JANUARY 2014 BAD FAITH CASES: PRIMA FACIE EVIDENCE CLAUSE ENFORCED AGAINST PRINCIPAL IN SURETY CASE THAT CONSIDERED STANDARDS FOR BAD FAITH IN SURETY CONTEXT (Chester County)

Plaintiff, the surety, brought suit against its principal seeking indemnification for damages paid on the principal’s behalf after issuing a bond for a construction project. Under the surety agreement, the principal was liable for indemnifying the surety for all losses and expenses arising from the execution or procurement of the bonds. The surety contract also included a “prima facie evidence clause.” Under the clause, the surety was allowed to pay or compromise any claim, demand, suit, judgment, or expense arising out of the bonds if the surety reasonably believed it was liable for the amount paid, or that it was expedient under the circumstances to make such a payment or compromise. The payment would be binding upon the principal as a loss or expense covered by the indemnity clause whether or not the liability actually existed.

Courts enforce prima facie evidence clauses against the principal unless the principal is able to demonstrate either bad faith or fraudulent payment by the surety. In the context of a surety contract, bad faith requires a showing of recklessness or improper motive, such as self-interest or ill will. In this scenario, plaintiffs produced an itemized statement, which was explicitly listed as sufficient to establish prima facie evidence in the surety agreement. Defendants were unable to demonstrate the payment in question as made in bad faith, making the court’s decision turn on the parties’ agreement as a matter of law. Defendants failed to create any genuine issue of material fact, and therefore summary judgment was entered in favor of the plaintiff.

Date of Decision: March 8, 2013

Lincoln Gen. ins. co. v. Gracie Corp., Civil Action No. 2008-06251, 2013 Pa. Dist. & Cnty. Dec. LEXIS 190 (March 8, 2013 Pa. County Ct.) (Tunnell, J.).