construction payment and performance bond bad faith...

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Construction Payment and Performance BondBad Faith Litigation: Bringing or DefendingClaims Amid Differing State Standards

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THURSDAY, JUNE 30, 2016

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Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Patrick R. Kingsley, Chair, Construction, Stradley Ronon Stevens & Young, Philadelphia

Marc A. Sanchez, Partner, Frantz Ward, Cleveland

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BADBAD FAITH CLAIMS AGAINSTFAITH CLAIMS AGAINSTSURETIESSURETIES

Presented by:Presented by:Patrick KingsleyPatrick KingsleyMarc SanchezMarc Sanchez

Stradley Ronon Stevens & Young, LLP

I.I. The Origin and EvolutionThe Origin and Evolutionof the Bad Faith Claimof the Bad Faith Claim

Against SuretiesAgainst Sureties

Patrick R. Kingsley, EsquirePatrick R. Kingsley, EsquireStradleyStradley RononRonon Stevens & Young, LLPStevens & Young, LLP

2005 Market Street, Suite 26002005 Market Street, Suite 2600Philadelphia, PA 19103Philadelphia, PA 19103

(215) 564(215) 564--80298029

6

I.I. The Origin and EvolutionThe Origin and Evolutionof the Bad Faith Claimof the Bad Faith Claim

Against SuretiesAgainst Sureties


2005 Market Street, Suite 26002005 Market Street, Suite 2600Philadelphia, PA 19103Philadelphia, PA 19103

(215) 564(215) 564--80298029


Origin of the Bad Faith ClaimOrigin of the Bad Faith Claim

English common law has long recognizedan implied duty of good faith of law dealingin every contract.

7

English common law has long recognizedan implied duty of good faith of law dealingin every contract.



The good faith and fair dealing doctrineprotects parties to a contract by prohibitingone party from interfering with the otherparty’s right to receive the benefit of thebargain.

8

The good faith and fair dealing doctrineprotects parties to a contract by prohibitingone party from interfering with the otherparty’s right to receive the benefit of thebargain.



Insurance contracts, just like othercontracts, are covered by this implied duty.

Brassil v. Md. Cas. Co. (N.Y. 1914)

9

Insurance contracts, just like othercontracts, are covered by this implied duty.

Brassil v. Md. Cas. Co. (N.Y. 1914)


Origins of the Bad Faith Claim:Origins of the Bad Faith Claim:

The general common law duty ofgood faith and fair dealing wastransformed into an affirmative

claim sounding in tort

10

The general common law duty ofgood faith and fair dealing wastransformed into an affirmative

claim sounding in tort



The new tort was based on the“special relationship” between

the insured and its insurer,which arose out of the unequal

bargaining power at policyinception and during coverage

determination

11

The new tort was based on the“special relationship” between

the insured and its insurer,which arose out of the unequal

bargaining power at policyinception and during coverage

determination



12Stradley Ronon Stevens & Young, LLP

At policy inception?



Responding to a claim?


Gruenberg v. Aetna Ins. Co. (1973)

• Restaurant owner obtains $35,000 worth of fireinsurance

• A fire subsequently occurs• Insurer’s claims investigator opines that the

owner over-insured the restaurant and suspectsfoul play by the owner in the incident

• Criminal changes were initiated but immediatelydismissed for lack of probable cause.

14


• Restaurant owner obtains $35,000 worth of fireinsurance

• A fire subsequently occurs• Insurer’s claims investigator opines that the

owner over-insured the restaurant and suspectsfoul play by the owner in the incident

• Criminal changes were initiated but immediatelydismissed for lack of probable cause.




“It is the obligation, deemed to be imposed bylaw, under which the insurer must act fairly withits insured by refusing, without proper cause, tocompensate its insured for a loss covered bythe policy, such conduct may give rise to acause of action in tort for breach of an impliedcovenant of good faith and fair dealing.”

15


“It is the obligation, deemed to be imposed bylaw, under which the insurer must act fairly withits insured by refusing, without proper cause, tocompensate its insured for a loss covered bythe policy, such conduct may give rise to acause of action in tort for breach of an impliedcovenant of good faith and fair dealing.”


