Pennsylvania Supreme Court: Under Pennsylvania’s Bad Faith Statute, Are Suretyships and Insurance One and the Same?
10.23.24
On October 9, 2024, the Supreme Court of Pennsylvania heard oral argument in Eastern Steel Constructors Inc. v. International Fidelity Insurance Co. In this suretyship action, subcontractor Eastern Steel sought to recover outstanding payments from International Fidelity Insurance Co. (IFIC), which provided a payment bond as surety for prime contractor Ionadi Corporation (Ionadi). Eastern Steel obtained a significant arbitration award against Ionadi. Unfortunately for Eastern Steel, Ionadi was a debtor in bankruptcy.
After confirming the award, Eastern Steel sued IFIC to collect under the payment bond and sought damages under Pennsylvania’s bad faith statute, 42 Pa.C.S. § 8371. The trial court and the Superior Court considered whether IFIC was bound by the arbitration award, with IFIC contending inter alia that Ionadi offered a token defense to the claim. The Superior Court found that IFIC, which was jointly and severally liable with Ionadi, had every opportunity to defend the claim. Based upon the language of the payment bond, the Superior Court held that IFIC was liable for “all sums due,” including interest (in part), penalties, attorneys’ fees and arbitration costs, under the applicable subcontract.
Concerning Eastern Steel’s bad faith claim, however, the Superior Court held that § 8371 does not apply to suretyships. 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):
(1) 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%.
(2) Award punitive damages against the insurer.
(3) Assess court costs and attorney fees against the insurer.
Per the Superior Court, “to apply § 8371 to sureties would bring about an absurd result and would deviate from the requirement that § 8371 be strictly construed.” Further, the court determined, as a matter of law, that the ordinary meaning of “insurance policy” does not include suretyship.
On November 7, 2023, the Supreme Court of Pennsylvania granted allocatur as to one question:
Whether Pennsylvania’s insurance bad faith statute, 42 Pa.C.S. § 8371, applies to surety contracts/policies issued by insurance companies?
Eastern Steel argued that a surety agreement was synonymous with insurance and likened suretyship to life insurance, whereby an individual purchases a policy to benefit another. Eastern Steel also asked the Court to avoid overemphasizing the three-party surety model, claiming that it was simply an insurance arrangement. IFIC urged the Court to follow Pennsylvania law, which for nearly 35 years, has drawn a distinction between surety arrangements and insurance, including by omitting sureties from the bad faith statute’s language.
While the matter will be pending for several additional months, industry participants await the Court’s interpretation as to § 8371 and suretyship. In the interim, parties benefiting from surety relationships, including owners, contractors and subcontractors, ought to be mindful of the impact of Eastern Steel in evaluating their strategies.
Co-authors Gaetano Piccirilli, partner, and Quincy Conrad, associate, are members of the Litigation Department at Klehr Harrison.