Title: Atlantic v. Ulico

State: maryland

Issuer: Maryland Supreme Court

Document:

Atlantic Contracting & Material Co., v. Ulico Casualty Co., No. 51, Sept. Term, 2003. 
INSURANCE – SURETY BONDS – PERFORMANCE & PAYMENT – INDEMNITY –
GOOD FAITH – ROLE OF REASONABLENESS: This case examines the scope of the
good faith clause in an indemnity agreement, and a principal’s obligation to indemnify a
surety for payment of a claim that may not be covered by a surety bond.  The Court
concludes, on the facts of this case, that the surety’s payment of the obligee’s claim was a
reasonable, good faith settlement based on the information made available to it at the time.
We hold that the good faith standard allows the surety a discretion limited by the bounds of
reasonableness, rather than by the bounds of fraud.  We also hold that the principal is bound
by a reciprocal obligation of good faith and fair dealing, embedded within which is a duty
to cooperate, and may not ignore, without peril, the surety’s pre-payment requests for
information.  Although a surety’s payment may not be included entirely in ‘labor and
materials’ as covered by a payment bond where the repairs made by the obligee to the
principal’s equipment add materially to the value of that particular equipment, in this case
the principal failed to inform the surety of the bond coverage issue and, after a diligent
investigation and a considerable amount of time had passed, the surety reasonably and in
good faith paid the obligee based on information in a Proof of Claim form indicating liability.
Circuit Court for Prince  George ’s County
Case # CAL 00-21412
IN THE COURT OF APPEALS OF
MARYLAND
No. 51
September Term, 2003
ATLANTIC CONTRACTING &
MATERIAL COMPANY, INC.
v.
ULICO CASUALTY COMPANY
Bell, C.J.
                    Raker
Wilner
Cathell
Harrell
Battaglia
Eldridge, John C. (retired,    
  specially assigned),
JJ.
Opinion by Harrell, J.
 Bell, C.J., Battaglia  and Eldridge, JJ.,      
                   Dissent.
Filed:   March 12, 2004
On 19 September 2000, Ulico Casualty Company (“Ulico”), Respondent here, filed
a complaint in the Circuit Court for Prince George’s County against Petitioner, Atlantic
Contracting and Material Company, Incorporated (“Atlantic”).  The complaint was in
response to Atlantic’s failure to reimburse Ulico for payments made by Ulico to a claimant
under a surety bond and indemnity agreement.  The surety, Ulico, had issued the performance
and payment surety bond (“the bond”) on behalf of Atlantic, as principal, to guarantee
Atlantic’s performance of its contractual obligations on a road repair project.  Ulico sought
to recover monies it paid to Clearwater Hydraulics and Driveshaft Services (“Clearwater”)
on a claim on the bond, and the attorneys’ fees it incurred in pursuing indemnification from
Atlantic.
A non-jury trial was held on 14 December 2001.  At the conclusion of the trial, the
trial judge took the matter under advisement.  In a series of subsequent written rulings, the
Circuit Court concluded: (a) that only part of the Clearwater claim was covered by the bond
and, therefore, Ulico was entitled to reimbursement only for that part of the claim; (b) under
the language of the indemnity agreement, Ulico was entitled to recover attorneys’ fees, costs,
and expenses; and, (c) an award of $5,750 in attorneys’ fees, costs, and expenses to Ulico,
out of a claim for $16,716.67, was fair and reasonable.
Ulico noted a timely appeal, arguing that it had acted in good faith in paying
Clearwater’s claim and, therefore, the Circuit Court erred when it did not award Ulico the
total sum paid on the bond.  In addition, Ulico argued that the Circuit Court abused its
discretion in not awarding Ulico the full amount of attorneys’ fees, costs, and expenses.
2
Atlantic filed a cross-appeal, asserting that Ulico was not entitled to any part of the amount
paid on the bond because the bond did not cover the Clearwater claim.  Atlantic also
contended that the Proof of Claim form filed by Clearwater was defective, and that Ulico
made the payment to Clearwater as a mere volunteer.  The Court of Special Appeals, in a
reported opinion, Ulico Casualty Co. v. Atlantic Contracting and Material Co., 150 Md.
App. 676, 822 A.2d 1257 (2003), reversed the Circuit Court and held that Ulico was entitled
to its entire claim.  The intermediate appellate court, with regard to Ulico’s claim for
attorneys’ fees, costs, and expenses, remanded for reconsideration in light of its holding as
to the error affecting the amount of reimbursement to which Ulico was entitled for paying
Clearwater’s claim.  We granted Petitioner’s petition for writ of certiorari, Atlantic
Contracting v. Ulico, 376 Md. 543, 831 A.2d 3 (2003), to consider Petitioner’s four
questions:
1.  Do repairs to equipment used on a project constitute “labor and materials”
supplied to that project, so as to fall within the coverage of a construction
bond?
2.  Was Ulico, who sued Atlantic as indemnitor on a bond, a volunteer when
Ulico paid a third party when that third party’s bill and claim were for repairs
to equipment used by the subcontractor defendant, which repairs did not
constitute “labor and materials in the prosecution of the work provided for in
said subcontract,” as were covered by the bond in question?
3.  Was Ulico also a volunteer, when the third party’s “Proof of Claim” on the
bond did not allege that the third party had provided labor and materials to the
particular subcontract covered by the bond?
4.  Under Maryland law, did the circuit court err or abuse its discretion in
awarding attorneys’ fees, costs, and expenses to Ulico?
3
We shall affirm the judgment of the Court of Special Appeals.
I.
A.
On 27 June 1997, Gilbert Southern Corporation (“Gilbert”), as general contractor,
entered into a contract with the North Carolina Department of Transportation to repair a
segment of the northbound lanes of Interstate 85 (“the project”).  Soon thereafter, Gilbert and
Atlantic entered into a subcontract for Atlantic to perform the concrete paving work on the
project.
Ulico issued a performance and payment surety bond on behalf of Atlantic, as
principal, in favor of Gilbert, as obligee.  The bond guaranteed Atlantic’s performance of its
duties under the subcontract and its prompt payment “to all persons supplying [Atlantic] with
labor and materials in the prosecution of the work provided for in [the subcontract between
Gilbert and Atlantic] . . . and [the prompt payment of] all other obligations incurred by
[Atlantic] in connection with such work . . . .”  In connection with the issuance of the bond,
Atlantic and its individual owners, John Madden and Thomas Madden, executed a General
Agreement of Indemnity and Security (“indemnity agreement”), in favor of Ulico.
Clearwater informed Ulico on 24 June 1998 that Clearwater had billed Atlantic
$21,843.48 for repairs to equipment Atlantic was using in connection with the project.
Clearwater told Ulico that Atlantic had not paid the bill and that Clearwater was now looking
to Ulico, as Atlantic’s surety, for payment.  In reply, Ulico sent Clearwater a Proof of Claim
4
form with a letter requesting that Clearwater return the form with supporting documentation
as verification of its claim.
Clearwater’s completion of the Proof of Claim form indicated that Atlantic owed
Clearwater $21,843.48 for “repair to equipment used on paving job at I-85 North, Granville
County project,” and no credits were due to Atlantic.  The unpaid bills sent by Clearwater to
Atlantic, attached to the Proof of Claim form, were three in number: (1) 5 December 1997
in the amount of $8,299.18; (2) 15 May 1998 in the amount of $7,565.36; and
(3) 15 May 1998 in the amount of $4,834.14 (totaling $20,698.68).
Clearwater transmitted the Proof of Claim form and supporting documents to Ulico
on 27 August 1998.  By then, Atlantic had paid to Clearwater the $4,834.14 bill, by check
dated 31 July 1998, which was negotiated by Clearwater on 6 August 1998; however no one
informed Ulico of the part payment nor documented the partial payment to Ulico until
sometime later.
On 31 August 1998, Cherie Rondinelli, the Bonds Claims Manager for Ulico, wrote
to John Madden, President of Atlantic, to inform him that Clearwater alleged it was owed by
Atlantic a total of $21,843.48 (comprised of the $20,698.68 represented by the three bills
attached to Clearwater’s Proof of Claim form, plus interest at 18 percent through
1 August 1998) on the project and asking him to inform Ulico of the reasons for Atlantic’s
delay in paying Clearwater.  On 3 September 1998, Thomas Madden responded with a terse
letter, sent via facsimile transmission and regular first-class mail, stating that Atlantic had
5
sent Clearwater a check for $4,834.14 in partial payment of Clearwater’s bills and that the
balance remaining was “being disputed and must be resolved prior to completion of
payment.”  Rondinelli responded with a letter, dated 26 October 1998, posing the following
questions:
Atlantic continues to state that the balance due is being disputed and will be
resolved prior to completion of the project.  What is the nature of the dispute?
