Pennsylvania Supreme Court Determines that Pennsylvania’s Insurance Bad Faith Statute Does Not Apply to Surety Bonds or Actions of a Surety

As previously reported within our alert on October 23, 2024, “Pennsylvania Supreme Court: Under Pennsylvania’s Bad Faith Statute, Are Suretyships and Insurance One and the Same?”, the Supreme Court of Pennsylvania heard oral argument in Eastern Steel Constructors Inc. v. International Fidelity Insurance Co. on October 9, 2024, concerning the question of whether Pennsylvania’s insurance bad faith statute, 42 Pa.C.S. § 8371, applies to surety contracts issued by insurance companies. On February 18, 2026, the Court issued its decision, affirming the Pennsylvania Superior Court, determining that the bad faith statute does not apply to surety bonds, thereby bringing to a close an approximately 15-year surety bond dispute at the center of which was a payment bond issued by International Fidelity Insurance Company (IFIC) as surety for prime contractor Ionadi Corporation (Ionadi).

The opinion, authored by Justice Wecht, addressed the following questions: (1) whether Pennsylvania’s insurance bad faith statute applies to surety contracts issued by insurance companies, (2) whether IFIC, as surety, is bound by an arbitration award entered against its principal Ionadi, and (3) the extent to which IFIC is liable for certain attorneys’ fees and prejudgment interest. The Court answered these questions with the following holdings:

• Pennsylvania’s bad faith statute, 42 Pa.C.S. § 8371, does not apply to surety bonds or actions of a surety.
• The arbitration award entered against Ionadi is conclusive and binding upon IFIC, which had an opportunity to defend itself and protect its interests.
• Interest and attorneys’ fees awarded at arbitration under the terms of a subcontract are within the “all sums due” for which a surety is jointly and severally liable with its principal to pay.

To determine whether Section 8371 applies to surety bonds, the Court engaged in statutory interpretation by considering the statute’s plain language. Section 8371 provides as follows:

In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions (emphasis added):

• • Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%.
  • Award punitive damages against the insurer.
  • Assess court costs and attorney fees against the insurer.

The Court compared the ordinary meanings of the terms “insurance policy,” “insurer” and “insured” to “payment bond,” “surety,” “suretyship” and “surety bond” and found that, consistent with their definitions, “the usual view, grounded in commercial practice, [is] that suretyship is not insurance.” Accordingly, Section 8371 does not include a surety bond. The language of Pennsylvania’s bad faith statute is “clear, unambiguous, and controlling,” that Section 8371 applies to insurance policies, not suretyship.

The Court considered whether the arbitration award entered against Ionadi was conclusive and binding against IFIC by examining the language of the payment bond between IFIC and Ionadi. The bond provided that IFIC and Ionadi “jointly and severally, bind themselves . . . to pay for labor, materials and equipment furnished for use in the performance” of the contract. It further provided for IFIC’s and Ionadi’s liability to bond claimants for “all sums due.” Lastly, the payment bond specified that actions against IFIC must proceed in a court of competent jurisdiction. In its subcontract with Eastern Steel, Ionadi agreed to arbitrate any disputes arising out of the subcontract.

Based on the payment bond’s plain text, the Court concluded that IFIC should have expected to be held responsible in the event of a breach by Ionadi. Further, IFIC was on notice of the arbitration proceedings and chose not to participate. If IFIC believed that it could not be bound by the arbitration proceedings, or that only a court of competent jurisdiction could determine its liability to Eastern Steel, IFIC was required to take action to assert its rights. IFIC had the opportunity to defend itself and protect its interests and chose not to. Accordingly, the Court found that the arbitration award entered against Ionadi was conclusive and binding upon IFIC.

Finally, the Court addressed whether a surety is liable for attorneys’ fees and contractual interest under the terms of the payment bond, which covered labor, materials and equipment. Based on contract interpreation, the attorneys’ fees and interest owed under the subcontract between Eastern Steel and Ionadi were “an integral part” of “all sums due” by Ionadi, for which IFIC was jointly liable. Notably, the Court held that IFIC was liable only for attorneys’ fees due under the subcontract and included in the arbitration award, not attorneys’ fees incurred in Eastern’s suing IFIC under the payment bond. In addition, IFIC was responsible for statutorily provided prejudgment interest as opposed to contractual based interest.

The Court’s opinion expressly provides that sureties are not subject to bad faith claims under 42 Pa.C.S. § 8371. Payment bond sureties such as IFIC must nevertheless take care to defend themselves and protect their interests with respect to arbitration claims for which they receive notice and an opportunity to participate when brought against their bond principals. In the event that a surety fails to participate, Pennsylvania courts have demonstrated their willingness to hold sureties jointly liable for arbitration awards entered against the surety’s bond principals.

Justice Brobson’s dissent (joined by Justice Donahue) concurs on the main holding that Pennsylvania’s bad faith insurance statute does not apply to surety bonds, but disagrees on the remaining relief, opining that: (1) the surety was not a party to the subcontract and the payment bond did not specifically identify or incorporate the subcontract by reference, therefore the surety could not be compelled to arbitrate or give up its right to litigate claims in a court of competent jurisdiction, such that the arbitration award among the claimant and the subcontractor could not bind the surety; and (2) the terms of the payment bond require payment for “all sums due” only for “labor, materials and equipment” but not for attorneys’ fees and interest.

Co-author Scott Levin is a partner in the Bankruptcy & Restructuring Department. Co-author C. Quincy Conrad is an associate in the Litigation Department.