Title: Bad Faith and Sureties: Recent Developments
Abstract: Writing in the May issue of the newsletter of the Fidelity and Surely Committee, Gary A. Wilson and Wayne J. Marotelli of Philadelphia's Duane, Morris & Heckscher look at the issue of whether bonds are insurance: The California Supreme Court's opinion in Cates Construction Inc. v. Talbot Partners, 980 P.2d 407 (Cal. 1999), relied heavily on published articles and other scholarly works in reaching the conclusion that no cause of action for bad faith may be asserted against a surety under California law. Despite this positive development for the surety industry, the issue remains clouded nationwide, with courts in different jurisdictions continuing to reach contrary results. Two recent federal district court opinions, one in Pennsylvania and the other in New Jersey, illustrate this divergence of opinion on the issue of the surety's potential liability to obligees and payment bond claimants for bad faith. No bad faith in Pennsylvania The U.S. District Court for the Eastern District of Pennsylvania recently held that the Pennsylvania Insurance Bad Faith Statute, 42 Pa.C.S.A. sec 8371, will not support a bad faith claim against a surety. Superior Precast Inc. v. Safeco Insurance Co. of America, 71 F.Supp.2d 438 (E.D. Pa. 1999). Superior Precast involved a claim by a subcontractor against the surety for a prime contractor on a payment bond. In addition to its claim against the bond, the subcontractor asserted a separate claim against the surety under the Pennsylvania statute, contending that the surety's failure to pay the sums demanded by the subcontractor amounted to bad faith. On the surety's motion, the district court dismissed the bad faith claim, holding as a matter of law that the Pennsylvania statute, which applies to actions by an against an under an policy, will not support an action against a surety on a bond. The court cited a number of compelling reasons for its holding. For one, while Section 8371 does not define the term policy, the court found that there are fundamental differences between suretyship and insurance that required a conclusion that the Pennsylvania legislature never intended for the bad faith statute to apply to surety bonds. In so concluding, the court echoed the reasoning of the California Supreme Court in Cates, relying, as did that court, on the late Edward F. Cushman's 1960 American Bar Association article, Surety Bonds on Public and Private Construction Projects, cited in Pearlman v. Reliance Insurance Co., 371 U.S. 132 (1962), to reach the conclusion that suretyship is not insurance. The court articulated the differences between suretyship and insurance thus: Central to this difference is consideration of the relationships among the parties to the different contracts. An insurer and its insured share a direct contractual relationship and the understanding of that relationship is that the insurer will compensate the insured for loss or damage upon proper proof of claim and without resort to litigation. Special damages for bad faith conduct within that relationship are consistent with such a direct relationship. But a surety such as Safeco and a protected party such as Superior [the claimant] share no such direct contractual relationship and no such promise of prompt, expeditious payment. Safeco's relationship in this case is with A&L [the principal obligor] and it has agreed only to answer for those debts, to any unrelated parties, for which A&L fails to answer. Special damages are not logically consistent in the absence of that immediate relationship between Safeco and Superior. This court therefore will avoid a construction of sec 8371 that would make special damages available in this situation. [71 F.Supp.2d at 451-52] The court also recognized that under Pennsylvania law a surety may assert any defense of which its principal can take advantage. The court noted in this regard that the claimant's bond claim against the surety was premised on its claim against the principal on the underlying subcontract, and that there is no cause of action in Pennsylvania for bad faith breach of an ordinary contract. …
Publication Year: 2000
Publication Date: 2000-10-01
Language: en
Type: article
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