Please provide the surety with documentation of the dispute and amount.  Is
the project complete, if no, what percentage of the project is complete?  When
do you expect the project to be complete?
In addition, Ulico requested a copy of the $4, 834.14 check that Atlantic purportedly remitted
to Clearwater.
On 3 December 1998, having received no response from Atlantic, Rondinelli again
wrote to Thomas Madden asking for any documentation supporting Atlantic’s dispute of
Clearwater’s claim.  Rondinelli’s letter stated in part:
“In order to properly and thoroughly investigate [Clearwater’s] claim, it is
imperative that the surety receive this information.  Atlantic’s lack of
cooperation with Ulico is placing the surety in a difficult position of possibly
having to incur a payment loss on this bond due to the lack of documentation
and valid defenses.
“Please consider this as Ulico’s SECOND REQUEST for Atlantic to provide
the following documentation.
“1. Atlantic continues to state that the balance due is being disputed and will
be resolved prior to the completion of the project.  What is the nature of the
dispute?
“2. Please provide the surety with documentation of the dispute and amount.
“3. Is the project complete, if no, what percentage of the project is complete?
“4. When do you expect the project to be complete?
“5.  Please provide the surety with a complete accounting of payments Atlantic
received on this project . . . .”
6
Receiving no response to her 3 December letter, Rondinelli wrote to Thomas Madden
again on 29 December 1998.  She stated that Ulico had “validated Clearwater’s claim of
$20,698.62" and  “Atlantic’s lack of response and documentation [had] placed [Ulico] in a
position of incurring a loss [of $20,698.62].”  Rondinelli’s letter demanded that Atlantic pay
Ulico that sum within 5 working days of receipt of the letter or Ulico “would be forced to
seek other restitution via its rights under the indemnity agreement.”  This letter was sent to
Atlantic by certified mail.  Ulico, on 4 January 1999, delivered its check to Clearwater for
$20,698.62, and received in return Clearwater’s assignment of its claim against Atlantic and
a release of Ulico from all liability under the bond.  
By a letter of 5 January 1999, which was transmitted to Ulico by facsimile at 4:50 p.m.
that day and sent also by certified mail, John Madden responded to Ulico stating that the
dispute over Clearwater’s bill was “predicated on the fact that unauthorized work was
performed and billed for” and that the invoices Atlantic received from Clearwater totaled
$15,864.54, not $20,698.62.  Attached to the letter were copies of the disputed invoices and
Atlantic’s canceled check to Clearwater, for $4,834.14.  Madden complained he had left
telephone messages on Rondinelli’s voice mail on 11 December 1998 and 5 January 1999
that had not been returned and directed Ulico not to make any payment to Clearwater.
Subsequently, Atlantic refused to reimburse Ulico.
7
B.
As noted above, Ulico filed a complaint in the Circuit Court for Prince George’s
County.  From Atlantic, Ulico sought to recover under the indemnity agreement the
$20,698.62 it had paid Clearwater, plus interest, attorneys’ fees, costs, and expenses.  
The case was tried to the bench on 14 December 2001.  John Madden testified on
behalf of Atlantic.  Madden stated that Clearwater had not supplied labor or materials for the
project for Atlantic.  Rather, Clearwater performed repair work on some hydraulic motors
for a “CMI concrete belt placer” machine that Atlantic was using on the project.  Madden
testified that the belt placer machine belonged to Atlantic, had a useful life of 10 or 15 years,
was not dedicated to the project, and had been used on several other projects.  Madden
further testified that Atlantic paid only $4,834.14 of the total amount billed by Clearwater
because the unpaid balance was for materials, mostly pumps, that were not received by
Atlantic and which had been obtained fraudulently by one of Atlantic’s former employees
in a collaborative scheme with one of Clearwater’s employees.
The Circuit Court penultimately noted that M aryland’s appellate courts had not yet
specifically addressed in a reported opinion the issue of whether repairs to previously owned
equipment constituted “labor and materials” under a surety bond for payment and
performance.  Thus, the trial judge relied on federal court decisions addressing the issue in
the context of contracts on federal construction projects.  He summarized the federal cases
as holding that, “repair parts, appliances, and accessories which add materially to the value
8
of the equipment and render it available for other work [than the project covered by the bond]
are not within the coverage of the payment bond.”  See, e.g., Continental Cas. Co. v.
Clarence L. Boyd, Co., 140 F.2d 115, 116 (10th Cir. 1944) (citations omitted).  The trial
judge concluded that repairs to equipment used by a subcontractor that materially enhance
the value of the equipment by making it available for jobs other than the project covered by
the surety bond are not payments within the scope of the bond.  By contrast, repairs to a
subcontractor’s equipment incidental to carrying on the particular project covered by the
bond, but which do not add to the value of the equipment, are covered.
The Circuit Court found that the repairs made by Clearwater to Atlantic’s equipment
added to the value of that equipment.  In particular, the court found that
Clearwater did not charge for incidental items consumed in completion of the
project such as gasoline, oil, filters, etc.  Clearwater supplied parts and
accessories that added to the value of the machinery, they were not incidental
and inexpensive in character and therefore are not covered by the bond.  As to
the labor charges, Clearwater’s bills attached to the Proof of Claim form
provided to [Ulico] outline $3,234.00 in unpaid labor costs.  Such costs aided
in the completion of the I-85 project covered by the Bond and therefore are
recoverable by the [Ulico] along with interest at the legal rate of 6% accruing
from the date of payment to Clearwater, December 31, 1998, in the amount of
$614.46.
Finally, the Circuit Court held that Ulico’s “payment of the claim made by Clearwater,
although made in good faith, was not entirely included in ‘labor and materials’ as covered
by the bond.  Defendant cannot be held liable for all of those costs, only the cost of labor.”
Ultimately, the Circuit Court concluded that, under the indemnity agreement, Ulico was
entitled to recover attorneys’ fees, costs, and expenses only in the amount of $5,750.
9
C.
In the Court of Special Appeals, as noted earlier, Ulico argued that the Circuit Court
erred in not awarding Ulico the total sum Ulico paid to Clearwater because Ulico made the
payment in the absence of fraud and in good faith.  In addition, Ulico asserted that the Circuit
Court erred in not awarding it the full amount of attorneys’ fees, costs, and expenses incurred
in pursuing recovery from Atlantic.  In a cross-appeal, Atlantic argued that the Circuit Court
erred in awarding Ulico any part of the payment made to Clearwater because Clearwater’s
work was not covered by the bond, or because the Proof of Claim form filed by Clearwater
was defective, and, in any event, Ulico made the payment as a volunteer.
The Court of Special Appeals held that under the good faith clause in the indemnity
agreement:
Ulico was entitled to reimbursement from Atlantic for a claim Ulico paid in
good faith, without fraud, regardless of whether Ulico was actually liable for
the claim – either by virtue of a defense of Atlantic to the claim or by virtue of
the claim’s being outside the scope of the Bond.  Accordingly, once the trial
court found that Ulico acted in good faith and without fraud in paying
Clearwater’s claim, it should have awarded Ulico reimbursement for its full
payment on the claim.
Ulico Cas. Co. v. Atlantic Contracting and Material Co., 150 Md. App. 676, 698, 822 A.2d
1257, 1270 (2003).  Accordingly, the intermediate appellate court reversed the Circuit
Court’s judgment and remanded the case “1) for the court  to award Ulico as damages the full
amount it paid to Clearwater on the Clearwater claim; and 2) for the court to reconsider
Ulico’s contractual claim for attorneys’ fees, costs, and expenses.”
10
II.
A.
First, we shall reiterate our understanding of the fundamental principles governing
surety bond and indemnification relationships.  A surety bond is a three-party agreement
between a principal obligor, an obligee, and a surety.  Gen. Motors Acceptance Corp. v.
Daniels, 303 Md. 254, 259, 492 A.2d 1306, 1309 (1985).  In a performance bond context,
the surety assures the obligee that if the principal fails to perform its contractual duties, the
surety will discharge the duties itself, either by performing them or paying the obligee the
excess costs of performance.  Id.; United States Fid. & Guar. Co. v. Feibus, 15 F. Supp. 2d
579, 580 (M.D. Pa. 1998), aff’d, 185 F.3d 864 (3d Cir. 1999) (affirmed without reported
opinion).  In a payment bond, the surety guarantees the principal’s duty to the obligee to pay
its (the principal’s) laborers, subcontractors, and suppliers.  Feibus, 15 F. Supp. 2d at 581
n.2.