Lack of Good Faith andLack of Good Faith andFair DealingFair Dealing

- sounds in contract

- is a way of establishing a breach of thecontract

- contract damages only

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- sounds in contract

- is a way of establishing a breach of thecontract

- contract damages only


Bad Faith ClaimBad Faith Claim

- Is a tort

- Unique elements (beyond mere breach)

- Extra-contractual damages

17

- Is a tort

- Unique elements (beyond mere breach)

- Extra-contractual damages



Dodge v. F&D Co. of Md. (Ariz. 1989)

• Homeowners contracted for theconstruction of a new residence

• The contract required a bond• The contractor defaulted but the bond

claim was denied• Homeowners sued the surety for bad faith• The trial court dismisses the bad faith

claim18


• Homeowners contracted for theconstruction of a new residence

• The contract required a bond• The contractor defaulted but the bond

claim was denied• Homeowners sued the surety for bad faith• The trial court dismisses the bad faith

claimStradley Ronon Stevens & Young, LLP


The intermediate court of appeals affirms:“Given the difference in the relationshipcreated by casualty insurance and suretyinsurance, we see no compelling publicpolicy reasons to expand the damagescollectible against a surety beyond thosetraditionally provided for breach ofcontract.”

19

The intermediate court of appeals affirms:“Given the difference in the relationshipcreated by casualty insurance and suretyinsurance, we see no compelling publicpolicy reasons to expand the damagescollectible against a surety beyond thosetraditionally provided for breach ofcontract.”




• Concluded that the common lawinsurance bad faith tort covers suretiesbecause sureties are insurers

• Suretyship was clearly referenced inArizona’s statutory insurance scheme,thus it is insurance

20


• Concluded that the common lawinsurance bad faith tort covers suretiesbecause sureties are insurers

• Suretyship was clearly referenced inArizona’s statutory insurance scheme,thus it is insurance


II. Insurance and Suretyship

Marc A. Sanchez, Esq.200 Public Square, Suite 3000Cleveland, OH 44114JUNE 30, 2016

Marc A. Sanchez, Esq.200 Public Square, Suite 3000Cleveland, OH 44114

INSURANCE VS. SURETYSHIP

Introduction:Surety Bond.

What is it? Purpose? Parties and Relationships? Types?Indemnity.

What is it? Purpose? Scope?Bad Faith.

What is it?

Introduction:Surety Bond.

What is it? Purpose? Parties and Relationships? Types?Indemnity.

What is it? Purpose? Scope?Bad Faith.

What is it?

22


Three (3) ways that courts extend the tort of bad faith fromthe policyholder / carrier context to sureties:

• Bond language has express good faith requirement.• Statutory Bad Faith – Unfair Claims Settlement

Practices Act or Unfair Trade Practices Act.• Common Law Bad Faith (the “special relationship”

between the obligee and surety is similar topolicyholder and insurance company).

Three (3) ways that courts extend the tort of bad faith fromthe policyholder / carrier context to sureties:

• Bond language has express good faith requirement.• Statutory Bad Faith – Unfair Claims Settlement

Practices Act or Unfair Trade Practices Act.• Common Law Bad Faith (the “special relationship”

between the obligee and surety is similar topolicyholder and insurance company).

23


Insurance Surety

Bi-Lateral Relationship. Tri-Partite Relationship. Contractor / Obligor. Owner or Subcontractor / Obligee. Bonding Company / Surety.

Carrier Defends Claims Against the Policyholder and Indemnifies. Surety Tenders Defense of Claims to Bonded Principal withDemand to be Held Harmless.

Calculate Premiums to Create Pool of Reserves in the Event a LossOccurs.

Capital, Capacity, Credit and Character.

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Insurance Surety

No subrogation Against Policyholder. Surety Can Recoup Expenditures from Principal Under a GeneralIndemnity Agreement.

Responds to Unforeseen Claims of Bodily Injury and PropertyDamage.

Guarantees Contract Performance or Payment.Responds to Unforeseen Claims of Bodily Injury and PropertyDamage.

Guarantees Contract Performance or Payment.

Contract of Adhesion / Unequal Bargaining Power. Owner Dictates Terms of Bond. Owner Dictates Terms ofUnderlying Construction Contract.

25


Insurance Surety

Policyholder Vulnerable in Event of Breach. Owner Has Retainage, Contract Balance and Contract RemediesAgainst Principal.

Defenses: Contract Language. Scope of Bonded Obligation, Contractual Limitations Period,Defenses of Bonded Principal.

