The Surety’s Reservation of Rights
August 9, 2022
We all do it. It’s practically instinctive. We don’t even give it so-much-as a second thought. Even if all we are doing is something mundane, or routine like transmitting a document, we still do it. We “reserve our rights.” No doubt you have written letter after letter which ends with some variation of the following: “The Surety reserves any and all rights, remedies and defenses under the bonds, other applicable documents, at law and/or in equity as pertain to this matter. Nothing stated herein, or left unsaid, shall constitute an admission of liability, estoppel, prejudice or waiver of any kind, including but not limited to a waiver of the statute of limitations.” Sometimes the reservation of rights is fairly detailed like the statement above, and sometimes it is short and pithy, such as – “the Surety fully reserves all of its rights.” Still other times the reservation of rights can be fairly lengthy, bordering on over-kill. So, the question arises, is the practice of reserving one’s rights a left-over vestige from some formalistic by-gone era when demurrers and writs roamed the land, or does it serve a legitimate risk management function in today’s world of claims handling? In this post we will explore the surety’s reservation of rights and perhaps put a new perspective on that reflexive action we all take for granted.
Reserving one’s rights or interests is a long-standing practice that has been employed in a variety of contexts. Perhaps the most familiar context is that of liability insurance coverage where a reservation of rights is most often discussed in the circumstance of an insurer providing a defense for an insured while at the same time preserving any rights and defenses the insurer may have regarding denial of coverage or liability for indemnity. Regardless of the context, the concept remains the same, the purpose of the reservation of rights is to advise the party with whom you are dealing that some part of the rights and obligations between the parties is being separated out, protected or reserved.
The concept of reserving one’s rights arises in part in response to the doctrines of waiver and estoppel. Essentially, the reservation serves the function of putting the recipient on notice that the surety is not intending its acts or omissions to constitute a waiver of rights or an estoppel. By providing the “notice” to the recipient, whether it be an obligee, claimant or indemnitor, the recipient is advised that the surety may yet assert its rights notwithstanding the action it is currently taking or notwithstanding the fact that the surety has not specifically addressed an issue. Thus, the reservation of rights is designed to simultaneously preclude any notion of “reasonable reliance” by the recipient, and plainly contradict any claim that may be made of intentional waiver by the surety.
In reviewing and distilling the case law regarding reservations of rights, both in the context of suretyship and insurance policies generally, several over-arching, common sense principles can be observed. First, to be effective, the reservation of rights must be adequately communicated to the intended recipient. Second, the reservation must clearly and unambiguously inform the recipient of the surety’s position. In this regard, the adequacy of the reservation is determined not by the recipient’s subjective intent, but by whether the reservation “fairly informs” the recipient of the rights being preserved objectively. Finally, the reservation must be asserted in a timely fashion. In addition to the foregoing principles, courts also look to other factors in determining whether a party’s rights have been properly reserved. Specifically, courts tend to place a great deal of weight on whether any other subsequent actions have been undertaken that are inconsistent with the reservation of rights. Further, courts also consider whether any representations or promises have been made to the recipient that are inconsistent with the reservation of rights. Finally, courts will look to whether the underlying claim has remained disputed throughout.
So, let’s look at some cases involving the use of reservations of rights. In J. Caiazzo Plumbing and Heating Corp. v. United States Fidelity and Guaranty Company, 2004 WL 2848548 (S.D.N.Y. December 9, 2004), the claimant asserted that the surety should be estopped from arguing that the statute of limitations had run because the surety acknowledged the claimant’s claim and represented that they were investigating the claim and then waited for the statute of limitations to expire before denying the claim. The court noted that a claimant can prove estoppel by showing that the surety initiated settlement negotiations in order to “lull the claimant into inactivity” until the statute of limitations expired. In addressing the estoppel argument raised by the claimant, the Court observed that New York courts have consistently rejected estoppel claims against a surety when the surety acknowledged receipt of the claim, reserved its rights on numerous occasions, the amount of the claim was always in dispute, and no settlement was ever offered by the surety. The Caiazzo Court noted that the surety never waived its rights under the bond because each letter it sent to the claimant explicitly reserved those rights. Further, the surety advised the claimant that it was in the process of determining its position with regard to the claim, but never offered a settlement or otherwise claimed to be in the process of resolving the claim. As a result, the Court held that there could be no estoppel or waiver.