The liability of a surety is coextensive with that of the principal.  Gen. Builders Supply
Co. v. MacArthur, 228 Md. 320, 326, 179 A.2d 868, 871-72 (1962) (citations omitted).  The
surety is primarily or jointly liable with the principal and, therefore, is immediately
responsible if the principal fails to perform.  Gen. Motors Acceptance Corp., 303 Md. at 259,
492 A.2d at 1309.  Ultimate liability, however, is with the principal, not the surety.  Id.  Upon
default of the principal, the surety may pay the money and proceed against the principal for
indemnity.  Dixon v. Spencer, 59 Md. 246, 248 (1883).  The bond is the measure of the
11
surety’s obligation.  In the construction industry, it is standard practice for surety companies
to require contractors for whom they write bonds to execute indemnity agreements by which
principals and their individual backers agree to indemnify sureties against any loss they may
incur as a result of writing bonds on behalf of principals.  See generally The Surety’s
Indemnity Agreement - Law & Practice (Marilyn Klinger, et al., eds., Am. Bar Assoc. 2002).
The seeming threshold legal issue in the present case is whether Ulico was entitled to
reimbursement for any of Clearwater’s repair bills that assertedly were not covered by the
bond.  Although we reach the same result as the Court of Special Appeals, we conclude that
the sweep of its analytical construct, that a surety, in paying a claim, acting in good faith and
without fraud, is entitled to indemnity under the indemnity agreement regardless of whether
the claim on the bond is covered actually by the bond, neglects some important factors that
to us seem necessary to the paradigm.
To start, the analysis of a surety bond and indemnity agreement ordinarily should
examine the bond’s coverage in conjunction with liability and good faith under the indemnity
agreement.  “A surety bond is a contract and is to be construed as such.”  John McShain, Inc.
v. Eagle Indem. Co., 180 Md. 202, 205, 23 A.2d 669, 670 (1942) (citations omitted).  The
indemnity agreement and surety bond, being written contracts, must be construed in
accordance with our traditional rules of objective contract interpretation.  “The interpretation
of a written contract is ordinarily a question of law for the court and, therefore, is subject to
de novo review by an appellate court.  Wells v. Chevy Chase Bank, 363 Md. 232, 250, 768
12
A.2d 620, 629-30 (2001) (citations omitted).  In determining the meaning of contractual
language, Maryland courts apply the principle of the objective interpretation of contracts.
Sy-Lene of Washington, Inc. v. Starwood Urban Retail II, LLC., 376 Md. 157, 166, 829 A.2d
540, 546 (2003), and cases there cited.  Applying objective interpretation principles, the clear
and unambiguous language of an agreement will not give way to what the parties thought the
agreement meant or was intended to mean.  Ashton, 354 Md. at 340, 731 A.2d at 444; Adloo
v. H.T. Brown Real Estate, Inc., 344 Md. 254, 266, 686 A.2d 298, 304 (1996).  Our primary
consideration, when interpreting a contract’s terms, is the “customary, ordinary, and accepted
meaning” of the language used.  Lloyd E. Mitchell, Inc. v. Maryland Cas. Co., 324 Md. 44,
56-57, 595 A.2d 469, 475 (1991) (citations omitted).  The terms of the contract must be
interpreted in context, and given their ordinary and usual meaning.  Langston v. Langston,
366 Md. 490, 506, 784 A.2d 1086, 1095 (2001).
Contract interpretation “involves discerning the terms of the contract itself.”  Fister
v. Allstate Life Ins. Co., 366 Md. 201, 210, 783 A.2d 194, 199 (2001) (citations omitted).  In
an action which presents an issue of coverage under a surety bond and liability under an
indemnity agreement, “it is the function of the court to interpret the policy and decide
whether or not there is coverage.  If such a coverage issue depends upon language of the
policy which is ambiguous,” we will resolve that ambiguity in favor of the insured.  St. Paul
Fire & Marine Ins. Co. v. Pryseski, 292 Md. 187, 194, 438 A.2d 282, 286 (1981).  In the
light of the aforegoing precepts, and bearing in mind that the payment bond in the instant
13
case was executed for the purpose of guaranteeing the performance of a private contract, it
is incumbent upon us to ascertain from the payment bond and indemnity agreement the
intention of the parties.  Levy v. Glens Falls Indem. Co., 210 Md. 265, 273, 123 A.2d 348,
351 (1956) (“The cardinal rule in the interpretation of bonds, as in the interpretation of all
written contracts, is to ascertain the intention of the parties and to give effect to that intention
if it can be done consistently with legal principles.”); see also Lange v. Bd. of Educ., 183 Md.
255, 260, 37 A.2d 317, 320 (1944); Hosp. for Women of Maryland v. United States Fid. &
Guar. Co., 177 Md. 615, 618, 11 A.2d 457, 459 (1940).
The coverage of the bond in the present case extended to “payment to all persons
supplying the Principal with labor and materials in the prosecution of the work provided for”
in the subcontract between Atlantic and Gilbert.  Clearwater’s claim was for “repair to
equipment used on paving job at I-85 North, Granville County project.”  In the indemnity
agreement, Atlantic promised to “indemnify [Ulico] from and against any and all Loss” and,
to that end, to “promptly reimburse [Ulico] for all Loss.”  The indemnity agreement defines
‘Loss’ to mean:
Any and all damages, costs, charges, and expenses of any kind, sustained or
incurred by [Ulico] in connection with or as a result of: (1) the furnishing of
any Bonds; and (2) the enforcement of this Agreement.  Loss shall also include
any funds disbursed by [Ulico], or arranged for or guaranteed by [Ulico] for
the use and/or benefit of any indemnitor.
Atlantic further agreed in the indemnity agreement that
(1) originals or photocopies of claim drafts or payment records kept in the
ordinary course of business . . . shall be prima facie evidence of the fact and
14
amount of such Loss; and (2) [Ulico] shall be entitled to reimbursement for
any disbursements made by it in good faith, under the belief that it was liable,
or that such disbursement was necessary or prudent.
In addition, Atlantic promised to deposit with Ulico on demand any reserve against loss that
Ulico required or deemed prudent to establish, “whether on account of actual liability or one
which is, or may be asserted against it whether or not [Ulico] has made any payment
therefore[,]” and to grant Ulico a security interest in certain pieces of its equipment.
Atlantic argues that despite the indemnity agreement, the work performed by
Clearwater was not covered by the bond because Clearwater provided ‘parts and service’ for
Atlantic’s equipment.  Atlantic contends that these ‘parts and service’ repairs made by
Clearwater were not ‘labor and material’ for the project because the equipment in question
was not bought for exclusive use on the project and because the life expectancy of the
equipment extended beyond that of the project.  Based on a review of our cases and
persuasive federal precedents, we would conclude, were this the dispositive issue in the
present case, that repairs to equipment that add materially to the life of the equipment and
extend the equipment’s useful life beyond the life of the project do not constitute ‘labor and
materials’ supplied to the project, so as to fall within the coverage of the bond.
We have not directly addressed the issue of whether repairs to permanent equipment
are ‘labor and materials’ for an individual project before, but we came close to resolving the
issue in the analogous case of Williams Construction Co. v. Construction Equipment, Inc.,
253 Md. 60, 251 A.2d 864 (1969).  In Williams, the principal, Williams Construction
15
Company (“Williams”), arranged for a payment bond with the surety, Fireman’s Fund
Insurance Company (“Fireman’s Fund”) for a bridge project.  Williams, 253 Md. at 61-62,
251 A.2d at 865.  The payment bond for the bridge project provided:
“[T]he condition of this obligation is such that if the [Principal] shall promptly
make payments to all persons supplying labor and/or material to the Principal
and to any Subcontractor of the Principal or any Subcontractor of the Principal
in the prosecution of the work provided for in said Contract * * * then this
obligation shall be void . . . .”
Id.  The equipment for the bridge project was leased from a leasing company.  The leasing
company incurred charges totaling $32,578.02 that were not paid and sued Williams and
Fireman’s Fund.  All of this amount was for equipment rental or for haulage or repair of the
leased equipment, except for a charge of $46.95 for carbide bits and covered wire, which
appear to have been materials used on the job.  Williams, 253 Md. at 62 n.3, 251 A.2d at 865
n.3.