26

III.III. Statutory verses CommonStatutory verses CommonLawLaw ClaimsClaims

PatrickPatrick R. Kingsley, EsquireR. Kingsley, EsquireStradleyStradley RononRonon Stevens & Young, LLPStevens & Young, LLP

2005 Market Street, Suite 26002005 Market Street, Suite 2600Philadelphia, PAPhiladelphia, PA 1910319103

(215) 564(215) 564--80298029

27

III.III. Statutory verses CommonStatutory verses CommonLawLaw ClaimsClaims

PatrickPatrick R. Kingsley, EsquireR. Kingsley, EsquireStradleyStradley RononRonon Stevens & Young, LLPStevens & Young, LLP


(215) 564(215) 564--80298029


Two Model Acts:Two Model Acts:

• Unfair Trade Practices Act

• Unfair Claims SettlementPractices Act

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• Unfair Trade Practices Act

• Unfair Claims SettlementPractices Act


The Unfair Trade Practices ActThe Unfair Trade Practices Act

National Association of InsuranceCommissions adopt the “UnfairTradePractices Act” establishing rules to regulateunfair trade practices in the insuranceindustry.

The scope of the model act appears to coversuretyship. Those states that have adoptedthe act include suretyship within the scopeof regulated insurance activities.

29

National Association of InsuranceCommissions adopt the “UnfairTradePractices Act” establishing rules to regulateunfair trade practices in the insuranceindustry.

The scope of the model act appears to coversuretyship. Those states that have adoptedthe act include suretyship within the scopeof regulated insurance activities.


The Unfair Claims SettlementThe Unfair Claims SettlementPractices ActPractices Act

National Association of InsuranceCommissions later adopts the “UnfairClaims Settlement Practice Act” which wasintended to define unfair claims practiceswith more exactitude.

The model act specifically excludessuretyship. However, not all the states thathave adopted the model act have adoptedthe language excluding suretyship.

30

National Association of InsuranceCommissions later adopts the “UnfairClaims Settlement Practice Act” which wasintended to define unfair claims practiceswith more exactitude.

The model act specifically excludessuretyship. However, not all the states thathave adopted the model act have adoptedthe language excluding suretyship.



Specifically excluded suretyship:

“[This Act] is not intended to cover claimsinvolving worker’s compensation, fidelity,suretyship or boiler and machineryinsurance.”

31

Specifically excluded suretyship:

“[This Act] is not intended to cover claimsinvolving worker’s compensation, fidelity,suretyship or boiler and machineryinsurance.”



A bond is not an insurance “policy”:

“ ‘Policy’ or ‘certificate’ for purposes of thisAct should not mean contracts of workers’compensation, fidelity, suretyship or boilerand machinery insurance.”

32

A bond is not an insurance “policy”:

“ ‘Policy’ or ‘certificate’ for purposes of thisAct should not mean contracts of workers’compensation, fidelity, suretyship or boilerand machinery insurance.”


Two Model ActsTwo Model Acts

Both model acts say they do notcreate a private cause of action,but that language has not beenconsistently adopted.

33

Both model acts say they do notcreate a private cause of action,but that language has not beenconsistently adopted.


Statutory Basis for the Bad Faith ClaimStatutory Basis for the Bad Faith Claim

In 1981, the Pennsylvania Supreme Courtdeclined to follow the lead of the CaliforniaSupreme Court in Gruenberg v. Aetna.

34

In 1981, the Pennsylvania Supreme Courtdeclined to follow the lead of the CaliforniaSupreme Court in Gruenberg v. Aetna.


Statutory BasisStatutory Basis forfor the Badthe Bad Faith ClaimFaith Claim

D’Ambrosio (Pa. 1981)

“There is no evidence to suggest, and we have noreason to believe, that the system of sanctionsestablished under the Unfair Insurance PracticesAct must be supplemented by a judicially createdcause of action…”

“An award of punitive damages unquestionably is adeterrent device,… one which is unnecessary inview of the present legislatively created regulatoryscheme”.

35

D’Ambrosio (Pa. 1981)

“There is no evidence to suggest, and we have noreason to believe, that the system of sanctionsestablished under the Unfair Insurance PracticesAct must be supplemented by a judicially createdcause of action…”

“An award of punitive damages unquestionably is adeterrent device,… one which is unnecessary inview of the present legislatively created regulatoryscheme”.


