Construction Payment and Performance Bond Bad Faith Litigation: - - PowerPoint PPT Presentation

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Construction Payment and Performance Bond Bad Faith Litigation: Bringing or Defending Claims Amid Differing State Standards

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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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BAD BAD FAITH CLAIMS AGAINST FAITH CLAIMS AGAINST SURETIES SURETIES

Presented by: Presented by: Patrick Kingsley Patrick Kingsley Marc Sanchez Marc Sanchez

Stradley Ronon Stevens & Young, LLP

I. I. The Origin and Evolution The Origin and Evolution

• f the Bad Faith Claim
• f the Bad Faith Claim

6

• f the Bad Faith Claim
• f the Bad Faith Claim

Against Sureties Against Sureties

Patrick R. Kingsley, Esquire Patrick R. Kingsley, Esquire Stradley Stradley Ronon Ronon Stevens & Young, LLP Stevens & Young, LLP 2005 Market Street, Suite 2600 2005 Market Street, Suite 2600 Philadelphia, PA 19103 Philadelphia, PA 19103 (215) 564 (215) 564-

• 8029

8029

Stradley Ronon Stevens & Young, LLP

Origin of the Bad Faith Claim Origin of the Bad Faith Claim

English common law has long recognized

7

English common law has long recognized an implied duty of good faith of law dealing in every contract.

Stradley Ronon Stevens & Young, LLP

Origin of the Bad Faith Claim Origin of the Bad Faith Claim

The good faith and fair dealing doctrine protects parties to a contract by prohibiting

8

protects parties to a contract by prohibiting

• ne party from interfering with the other

party’s right to receive the benefit of the bargain.

Stradley Ronon Stevens & Young, LLP

Origin of the Bad Faith Claim Origin of the Bad Faith Claim

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

9

contracts, are covered by this implied duty.

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

Stradley Ronon Stevens & Young, LLP

Origins of the Bad Faith Claim: Origins of the Bad Faith Claim: The general common law duty of good faith and fair dealing was transformed into an affirmative

10

good faith and fair dealing was transformed into an affirmative claim sounding in tort

Stradley Ronon Stevens & Young, LLP

Origins of the Bad Faith Claim: Origins of the Bad Faith Claim: The new tort was based on the “special relationship” between the insured and its insurer, which arose out of the unequal

11

the insured and its insurer, which arose out of the unequal bargaining power at policy inception and during coverage determination

Stradley Ronon Stevens & Young, LLP

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

12 Stradley Ronon Stevens & Young, LLP

At policy inception?

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

13 Stradley Ronon Stevens & Young, LLP

Responding to a claim?

Origin of the Bad Faith Claim Origin of the Bad Faith Claim

Gruenberg v. Aetna Ins. Co. (1973)

• Restaurant owner obtains $35,000 worth of fire

insurance

• A fire subsequently occurs

14

• A fire subsequently occurs
• Insurer’s claims investigator opines that the
• wner over-insured the restaurant and suspects

foul play by the owner in the incident

• Criminal changes were initiated but immediately

dismissed for lack of probable cause.

Stradley Ronon Stevens & Young, LLP

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

Gruenberg v. Aetna Ins. Co. (1973) “It is the obligation, deemed to be imposed by law, under which the insurer must act fairly with its insured by refusing, without proper cause, to

15

its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy, such conduct may give rise to a cause of action in tort for breach of an implied covenant of good faith and fair dealing.”

Stradley Ronon Stevens & Young, LLP

Lack of Good Faith and Lack of Good Faith and Fair Dealing Fair Dealing

• sounds in contract

16

• sounds in contract
• is a way of establishing a breach of the

contract

• contract damages only

Stradley Ronon Stevens & Young, LLP

Bad Faith Claim Bad Faith Claim

• Is a tort

17

• Is a tort
• Unique elements (beyond mere breach)
• Extra-contractual damages

Stradley Ronon Stevens & Young, LLP

Origin of the Bad Faith Claim Origin of the Bad Faith Claim

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

• Homeowners contracted for the

construction of a new residence

• The contract required a bond

18

• 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

claim

Stradley Ronon Stevens & Young, LLP

Origin of the Bad Faith Claim Origin of the Bad Faith Claim

The intermediate court of appeals affirms: “Given the difference in the relationship created by casualty insurance and surety

19

created by casualty insurance and surety insurance, we see no compelling public policy reasons to expand the damages collectible against a surety beyond those traditionally provided for breach of contract.”