When the case reached this Court, we concluded that the circuit court should have
directed a verdict for Williams and Fireman’s Fund “with respect to $32,481.07 of the total
amount in controversy, this being the aggregate amount of charges for equipment rental and
haulage and repair.”  Williams, 253 Md. at 69, 251 A.2d at 869.  In addition, the circuit court
“should have permitted the case to go to the jury as to the remaining amount of $46.95, this
being the charge for materials delivered to the job site, because it appeared to be conceded
that this amount was recoverable under the bond.”  Williams, 253 Md. at 69-70, 251 A.2d at
869.
16
The conclusion reached in Williams relied on our reasoning in State use of Gwyns
Falls Quarry Co. v. National Surety Co., 148 Md. 221, 224-25, 128 A. 916, 917 (1925),
where we resolved that renting a steam shovel was not furnishing labor or materials for a
particular project under a contractor’s bond:
The steam shovel leased by the appellant in this case was merely an implement
utilized by the lessees in the work for which they were employed.  It formed
a part of their equipment for the business in which they were regularly
engaged.  The monthly rent accruing to the appellant was payable regardless
of the extent to which the steam shovel was actually used or of the place where
it was operated.  The appellant’s claim is obviously not for labor performed on
the highway, since the work in which the leased machine was used on the road
was done exclusively by the lessee, and we think it also clear that the use and
depreciation of the steam shovel, and its transportation to the appellant, should
not be regarded as materials furnished in the construction of the roadway,
within the terms of the contractor’s bond . . . .
Relying on this reasoning, we held, in Williams, that charges for equipment rentals are not
recoverable under a payment bond as ‘labor and materials.’  Williams, 253 Md. at 69-70, 251
A.2d at 869.  Just as the leased equipment and its repair was not covered by the payment
bond in Williams, it would seem that repairs to Atlantic’s equipment in the present case
would not be covered.  Like the steam shovel, Atlantic’s concrete belt placer was merely an
implement utilized by Atlantic in the work for which it was employed.  Atlantic’s concrete
belt placer formed a part of its equipment for the business in which it regularly was engaged.
The repair bill was payable by Atlantic regardless of whether Atlantic’s concrete belt placer
actually was used on the project.
17
In federal construction projects, federal courts that have addressed the same issue held
that “repair parts, appliances, and accessories which add materially to the value of the
equipment and render it available for other work are not within the coverage of the payment
bond.”  Continental Cas. Co. v. Clarence L. Boyd Co., 140 F.2d 115, 116, (10th Cir. 1944)
(citing Maryland Cas. Co. v. Ohio River Gravel Co., 20 F.2d 514 (4th Cir. 1927); United
States use of Galliher & Huguely, Inc. v. James Baird Co., 73 F.2d 652 (D.C. Cir. 1934)).
In Maryland Casualty, a claim was made under a bond by a garage that provided labor, gas,
oil, an engine, and tires for trucks of a contractor working on a state road construction
project.  All of the items were furnished for trucks that were used on the work of the
contractors on the road project.  Ohio River, 20 F.2d at 518.  The Fourth Circuit Court of
Appeals noted that there is a “well recognized rule that a bond such as this does not cover
machinery and equipment used by the contractor in carrying on the work, or repairs to such
machinery and equipment.”  Id.  Despite this general rule, the Fourth Circuit went on to note
that some items used on permanent equipment may still come within the scope of the bond.
In a particularly well reasoned passage, the Fourth Circuit analyzed how repairs and materials
for permanent equipment owned by the contractor may or may not be covered by a bond for
a specific project:
“It is undoubtedly true that repairs which add materially to the value of
the equipment and render it available for other work are no more within the
protection of the bond than the equipment itself; and one, for instance, who
supplies a tire or a motor for a truck is no more entitled to recover under the
bond than one who furnishes the truck itself.  On the other hand, there are
repairs of an incidental and inexpensive character, such as most of those
18
embraced in the account seem to have been, which do not in any true sense add
to the value of the equipment, but are incidental to the carrying on of the work
and represent merely ordinary wear and tear or its equivalent.  The labor done
in making such repairs is in reality labor done in the carrying on of the work,
and we think should be treated as such.  Thus a blacksmith who sharpens the
plows and drills or repairs the carts used in making an excavation would
undoubtedly be protected in the same way as other laborers, and we see no
difference between his case and that of a mechanic who keeps in repair and
running condition a fleet of trucks used on the job.  The labor of such a one
adds to and becomes a part of the finished structure just as truly as does the
labor of one who wields a pick or shovel.  And, of course, granting the
principle, it can make no difference whether the mechanic does the work at the
scene of the operation or in his own garage.  We think that those items of the
account which represent mere incidental repairs upon the trucks used on the
job necessary to keep them in running condition for the performance of the
work, should have been allowed as being within the protection of the bond.
“We think, too, that claimant is entitled to recover for the gasoline and
oil furnished for use in operating the trucks.”
Id. (citations omitted).
If the reasoning employed by the Fourth Circuit were applied to the facts in the
present case, it would seem the Circuit Court was correct, as far as it went, because the
repairs made by Clearwater to Atlantic’s equipment added to the value of that equipment and,
thus, were not ‘labor and materials’ covered by the bond.  Nonetheless, Atlantic is not
entitled to be declared the victor in this litigation.  Ulico did not know the facts supporting
this coverage defense at the time of its settlement of the claim with Clearwater because
Atlantic had not informed Ulico timely or adequately of the underlying facts, though
requested to provide such information.
While a number of jurisdictions apply a constrained standard of good faith/absence
of fraud analysis in determining whether a surety is permitted to enforce an indemnity
19
agreement against the indemnitor, several jurisdictions include in their assessment of the
surety’s actions in settling or paying a claim in good faith a criterion of reasonableness.
Lumbermens Mut. Cas. Ins. Co. v. Darel Group U.S.A., Inc., 253 F. Supp. 2d 578, 585
(S.D.N.Y. 2003) (“New York courts have upheld [indemnity agreement] provisions, and
payments made by sureties under such provisions are scrutinized only for good faith and
reasonableness as to amount paid.”) (citations omitted); The Hartford v. Tanner, 910 P.2d
872, 881 (Kan. Ct. App. 1996) (“we agree with those cases that hold that the implied
covenant of good faith requires a surety seeking indemnification to show that its conduct was
reasonable”); Hawaiian Ins. & Guar. Co., v. Higashi, 675 P.2d 767, 769 (Haw. 1984) (“Even
if an indemnitee has a legal right to settle a claim, the settlement must be reasonable and
made in good faith.”); J.F. White Engineering Corp. v. General Ins. Co., 351 F.2d 231, 233
(10th Cir. 1965) (“while [the surety] was not required to permit the contractor to complete
the contract, if it believed that in the exercise of reasonable diligence and precaution [the
principal] . . . should have been employed to complete the project, the jury should reduce or
deny recovery in the amount which it believed could have been saved by so doing”); Nat’l
Sur. Corp. v.  Peoples Milling Co., 57 F. Supp. 281, 283 (W.D. Ky. 1944) (“If the surety or
the indemnitee has the legal right to adjust or settle the claim, either by reason of the terms
of his contract or because of actions on the part of the indemnitor, it is only necessary that
such an adjustment or settlement be a reasonable one and made in good faith.”); Luton
Mining Co. v. Louisville & N. R. Co., 123 S.W.2d 1055, 1062 (Ky. App. 1938) (surety is
20
justified in settling claim when “it acted in good faith and with reasonable prudence”); see
generally Bruner & O’Connor, 3 Construction Law § 10:107 (2003) (Reasonableness vs.
Good-Faith Standards).
In the present case, the Court of Special Appeals was persuaded by Fidelity & Deposit
Co. v. Bristol Steel & Iron Works, Inc., 722 F.2d 1160 (4th Cir. 1983), in concluding that
when a good faith standard is applicable to the surety’s performance, the only issue is
whether fraud was present.  Under this analysis, a bond coverage issue raised by the principal
would, therefore, be irrelevant to the analysis.  The effect of this, in those jurisdictions that
recognize only a narrowly applied good faith standard, is that the test is not whether the
surety “was negligent in spending too much money in completing the construction contract,”
English v. Sentry Indemnity Co., 342 S.W.2d 366, 369 (Tex. Civ. App. 1961), nor if the
principal alleged lack of 
diligence, Continental Casualty Co. v. American Security Corp., 443
F.2d 649 (D.C. Cir. 1970); Engbrock v. Federal Insurance Co., 370 F.2d 784, 787 (5th Cir.
