Municipal Authority’s Claim Against Surety for Bad Faith Falls Short

Intercon Constr., Inc. v. Williamsport Mun. Water Auth., 2008 WL 239554 (M.D. Pa. Jan. 28, 2008)

This case involved standard breach of contract claims and counterclaims between a general contractor and a public municipal authority.  In addition, the municipal authority also sued a performance bond surety on claims of bad faith. The municipal authority alleged that the manner in which the surety investigated and denied coverage under the performance bond, and its withholding of certain information from the authority, constituted bad faith under the Pennsylvania bad faith insurance statute.

Safeco raised the legal defense that Pennsylvania’s bad faith insurance statute, which provides for interest, penalties and attorneys fees if successfully prosecuted, does not apply to surety companies, such as Safeco.  The issue facing the federal district court was whether a surety bond may be considered an insurance policy for purposes of imposing bad faith sanctions.  Facing no governing federal circuit court authority, and no precedent from Pennsylvania’s appellate courts, the court noted a split in case law among nearby jurisdictions and lower Pennsylvania state courts.

The federal district court concluded that a surety bond did not have the same characteristics as an insurance policy, and dismissed the authority’s third-party complaint against Safeco.  The court found that an insurance policy is an insuring agreement, by which a carrier undertakes for a consideration to pay money to another on the death, injury or property damage to another.  In contrast, a contract for suretyship is a contract for one (the surety) to answer for the debt or default of another (the contractor).  The intent of the Pennsylvania legislature to burden an insurance company with bad faith penalties arises from the insurer and the insured’s direct contractual relationship with one another, and thus, an insurer’s bad faith failure to honor an insurance contract was reasonably compensable with the statutory penalties.  Not so with the surety bond, where the surety merely is contractually bound to answer for the debts of the contractor, if the contractor does not do so itself.  The court was quick to point out that the legislature can act to identify those entities which are subject to bad faith sanctions.  The court chose not to bring a surety into the scope of the bad faith statute, where the statute is silent as to sureties.