Bad Faith Does Not Apply to the Surety Line of Business

Bad Faith Does Not Apply to the Surety Line of Business

Although surety is a type of insurance, it is far different from a traditional insurance policy and must be viewed differently.  For example, the facts and circumstances that support a claim of bad faith against an insurance company writing an insurance policy do not apply in the case of a surety bond.  The following case is an example. 

In Goudy Construction, Inc. v. Raks Fire Sprinkler, LLC, 2019 U.S. dist. LEXIS 215707 (N.D.Ala. December 16, 2019), a prime contractor made a claim under the subcontractor’s performance bond arising from the subcontractor’s performance issues.  The surety denied the claim.  The prime contractor sued the surety for breach of contract and bad faith.  The surety moved to dismiss the bad faith claim.  The court, noting Alabama precedent, stated that a bad faith claim must involve a first-party “insurance contract”.  The court then assessed whether a surety bond was an insurance contract.  It found that the Alabama Supreme Court had declined to extend the tort of bad faith to any situation other than a dispute involving a first-party insurance contract.  Further the court cited federal precedent in Alabama that declined to extend bad faith claims to a surety bond dispute.  The court rejected the prime contractor’s argument that the surety has superior bargaining power, stating that the prime contractor was a sophisticated party.  Lastly, the court did not find the fact that sureties were subject to insurance regulation dispositive of whether suretyship is insurance.  The court granted the motion and dismissed the bad faith claim. 

Words Matter

Hilary Clinton reportedly said, “Words matter when you run for president. And they really matter when you are president.”  Well, words matter when you are surety.  A surety bond is a contract and the scope of the coverage of a surety bond is dictated by the words on the bond.  The following case is an example of a court interpreting the scope of a surety bond’s coverage. 

In County of Suffolk v. U.S. Specialty Insurance Co., 2020 N.Y. App. Div. LEXIS 107 (App. Div. January 8, 2020), the surety furnished a $15,000 bond to permit the bond principal to retain his car pending a civil forfeiture action after he was arrested by the County of Suffolk for driving while intoxicated.  The condition of the bond was that the principal would preserve the car or would return it.  The car subsequently was damaged in an accident while the principal was driving.  The principal was arrested for leaving the scene of an accident and the police seized the car, which had a scrap value of $252.  The County made a claim under the bond, which the surety denied.  The County sued the surety and the trial court granted summary judgment in favor of the County and awarded $15,000 in damages.  The surety appealed.  It argued that the bond was conditioned on the return of the car to the County, and the car was returned.  The Appellate Division reviewed the language of the bond form.  It noted that the bond stated that the principal signed an affidavit barring “the sale, transfer, destruction or any other disposal of the vehicle." The Appellate Division concluded that destruction of the car was the same as its disposal and the bond condition was violated.  The Appellate Division affirmed the judgment against the surety.

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