What contractors should understand about surety bonds, indemnity agreements, personal liability, and what can happen when a bond claim arises.
The contents of this article are based on insights shared in the Fall 2025 issue of Highway Builder, the official publication of the Associated Pennsylvania Constructors (APC).
In Pennsylvania, surety bonds are commonly used on public and private construction projects to ensure that work is fully completed and that contractors, subcontractors, and suppliers are paid in full. But do you really know what you are agreeing to when you obtain and submit bonds on a project?
Generally, in order to obtain surety bonds, contractors are required to sign indemnity agreements that expose their businesses, related companies, owners, and, in some circumstances, personal assets to financial liability. If a claim is made against a bond, the surety may also have significant authority to decide how that claim is resolved.
Understanding these obligations before a bond claim arises can help contractors better assess their risks.
Key takeaways:
On Pennsylvania highway construction projects, surety bonds are one of the primary ways a public owner can ensure that an awarded project will be completed and paid for. This is because mechanics’ liens cannot be filed against property used for a purely public purpose, such as local, state, or federal highways.
As a resident, the Pennsylvania legislature later enacted the Public Works Contractors’ Bond Law to provide protections for public projects where mechanics’ liens are unavailable. The law requires a prime contractor to provide performance and payment bonds before being awarded certain public construction contracts.
A performance bond protects the project owner if the prime contractor fails to fulfill its obligations. If the contractor is terminated or otherwise removed from the project, the surety may be called upon to ensure the project work is completed.
A payment bond protects qualifying subcontractors and suppliers who have not been paid for labor or materials provided to the project.
Together, the bonds protect the public owner while providing a potential source of payment for qualifying subcontractors and suppliers.
Although surety bonds are sometimes compared to insurance policies, there is an important difference for contractors: a surety generally expects to be fully reimbursed by the contractor if it suffers a loss under the bond.
Before issuing a bond, a surety typically reviews the contractor’s finances, working capital, work history, current projects, internal operations, and past performance on similar projects.
If approved for bonding, the contractor typically must sign a general indemnity agreement. This agreement generally requires the contractor to reimburse the surety for losses and expenses it incurs under the bond.
For example, the surety might initially pay to resolve a claim, complete a project, or compensate an unpaid claimant. The surety may then seek reimbursement from the contractor for those payments and related expenses.
The indemnity agreement can also extend to the financial assets beyond those of the company obtaining the bond.
Depending on the surety’s requirements, the agreement may need to be signed by the contractor, related companies, individual company owners, and, in some circumstances, the owners’ spouses. Certain assets, such as residences, commercial properties, or investment accounts, may also be pledged as collateral.
By signing an indemnity agreement individually rather than solely on the company’s behalf, an owner may become personally responsible for reimbursing the surety.
Contractors should therefore understand who is signing the agreement, what obligations they are accepting, what assets may be affected, and what authority the agreement gives the surety.
When a surety receives a claim under a payment or performance bond, it investigates the circumstances and determines whether it has an obligation under the bond.
The contractor and surety may not always reach the same conclusion.
For example, a contractor may believe that a subcontractor or supplier is not entitled to additional payment or that the contractor has satisfied its performance obligations. The surety, however, may reach a different conclusion and decide to settle the claim.
A decision from the U.S. District Court for the Western District of Pennsylvania illustrates what can happen when the contractor and surety disagree.
In Travelers Casualty & Surety Co. of America v. Bunting Graphics, Inc., the surety settled a performance bond claim made by the project owner for $4.2 million.
The contractor disagreed with the decision to settle and refused to reimburse the surety. The surety then sued the contractor under its indemnity agreement, seeking reimbursement of the settlement amount as well as its legal fees, costs, and other expenses.
The court determined that the surety was entitled to recover the settlement payment, legal fees, and costs from the contractor.
Importantly, the court focused on the language of the indemnity agreement rather than deciding the contractor’s factual defenses about its performance or objections to the settlement amount. The agreement gave the surety broad discretion to settle claims made under the bond.
The decision illustrates why the terms of an indemnity agreement matter and why it is incumbent upon business owners to know the full impact of that agreement. Depending on the agreement, a surety may have significant control over how a claim is resolved, and the contractor may be responsible for reimbursing the surety even when it disagrees with that resolution.
Indemnity agreements may be a routine part of obtaining bonds for construction projects, but they should not be treated as routine paperwork.
Before signing, contractors should understand who is assuming the indemnity obligations, whether personal assets may be affected, what authority the surety has when a claim is made, and what costs the contractor may ultimately be required to reimburse.
If a bond claim arises, early communication with the surety and a clear presentation of the relevant project documents and facts can be important. Involving construction counsel early can also help facilitate discussions with the surety as the claim is investigated, defended, or resolved.
Contractors with questions about surety bonds, indemnity agreements, or payment and performance bond claims can contact a member of McNees’ Construction Group for more information.
McNees Wallace & Nurick announces that its Construction Law Group has been ranked in the 2026 Chambers USA Guide for Construction (Pennsylvania). The recognition distinguishes the practice’s strong track record and professional scope, advising clients across the construction industry. Published by Chambers and Partners, the Chambers USA Guide is one of the most respected legal […]
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