The Pennsylvania Bad Faith StatuteThe Pennsylvania Bad Faith Statute

Actions on insurance policies

In an action arising under an insurance policyinsurance policy, if thecourt finds that the insurer has acted in bad faith towardthe insured, the court may take all of the followingactions:

1. Award interest on the amount of the claim from thedate the claim was made by the insured in an amountequal to the prime rate of interest plus 3%.

2. Award punitive damages against the insurer.

3. Assess court costs and attorney fees against theinsurer.

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Actions on insurance policies

In an action arising under an insurance policyinsurance policy, if thecourt finds that the insurer has acted in bad faith towardthe insured, the court may take all of the followingactions:

1. Award interest on the amount of the claim from thedate the claim was made by the insured in an amountequal to the prime rate of interest plus 3%.

2. Award punitive damages against the insurer.

3. Assess court costs and attorney fees against theinsurer.



After initially finding that suretyship wascovered by this statute, PennsylvaniaCourts have now consistently ruled that asurety bond is not an insurance policy.

37

After initially finding that suretyship wascovered by this statute, PennsylvaniaCourts have now consistently ruled that asurety bond is not an insurance policy.


Statutory BasisStatutory Basis forfor Bad FaithBad Faith

SimplexGrinnel (M.D. Pa. 2009)

1. The surety bond is a financial credit product, not insurance;

2. The surety has a “contractual” relationship with two parties that oftenhave conflicting interests, which the surety must balance;

3. The surety bond form customarily is written or furnished by the obligeerather than the surety;

4. Bonded projects involve parties with commercial sophistication, relativeparity of bargaining power and access to ample legal and technical advice;

5. The bond premium usually is paid by the contractor to the surety, ratherthan directly by the obligee; and

6. The pricing of the bond premium is not based upon risk of loss.

38

SimplexGrinnel (M.D. Pa. 2009)

1. The surety bond is a financial credit product, not insurance;

2. The surety has a “contractual” relationship with two parties that oftenhave conflicting interests, which the surety must balance;

3. The surety bond form customarily is written or furnished by the obligeerather than the surety;

4. Bonded projects involve parties with commercial sophistication, relativeparity of bargaining power and access to ample legal and technical advice;

5. The bond premium usually is paid by the contractor to the surety, ratherthan directly by the obligee; and

6. The pricing of the bond premium is not based upon risk of loss.



Fed. Ins. Co. v. Maine Yankee (D. Me. 2001)

The issue of whether an obligee couldobtain extra contractual damages on aperformance bond “must be asked andanswered as a matter of statutoryinterpretation”.

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The issue of whether an obligee couldobtain extra contractual damages on aperformance bond “must be asked andanswered as a matter of statutoryinterpretation”.


Statutory Basis for Bad FaithStatutory Basis for Bad Faith


• The Maine insurance statutes defined surety asinsurance

• There was no express exclusion of suretyshipfrom Maine’s version of the Uniform ClaimsSettlement Practices Act

• Instead, the statutes allowed insureds to bringextra contractual claims against their “owninsurer”

• So, is the surety the obligee’s “own insurer”?

40


• The Maine insurance statutes defined surety asinsurance

• There was no express exclusion of suretyshipfrom Maine’s version of the Uniform ClaimsSettlement Practices Act

• Instead, the statutes allowed insureds to bringextra contractual claims against their “owninsurer”

• So, is the surety the obligee’s “own insurer”?


Statutory Basis for Bad Faith ClaimStatutory Basis for Bad Faith Claim


• The Court held that the surety is not theobligee’s “own insured”

• It is the general contractor, not theobligee, who purchases the performancebond

• Hence, no extra contractual damages wereavailable to the obligee

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• The Court held that the surety is not theobligee’s “own insured”

• It is the general contractor, not theobligee, who purchases the performancebond

• Hence, no extra contractual damages wereavailable to the obligee


Statutory Basis for Bad Faith ClaimStatutory Basis for Bad Faith Claim

Dadeland v. St. Paul (Fla. 2006)

• Court concluded that a bond obligee wasan “insured” under the Florida Statute

• Court explained that the obligee requiresthe contractor to obtain the performancebond thereby “essentially insuring itselffrom potential loss”

• In 2005 that statute was amended toexpressly exclude suretyship

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Dadeland v. St. Paul (Fla. 2006)

• Court concluded that a bond obligee wasan “insured” under the Florida Statute

• Court explained that the obligee requiresthe contractor to obtain the performancebond thereby “essentially insuring itselffrom potential loss”

• In 2005 that statute was amended toexpressly exclude suretyship


IV. Miller Act Preemption



BAD FAITH AND THE MILLER ACT

The Miller Act -- 40 USC §§ 3131-3134.(Heard Act in 1894. Miller Act in 1935)

Why?

