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Insurance Law

: INSURANCE LAW NOTES

Surety Bonds Not Subject to Bad Faith Statute

By Richard T. Victoria

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A recent case from the U.S. District Court for the Middle District of PA provides further support for those arguing that surety bonds are not insurance policies for purposes of PA's bad faith statute, 42 Pa.C.S.A. § 8371.

In reaching this conclusion, the court in Intercon Construction, Inc. v. Williamsport Municipal Water Auth., No. 4:07-CV-1360, 2008 U.S. Dist. LEXIS 6022, (M.D. Pa. 2008), first noted that "there does not appear to be any Third Circuit, Pennsylvania Supreme Court, or Pennsylvania Superior Court case law on the issue," but that there are other "Pennsylvania state court decisions on the issue which appear to have reached opposite conclusions." Looking at those decisions, the court determined that there were "numerous differences between surety bonds and insurance policies." These differences include that:

"insurance is an agreement by which one undertakes for a consideration to pay money to another on the death, destruction, loss, or injury of someone or something, while a contract of suretyship is one to answer for the debt, default, or miscarriage of another"; and
the insurer and insured share a direct contractual relationship and there exists the idea of prompt compensation for loss or damage upon proof of a claim, but a surety does not have a direct contractual relationship with a third-party and has simply agreed to answer for another party's debts to the extent that party fails to answer for them itself.

Based upon these distinctions, the District Court concluded that the PA legislature did not intend to include issuers of surety bonds within the scope of the bad faith statute and dismissed the bad faith claim at issue.

Full post as published by INSURANCE LAW NOTES on February 20, 2008 (boomark / email).