In United States ex rel. SimplexGrinnell, LP v. Aegis Insurance Company, the court dismissed a bad faith claim regarding failure to pay a surety bond because a surety bond is not an insurance policy, so it can not be the basis for a claim under the bad faith statute.
In this case, a subcontractor was never paid by the contractor for work completed so it applied for payment to the surety who had issued a bond. When the surety denied payment, the subcontractor filed suit against the contractor and the surety and added a bad faith claim against the surety. The court granted the surety’s motion to dismiss the bad faith claim.
The court held that, although the statute does not define “an action arising under an insurance policy,” it is generally understood that suretyship is not insurance. It cited case law and legal treatises that explain the differences between a surety and an insurer (e.g., the instrument generated is for financial credit instead of indemnity and there is greater commercial sophistication of the parties involved in suretyship). The court focused on how there is an indirect relationship between a surety and the party owed the money but there is a direct relationship between an insurer and its insured. It also agreed with a prior court that allowing a bad faith claim against a surety would result in the surety having greater liability than its principal because the bad faith action could be brought against it but not against the principal (the contractor, in this case).
The court disagreed with two cases from the Eastern District of Pennsylvania because it felt they had accepted application of the statute to suretyship without analysis. It, instead, agreed with other courts that addressed the legislative intent of the bad faith statute and found that the differences between surety bonds and insurance policies did not merit expanding the statute to include surety bonds.
Date of Decision: January 14, 2009
United States ex rel. SimplexGrinnell, LP v. Aegis Ins. Co., No. 1:08-CV-01728, 2009 U.S. Dist. LEXIS 2381 (M.D. Pa. Jan. 14, 2009)(Rambo, J.)