Surety Bond - Policyholder Obliged to Release the Insurer from its Liability to the Insured

As a guarantee of the execution of some work contracts, the defendant took out surety bonds with the insurer, where the beneficiaries were certain public entities. Some time later, the defendant stopped paying the insurance premiums.

The plaintiff filed a lawsuit, claiming: a) the payment of outstanding premiums; b) that the defendant must perform all acts necessary to release the insurer from its liability against the insured, in connection with the obligations undertaken under the surety bonds; and c) that the policies be returned as evidence that the guarantee of the surety bond had expired. The insurer alleged that the claim was exclusively targeted against the defendant, without prejudice to the right of the insureds (i.e., the public entities).

The first instance court ruling admitted only part of the claim, and held that defendant must payment outstanding premiums. The plaintiff challenged the ruling.

In second instance, the Court of Appeals denied the plaintiff’s claim that its liability to the insured be released since the plaintiff had not proven that works guaranteed by the insurance bonds had been properly accomplished. The Court held that the defendant took out surety bond insurance to guarantee his creditors (the public entities) that if he failed to perform the works, creditors would be indemnified by the insurer. Therefore, the insurer was obliged to maintain the insurance contracts in force until the debtor (i.e., the policyholder) is free from liability in connection with the works.

However, the Court of Appeals understood that the insurer also had the right to be released from its obligations under the policies and that no one may be bound indefinitely in a contract relationship.

The Court of Appeals held that the acts necessary to release the insurer from its liability to the insured could be carried out by no-one other than the policyholder. Consequently, the Court of Appeals ruled that the defendant (i.e., the policyholder) must perform all acts necessary to release the plaintiff from its obligations under the policies. If the defendant fails to do so, such acts could be carried out by other at the defendant’s expense, and the defendant would be liable for damages and also for procedural fines (article 513 of the Civil and Commercial Code of Procedures).