posture. Fairness dictates that Bailey should have an opportunity to litigate its bad faith argument somewhere. Exactly where and when bad faith can be raised by a party in Bailey’s position involves two questions that are unanswered under Michigan law. First, can bad faith be raised as a defense in a surety’s declaratory judgment action regarding its right to settle claims involving the principal? Or must the principal wait until the surety brings an indemnification claim to recover its payout from the disputed settlement? Bailey relied on decisions from other jurisdictions to argue in the district court that it could not yet raise bad faith as a defense to GAIC’s declaratory judgment claim. See Bell BCI Co. v. Old Dominion Demolition Corp., 294 F.Supp.2d 807, 815 (E.D. Va. 2003) (<HOLDING>); accord Safeco Ins. Co. of Am. v. M.E.S.,
holding that potential outlay for indemnification was put in controversy as soon as insurer brought a declaratory judgment against its insured even though a judgment in the underlying suit had not yet been rendered because if the insurer prevailed on defense it would also prevail on indemnification in the same stroke holding that a principal does not have an action against his agent for indemnification based on the agents misrepresentations because the principal was not blameless in the misrepresentations made to the third parties holding that a bad faith claim is a tort holding that a declaratory judgment action was not the proper forum for the principal to make its bad faith argument which instead is properly asserted as a defense to the suretys claim against the principal for indemnification holding that the liability of a principal or master to a third person based upon respondeat superior is purely derivative and thus a judgment on the merits for or against the agent or servant is res judicata visavis the principal or master though he was not a party to the action