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Employee Dishonesty, Commercial Surety and Multiple Claims: Recognizing The Right To Equitable Set-Off

It will come as no surprise to insurance and surety professionals that individuals and companies often look to one carrier/surety for most of their insurance and bonding needs. Consequently, one carrier/surety will often issue both employee dishonesty insurance and one or more commercial surety bonds to a single insured/bond principal. Because a large employee dishonesty loss will frequently cause an insured to have trouble meeting other obligations, including bonded obligations, such a fidelity loss can directly or indirectly lead to third-party claims on bond(s) as well. Thus, the carrier may be obligated to compensate its insured under the employee dishonesty coverage, and at the same time be entitled to indemnification from the insured for any payments made to third-parties under bonds the carrier also issued on the insured‘s behalf. This situation raises an important and often overlooked issue of equitable set-off, which may allow the carrier to offset the insured‘s obligation to indemnify it for bond payments made to third parties against the carrier‘s obligation to pay the insured for the employee dishonesty loss.

Equitable set-off should be allowed when the party seeking the set-off shows some equitable ground in support and the set-off is necessary to promote justice, prevent a wrong, or to give effect to the fairness of the party seeking it. The carrier must, therefore, look to the equities of the situation to properly assess its right to a set-off. The insolvency of the indemnitor/insured is an example of an equitable ground upon which a set-off can be based because it presents the likely prospect that the carrier will lose its demand to be indemnified by the insured for the surety bond losses, while being compelled to pay the insured for the employee dishonesty loss.

Issues which may arise in relation to this type of a set-off include the requirement that the debts are considered mutual, the distincition between liquidated and unliquidated debts, and the extent to which the competing claims are considered to be sufficiently matured. Set-off can be asserted either independently or as a counterclaim in litigation. If raised as a counterclaim, the extent to which the claim is considered a mandatory, permissive or supplemental counterclaim under Rule 13 must also be considered. Although assertion of the common-law right to set-off should not ordinarily raise any valid claims of impropriety, as with the consideration of any claim, the applicable unfair claim practices acts and regulations in the subject jurisdiction should always be considered.

For information on this topic, please contact Craig D. Roswell at or 410-783-6341.

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