The case of Hutton Construction Co., Inc. v. County of Rockland, 1993 WL 535012 (S.D.N.Y. Dec. 22, 1993), presents somewhat of an unusual circumstance. In Hutton, the principal encountered subsurface rock and water conditions on a project that were materially different than what was disclosed by the owner in the contract documents. The principal filed suit to obtain payment from the owner for the additional costs caused by the changed conditions. The owner asserted that the Principal failed to timely perform and terminated the principal and made claim against the three surety companies. In response to the claim against the bond, the sureties chose to litigate the issue of the termination of the principal. The litigation dragged on for over 5 years. The principal could not afford to fund the litigation, so the sureties incurred $1.3 million in legal fees, expert fees and payment of some payment bond claims. Along the way there were several attempts at settlement to no avail. Also, along the way, the sureties made two demands for collateral and indemnity from the principal and its indemnitors, but no collateral was provided and no payments were made. Finally, after a jury was empaneled a settlement was reached between the sureties, the owner and the owner’s design engineers. The sureties settled the claims on behalf of the principal and indemnitors under the GIA without their consent or approval. Subsequently, the sureties filed a motion to enforce the settlement. The principal opposed the motion challenging the sureties’ rights to settle and asserting that the sureties had waived any such rights or were estopped from asserting such rights. The principal contended that the sureties’ support for the litigation over five years constituted a waiver of any right to settle the claims. The Court rejected this argument and noted that the Sureties continuously reserved their rights under the GIA in four separate letters over the five-year period of the litigation and concluded that in light of the reservation of rights there can be no issue of fact as to whether the sureties intentionally relinquished their rights. The Court also pointed to the reservation of rights in denying the claim of estoppel noting that the principal could not have reasonably relied on the sureties’ actions in funding the litigation because the sureties continuously reserved their rights under the GIA. So, the Hutton case stands as a reminder to repeatedly assert and reassert your reservation of rights in order to preserve your rights, particularly when the matter drags on for a long period of time.
The case law also reveals that a reservation of rights is not an impenetrable shield or license to do as one pleases. Actions and conduct after the reservation of rights can still lead to such significant prejudice that a court will be more inclined to find estoppel.
Far from being a remnant from a by-gone era, the reservation of rights can play a vital role in the claims handling process. Indeed, the surety should renew and reevaluate its approach to the use of the reservation of rights as a risk management tool. Several constructive points can be taken away from this post which may appropriately be put into practice by the surety to begin and/or continue the benefits of the reservation of the surety’s rights. Starting with the reservation of rights itself, the following general points are important:
- The wide-spread practice of using pre-packaged form language, whether it is applicable to the context or not, should be reviewed with a concerted effort to include a specifically tailored reservation of rights in all communications with obligees, claimants and indemnitors.
- Form language may not address the many nuances and circumstances in which estoppel and/or waiver can arise. Such circumstances vary from case to case and depend on a myriad of factors such as:
- the sophistication the party;
- the magnitude of the prejudice to the party;
- the knowledge and information available to the surety and the timing of obtaining that knowledge;
- whether the claim is disputed; and
- whether the claimant is represented by counsel.
- The reservation of rights should be clear and unambiguous;
- The reservation of rights should be adequately communicated or delivered to the recipient and repeatedly re-asserted;
- The reservation of rights should fairly inform the recipient of the surety’s position;
- The reservation of rights should be timely asserted; and
- The reservation of rights should be updated as facts and events unfold and knowledge and information are obtained.
Once the surety has effectively reserved its rights, it should make every effort to avoid actions which might undermine the reservation of rights. The following general points are important:
- Avoid actions which are inconsistent with the reservation of rights;
- Avoid statements or representations which are inconsistent with the reservation of rights;
- Avoid omissions, silence or failures to act which could be construed as being inconsistent with the reservation of rights;
- If the claimant communicates its intent to hold-off filing suit based upon its understanding of communications with the surety, the surety should respond informing the claimant that it does so at its own risk.
- Make outside counsel, consultants and agents aware of the reservation of rights and request that they act in a manner consistent therewith;
- Make sure the reservation of rights does not become stale.
Effectively reserving one’s rights and then preserving the reservation thereafter can be effective for the surety if proper attention and effort are focused on the subject and the process becomes one of deliberate action instead of repetitious and reflexive action.
If you have any questions regarding the surety’s reservation of rights please contact Michael A. Stover, Esq. (firstname.lastname@example.org) or any member of the Surety and Fidelity Practice Group.
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