• History of insolvent contractors costing taxpayers money.• Don’t want mechanic’s liens on federal projects• Lien is an in rem remedy. Doesn’t guarantee a recovery.• Bond is a credit product that provides funds for successful

claimants.

The Miller Act -- 40 USC §§ 3131-3134.(Heard Act in 1894. Miller Act in 1935)

Why?

• History of insolvent contractors costing taxpayers money.• Don’t want mechanic’s liens on federal projects• Lien is an in rem remedy. Doesn’t guarantee a recovery.• Bond is a credit product that provides funds for successful

claimants.

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The Miller Act -- 40 USC §§ 3131-3134.

• Requires prime contractors on construction contracts(“construction, alteration, or repair”) in excess of$100,000 to post bonds guaranteeing both theperformance of their contractual duties and the paymentof their subcontractors and material suppliers.

• Suit 90 days after last date of work (not longer than 1year).

• Bring action in name of United States Government in USDistrict Court.


• Requires prime contractors on construction contracts(“construction, alteration, or repair”) in excess of$100,000 to post bonds guaranteeing both theperformance of their contractual duties and the paymentof their subcontractors and material suppliers.

• Suit 90 days after last date of work (not longer than 1year).

• Bring action in name of United States Government in USDistrict Court.

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• Performance Bonds:• Bonding process helps weed out irresponsible

contractors.• Bond defrays the government’s cost of substitute

performance.• Sureties rights against bonded principal act as a

deterrent to nonperformance.


• Performance Bonds:• Bonding process helps weed out irresponsible

contractors.• Bond defrays the government’s cost of substitute

performance.• Sureties rights against bonded principal act as a

deterrent to nonperformance.

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• Payment Bonds:• Without this security, unpaid subcontractors and

material suppliers would have no recourse.• Would be reluctant to work on government projects.• This would diminish competition and drive up

construction costs.


• Payment Bonds:• Without this security, unpaid subcontractors and

material suppliers would have no recourse.• Would be reluctant to work on government projects.• This would diminish competition and drive up

construction costs.

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Attorneys’ fees are generally not recoverable under theMiller Act. F.D. Rich, Inc. v. United States ex rel. IndustrialLumber Co., Inc., 417 U.S. 116, 126-31, 40 L.Ed. 2d 703, 94S.Ct. 2157 (1974).

• Can be recovered against the surety if there is a fee-shifting provision in the underlying constructioncontract.

• “Sums justly due”• Can be recovered if bad faith. Most courts limit this

to conduct during litigation.• Many Little Miller Acts specifically authorize recovery

of attorneys’ fees.

Attorneys’ fees are generally not recoverable under theMiller Act. F.D. Rich, Inc. v. United States ex rel. IndustrialLumber Co., Inc., 417 U.S. 116, 126-31, 40 L.Ed. 2d 703, 94S.Ct. 2157 (1974).

• Can be recovered against the surety if there is a fee-shifting provision in the underlying constructioncontract.

• “Sums justly due”• Can be recovered if bad faith. Most courts limit this

to conduct during litigation.• Many Little Miller Acts specifically authorize recovery

of attorneys’ fees.

48


Little Miller Acts:

• State statutes based on the federal Miller Act.• Requires prime contractors on state projects to post

bonds guaranteeing performance of the contract andpayment of their subcontractors and suppliers

• All 50 states• Mimics federal version

Little Miller Acts:

• State statutes based on the federal Miller Act.• Requires prime contractors on state projects to post

bonds guaranteeing performance of the contract andpayment of their subcontractors and suppliers

• All 50 states• Mimics federal version

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Courts are split on whether or not the Miller Act preemptsstate law claims:

• K-W Industries v. Nat’l Surety Corp., 855 F.2d 640 (9th

Cir. 1988) – No preemption. No express preemption,Miller Act does not occupy the entire field, noconflict with state law. State law bad faith actuallyadvances purpose of Miller Act.

