It all traces back to a bridge, a termination, and $92 million in claims
An insurer has prevailed over a surety in a first-of-its-kind $3.9 million fight over arbitration defense costs.
The ruling, handed down on March 24, 2026, by Judge Theresa L. Springmann of the United States District Court for the Northern District of Indiana, resolved a question that neither party - nor the court - could find any precedent for: when a liability insurer pays for its insured's defense in an arbitration, and the arbitration panel then awards those same defense costs back to the insured, does the money belong to the insurer or to the surety that also has a claim on the insured's assets?
The answer, at least in this case, is the insurer.
The dispute grew out of the construction of the Cline Avenue Bridge in Lake County, Indiana. Figg Bridge Builders, LLC (FBB) had contracted with Cline Avenue Bridge, LLC (CAB) to design and build the bridge. Great American Insurance Company (GAIC) served as surety on the project, issuing performance and payment bonds on FBB's behalf. Lexington Insurance Company, meanwhile, issued professional liability and general liability policies to FBB covering the same project.
An insurer has prevailed over a surety in a first-of-its-kind $3.9 million fight over arbitration defense costs.
Things went sideways in April 2020 when CAB terminated FBB before the bridge was finished. Over the same period, GAIC had been advancing funds to FBB totaling $14.775 million to support its performance on the project. CAB then filed for arbitration, seeking over $92 million in damages from FBB.
FBB asked Lexington for a defense, and Lexington obliged – retaining two law firms and spending over $4 million defending FBB in the arbitration under a reservation of rights. Lexington drew the line, however, at funding FBB's offensive claims against CAB, taking the position that its policies only covered defense costs. FBB hired its own lawyers for that piece.
The arbitration panel issued its award in July 2022. It found that while FBB had defaulted under the contract, the default did not amount to a material breach – and that CAB's decision to terminate FBB was wrongful. The panel awarded FBB roughly $4.94 million in contract damages and $4.73 million in attorneys' fees. CAB received $3.71 million for defective work and $1.56 million in liquidated damages. After offsetting the two sides, FBB came out ahead with a net award of about $4.4 million.
Here is where it gets interesting for insurance professionals. Of the $4.73 million fee award, $3.91 million represented money Lexington had already spent defending FBB. Both Lexington and GAIC claimed that money was theirs.
GAIC's argument was straightforward: it had a perfected security interest in FBB's rights under the construction contract and in any claims or proceeds arising from it, backed by a UCC filing. It also argued it was entitled to the funds through equitable subrogation as a surety that had advanced millions to its principal. In GAIC's view, its interest came first.
Lexington took a different approach. It argued that the transfer-of-rights provisions in its insurance policies meant that FBB never actually had any right to the $3.91 million in the first place. The policies provided that if Lexington made a payment, it would be subrogated to FBB's rights of recovery. Since Lexington paid the defense costs and the arbitration panel awarded those exact costs back, Lexington was the real party in interest – and FBB was simply the nominal party through which the award flowed.
The court agreed with Lexington. Under both Indiana and Florida law, the entity that actually pays the attorneys' fees for a party to litigation is the real party in interest to any fee award. FBB did not pay the $3.91 million – Lexington did. That meant FBB never had rights in those funds, which in turn meant GAIC's security interest never attached to them. A security interest under the UCC requires that the debtor have rights in the collateral, and FBB simply did not.
The court also found that GAIC's equitable subrogation argument fell short. Every case GAIC cited involved a surety's right to remaining contract funds or retained contract balances – money owed under the construction contract itself. The attorneys' fee award was a different animal. It was not contract funds retained by the project owner; it was a reimbursement of defense costs that Lexington had paid.
GAIC raised several counterarguments on the insurance side. It pointed to the general principle that an insurer cannot subrogate against its own insured, but the court found that inapplicable because Lexington was not seeking recovery from FBB - it was seeking recovery of the arbitration award that FBB had obtained for fees Lexington had paid.
GAIC also argued that Lexington had waived its subrogation rights. The general liability policy did contain a blanket waiver of subrogation endorsement, but it only kicked in where the insured had waived the liability of the party against whom subrogation was sought as part of a written agreement. FBB had not waived CAB's liability - it had, in fact, recovered millions from CAB in the arbitration. The construction contract did require that all insurance policies contain a waiver of subrogation provision, but the actual insurance policies did not contain such a provision, and CAB never enforced that contractual requirement. The court applied the plain language of the policies as written.
On the question of whether FBB had been made whole - a prerequisite for an insurer to exercise subrogation rights under the equitable made-whole doctrine - the court found that FBB had been made whole through the contract damages and the roughly $820,000 portion of the fee award representing fees FBB had paid out of its own pocket. The $3.91 million that Lexington paid was not part of FBB's own recovery.
The court imposed a constructive trust on the $3.91 million held by GAIC, ordering it to convey those funds to Lexington. Allowing GAIC to keep the money, the court reasoned, would amount to unjust enrichment.
Both sides had also accused each other of tortious interference with contract. Neither claim survived. The court found that Lexington was justified in asserting its claim to the fee award given its contractual and legal rights. It also found that GAIC was justified in asserting its own rights given the genuine complexity of the legal questions involved - a tacit acknowledgment that this was a legitimately difficult case, not a frivolous power grab by either side.
Lexington had also asked for prejudgment interest, but the court deferred that question for further briefing, with a schedule running through mid-May 2026. Final judgment has not yet been entered.
The case is worth watching for anyone in the surety or liability insurance space. The core takeaway is that when an insurer pays for a defense and those costs are later awarded back in litigation or arbitration, the insurer - not the insured, and not the insured's surety - may be treated as the real party in interest to those funds, regardless of any competing security interests. That has practical implications for how sureties and insurers structure their agreements and for how they approach recovery when their interests overlap on the same project.
A separate dispute between FBB and Lexington over whether the $1.56 million in liquidated damages is covered by the insurance policies remains pending in federal litigation in Florida, currently stayed for arbitration.