1967), negligent ignorance, Ford v. Aetna Insurance Co., 394 S.W.2d 693 (Tex. Civ. App.
1965), or even a mistake of law made by the surety in making the disbursement, Central
Surety & Insurance Corp. v. Hinton, 130 S.W.2d 235, 242 (Mo. Ct. App. 1939); instead, the
test is whether the surety committed fraud in making payment.  We conclude that a good faith
standard that protects the surety for every mistake no matter how egregious, that falls short
of fraud, is unwise.  The Hartford v. Tanner, 910 P.2d 872, 881 (Kan. Ct. App. 1996)
(“Allowing the surety’s indemnification to be enforced, absent fraud, leaves the principal and
21
indemnitor at the mercy of the surety’s unreasonable conduct.”) (citation omitted).  We
conclude rather that a standard of reasonableness also should be implied in the good faith
analysis of a surety’s actions in determining whether it may recover against the principal.
In a three-way relationship between a surety, an obligee, and a principal, the
reasonable expectations of all the parties must be effectuated and the surety must act in a
reasonable manner in handling or paying claims.  We find the reasoning in City of Portland
v. George D. Ward & Associates, Inc., 750 P.2d 171, 175 (Or. Ct. App. 1988), to be
persuasive:
Parties to an indemnity agreement which subjects the right to compromise a
claim against the principal to the sole discretion of the surety must reasonably
expect that compromise and payment will be made only after a reasonable
investigation of the claims, counterclaims and defenses asserted in the
underlying action.  In order to prove lack of good faith in settling the claim,
[the indemnitors] needed only prove that [the surety] acted for dishonest
purposes or improper motives.
Id.  In the present case, we do not substitute a reasonableness standard for the good faith
standard; we simply have equated the two standards, as the court does in City of Portland.
We hold that the good faith standard allows the surety a discretion limited by the bounds of
reasonableness, rather than by the bounds of fraud.
We disagree with the Court of Special Appeals’ narrow reading of the good faith
clause in the indemnity agreement here that effectively renders the terms of the bond
nugatory and could permit a surety, under circumstances different from those in the present
case, to be indemnified for payment of claims that may be outside the scope of the bond.  We
22
think that, in the present case, the factors to be considered in determining whether a surety
made a reasonable, good faith settlement under the terms of the bond and the indemnity
agreement are the following: (1) the obligations of the surety as provided by the terms and
coverage of the bond, Commercial Union Insurance Co. v. Melikyan, 430 So. 2d 1217, 1222
(La. Ct. App. 1983); (2) whether the principal has made more than generalized demands that
the surety deny the claim, Glens Falls Indemnity Co. v. Carobine, 36 N.Y.S.2d 253, 255
(N.Y. City Ct. 1942); (3) the cooperation, or lack thereof, by the principal, in dealing with
the surety, Id.; (4) the thoroughness of the investigation performed by the surety, Maryland
Casualty Co. v. R & L Construction Co., 368 S.W.2d 134, 136 (Tex. Civ. App. 1963).  See,
e.g., Hinchey, Surety’s Performance Over Protest of Principal: Considerations and Risks,
22 Tort & Ins. L.J. 133 (1986) (enumerating a host of factors considered by courts in
determining whether the surety has performed or settled in good faith).
In the present case, the Court of Special Appeals held that the coverage of the bond
was irrelevant, and that the terms and coverage of the bond did not control the indemnity
agreement.  The Court of Special Appeals reasoned that
The pertinent language does not say (as it could have said) that, for the surety
to be entitled to reimbursement, the expense or cost it incurred must be
covered by or within the scope of the Bond.  Rather, it says that the surety
must have incurred the expense or cost “in connection with or as a result of .
. . the furnishing of” the Bond.  In the context in which the phrases “in
connection with” and “as a result of” are used, they connote “with relation to”
or “as part of.”  An expense or cost can be incurred or paid by a surety “in
connection with . . . the furnishing of” or “as a result of . . . the furnishing of”
the bond, notwithstanding that there will never be a determination whether the
claim in fact was with the scope of the bond.
23
Ulico, 150 Md. App. at 693-94, 822 A.2d at1267.
We, however, perceive a difference between coverage and liability.  The words of the
bond are not mere surplusage, they must be read in conjunction with the indemnity
agreement.  We have said that “a bond is to be construed in connection with the contract
whose performance it secures.”  State Highway Admin. v. Transamerica Ins. Co., 278 Md.
690, 700, 367 A.2d 509, 516 (1976) (citing Lange v. Bd. of Educ., 183 Md. 255, 260, 37 A.2d
317, 320 (1944)).  We think too that an indemnity agreement is to be construed in
conjunction with the bond upon which it is based.  Contractual terms cannot be read out of
the agreement altogether, and the meaning of a provision is not discerned by reading it in
isolation, but by recognizing its relation to the other terms of the complete contractual
relationship.  See Goldberg v. Goldberg, 290 Md. 204, 213, 428 A.2d 469, 475 (1981).  In
Jones v. Hubbard, 356 Md. 513, 534-35, 740 A.2d 1004, 1016 (1999), we discussed the need
for accounting for all the relevant contract provisions:
Implied in this [objective] test is that the interpretation of the language is to be
of the entire language of the agreement, not merely a portion thereof.  This
implication was demonstrated by the Court of Special Appeals in Shanty Town
Assocs., 92 Md. App. 103, 607 A.2d 66 [(1992)].  In that case involving the
interpretation of a consent judgment, the court implied that one needs to read
the complete language of a consent judgment to determine its purpose.  Thus,
to understand the true meaning of a consent order, the language of the
judgment must be “read as a whole.”  Id. at 114, 607 A.2d at 71.  “The entire
judgment – all provisions considered – should be read as a whole in the light
of all the circumstances as well as of the conduct of the parties.”  Hanson v.
Hearn, 521 So. 2d 953, 955 (Ala. 1988).  “When interpreting a consent decree,
or any other agreement, words must be read in context.  The decree must be
read as a whole, each of its provisions being interpreted together with its other
24
provisions.”  Westinghouse Air Brake Div. v. United Elect., 294 Pa. Super.
407, 414, 440 A.2d 529, 533 (1982).  “An interpretation of the judgment that
gives meaning according to its entirety is favored over one that makes some
part of it mere surplusage.”  Hanson, 521 So. 2d at 955.
Reading the payment bond and indemnity agreement together, if a surety unreasonably
pays for an obligee’s work that is not covered under a payment bond, then the surety should
not be entitled to indemnification from the principal, without further ado, under the good
faith provision in the indemnity agreement.  In the present case, however, the undisputed
facts indicate that the surety reasonably paid Clearwater in good faith.  Atlantic did not
inform the surety in a timely fashion of its contention, or supporting facts, that the bond did
not cover the work performed by Clearwater.  On its face, the completed Proof of Claim
indicated that Clearwater’s work was part of the project and covered by the bond.  Ulico
informed Atlantic of the claim and repeatedly asked for clarification in the form of receipts
and information as to why Clearwater’s claim should not be paid.  Atlantic did not provide
adequate information that would indicate to a reasonable surety that there was an issue with
the coverage of the payment bond as to Clearwater’s work.  Madden’s claims about initiating
two telephone calls to Rondinelli that went unreturned, even if believed, were not sufficient
under the circumstances to render Ulico’s conduct unreasonable or lacking in good faith.
Not only does the surety have to act with reasonableness and good faith, the principal
is bound by a reciprocal obligation of good faith and fair dealing.  Kransco v. American
Empire Surplus Lines Ins. Co., 2 P.3d 1, 11 (Cal. 2000) (insurer and insured are bound by a
reciprocal obligation of good faith and fair dealing).  Embedded in this obligation is a duty
25
to cooperate in timely fashion with the surety in processing and considering any claim.
Atlantic may not ignore Ulico’s reasonable requests, over a period of months, for information
as to why Clearwater’s claim should not be paid and then expect to assert an effective bond
coverage defense after the claim is paid.  The surety is not omniscient, and cannot be
expected to refuse claims on grounds about which it has not been informed adequately by the
principal.  If Atlantic believed the payment bond did not cover the work performed by
Clearwater, as it apparently thought, then it should have informed Ulico when requested to
do so.  The likeliest source from which the surety may obtain reliable information about the
nature of the work performed and its relation to the bond is from the principal.  Its efforts to
learn if such information existed having been frustrated, Ulico made a reasonable, good faith
payment of the claim based on the information that was supplied to it by Clearwater.