• United States ex rel. Great Wall Construction, Inc. v.Mattie & O’Brien, Case No. 00-180-P-H, 2001 U.S.Dist. LEXIS 24951 (D. Me. Feb. 14, 2001) –Preemption.

Courts are split on whether or not the Miller Act preemptsstate law claims:

• K-W Industries v. Nat’l Surety Corp., 855 F.2d 640 (9th

Cir. 1988) – No preemption. No express preemption,Miller Act does not occupy the entire field, noconflict with state law. State law bad faith actuallyadvances purpose of Miller Act.

• United States ex rel. Great Wall Construction, Inc. v.Mattie & O’Brien, Case No. 00-180-P-H, 2001 U.S.Dist. LEXIS 24951 (D. Me. Feb. 14, 2001) –Preemption.

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• U.S. ex rel. Metric Elec., Inc. v. Enviroserve, Inc., 301 F.Supp. 2d 56 (D. Mass. 2003); Tacon Mech.Contractors, Inc. v. Aetna Cas. & Sur. Co., 860 F. Supp.385 (S.D. Tex. 1994). Preemption.

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Analysis:• Miller Act or Little Miller Act Preemption

• Case law and Legislative History• Bond language has express good faith requirement.• Common Law Bad Faith (the “special relationship”

between the obligee and surety is similar to policyholderand insurance company).

• Statutory Bad Faith – Unfair Claims Settlement PracticesAct or Unfair Trade Practices Act. Private right of action.

Analysis:• Miller Act or Little Miller Act Preemption

• Case law and Legislative History• Bond language has express good faith requirement.• Common Law Bad Faith (the “special relationship”

between the obligee and surety is similar to policyholderand insurance company).

• Statutory Bad Faith – Unfair Claims Settlement PracticesAct or Unfair Trade Practices Act. Private right of action.

52

V.V. What Arguments Work inWhat Arguments Work inFavor of the Claim?Favor of the Claim?



(215) 564(215) 564--80298029

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V.V. What Arguments Work inWhat Arguments Work inFavor of the Claim?Favor of the Claim?



(215) 564(215) 564--80298029


Arguments In Favor:Arguments In Favor:

Sureties are just likeinsurance companies


TransamericaTransamerica v. Brighton Schoolv. Brighton School (Colo. 1997)(Colo. 1997)

“While there may be differences in the form of thesuretyship agreement and the obligations of theparties, its substance is essentially the same asinsurance.”

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“While there may be differences in the form of thesuretyship agreement and the obligations of theparties, its substance is essentially the same asinsurance.”


ATULATUL ((D.N.JD.N.J. 2000). 2000)

“Although the relationship between anobligee and a surety is not identical to therelationship between an insurer and aninsured, the relationships are closelyanalogous.”

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“Although the relationship between anobligee and a surety is not identical to therelationship between an insurer and aninsured, the relationships are closelyanalogous.”



Suretyship is referencedin the regulatory scheme


SzarkowskiSzarkowski v. Reliancev. Reliance (N.D. 1987)(N.D. 1987)

“Reliance, in issuing performance bonds fora profit is engaged in the business ofinsurance as to which the provisions of” theNorth Dakota Unfair Insurance Practices Actapply.

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“Reliance, in issuing performance bonds fora profit is engaged in the business ofinsurance as to which the provisions of” theNorth Dakota Unfair Insurance Practices Actapply.



A “special relationship”exists between

a surety and obligee


DodgeDodge ((ArizAriz. 1989). 1989)

The surety and the obligee were in a“special relationship” because the bond wasprocured for security and protection ratherthan for commercial advantage

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The surety and the obligee were in a“special relationship” because the bond wasprocured for security and protection ratherthan for commercial advantage



Sureties have superiorbargaining powervis-à-vis obligees


TransamericaTransamerica (Colo. 1997)(Colo. 1997)

“It is the commercial surety who controlsthe ultimate decision of whether to payclaims made by the obligee under the termsof the surety bond. For this reason, thecommercial surety has a distinct advantageover the obligee in its ability to controlperformance under the security agreement.”

62

“It is the commercial surety who controlsthe ultimate decision of whether to payclaims made by the obligee under the termsof the surety bond. For this reason, thecommercial surety has a distinct advantageover the obligee in its ability to controlperformance under the security agreement.”