Stradley Ronon Stevens & Young, LLP

Origin of the Bad Faith Claim Origin of the Bad Faith Claim

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

• Concluded that the common law

insurance bad faith tort covers sureties because sureties are insurers

20

because sureties are insurers

• Suretyship was clearly referenced in

Arizona’s statutory insurance scheme, thus it is insurance

Stradley Ronon Stevens & Young, LLP

• II. Insurance and Suretyship

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

JUNE 30, 2016

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

INSURANCE VS. SURETYSHIP

Three (3) ways that courts extend the tort of bad faith from the 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 to policyholder and insurance company). Three (3) ways that courts extend the tort of bad faith from the 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 to policyholder and insurance company).

23

INSURANCE VS. SURETYSHIP

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 with Demand to be Held Harmless. Calculate Premiums to Create Pool of Reserves in the Event a Loss Occurs. Capital, Capacity, Credit and Character.

24

INSURANCE VS. SURETYSHIP

Insurance Surety No subrogation Against Policyholder. Surety Can Recoup Expenditures from Principal Under a General Indemnity Agreement. Responds to Unforeseen Claims of Bodily Injury and Property Damage. Guarantees Contract Performance or Payment. Responds to Unforeseen Claims of Bodily Injury and Property Damage. Guarantees Contract Performance or Payment. Contract of Adhesion / Unequal Bargaining Power. Owner Dictates Terms of Bond. Owner Dictates Terms of Underlying Construction Contract.

25

INSURANCE VS. SURETYSHIP

Insurance Surety Policyholder Vulnerable in Event of Breach. Owner Has Retainage, Contract Balance and Contract Remedies Against Principal. Defenses: Contract Language. Scope of Bonded Obligation, Contractual Limitations Period, Defenses of Bonded Principal.

26

III.

• III. Statutory verses Common

Statutory verses Common Law Law Claims Claims

27

Patrick Patrick R. Kingsley, Esquire

• R. Kingsley, Esquire

Stradley Stradley Ronon Ronon Stevens & Young, LLP Stevens & Young, LLP 2005 Market Street, Suite 2600 2005 Market Street, Suite 2600 Philadelphia, PA Philadelphia, PA 19103 19103 (215) 564 (215) 564-8029 8029

Stradley Ronon Stevens & Young, LLP

Two Model Acts: Two Model Acts:

• Unfair Trade Practices Act

28

• Unfair Trade Practices Act
• Unfair Claims Settlement

Practices Act

Stradley Ronon Stevens & Young, LLP

The Unfair Trade Practices Act The Unfair Trade Practices Act

National Association of Insurance Commissions adopt the “UnfairTrade Practices Act” establishing rules to regulate unfair trade practices in the insurance

29

unfair trade practices in the insurance industry. The scope of the model act appears to cover

• suretyship. Those states that have adopted

the act include suretyship within the scope

• f regulated insurance activities.

Stradley Ronon Stevens & Young, LLP

The Unfair Claims Settlement The Unfair Claims Settlement Practices Act Practices Act

National Association of Insurance Commissions later adopts the “Unfair Claims Settlement Practice Act” which was intended to define unfair claims practices

30

intended to define unfair claims practices with more exactitude. The model act specifically excludes

• suretyship. However, not all the states that

have adopted the model act have adopted the language excluding suretyship.

Stradley Ronon Stevens & Young, LLP

The Unfair Trade Practices Act The Unfair Trade Practices Act

Specifically excluded suretyship: “[This Act] is not intended to cover claims involving worker’s compensation, fidelity, suretyship or boiler and machinery

31

suretyship or boiler and machinery insurance.”

