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This case involves a surety bond in the construction context, and the implied duty of good faith and fair dealing imposed on the surety by contract law.  The court raised the issue about whether the implied duty of good faith and fair dealing exists in a contract under Pennsylvania law, but assumed it did for purposes of this case.

The court summarized the basic facts and issues:

In this case, the parties are connected by a surety bond and two indemnity agreements. Plaintiff is the surety and indemnitee, and Defendants are the principals and indemnitors. The obligee to this performance bond terminated Defendants and brought a claim against the bond demanding Plaintiff take over Defendants’ obligations. Defendants protested that they had been wrongfully terminated and that the obligee’s bond claim was meritless. But Plaintiff’s response was, essentially, “I don’t care.” Plaintiff honored the claim and took over the project in an attempt to minimize its own exposure to loss.

The surety later pursued contractual indemnification claims against the contractor/principal.  The contractor counterclaimed against the surety, alleging “breach of the duty of good faith and fair dealing implicit in their indemnity agreements by so callously honoring the obligee’s allegedly meritless bond claim.” The court dismissed the counterclaims.  Even if the principal was correct that it did nothing wrong and there was no reason in fact for the surety to step in and have the work completed, the contractor/principal’s “innocence” is irrelevant to the surety’s right to decide whether it wants to honor the bond.

The court summarized the law as follows: “By the time the parties entered this [indemnity] contract, it was settled in the construction context that sureties did not act in bad faith by honoring a claim purely out of self-interest or without thoroughly investigating the claim’s merit.” Thus, failure to investigate before honoring a bond or actually evaluating the merits of an obligee’s bond demand “purely for the purpose of getting off the obligee’s ‘blacklist’” does not constitute fraud or bad faith.

Moreover, the parties’ agreement included express terms “privileging [the surety’s] interests and maximizing [its] discretion to take over and complete the project….” Combined with existing case law, this language confirmed any surety’s “broad authority to prioritize their own interests….”

The court further concluded, “it is clear that the parties would have reasonably expected that [the surety] could settle the [owner/obligee’s] claim precisely” as it is alleged to have done in the counterclaims.

Date of Decision:  January 25, 2022

Hartford Fire Insurance Company v. E.R. Stuebner, Inc., U.S. District Court Eastern District of Pennsylvania No. 5:21-CV-02466-JMG, 2022 WL 245237 (E.D. Pa. Jan. 25, 2022) (Gallagher, J.)