Surety Case Law Note: No You May Not See My Underwriting Files
February 28, 2023
In this Surety Today Blog post we consider a Case Law Note addressing the issue of whether the surety’s underwriting files are discoverable in an indemnity action. Spoiler alert: The court said they are not. The case is:
FID. & DEPOSIT CO. OF MD. V. BLANTON, 4:21-CV-1074- JAR, (E.D. MO. FEB. 8, 2023)
How many times has a claimant or indemnitor sought discovery as to the surety’s underwriting files? In many instances they ask through discovery, the surety steadfastly refuses to provide the files and the issue goes away. Occasionally, they press for production. In this case, the indemnitors filed a motion to compel production of the underwriting files and the surety, Fidelity Deposit Company of Maryland (“F&D”), opposed.
The facts of the case are these: F&D issued a Performance Bond and Payment Bond, as well as various permit and licensing bonds, on behalf of Ben F. Blanton Construction, Inc. Eventually, the obligee on the Performance Bond, declared the principal in default and filed suit against F&D seeking the full $24,461,157.50 penal sum of the Performance Bond. In addition, F&D was sued by two payment bond claimants. F&D paid at least $1,804,551.21 to resolve the claims on the Payment Bond, and anticipated more payments to be incurred, as well as attorneys’ fees and interest while the obligee’s suit was still pending. F&D demanded indemnification and collateral from the Indemnitors for its losses and expenses incurred and anticipated, but the Indemnitors did not make any payments to F&D. Accordingly, F&D filed this action against the Indemnitors alleging breach of written indemnity agreement (Count I), specific performance (Count II), and Quia Timet (Count III). The indemnitors answered asserting lack of consideration and the doctrines of unclean hands, laches, waiver and/or estoppel, among others.
The Indemnitors filed a Motion to Compel discovery, seeking production of documents related to the underwriting and due diligence F&D conducted as to the Indemnitors prior to entering into the Indemnification Agreement and the Bonds. The Indemnitors claimed that the underwriting files were relevant to their defenses. Specifically, the Indemnitors asserted that F&D did not conduct any reasonable inquiry into any Indemnitors’ ability to pay or financial resources and therefore F&D did not rely on the financial condition of each Indemnitor in determining whether to issue the bonds. In response, F&D contended that the motion to compel was untimely and that the underwriting files were not relevant to the Indemnitors’ defenses.
The Court noted that generally, “[p]arties may obtain discovery regarding any non-privileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit. Information within this scope of discovery need not be admissible in evidence to be discoverable.” Fed.R.Civ.P. 26(b)(1).
The Court denied the motion to compel finding that the Indemnitors failed to show how the requested relief was relevant to their defenses. The Court stated that the defense of lack of consideration for the Indemnification Agreement was not relevant to F&D’s claim. See Union Elec. Co. v. Sw. Bell Tel. L.P., 378 F.3d 781, 786 (8th Cir. 2004) (citing Schaefer v. Spider Staging Corp., 275 F.3d 735, 739 (8th Cir. 2002) (applying Missouri law)(“[A]n indemnity agreement is enforceable if the agreement is clear and unequivocal, the provision applies to the claim in question, and the agreement was not signed under duress.”). In this case, the Indemnity Agreement stated that the issuance of the bonds is the consideration for the Indemnity Agreement. The Indemnitors provided no basis for the Court to look outside the contract terms to determine whether the Bonds did not constitute consideration. Further, the Court held that the requested discovery was not relevant to the litigation because the execution of the Bonds is sufficient consideration for the execution of the Indemnity Agreement under applicable law. See Am. Ins. Co. v. Gilbert, 319 F.Supp. 1315, 1317-18 (E.D. Mo. 1970) (citing James W. Scudder & Co. v. Morris, 107 Mo. App. 634, 82 S.W. 217 (S.L.C.A. 1904)). Indeed, the Indemnity Agreement specifically provided, “the Indemnitors have a substantial, material and beneficial interest in the obtaining of the Bonds.” Thus, the Court found that the existence of consideration was “contemplated and expressly written in the contract.” Am. Contractors Indem. Co. v. Leadco, LLC, No. 4:11-CV-2126 CAS, 2014 WL 1272771, at *7 (E.D. Mo. Mar. 27, 2014). Accordingly, the Court held that discovery related to the Indemnitors’ defense was not reasonably calculated to lead to admissible evidence and denied the motion to compel.
Discovery of the “underwriting files” can be a fact intensive and complicated issue. There are questions about the protected nature of the documents in those files relating to financial details of the principal/indemnitors and business/trade secrets relating to the surety’s underwriting process, analysis, considerations, etc. The issue also depends on the nature of the parties’ claims and/or defenses. If the claims and/or defenses relate to knowledge of the financial condition of the principal or indemnitors, the surety’s knowledge of the health and operations of the principal, such files may become relevant. Several cases have gone in a different direction – ordering production. See Western Sur. Co. v. Alliance Steel Const., Inc., No. 06-C-326-C, 2007 WL 5514730, at * 1 (W.D. Wis. May, 23, 2007) (compelling the production of surety’s underwriting files); Johnson Controls, Inc. v. Great Am. Ins. Co., No. 2:20-CV-3029-RMG, 2021 WL 5918620, at *3 (D.S.C. Mar. 29, 2021)(same); Fid. & Deposit Co. of Maryland v. Cnty. of Lake, No. 97 C 6276, 1998 WL 852933, at *2 (N.D. Ill. Dec. 7, 1998)(same);
It is always nice to see the court get it right. If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321 or mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.