Stradley Ronon Stevens & Young, LLP

The Unfair Trade Practices Act The Unfair Trade Practices Act

A bond is not an insurance “policy”: “ ‘Policy’ or ‘certificate’ for purposes of this Act should not mean contracts of workers’ compensation, fidelity, suretyship or boiler

32

compensation, fidelity, suretyship or boiler and machinery insurance.”

Stradley Ronon Stevens & Young, LLP

Two Model Acts Two Model Acts Both model acts say they do not

33

Both model acts say they do not create a private cause of action, but that language has not been consistently adopted.

Stradley Ronon Stevens & Young, LLP

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

In 1981, the Pennsylvania Supreme Court

34

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

Stradley Ronon Stevens & Young, LLP

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

D’Ambrosio (Pa. 1981) “There is no evidence to suggest, and we have no reason to believe, that the system of sanctions established under the Unfair Insurance Practices

35

established under the Unfair Insurance Practices Act must be supplemented by a judicially created cause of action…” “An award of punitive damages unquestionably is a deterrent device,… one which is unnecessary in view of the present legislatively created regulatory scheme”.

Stradley Ronon Stevens & Young, LLP

The Pennsylvania Bad Faith Statute The Pennsylvania Bad Faith Statute

Actions on insurance policies In an action arising under an insurance policy insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions:

36

actions: 1. Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%. 2. Award punitive damages against the insurer. 3. Assess court costs and attorney fees against the insurer.

Stradley Ronon Stevens & Young, LLP

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

After initially finding that suretyship was covered by this statute, Pennsylvania

37

covered by this statute, Pennsylvania Courts have now consistently ruled that a surety bond is not an insurance policy.

Stradley Ronon Stevens & Young, LLP

Statutory Basis Statutory Basis for for Bad Faith Bad 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 often have conflicting interests, which the surety must balance;

38

3. The surety bond form customarily is written or furnished by the obligee rather than the surety; 4. Bonded projects involve parties with commercial sophistication, relative parity of bargaining power and access to ample legal and technical advice; 5. The bond premium usually is paid by the contractor to the surety, rather than directly by the obligee; and 6. The pricing of the bond premium is not based upon risk of loss.

Stradley Ronon Stevens & Young, LLP

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

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

The issue of whether an obligee could

39

The issue of whether an obligee could

• btain extra contractual damages on a

performance bond “must be asked and answered as a matter of statutory interpretation”.

Stradley Ronon Stevens & Young, LLP

Statutory Basis for Bad Faith Statutory Basis for Bad Faith

• Fed. Ins. Co. v. Maine Yankee (D. Me. 2001)
• The Maine insurance statutes defined surety as

insurance

• There was no express exclusion of suretyship

40

• There was no express exclusion of suretyship

from Maine’s version of the Uniform Claims Settlement Practices Act

• Instead, the statutes allowed insureds to bring

extra contractual claims against their “own insurer”

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

Stradley Ronon Stevens & Young, LLP

Statutory Basis for Bad Faith Claim Statutory Basis for Bad Faith Claim

• Fed. Ins. Co. v. Maine Yankee (D. Me. 2001)
• The Court held that the surety is not the
• bligee’s “own insured”
• It is the general contractor, not the

41

• It is the general contractor, not the
• bligee, who purchases the performance

bond

• Hence, no extra contractual damages were

available to the obligee

Stradley Ronon Stevens & Young, LLP

Statutory Basis for Bad Faith Claim Statutory Basis for Bad Faith Claim Dadeland v. St. Paul (Fla. 2006)

• Court concluded that a bond obligee was

an “insured” under the Florida Statute

• Court explained that the obligee requires

42

• Court explained that the obligee requires

the contractor to obtain the performance bond thereby “essentially insuring itself from potential loss”

• In 2005 that statute was amended to

expressly exclude suretyship

Stradley Ronon Stevens & Young, LLP

• IV. Miller Act Preemption

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

JUNE 30, 2016

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

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.

44

BAD FAITH AND THE MILLER ACT

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 the performance of their contractual duties and the payment

• f their subcontractors and material suppliers.