Glens Falls Indemnity Co. v. Carobine, 36 N.Y.S.2d 253 (N.Y. City Ct. 1942) is the
most analogous case to the present one we were able to locate.  In Carobine, the principal
failed to co-operate with a surety company that payed a tax claim to the obligee, the
government’s collector of internal revenue, on some bonded wine.  The principal, a
corporation, made various generalized claims as to why it was not liable for the tax.  The City
Court of New York found that the surety could only have contested the case on the basis of
information supplied by the corporate principal.  The court further found that the principal
spoke to the surety “only in generalities and it can hardly be said that payment by the [surety]
in the circumstances disclosed at the time was a voluntary one.”  Carobine, 36 N.Y.S.2d at
26
255.  Ultimately, the court held that there was “no justification for [the surety’s] refusal to
pay the government’s claim valid on its face when the principal . . . gave it no substantial
basis upon which to resist payment.”  Id. (citation omitted).
Likewise, in the present case, we are unable to say that payment under the
circumstances disclosed at the time Ulico paid Clearwater’s claim was anything but a
reasonable good faith payment.  Ulico’s claim payment to Clearwater resulted from
Atlantic’s failure to cooperate timely in Ulico’s investigation.  As the Circuit Court noted,
“[Ulico] having not received any additional information from [Atlantic], discharged the debt
owed to Clearwater . . . .  Although [Ulico] made several requests for information from
[Atlantic], no written documentation was sent until January 5, 2000 after [Atlantic] had
received notice that [Ulico] had paid Clearwater’s claim.”  The repeated correspondence
from Ulico to Atlantic requesting information or documentation evidences the surety’s
diligent investigation of the matter.  See, e.g., Banque Nationale de Paris S.A. v. Ins. Co. of
North America, 896 F. Supp. 163, 165 (S.D.N.Y. 1995) (summary judgment granted in favor
of surety where it was undisputed that surety “investigated and evaluated [the principal’s]
alleged defenses before settling”); United States v. D Bar D Enterprises, Inc., 772 F. Supp.
1167, 1170 (D. Nev. 1991) (parties may expect surety to settle only after investigation of
claims, counterclaims, and possible defenses); Continental Cas. Co. v. American Sec. Corp.,
443 F.2d 649, 650 (D.C. Cir. 1970) (upholding summary judgment for surety where
27
uncontradicted affidavits stated that all claims had been paid by surety “in good faith after
investigation”).
The reasonable behavior required of a surety acting in good faith is not meant to foster
reluctance on a surety’s part to satisfy bond claims.  We agree with the court in General
Accident Insurance Co. of America v. Merritt-Meridian Construction Corp., 975 F. Supp.
511, 516 (S.D.N.Y. 1997), which explained:
Sureties enjoy such discretion to settle claims because of the important
function they serve in the construction industry, and because the economic
incentives motivating them are a sufficient safeguard against payment of
invalid claims.  The many parties to a typical construction contract – owners,
general contractors, subcontractors and sub-subcontractors – look to sureties
to provide assurance that defaults by any of the myriad other parties involved
will not result in a loss to them.  Courts have recognized that “as a practical
matter the suppliers and small contractors on large construction projects need
reasonably prompt payment for their work and materials in order for them to
remain solvent and stay in business.”
(citations omitted).  The surety in the present case acted diligently and reasonably based on
the information available to it.  The reasonableness requirement is meant only to filter the
most egregious, careless, or inattentive conduct, short of fraud, of a surety; such as making
a payment on a bond that the surety clearly knows or should know is not covered by the bond.
Had the surety in the present case been told in a timely fashion by the principal the details
of why Clearwater’s claim was not covered by the bond and the documentation provided that
illustrated such a defense, a reasonable and diligent surety might not have made payment.
Atlantic renews its argument from the Court of Special Appeals that the Proof of
Claim form submitted by Clearwater was defective and, therefore, could not support a claim
28
by Ulico for reimbursement of the paid claim under the indemnity agreement, Atlantic
repeats its assertion that because Clearwater specified in the Proof of Claim that its work was
done in performance of its contract with Atlantic, and not in performance of the subcontract
between Atlantic and Gilbert, there was no payment obligation by Ulico as Atlantic’s surety.
We agree with the Court of Special Appeals that the Proof of Claim form was not
defective.  As the intermediate appellate court observed, the completed Proof of Claim stated
that the work done by Clearwater was “for repair to equipment used on paving job at I-85
North, Granville County project,” which is the project in question.  It was reasonable for
Ulico to assume that the “equipment used on paving job at I-85 North, Granville County
project” was the construction project it had bonded for Atlantic.  After receiving the Proof
of Claim, Cherie Rondinelli, the Bonds Claims Manager for Ulico, wrote to John Madden
at Atlantic to inform him that Clearwater was alleging it was owed $21,842.48 on the project
and asking him to inform Ulico of Atlantic’s reasons for delaying payment to Clearwater.
On 3 September 1998, Thomas Madden responded with a letter stating that Atlantic had sent
Clearwater a check for $4,834.14 in partial payment of Clearwater’s bill and that the balance
($15,864.54) was “being disputed and must be resolved prior to completion of payment.”
In Atlantic’s letter, Thomas Madden refers to “the above referenced project” which is
“Project No. 8. 1370303 I-85 NBL from south rest area to north of Vance County Line ACM
Job No. 556, Letter No. 174.”  In addition, the subject of the letter is the payment bond in
question.  Atlantic’s letter, at least implicitly, if not explicitly, assumes that Clearwater’s
29
claim is covered by the bond, and it was reasonable for Ulico to conclude that Clearwater’s
claim was covered.
B.
Finally, we turn to the question regarding attorneys’ fees, costs, and expenses.  In
Maryland, following the “American Rule,” a prevailing party ordinarily is not entitled to
recover attorneys’ fees as part of compensatory damages.  Hess Constr. Co. v. Bd. of Educ.,
341 Md. 155, 159, 669 A.2d 1352, 1354 (1996) (citations omitted).  Litigation expenses,
however, may be awarded where the parties’ contract provides for fees and costs.  Allfirst
Bank v. Dep’t of Health & Mental Hygiene, 140 Md. App. 334, 373, 780 A.2d 440, 463
(2001) (citation omitted).  A contractual obligation to pay attorneys’ fees generally is valid
and enforceable in Maryland.  Qualified Builders, Inc. v. Equitable Trust Co., 273 Md. 579,
584, 331 A.2d 293, 296 (1975); Noyes Air Conditioning Contractors, Inc. v. Wilson Towers
Ltd. P’ship, 122 Md. App. 283, 294, 712 A.2d 126, 131 (1998).  Absent misconduct or fraud,
overreaching, misrepresentation, or other grounds for voiding the contract, a contractual
provision for awarding attorneys’ fees may be enforced.  Noyes, 122 Md. App. at 294, 712
A.2d at 131.
Where an award of attorneys’ fees is called for by the contract in question, the trial
court will examine the fee request for reasonableness, even in the absence of a contractual
term specifying that the fees be reasonable.  Rauch v. McCall, 134 Md. App. 624, 638, 761
A.2d 76, 84 (2000).  The reasonableness of attorneys’ fees is generally a factual
30
determination within the “sound discretion of the trial judge and will not be overturned
unless clearly erroneous.”  Reisterstown Plaza Assocs. v. Gen. Nutrition Ctr., Inc., 89 Md.
App. 232, 248, 597 A.2d 1049, 1057 (1991) (citations omitted); Danziger v. Danziger, 208
Md. 469, 474, 118 A.2d 653, 656 (1955) (an award of attorneys’ fees will not be disturbed
unless the trial court acted arbitrarily or its judgment was clearly wrong).
“The burden is on the party seeking recovery to provide the evidence necessary for
the fact finder to evaluate the reasonableness of the fees.”  Maxima Corp. v. 6933 Arlington
Dev. Ltd. P’ship, 100 Md. App. 441, 454, 641 A.2d 977, 983 (1994).  See also Friolo v.
Frankel, 373 Md. 501, 527, 819 A.2d 354, 370 (2003) (setting forth standards for the award
of attorneys’ fees).
In the present case, the trial court properly concluded that, under the terms of the
indemnity agreement, Atlantic was obligated by contract to pay Ulico the sums it incurred
to enforce the agreement, which included its attorneys’ fees, costs, and expenses.  Indemnity
agreements of this kind are interpreted generally to entitle the surety to recover fees, costs,
and expenses incurred in enforcing them.  See Fid. & Deposit Co., 722 F.2d at 1166.
