A recent case out of Pennsylvania again raises the oft disputed issue of whether a surety may be sued for bad faith by the beneficiary of the bond. Courts throughout the country have reached differing conclusions as to whether bad faith claims may be brought against sureties. Those courts that have found that sureties may not be sued for bad faith have found a significant distinction between insurance and suretyship. If the court finds that suretyship is similar to insurance, the court will generally allow the bad faith action against a surety.
In the Pennsylvania case, the general contractor sought to enforce the sub’s performance bond after it terminated the sub for performance failures. The bonding company refused to arrange for substitute performance and denied any obligation to the general contractor. The general contractor sued the bonding company, asserting, among other things, bad faith.
The court rejected the general contractor’s claim for bad faith against the surety, holding that Pennsylvania law does not allow for such a claim. In so ruling, the court disagreed with other jurisdictions, such as Colorado, Delaware, New Jersey, Arizona, and Alaska, all of which have allowed bad faith claims against sureties. The court held that the general contractor could not proceed with the bad faith claim because the surety owed no duty to the general contractor and any claim arising out of a contract must be a based in contract, not tort.
Depending on your jurisdiction, pursuing a bad faith claim against a surety may prove to be difficult. But, given the division amongst the courts in jurisdictions around the country, it may still be worth pursuing such a claim.