Suit 90 days after last date of work (not longer than 1 year). Bring action in name of United States Government in US District Court. 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 the performance of their contractual duties and the payment

• f their subcontractors and material suppliers.
• Suit 90 days after last date of work (not longer than 1

year).

• Bring action in name of United States Government in US

District Court.

45

BAD FAITH AND THE MILLER ACT

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

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

46

BAD FAITH AND THE MILLER ACT

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

• 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. The Miller Act -- 40 USC 3131-3134. 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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BAD FAITH AND THE MILLER ACT

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

• Can be recovered against the surety if there is a fee-

shifting provision in the underlying construction contract. “Sums justly due” Can be recovered if bad faith. Most courts limit this to conduct during litigation. Many Little Miller Acts specifically authorize recovery

• f attorneys’ fees.

Attorneys’ fees are generally not recoverable under the Miller Act. F.D. Rich, Inc. v. United States ex rel. Industrial Lumber Co., Inc., 417 U.S. 116, 126-31, 40 L.Ed. 2d 703, 94 S.Ct. 2157 (1974). Can be recovered against the surety if there is a fee- shifting provision in the underlying construction contract.

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

to conduct during litigation.

• Many Little Miller Acts specifically authorize recovery
• f attorneys’ fees.

48

BAD FAITH AND THE MILLER ACT

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 and payment 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 and payment of their subcontractors and suppliers

• All 50 states
• Mimics federal version

49

BAD FAITH AND THE MILLER ACT

Courts are split on whether or not the Miller Act preempts state 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, no conflict with state law. State law bad faith actually advances 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 preempts state 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, no conflict with state law. State law bad faith actually advances 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.

50

BAD FAITH AND THE MILLER ACT

• 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.

51

BAD FAITH AND THE MILLER ACT

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 policyholder and insurance company). Statutory Bad Faith – Unfair Claims Settlement Practices Act 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 policyholder and insurance company).

• Statutory Bad Faith – Unfair Claims Settlement Practices

Act or Unfair Trade Practices Act. Private right of action.

52

V.

• V. What Arguments Work in

What Arguments Work in Favor of the Claim? Favor of the Claim?

53

Favor of the Claim? Favor of the Claim?

Patrick R. Kingsley, Esquire Patrick R. Kingsley, Esquire Stradley Stradley Ronon Ronon Stevens & Young, LLP Stevens & Young, LLP 2005 Market Street, Suite 2600 2005 Market Street, Suite 2600 Philadelphia, PA Philadelphia, PA 19103 19103 (215) 564 (215) 564-

• 8029

8029

Stradley Ronon Stevens & Young, LLP

Arguments In Favor: Arguments In Favor:

Sureties are just like insurance companies

54 Stradley Ronon Stevens & Young, LLP

Transamerica Transamerica v. Brighton School

• v. Brighton School (Colo. 1997)

(Colo. 1997) “While there may be differences in the form of the

55

“While there may be differences in the form of the suretyship agreement and the obligations of the parties, its substance is essentially the same as insurance.”

Stradley Ronon Stevens & Young, LLP

ATUL ATUL (D.N.J D.N.J. 2000) . 2000)

“Although the relationship between an

• bligee and a surety is not identical to the

56

• bligee and a surety is not identical to the

relationship between an insurer and an insured, the relationships are closely analogous.”

Stradley Ronon Stevens & Young, LLP

Arguments In Favor: Arguments In Favor:

Suretyship is referenced in the regulatory scheme

57 Stradley Ronon Stevens & Young, LLP

Szarkow ski Szarkow ski v. Reliance

• v. Reliance (N.D. 1987)

(N.D. 1987) “Reliance, in issuing performance bonds for a profit is engaged in the business of

58

a profit is engaged in the business of insurance as to which the provisions of” the North Dakota Unfair Insurance Practices Act apply.

