Legal Update: Bad Faith Payments Throw a Wrench in a Surety’s Indemnity Plans
Authors: Christopher K. LeMieux and Brandon M. Tate
The Ohio Casualty Insurance Company v. Ryder & Ryder, Ltd., et al., 2025 WL 2938698 (E.D. La. Oct. 16, 2025).
In a significant decision affecting the surety and construction industry, the U.S. District Court for the Eastern District of Louisiana has signaled that a surety’s bad faith payment can serve as an affirmative defense by the principal to that surety’s claim for indemnification. The ruling came in The Ohio Casualty Insurance Company v. Ryder & Ryder, Ltd., et al.
The Ohio Casualty Insurance Company (“Ohio Casualty”) issued payment and performance bonds on behalf of Ryder & Ryder, Ltd. (“Ryder”) and executed an indemnity agreement that required Ryder to reimburse the surety for all losses incurred. After more than $1 million in claims were filed on the bonds, Ohio Casualty sought indemnification from Ryder.
In its answer, Ryder asserted Ohio Casualty’s bad faith payments as an affirmative defense to indemnification. Ryder alleged that Ohio Casualty acted in bad faith by settling meritless subcontractor claims, performing out-of-scope work, and interfering with ongoing projects for which Ryder was not yet placed in default. Ohio Casualty moved to strike the defense, arguing that it had “sole discretion” over bond claim settlements and that neither the agreement nor Louisiana law imposed a duty of good faith toward Ryder.
Ryder countered that the indemnity agreement expressly limited reimbursement (indemnity) to payments made in good faith and that Louisiana Civil Code article 1759 imposes a general duty of good faith in all contractual relations. The indemnity agreement permitted Ohio Casualty to recover “all disbursements made by [surety] in good faith.”
In acknowledging the good faith requirement contained in the agreement, the court denied Ohio Casualty’s motion to strike, finding that the bad faith defense by the principal was not insufficient as a matter of law. While the court confirmed that a suretyship does not, in and of itself, create a fiduciary relationship with the principal obligor, it made clear that a surety’s bad faith acts may nevertheless constitute an exception to a principal obligor’s liability to a surety.
The ruling sends a clear signal to sureties, contractors, and owners alike: A surety’s right to indemnity may be conditioned upon its good faith payment and fulfillment of its bond obligations. This case should influence how sureties evaluate claims and whether to make payments going forward.
