Engbrock v. Federal Insurance Company

• Decision Date: 06 January 1967
• Docket Number: No. 22442.,22442.
• Citation: 370 F.2d 784
• Parties: Glenn H. ENGBROCK, Glenn H. Engbrock, Inc. and Encon Construction, Inc., Appellants, v. FEDERAL INSURANCE COMPANY, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

370 F.2d 784 (1967)

Glenn H. ENGBROCK, Glenn H. Engbrock, Inc. and Encon Construction, Inc., Appellants, v. FEDERAL INSURANCE COMPANY, Appellee.

No. 22442.

United States Court of Appeals Fifth Circuit.

January 6, 1967.

Dougal C. Pope, Houston, Tex., for appellants.

Russell Talbott, Houston, Tex., Fulbright, Crooker, Freeman, Bates & Jaworski, Houston, Tex., for appellee.

Before HUTCHESON, BELL and AINSWORTH, Circuit Judges.

HUTCHESON, Circuit Judge.

Federal Insurance Company¹ sued Engbrock, Inc. and Encon Construction, Inc.² as its defaulting principals and indemnitors. The two corporations are owned and controlled by Glenn H. Engbrock who was sued individually as an indemnitor. Trial was to the court without a jury in the Southern District of Texas. We affirm the judgments entered against the corporations and Engbrock individually.

Engbrock, Inc. and Encon each entered into a construction contract with the Tomball Independent School District³ and the Eagle Lake Independent School District,⁴ respectively. In connection with the two contracts, Surety issued performance and payment bonds. Both corporations defaulted in the performance of the construction contracts, and Surety therefore made payments under the terms of the bonds. The two corporations and Engbrock as an individual had executed agreements to indemnify Surety for any losses it might sustain on any bonds issued to the two corporations. Summary judgment was entered against the corporations, but the action against Engbrock as an individual proceeded to trial.

Appellants contended in the district court that some of the payments made by Surety were excessive. The trial judge held that appellants were precluded from supplying evidence to support that contention in the absence of pleadings that Surety made excessive payments through fraud or lack of good faith. It is well settled Texas law that the nature of an indemnitor's liability upon an indemnity contract must be determined by the provisions of the contract. United States Fid. & Guar. v. Jones, 87 F.2d 346, 347 (5th Cir. 1937); Central Sur. & Ins. Corp. v. Martin, Tex. Civ.App., 224 S.W.2d 773, 776 (Beaumont — 1949), error ref'd. Thus we turn to the indemnity agreement at issue which contained these clauses:

1. That the voucher or other evidence of payment by said Surety of any such loss, damage, expense, claim or liability shall be prima facie evidence of the fact and amount of each Indemnitor\'s liability to said Surety under this agreement; (Emphasis added.)

2. Any such decision, determination, settlement, defense, compromise or other action of the Surety in connection with any claim matter arising under said bond shall be final and conclusive and unconditionally binding upon each Indemnitor. (Emphasis added.)

Similar provisions, although apparently harsh as to an indemnitor, often have been upheld and are not against public policy. See, e. g., Ford v. Aetna Ins. Co., Tex.Civ.App., 394 S.W.2d 693 (Corpus Christi — 1965), n.r.e.; Fidelity & Cas. Co. of New York v. Harrison, Tex.Civ. App., 274 S.W. 1002, 1004 (Fort Worth — 1925), error ref'd. The accepted rationale is that "the expense, delay, trouble, and risk of loss to the guarantee company is a sufficient safeguard against an unwarranted payment. * * *" Guarantee Co. of North America v. Pitts, 78 Miss. 837, 841, 30 So. 758, 759 (Miss. 1901).

In the face of these provisions, an indemnitor may successfully attack payments made by Surety only by pleading and proving fraud or lack of good faith by Surety. English v. Century Indem. Co., Tex.Civ.App., 342 S.W.2d 366, 369 (San Antonio — 1961), no writ hist.; Lander v. Phoenix Indem. Co., Tex.Civ.App., 329 S.W.2d 951, 955 (Waco — 1959), no writ hist. See also Shaw v. Massachusetts Bonding & Ins. Co., Tex. Civ.App., 373 S.W.2d 553, 558 (Dallas — 1963), no writ hist. Appellant did not plead fraud. However, he asserts the issue of good faith was raised by his pleading that Surety "did not do what it should have done in order to limit or minimize the costs on the Eagle Lake job." At most, the pleading alleges negligence by Surety. But neither lack of diligence nor negligence is the equivalent of bad faith; and improper motive, which is not alleged, is an essential element of bad faith. Ford v. Aetna Ins. Co., supra, 394 S.W.2d at 698; English v. Century Indem. Co., supra, 342 S.W.2d at 369. Hence, we conclude that it was not error for the trial judge to deny admission into evidence the testimony of appellant that the payments were excessive.⁵

In the trial against Engbrock as an individual, a question was raised in regard to an agreement under which Engbrock was to indemnify Surety for losses sustained under bonds issued to Encon on the Eagle Lake job. Engbrock contends that the indemnity agreement fails for lack of consideration because he signed the agreement four months after the bonds had been issued. The trial judge recognized this contention would have force if the signing of the agreement had constituted a new promise by Engbrock. But, to the contrary, the judge found that prior to the execution of the bonds in May, 1962, Engbrock had promised orally to execute the...