Stradley Ronon Stevens & Young, LLP

Arguments In Favor: Arguments In Favor:

A “special relationship” exists between a surety and obligee

59 Stradley Ronon Stevens & Young, LLP

Dodge Dodge (Ariz

• Ariz. 1989)

. 1989)

The surety and the obligee were in a “special relationship” because the bond was

60

“special relationship” because the bond was procured for security and protection rather than for commercial advantage

Stradley Ronon Stevens & Young, LLP

Arguments In Favor: Arguments In Favor:

Sureties have superior bargaining power vis-à-vis obligees

61 Stradley Ronon Stevens & Young, LLP

Transamerica Transamerica (Colo. 1997) (Colo. 1997)

“It is the commercial surety who controls the ultimate decision of whether to pay

62

the ultimate decision of whether to pay claims made by the obligee under the terms

• f the surety bond. For this reason, the

commercial surety has a distinct advantage

• ver the obligee in its ability to control

performance under the security agreement.”

Stradley Ronon Stevens & Young, LLP

Arguments In Favor: Arguments In Favor:

A bad faith tort claim is needed to keep sureties honest

63 Stradley Ronon Stevens & Young, LLP

Dodge Dodge (Ariz

• Ariz. 1989)

. 1989)

Ordinary contract damages “offer no motivation whatsoever for the insurer not to breach. If the

• nly damages an insurer will have to pay upon

judgment of breach are the amounts that it

64

• nly damages an insurer will have to pay upon

judgment of breach are the amounts that it would have owed under the policy plus interest, it has every interest in retaining the money, earning the higher rates of interest on the

• utside market and hoping eventually to force

the insured into a settlement for less than the policy amount.”

Stradley Ronon Stevens & Young, LLP

• VI. Jurisdictions Finding No Bad Faith

Cause of Action Against Sureties

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

JUNE 30, 2016

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

BAD FAITH

Courts are split:

• Moundsville Water Bd. v. Shook, Inc., US Dist., Northern

District of W. Va., 2010 U.S. Dist. LEXIS 62273. Suretyship covered by insurance statutes. Claim not subject to dismissal.

• Seeman v. Liberty Mut. Ins. Co., 322 N.W.2d 35 (Iowa

1982). Although sureties included in Iowa’s insurance statutes, the statutes do not create a private cause of action. Cates Constr., Inc. v. Talbot Partners, 21 Cal.4th 28, 980 P.2d 407 (1999). Elements of adhesion, public interest, and fiduciary responsibility are not present in construction surety context. Courts are split: Moundsville Water Bd. v. Shook, Inc., US Dist., Northern District of W. Va., 2010 U.S. Dist. LEXIS 62273. Suretyship covered by insurance statutes. Claim not subject to dismissal.

• Seeman v. Liberty Mut. Ins. Co., 322 N.W.2d 35 (Iowa

1982). Although sureties included in Iowa’s insurance statutes, the statutes do not create a private cause of action.

• Cates Constr., Inc. v. Talbot Partners, 21 Cal.4th 28, 980

P.2d 407 (1999). Elements of adhesion, public interest, and fiduciary responsibility are not present in construction surety context.

66

BAD FAITH

• Great Am. Ins. Co. v. N. Austin Muni. Util. Dist. No. 1, 908

S.W.2d 415, 419 (Tex. 1995). Texas legislature did not intend to include suretyship as the business of insurance for all purposes under the insurance code.

• Cincinnati Ins. Co. v. Centech Bldg. Corp., 286 F. Supp. 2d

669, 690 (M.D.N.C. 2003). The court found that the type of “special relationship” which exists between an insurer and its insured is absent in the relationship between a surety and an obligee.

• Great Am. Ins. Co. v. N. Austin Muni. Util. Dist. No. 1, 908

S.W.2d 415, 419 (Tex. 1995). Texas legislature did not intend to include suretyship as the business of insurance for all purposes under the insurance code.

• Cincinnati Ins. Co. v. Centech Bldg. Corp., 286 F. Supp. 2d

669, 690 (M.D.N.C. 2003). The court found that the type of “special relationship” which exists between an insurer and its insured is absent in the relationship between a surety and an obligee.

67

BAD FAITH

• Boldt Co. v. Thomason Elec. & Am. Contrs. Indem. Co., 820
• F. Supp. 2d 703, 706 (S.D. S.C. 2007) (refusing to recognize

an 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 County Commr’s, 511 A.2d 1136 (Md. Ct. Spec. App. 1986) (reversing a judgment in favor of the obligee on its bad faith claim against a surety, holding that the obligee could not maintain a tort action against surety for bad faith refusal to pay a claim).