As the Court of Special Appeals aptly put it:
When a contract entitles a party to recover attorney’s fees, the trial court must
examine the fee request to determine whether it is reasonable, even in the
absence of a provision requiring that the fee request be reasonable.  Rauch v.
McCall, 134 Md. App. 624, 638, 761 A.2d 76 (2000).  In this case, the trial
court’s decision on the issue of reasonableness necessarily was affected by its
decision, in error, that Ulico only was entitled to reimbursement for part of the
monies it paid to Clearwater.  Accordingly, the reasonableness of the sums
sought by Ulico for attorneys’ fees, costs, and expenses must be reconsidered
1 Though our disposition (similar to that of the intermediate appellate court) of this
case would seem to have the effect of Clearwater recovering twice for the $4,834.14 paid on
account of its 15 May 1998 bill, once by Atlantic in August 1998 and again by Ulico in
January 1999, our judgment should not be read to mean that Atlantic or Ulico may not be
able, all other things being equal, to proceed against Clearwater to correct that windfall.
Clearwater, in signing the Ulico release, represented that “the sum of $20,698.62 is justly due
and owing by contract to [Clearwater] and that [Clearwater] has not released or discharged
the same or any part hereof, that there are no counterclaims or set-offs to said account . . . .”
As is now apparent, Clearwater’s claim, at that time, had been reduced by Atlantic’s payment
of $4,834.14 on account of the 15 May 1998 bill.
31
in light of our decision that Ulico is entitled to full reimbursement of its
payment to Clearwater.
Ulico, 150 Md. App. at 700-01, 822 A.2d at 1271.
Equally apt, the intermediate appellate court, because it had decided to reverse and
remand the case, encouraged the trial judge on remand to reconsider Ulico’s prayer for
attorneys’ fees, costs, and expenses on the inferred basis that the earlier award may have been
predicated on a proportionality relationship to the limited recovery afforded under the
indemnity agreement.  We shall affirm the Court of Special Appeals, and remand the case
to the Circuit Court 1) to award Ulico as damages the full amount it paid to Clearwater;1 and
2) to reconsider Ulico’s contractual claim for attorneys’ fees, costs, and expenses in light of
its entitlement to the full indemnification claim.
JUDGMENT OF THE COURT
O F 
S P E CI A L  
A P P E A LS
AFFIRMED; COSTS TO BE
PAID BY PETITIONER.
IN THE COURT OF APPEALS OF
MARYLAND
No. 51
September Term, 2003
ATLANTIC CONTRACTING &
MATERIAL COMPANY, INC.
 V.
 
ULICO CASUALTY COMPANY
Bell, C.J.
Raker
Wilner
Cathell
Harrell
Battaglia
Eldridge, John C. (retired,    
  specially assigned),
JJ.
Dissenting Opinion by Battaglia, J.,
which Bell, C.J. and Eldridge, J., Join
Filed:    March 12, 2004
The majority gets it right in this case – almost.  I cannot quarrel with the majority’s
conclusion that “the repairs made by Clearwater to Atlantic’s equipment added to the value
of that equipment and, thus, were not ‘labor and materials’ covered by the bond.”  Majority
slip op. at 18.  Nor do I dispute the majority’s holding that a surety’s duty of good faith
requires it to act reasonably in settling or paying claims.  Id. at 19.  I even agree with the
majority that the record does not establish, as a matter of law, that the payment by Ulico (the
surety) to Clearwater (the obligee) over the objection of Atlantic (the principal) was made
in bad faith or was unreasonable.  Where the majority falters, however, is in deciding that the
payment was reasonable, per se.
The traditional definition of a surety is “someone who contracts to answer for the debt
or default of another.”  EDWARD G. GALLAGHER, THE LAW OF SURETYSHIP 1 (2d. ed. 2000)
(hereinafter “Gallagher”); SNML Corp. v. Bank of North Carolina, 254 S.E.2d 274 (N.C.
App. 1979).  Defined more narrowly, “a surety is a person who binds himself for the payment
of a sum of money, or for the performance of something else, for another who is already
bound for such payment or performance.”  SNML Corp., 254 S.E.2d at 279.  A surety
relationship involves three parties: (1) the principal, “the one for whose account the contract
is made, whose debt or default is the subject of the transaction”; (2) the obligee, “the one to
whom the debt or obligation runs”; and (3) the surety, “the one who agrees that the debt or
obligation running from the principal to the [obligee] shall be performed [or paid], and who
undertakes on his own part to perform [or pay] it if the principal does not.”  ARTHUR A.
STEARNS, LAW OF SURETYSHIP § 1.4 (5th ed. 1951); Gallagher at 1.  Typically, in such an
-2-
arrangement, the surety only suffers a loss if the principal does not perform its obligation to
the obligee and then is unable to reimburse the surety for payments that the surety made to
the obligee.  Gallager at 1.  A surety also suffers loss, however, when it fails to exercise good
faith in paying an obligee’s claim that falls outside the terms of the bond agreement.  See The
Hartford v. Tanner, 910 P.2d 872, 877 (Kan. Ct. App. 1996); City of Portland v. George D.
Ward & Assoc., Inc., 750 P.2d 171, 174 (Or. App. 1988).
Most courts agree that sureties should not be reimbursed for claim payments unless
the payments were made in good faith.  This is so for two reasons.  First, the indemnity
agreements that often accompany bonds usually provide that reimbursement is available only
if the surety paid the obligee’s claim in good faith.  Gallagher at 488.  Second, in the absence
of such a “good faith” provision, courts have held that the surety’s duty to exercise good faith
arises from an implied covenant of good faith and fair dealing, which is inherent in all
contracts.  Id. at 534; Tanner, 910 P.2d at 878 (“The obligation of good faith and fair dealing
on the part of the surety is implied and in a sense superimposed on the entire surety
contract.”); City of Portland, 750 P.2d at 175 (stating that, although the indemnity agreement
contained no “good faith” clause, the surety “was bound by its implied covenant of good faith
to exercise its discretion in compromising the claim”).
Although courts generally agree that sureties are entitled to be reimbursed for claims
paid in good faith, they are sharply divided as to what it means to exercise good faith.  A
number of courts have concluded that a surety has breached its duty of good faith only when
-3-
the surety acted with an improper motive.  See Gallagher at 491 (describing the majority view
and citing cases in which courts have adopted it).  That is, in order for the principal to show
that the surety paid a claim to the obligee in bad faith, the principal must present evidence
demonstrating that the surety acted fraudulently or with ill-will.  See, e.g., PSE Consulting,
Inc. v. Frank Mercede & Sons, Inc., 838 A.2d 135, 152 (Conn. 2004); Fidelity and Deposit
Co. of Maryland v. Bristol Steel & Iron Works, Inc., 722 F.2d 1160, 1165 (4th Cir. 1983);
Engbrock v. Federal Ins. Co., 370 F.2d 784, 787 (5th Cir. 1967).  As one court explained,
“[g]ross negligence or bad judgment is insufficient to amount to bad faith.” U.S. Fidelity &
Guar. Co. v. Feibus, 15 F. Supp.2d 579, 587 (M.D.Pa. 1998), aff’d 185 F.3d 864 (3rd Cir.
1999).
Other courts have assigned a different meaning to “good faith.,” one that evaluates a
surety’s payment according to a standard of reasonableness.  These courts have concluded
that, even if there is no evidence of fraud or ill-will, the surety has fallen short of its good-
faith duty by unreasonably or negligently paying an obligee’s claim on the bond.  Arntz
Contracting Co. v. St. Paul Fire & Marine Ins. Co., 47 Cal. App. 4th 464, 483 (1996) (Cal.
Ct. App. 1996) (“[T]he covenant of good faith can be breached for objectively unreasonable
conduct, regardless of the actor’s motive.”); Tanner, 910 P.2d at 880; City of Portland, 750
P.2d at 174; see Gallagher at 493.  Therefore, as the court in City of Portland reflected, to
show bad faith under this standard, the principal “[need] only prove that [the surety] failed
to make a reasonable investigation of the validity of the claims against them or to consider
-4-
reasonably the viability of their counterclaims and defenses, not that [the surety] acted for
dishonest purposes or improper motives.”  750 P.2d at 175.
