NOVEMBER 2013 BAD FAITH CASES: EASTERN DISTRICT DECIDES PENNSYLVANIA BAD FAITH STATUTE DOES NOT EXTEND TO SURETY BONDS (Philadelphia Federal)
An Eastern District judge held Pennsylvania’s bad faith statute does not apply to companies that issue surety bonds. Plaintiff hired a construction company to make improvements to its public spaces. The construction contract required the construction company to purchase a bond for the value of the project, which it did, through the defendant surety company. Approximately two years after beginning the project, the construction company filed for bankruptcy, and plaintiff requested the face value of the bond from the surety. When the surety refused to provide the face value of the bonds to plaintiff, plaintiff filed suit against the surety, including a count for bad faith.
The surety moved to have the count dismissed, arguing Pennsylvania’s bad faith statute only applies to insurance contracts, not surety contracts. The bad faith statute does not define insurance contracts, and the Pennsylvania Supreme Court has not been faced with the specific question, so the district court was forced to predict whether the state Supreme Court would find ‘insurance contracts’ included surety contracts. Based on commentary regarding the differences between insurance and surety contracts, as well as an unreported case, the district court held surety contracts are not insurance contracts under the Pennsylvania bad faith statute. The court found the legislature could have specifically included surety contracts, as well as other types of insurance-related contracts, had it so desired. Since the legislature declined to create an expansive statute, to enforce the statute in a broad manner would be inconsistent with legislative intent. Thus, the court held surety bonds are not insurance contracts within the meaning of the bad faith statute, and granted the surety’s motion to dismiss the claim.