• Boldt Co. v. Thomason Elec. & Am. Contrs. Indem. Co., 820
• F. Supp. 2d 703, 706 (S.D. S.C. 2007) (refusing to recognize

an 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 County Commr’s, 511 A.2d 1136 (Md. Ct. Spec. App. 1986) (reversing a judgment in favor of the obligee on its bad faith claim against a surety, holding that the obligee could not maintain a tort action against surety for bad faith refusal to pay a claim).

68

BAD FAITH

• Toltest v. Purcel P&C, LLC, 2013 U.S. Dist. LEXIS 52897 (N.D.

Ohio April 12, 2013). Performance bond obligee not dependent upon surety’s good faith investigation. Not

• vulnerable. No bad faith cause of action. In re Commercial

Money Ctr., Inc. Equip. Lease Litig., 603 F. Supp. 2d 1095, 1122-1125 (N.D. Ohio 2009). Finding Ohio Supreme Court was likely to refuse to recognize a bad faith claim by an

• bligee against a surety on a performance bond. Unique

factors in the insurance carrier / policyholder relationship were not present.

• Toltest v. Purcel P&C, LLC, 2013 U.S. Dist. LEXIS 52897 (N.D.

Ohio April 12, 2013). Performance bond obligee not dependent upon surety’s good faith investigation. Not

• vulnerable. No bad faith cause of action. In re Commercial

Money Ctr., Inc. Equip. Lease Litig., 603 F. Supp. 2d 1095, 1122-1125 (N.D. Ohio 2009). Finding Ohio Supreme Court was likely to refuse to recognize a bad faith claim by an

• bligee against a surety on a performance bond. Unique

factors in the insurance carrier / policyholder relationship were not present.

69

BAD FAITH

• Dadeland Depot, Inc. v. St. Paul Fire and Marine Ins. Co., 945

So.2d 1216, 1231 (Fla. 2006). Sureties were included in the Florida Insurance Code and this exposed them to statutory bad faith cause of action. This changed in 2005, when sureties 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 section 2436-A [Maine’s Unfair Claims Settlement Practices Act] is that a surety insurance company is not the owner's ‘own insurer’ for either a payment or a performance bond that a general contractor has purchased under the requirements of a contract for a construction project. . . .”)

• Dadeland Depot, Inc. v. St. Paul Fire and Marine Ins. Co., 945

So.2d 1216, 1231 (Fla. 2006). Sureties were included in the Florida Insurance Code and this exposed them to statutory bad faith cause of action. This changed in 2005, when sureties 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 section 2436-A [Maine’s Unfair Claims Settlement Practices Act] is that a surety insurance company is not the owner's ‘own insurer’ for either a payment or a performance bond that a general contractor has purchased under the requirements of a contract for a construction project. . . .”)

70

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.

71

Contact Information: Marc A. Sanchez, Esq. Frantz Ward, LLP 200 Public Square, Suite 3000 Cleveland, OH 44114 msanchez@frantzward.com (216) 515-1638 (216) 406-2695 (cell) Contact Information: Marc A. Sanchez, Esq. Frantz Ward, LLP 200 Public Square, Suite 3000 Cleveland, OH 44114 msanchez@frantzward.com (216) 515-1638 (216) 406-2695 (cell)

72

Contact Information:

Patrick R. Kingsley, Esquire Patrick R. Kingsley, Esquire Stradley Stradley Ronon Ronon Stevens & Young, LLP Stevens & Young, LLP

73 Stradley Ronon Stevens & Young, LLP

Stradley Stradley Ronon Ronon Stevens & Young, LLP Stevens & Young, LLP 2005 Market Street, Suite 2600 2005 Market Street, Suite 2600 Philadelphia, PA Philadelphia, PA 19103 19103 (215) 564 (215) 564-

• 8029

8029 pkingsley@ stradley.com pkingsley@ stradley.com