Bad Faith – Does It Apply to Sureties?
Updated: Jan 10
The age-old still unanswered question among the few and the proud who deal with surety law – does bad faith apply? Honestly, it is a question that has been answered by some states or at least some courts, but it depends. The question of whether bad faith applies to sureties is often answered by the uninformed with yet another question – why wouldn’t it, after all, bonds are written by insurance companies? Obviously, answers are not simple (like most things involving suretyship), and they depend on context (also like most things when suretyship is involved).
1. The relationship between a principal, a surety, and an obligee is a unique tripartite relationship under the law.
Each member of the triad has a contractual relationship with the other two. The terms of some might be included in another but each has its own provisions and thus its unique duties and obligations.
2. Bad faith has more than one application.
One is the tort of bad faith which generally applies to insurers either by statute or common law. Another is the general notion of bad faith which is implicit in many contractual relationships. It might serve as a defense or an excuse under a contract but might not rise to the level of a separate cause of action.
Some courts have allowed an obligee to pursue a tort or statutory claim of bad faith against a surety [i] while others have not [ii]. It depends on, at a minimum, the jurisdiction.
My first published article dealt with this issue. [iii] The fact that it is still cited shows that the law is still undecided in some jurisdictions. [iv]
Why does this matter in the context of mediation?
Mediating a dispute involving a surety without appreciating the finer points of the uniqueness of suretyship presents unnecessary added challenges. Having a mediator that understands and appreciates the claims and defenses unique to surety bonds and indemnity agreements saves lots of time (and therefore money).
Is your mediator familiar with surety law? I’m ready to hit the ground running. And there’s no charge for travel time.
[i] A recent example: Insight Investments, LLC v. North American Specialty Insurance Co., No. CIV-20-788-G, 2021 WL 412277 (W.D. Okla. Feb. 5, 2021).
[ii] A recent example: Old House Specialists, LLC v. Guarantee Insurance of North America USA, 541 F. Supp. 3d 1325 (M.D. Ala. 2021).
[iii] Bad Faith: Does it Apply to Sureties in Alabama, 57 ALA. LAW. 241 (July 1996).
[iv] See, e.g., Old House Specialists, LLC, supra., at 1330-1331; Cates Construction, Inc. v. Talbot Partners, 86 Cal.Rptr.2d 855, 871+ (Cal. 1999); Masterclean, Inc. v. Star Ins. Co., 556 S.E.2d 371, 375 (S.C. 2001).