A bad faith tort claim is needed to keepsureties honest


DodgeDodge ((ArizAriz. 1989). 1989)

Ordinary contract damages “offer no motivationwhatsoever for the insurer not to breach. If theonly damages an insurer will have to pay uponjudgment of breach are the amounts that itwould have owed under the policy plus interest,it has every interest in retaining the money,earning the higher rates of interest on theoutside market and hoping eventually to forcethe insured into a settlement for less than thepolicy amount.”

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Ordinary contract damages “offer no motivationwhatsoever for the insurer not to breach. If theonly damages an insurer will have to pay uponjudgment of breach are the amounts that itwould have owed under the policy plus interest,it has every interest in retaining the money,earning the higher rates of interest on theoutside market and hoping eventually to forcethe insured into a settlement for less than thepolicy amount.”Stradley Ronon Stevens & Young, LLP

VI. Jurisdictions Finding No Bad FaithCause of Action Against Sureties



BAD FAITH

Courts are split:• Moundsville Water Bd. v. Shook, Inc., US Dist., Northern

District of W. Va., 2010 U.S. Dist. LEXIS 62273. Suretyshipcovered by insurance statutes. Claim not subject todismissal.

• Seeman v. Liberty Mut. Ins. Co., 322 N.W.2d 35 (Iowa1982). Although sureties included in Iowa’s insurancestatutes, the statutes do not create a private cause ofaction.

• Cates Constr., Inc. v. Talbot Partners, 21 Cal.4th 28, 980P.2d 407 (1999). Elements of adhesion, public interest,and fiduciary responsibility are not present inconstruction surety context.

Courts are split:• Moundsville Water Bd. v. Shook, Inc., US Dist., Northern

District of W. Va., 2010 U.S. Dist. LEXIS 62273. Suretyshipcovered by insurance statutes. Claim not subject todismissal.

• Seeman v. Liberty Mut. Ins. Co., 322 N.W.2d 35 (Iowa1982). Although sureties included in Iowa’s insurancestatutes, the statutes do not create a private cause ofaction.

• Cates Constr., Inc. v. Talbot Partners, 21 Cal.4th 28, 980P.2d 407 (1999). Elements of adhesion, public interest,and fiduciary responsibility are not present inconstruction surety context.

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BAD FAITH

•Great Am. Ins. Co. v. N. Austin Muni. Util. Dist. No. 1, 908S.W.2d 415, 419 (Tex. 1995). Texas legislature did not intendto include suretyship as the business of insurance for allpurposes under the insurance code.

•Cincinnati Ins. Co. v. Centech Bldg. Corp., 286 F. Supp. 2d669, 690 (M.D.N.C. 2003). The court found that the type of“special relationship” which exists between an insurer andits insured is absent in the relationship between a suretyand an obligee.

•Great Am. Ins. Co. v. N. Austin Muni. Util. Dist. No. 1, 908S.W.2d 415, 419 (Tex. 1995). Texas legislature did not intendto include suretyship as the business of insurance for allpurposes under the insurance code.

•Cincinnati Ins. Co. v. Centech Bldg. Corp., 286 F. Supp. 2d669, 690 (M.D.N.C. 2003). The court found that the type of“special relationship” which exists between an insurer andits insured is absent in the relationship between a suretyand an obligee.

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BAD FAITH

•Boldt Co. v. Thomason Elec. & Am. Contrs. Indem. Co., 820F. Supp. 2d 703, 706 (S.D. S.C. 2007) (refusing to recognizean obligee’s bad faith tort claim against a surety).

•Inst. Of Mission Helpers v. Reliance Ins. Co., 812 F. Supp. 72(D. Md. 1992). See also Republic Ins. Co. v. Bd. of CountyCommr’s, 511 A.2d 1136 (Md. Ct. Spec. App. 1986)(reversing a judgment in favor of the obligee on its bad faithclaim against a surety, holding that the obligee could notmaintain a tort action against surety for bad faith refusal topay a claim).

•Boldt Co. v. Thomason Elec. & Am. Contrs. Indem. Co., 820F. Supp. 2d 703, 706 (S.D. S.C. 2007) (refusing to recognizean obligee’s bad faith tort claim against a surety).

