In a typical scenario, the insurers issued surety bonds (guarantees) on construction projects. The supplier provided architectural products for construction companies. The court held that the ‘prima facie evidence’ clause in an indemnity agreement shifts to the counter guarantor the burden of proving fraud or bad faith or that the costs incurred were not recoverable.
The essential part of the ‘prima facie evidence’ clause obliged the insurers to indemnify the insured arising from furnishing of the bonds. Importantly, the policy provided that (1) originals or photocopies of claim drafts or of payment records shall be prima facie evidence of the fact and amount of the loss and (2) the insurer was entitled to reimbursement for any disbursements made by it, under the belief that it was liable, or of disbursements that were necessary or expedient.
In the US, the surety acts in bad faith if (1) the surety lacked a reasonable basis for paying the claim; and (2) the surety knew or recklessly disregarded its lack of reasonable basis for doing so. The indemnity contracts therefore granted the insurer a broad discretion in settling claims which, the court said, was consistent with construction and surety industry practices in order to prevent indemnity claims from becoming mired in litigation. The payment by the insurer “under belief that it was liable” phrasing permits sureties to evaluate and resolve claims without the necessity of litigation to determine the merits of a claim or to establish an indemnitor’s liability to the surety. The insurer’s actions and decisions to pay the claim were within their contractual discretion and the insured had not met its burden to produce evidence sufficient to establish fraud or bad faith.
These US provisions are much more elaborate than a simple on-demand guarantee well-understood in South African law.