by sureties not only protects their immediate interests but also shields them against subsequent allegations of bad faith settlement from their contractor/principals.

Unless a construction company is a large, highly capitalized business entity, there is almost no way for individual company ownership to avoid co-signing the General Agreement of Indemnification. This personal liability exposure is an uncomfortable reality of the industry.

Participants:
For Berkley Insurance Corp.: Charles E. Williams, New York, New York
For FG-PH Corp.: Thomas Frank, Huntington, New York

Before: Judges Raggi, Perez, and Merriam

Opinion by: The full court

Outcome: Summary judgment in favor of surety affirmed

Source: Please click here to read the complete opinion.