•Inst. Of Mission Helpers v. Reliance Ins. Co., 812 F. Supp. 72(D. Md. 1992). See also Republic Ins. Co. v. Bd. of CountyCommr’s, 511 A.2d 1136 (Md. Ct. Spec. App. 1986)(reversing a judgment in favor of the obligee on its bad faithclaim against a surety, holding that the obligee could notmaintain a tort action against surety for bad faith refusal topay a claim).

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BAD FAITH

•Toltest v. Purcel P&C, LLC, 2013 U.S. Dist. LEXIS 52897 (N.D.Ohio April 12, 2013). Performance bond obligee notdependent upon surety’s good faith investigation. Notvulnerable. No bad faith cause of action. In re CommercialMoney Ctr., Inc. Equip. Lease Litig., 603 F. Supp. 2d 1095,1122-1125 (N.D. Ohio 2009). Finding Ohio Supreme Courtwas likely to refuse to recognize a bad faith claim by anobligee against a surety on a performance bond. Uniquefactors in the insurance carrier / policyholder relationshipwere not present.

•Toltest v. Purcel P&C, LLC, 2013 U.S. Dist. LEXIS 52897 (N.D.Ohio April 12, 2013). Performance bond obligee notdependent upon surety’s good faith investigation. Notvulnerable. No bad faith cause of action. In re CommercialMoney Ctr., Inc. Equip. Lease Litig., 603 F. Supp. 2d 1095,1122-1125 (N.D. Ohio 2009). Finding Ohio Supreme Courtwas likely to refuse to recognize a bad faith claim by anobligee against a surety on a performance bond. Uniquefactors in the insurance carrier / policyholder relationshipwere not present.

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BAD FAITH

•Dadeland Depot, Inc. v. St. Paul Fire and Marine Ins. Co., 945So.2d 1216, 1231 (Fla. 2006). Sureties were included in theFlorida Insurance Code and this exposed them to statutorybad faith cause of action. This changed in 2005, whensureties were specifically excluded from the Code.•Fed. Ins. Co. v. Me. Yankee Atomic Power Co., 183 F. Supp.2d 76, 90 (D. Me. 2001) (“The natural reading of section2436-A [Maine’s Unfair Claims Settlement Practices Act] isthat a surety insurance company is not the owner's ‘owninsurer’ for either a payment or a performance bond that ageneral contractor has purchased under the requirements ofa contract for a construction project. . . .”)

•Dadeland Depot, Inc. v. St. Paul Fire and Marine Ins. Co., 945So.2d 1216, 1231 (Fla. 2006). Sureties were included in theFlorida Insurance Code and this exposed them to statutorybad faith cause of action. This changed in 2005, whensureties were specifically excluded from the Code.•Fed. Ins. Co. v. Me. Yankee Atomic Power Co., 183 F. Supp.2d 76, 90 (D. Me. 2001) (“The natural reading of section2436-A [Maine’s Unfair Claims Settlement Practices Act] isthat a surety insurance company is not the owner's ‘owninsurer’ for either a payment or a performance bond that ageneral contractor has purchased under the requirements ofa contract for a construction project. . . .”)

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BAD FAITH

•U.S. ex rel, SimplexGrinell, LP v. Aegis Ins. Co., No. 1:08-CV-01728, 2009 U.S. Dist. LEXIS 2381 (M.D. Pa. Jan. 14, 2009);Superior Precast, Inc. v. Safeco Ins. Co. of Amer., 71 F. Supp.2d 438, 448-454 (E.D. Pa. 1999). Not recognized.

•U.S. ex rel, SimplexGrinell, LP v. Aegis Ins. Co., No. 1:08-CV-01728, 2009 U.S. Dist. LEXIS 2381 (M.D. Pa. Jan. 14, 2009);Superior Precast, Inc. v. Safeco Ins. Co. of Amer., 71 F. Supp.2d 438, 448-454 (E.D. Pa. 1999). Not recognized.

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Contact Information:

Marc A. Sanchez, Esq.Frantz Ward, LLP

200 Public Square, Suite 3000Cleveland, OH 44114

[email protected](216) 515-1638

(216) 406-2695 (cell)


Marc A. Sanchez, Esq.Frantz Ward, LLP

200 Public Square, Suite 3000Cleveland, OH 44114

[email protected](216) 515-1638

(216) 406-2695 (cell)

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(215) 564(215) [email protected]@stradley.com





(215) 564(215) [email protected]@stradley.com

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