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First Indemnity of America Insurance Company v. Kemenash

328 N.J. Super. 64, 744 A.2d 691 (App. Div. 2000)

SURETIES; GUARANTIES; STATUTE OF LIMITATION—A surety entitled to indemnification from a guarantor for “losses or liabilities” may sue its guarantor based on either a loss or a liability and the statute of limitations does not run from the earlier of the accrual of the two alternatives.

A corporate general contractor defaulted on two municipal construction projects. The municipality asked the project surety to complete the work under takeover contracts with the municipality. After doing so, and relying upon the indemnity agreements signed by the individual owners of the corporate contractor, the surety claimed reimbursement. One of the individuals asserted that he had never provided the surety with an indemnity agreement for his construction business, and that the agreement on which the surety relied was signed in favor of another surety. Further, the individual “guarantor” argued that the surety waited beyond the statute of limitations. The lower court held that the document in question had been signed in favor of the surety. This left the question as to whether the statute of limitations had run. The indemnification agreement provided that the individual would indemnify and save the surety harmless “from and against every claim, demand, liability, loss, cost, charge, counsel fee, ... .” The difficulty was that the surety did not file suit until almost seven months beyond the expiration of what would have been a six year limitations period. The surety argued that it made its last payment on the project about three years after it entered into the takeover contracts and that the statute of limitations should run from when final payment was made. The “guarantor” reasoned that because the terms of the indemnity agreement provided for contractual indemnification “against mere claims, demands, and any liability, and not just loss or damage,” the cause of action accrued the moment liability was imposed upon the surety. By this reasoning, that date would have been the date that the surety signed the takeover contracts. The surety, on the other hand, contended that “the indemnification agreement contained a ‘bundle of rights,’ including the ‘mutually independent’ rights to seek ‘exoneration’ from the indemnitor in the form of posted collateral sufficient to cover liability and to ‘compel indemnifications for any losses actually sustained’ by it. It assert[ed] that ‘the statute of limitations on a claim for indemnification for loss begins to run only upon the occurrence of the loss, which occurs upon settlement of the case, final judgment against the indemnitee, or payment by the indemnification.’” Therefore, the surety argued, as a practical matter, that “its cause of action could not accrue until it made payments in excess of the money owed” on the underlying contract because “if the contract balances ... had exceeded [its] payments, [it] would have suffered no loss.” The Court assumed for the purposes of its opinion that the surety’s “liability” on the bond was fixed when it executed the takeover agreements. Therefore, it could have instituted suit on that day, had it chosen to do so. The question, however, was whether it had the choice to sue either on the accrual of its cause of action based upon “liability” or the indemnity agreement when its cause of action for “loss” accrued. Authority in New Jersey was sparse. Therefore, the Court looked to other states. After its review, it found “the more reasoned approach” to be that there are two separate covenants “based on language in an indemnity agreement that provided the surety with “the right of immediate action ... for any ‘loss or liability when ... paid, adjusted, incurred, or assumed ... whether the same shall have been paid or not.’” Therefore, it held that those covenants may be treated as separate agreements, and the surety should have been permitted to maintain an action for recovery of actual loss even though the time had expired for an action to recover on the covenant to indemnify for liability. To the Court, this approach resolved the statute of limitations issue on sound, fair principles of law. “Most importantly, it fulfills the expectations of the parties under the clear terms of their agreement and affords the surety the benefit of its bargain.” Because the “guarantor” admitted that the indemnification agreement provided the surety with protection against both liability and loss, it could not claim that it was surprised by the surety’s desire to pursue a claim for actual losses. The Court also held that “[t]here may be times, however, where it may be impractical for the surety to institute suit in reliance on the indemnification against liability.” In such cases, “[i]t would be unfair to the surety in such circumstances to have the statute of limitations begin to run at that time because the sole aim of the indemnification agreement and the expectations of the parties is to make the surety whole on its bond undertaking.”


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