The Surety Has Tendered its Defense – Now What?
This is a question we sometimes get from contractors who are either on the receiving end of a payment bond claim for the first time or have deeper concerns about their current bonding relationship. An important first step is to review the fundamental difference between insurance policies (which provide coverage against the risk of defined losses in exchange for a premium) and surety bonds (which are more akin to an extension of credit). The key distinction here is that sureties expect (and are generally entitled) to full indemnification from the bonded principal and its indemnitors. If the tender of defense is rejected, the surety will almost certainly retain separate counsel and look to the principal and indemnitors for payment of these fees. This results in duplication of effort and expense as two attorneys (one for the bonded contractor and one for the surety) work to defend against the same bond claim.
The ability to avoid these duplicate fees, coupled with the tangible benefits of working with their own counsel, lead most bonded contractors to accept the tender of defense and move on down the road. As a “general rule,” this is sound practice and accepting the tender works well most of the time. Until it doesn’t.
I believe that contractors should consider both the pros and the cons of accepting a tender of defense. Sharing counsel with another party can be efficient, but it can also create conflict of interest problems in the event of a subsequent dispute between the bonded contractor and its surety. If the bonding relationship is already strained, the risk of conflicting out your go-to attorney may not be worth the savings.