The parties in the present case entered into an indemnity agreement in which Atlantic
promised to reimburse Ulico “for any and all disbursements made by it in good faith, under
the belief that it was liable, or that such disbursement was necessary or prudent.”  This
provision serves as the source of Ulico’s duty to exercise good faith in paying Clearwater’s
claim.  In determining the meaning of “good faith” in this context, the majority correctly
embraced the latter of the two views described above, stating the duty of good faith “allows
the surety a discretion limited by the bounds of reasonableness, rather than the bounds of
fraud.”  Majority slip op. at 21 (emphasis added).
The trial judge in this case, however, did not apply this standard of good faith.  The
judge’s order stated: “Because [Atlantic] failed to prove fraud on the part of [Ulico], it is
clear that [Ulico] has proven its case and is entitled to stand upon the letter of the [indemnity
agreement].”  As the majority explains, however, Atlantic did not have to prove fraud to
show bad faith and avoid having to reimburse Ulico; rather, the question of bad faith turned
on whether Ulico’s payment to Clearwater was reasonable.  Majority slip op. at 21.  Up to
this point in the analysis, I share the majority’s views.  
The majority’s analysis goes awry, however, when it fails to delegate the
determination of the reasonableness of Ulico’s payment to the fact-finder.  Instead of
remanding this case for such a fact-finding, the majority assumes the role of fact-finder and
-5-
finds that the surety’s payment here was reasonable as a matter of law.  This approach is
flawed for three reasons: the question of reasonableness is for the fact-finder; the
circumstances in this case do not establish that Ulico’s payment was reasonable; and, the
majority’s holding will allow courts to enforce indemnity agreements where the surety has
paid a claim unreasonably.   
First, appellate courts should not make determinations of reasonableness because, as
this Court has observed, such questions generally fall within the province of the fact-finder.
Murphy v. 24th Street Cadillac Corp., 353 Md. 480, 494, 727 A.2d 915, 922 (1999).
Appellate courts ordinarily do not determine reasonableness because the trier of fact is in the
best position to “account[] for the circumstances of the individual case and the credibility of
the witnesses and evidence presented at trial.”  Id.; Informed Physician v. Blue Cross, 350
Md. 308, 332, 711 A.2d 1330, 1342 (1998) (“[W]hat will constitute reasonable efforts under
a contract expressly or impliedly calling for them is largely a question of fact in each
particular case . . . .”) (quoting Allview Acres v. Howard, 229 Md. 238, 244, 182 A.2d 793,
796 (1962)); Wilson v. Morris, 317 Md. 284, 295, 563 A.2d 392, 397 (1989) (stating that the
issue of reasonableness was “a question of fact for the jury”); see Lynx, Inc. v. Ordnance
Products, Inc., 273 Md. 1, 13, 327 A.2d 502, 512 (1974) (stating that what constitutes a
“reasonable time” is ordinarily a “question[ ] of fact based upon all the surrounding
circumstances”).  In the specific context of this case –  where the good faith of a surety is
determined by the reasonableness of its payment of a bond claim – courts have assigned the
-6-
reasonableness inquiry to the trier of fact.  See Tanner, 910 P.2d at 880 (explaining that, in
previous appellate proceedings in the case, the court had remanded the case because “the
reasonableness of the payments made by [the surety] is a fact question that must be
litigated”); City of Portland, 750 P.2d at 175 (reviewing a whether sufficient evidence
supported the jury’s determination of good faith under a reasonableness standard).  Because
this Court and other courts disfavor the practice of appellate courts declaring what is
reasonable, this case should be sent back to the trial court for a fact-finder’s assessment of
Ulico’s good faith under the reasonableness standard.
The majority also is wrong because the facts of this case do little to establish that
Ulico acted reasonably in satisfying Clearwater’s claim. The majority points out that several
factors have guided courts outside of Maryland “in determining whether a surety made a
reasonable, good faith settlement under the terms of the bond and the indemnity agreement.”
Majority slip op. at 22.  The majority’s list of relevant factors includes: “(1) the obligations
of the surety as provided by the terms and coverage of the bond, (2) whether the principal has
made more than generalized demands that the surety deny the claim, (3) the cooperation, or
lack thereof, by the principal, in dealing with the surety, [and] (4) the thoroughness of the
investigation performed by the surety.”  Id. (citations omitted).  
Although all of these factors are relevant, the majority’s analysis places much too
much emphasis on just one of these factors, the principal’s lack of cooperation with the
surety.  The majority states: “Atlantic did not provide adequate information that would
-7-
indicate to a reasonable surety that there was an issue with the coverage of the payment bond
as to Clearwater’s work.”  Majority slip op. at 24.  The majority followed the reasoning of
the state trial court decision in Glens Falls Indem. Co. v. Carobine, 36 N.Y.S.2d 253 (N.Y.
City Ct. 1942).  The surety in that case moved for summary judgment in its suit against the
principal who refused to reimburse a bond claim that the surety had satisfied.  Id. at 254.
Although the claim was not covered by the terms of the bond agreement and should not have
been paid, the trial court granted the surety’s motion solely on the ground that the principal
objected to the bond payment with nothing more than “generalities,” which “gave [the surety]
no substantial basis upon which to resist payment.”  Id. at 255.  In the present case, Atlantic’s
communication to Ulico was not so general.  Altlantic informed Ulico by letter that
$4,834.14 had been paid already and that the remaining bills from Clearwater were “being
disputed and must be resolved prior to completion of payment.”
The reasonableness inquiry, however, should involve more than an assessment of the
principal’s cooperation with the surety.  The surety also has a responsibility to understand the
terms and coverage of the bond agreement and carefully investigate the nature of the claim
from all available sources, including the obligee.  Should the surety then learn for certain that
a particular claim is not covered by the bond yet pays it nonetheless, the payment, in my
view, could not pass the reasonableness test.  In the instant case, Atlantic was not the only
source from which Ulico could have obtained information about the coverage of Clearwater’s
claim.  Clearwater, itself, had knowledge of the specifics of its contract with Atlantic and the
-8-
work it completed on Atlantic’s machinery.  The information provided by Clearwater in the
Proof of Claim form and billing statements, by no means, establishes that its charges to
Atlantic were covered by the surety bond.  In fact, because of the nature of the work
described in Clearwater’s bills to Atlantic (i.e., substantial repairs to durable machinery), the
documents should have alerted Ulico that Clearwater was not entitled to payment under the
bond agreement for “labor and materials,” a document that Ulico relied upon at trial.  As an
entity engaged in the business of insuring construction contracts, Ulico should have
considered that such substantial repairs to durable machinery might add to the value of that
equipment and, thus, fall outside the coverage of the bond.
A reasonable surety well might have investigated Clearwater’s claim with greater
scrutiny before paying the claim.  In Tanner, the court held that the reasonableness of a
surety’s payment depends in part on the thoroughness with which it investigated each bond
claim.  910 P.2d at 880-81.  The court recognized that “the surety’s investigation is ‘standard
practice’ in the industry.”  Id.  Affirming the trial court’s factual finding that the surety’s
payments were unreasonable, the court was persuaded by the fact that the surety “did not
conduct a thorough investigation” but rather “simply paid the claims and sought
indemnification.”  Id.  
Evidence in the present case raises similar questions about the surety’s claim
investigation.  After the initial request for a Proof of Claim form, Ulico did not consult
Clearwater to learn more about the nature of the service provided to Atlantic.  When
-9-
Atlantic’s President allegedly did attempt to contact Ulico by telephone, the surety neglected
to return the messages.  Considering these circumstances, a trier of fact could conclude that
Ulico’s efforts to investigate the Clearwater claim were less than thorough.
Finally, not only is the majority conclusion regarding reasonableness incorrect, the
precedent established by that conclusion could lead to unjust enforcement of unreasonable
surety payments.  If Ulico’s payments were reasonable under the present circumstances, the
same could be said of a surety who pays the claim even though the principal is, for some
other reason, unable to communicate promptly with the surety.  Such a situation might arise
where the principal is conducting business overseas or where the principal has not received
the surety’s notification of the obligee claim.  The majority’s holding gives broad license to
sureties to settle claims only on the basis that they have not received detailed instructions
from the principal.  No longer must sureties seek clarification from sources other than the
principal or concern themselves with the specific terms of the bond agreements.  A finder of
fact might very well determine that sureties should be held to a much higher standard of
conduct than what the majority dictates is reasonable.
I would reverse the judgement of the Court of Special Appeals and remand this case
for an application of the appropriate standard and so that a fact-finder, not appellate judges,
can determine whether Ulico’s payment of the Clearwater claim was reasonable.
Chief Judge Bell and Judge Eldridge authorize me to state that they join in this
dissent.
-10-