Surety Liability for Default Judgments, Attorney’s Fees; Does Pennsylvania’s bad faith statute apply to surety contracts issued by insurance companies?
Eastern Steel v. International Fidelity Ins. Co., 282 A.3d 827 (Pa. Super 2022), allocatur granted Nov. 7, 2023, appeal dockets 103 & 104 MAP 2024
In this case, the Pennsylvania Supreme Court will consider the claims and judgments that a subcontractor may bring against a surety, including whether Pennsylvania’s insurance bad faith statute, 42 Pa.C.S. § 8371, applies to surety contracts/policies issued by insurance companies.
42 Pa.C.S. § 8371 states:
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:
(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.
The underlying background is a dispute between Ionadi, a prime contractor, and Eastern Steel Constructors, Inc. (Eastern), a subcontractor, regarding payment for a construction project under a payment bond issued by International Fidelity Insurance Company (IFIC), Ionadi’s surety. As summarized by Superior Court:
In 2008, the Pennsylvania State University (“PSU”) entered into a prime contract (the “Construction Contract”) with Ionadi for the erection of steel on a project for the construction of the Millennium Science Center Complex at PSU’s University Park Campus in Centre County, Pennsylvania (the “Project”). On October 29, 2008, IFIC issued a $10,125,000.00 payment bond (“Payment Bond”) for Ionadi in connection with the Project.
Slip op. at 2-3. Ionadi had failed to make payments owed to Eastern and Eastern made a claim under the payment bond. IFIC made partial payments to Eastern, which Superior Court summarized as follows:
On August 23, 2010, IFIC issued a check to Eastern for $277,295.00. Later, IFIC issued another check for $172,080.00 to Eastern on December 23, 2010. In the aggregate, Eastern received $944,277.52 for its work on the Project. Eastern, however, claimed that, exclusive of interest, attorneys’ fees, costs, expenses and penalties, Eastern still was due $253,788.08 for its work on the Project.
Slip op. at 8. Thereafter, Eastern won an arbitration award against Ionadi for the remaining sum; however, Eastern was unsuccessful in collecting against IFIC. Eastern then filed a lawsuit against IFIC alleging the following:
Count 1: breach of contract; Count 2: breach of contract (third party beneficiary); Count 3: action in assumpsit/civil action under the Public Works Contractors’ Bond Law of 1967, 8 P.S. § 191 et seq.; Count 4: indemnification; Count 5: breach of contract (enforcement of arbitration award); Count 6: action in assumpsit/civil action under the Public Works Contractors’ Bond Law (enforcement of arbitration award); Count 7: bad faith under 42 Pa.C.S.A. § 8371; and Count 8: promissory estoppel.
Slip op. at 11. Superior Court summarized the subsequent procedural history as follows:
IFIC filed a “Motion for Partial Judgment on the Pleadings or, in the Alternative, Certification of Issues for Interlocutory Appeal.” IFIC sought dismissal, as a matter of law, of Count 5 (breach of contract – enforcement of arbitration award), Count 6 (action in assumpsit – enforcement of arbitration award), and Count 7 (bad faith), claiming that IFIC, as Ionadi’s surety, was not bound by the arbitration award and the judgment thereon. In support, IFIC reasoned that there was no statutory predicate or case law in Pennsylvania that would obligate it to pay an arbitration award rendered against its principal and in favor of a subcontractor in an ex parte proceeding to which IFIC was not a party. In other words, IFIC argued that it was not a party to the Subcontract containing the AAA arbitration provision and it did not participate in the resulting arbitration proceedings at which Ionadi failed to defend itself. Thus, according to IFIC, it was not liable to pay the arbitration award, as confirmed and reduced to judgment. With respect to Count 7, IFIC argued that Eastern’s claim for bad faith was not cognizable against a surety and, therefore, should be dismissed as a matter of law. IFIC reasoned that there was no authority to support Eastern’s claim that a surety contract constituted an insurance policy within the meaning of Section 8371.
On March 22, 2013, while IFIC’s motion for partial judgment on the pleadings was pending, Eastern filed a motion for partial summary judgment with respect to Counts 1 through 3, 5, and 6 of the amended complaint. Eastern’s summary judgment motion was premised, inter alia, on its contention that IFIC was indeed bound by the arbitration award and that, as a result, the award should be enforced against IFIC. Eastern based its summary judgment motion in large part on certain admissions made during the deposition testimony of Kathleen Maloney, IFIC’s senior claims representative and admissions in IFIC’s answer to the amended complaint.
Thereafter, on April 4, 2013, Eastern responded to IFIC’s motion for partial judgment on the pleadings, asserting that IFIC was bound by the arbitration award entered against Ionadi. Eastern reasoned that IFIC, as a co-obligor, was in privity with Ionadi and had notice of, and opportunity to participate in, the arbitration proceedings. Eastern claimed that “Ionadi, as well as co-obligor IFIC, had received advance notice, [and Ionadi] had responded to the demand for arbitration and participated in conferences with the arbitrator prior to the arbitration proceedings.” Answer to Motion for Partial Judgment on Pleadings, 4/8/13, at ¶ 4. Specifically, Eastern countered that it “notified IFIC of the filing of its demand for arbitration, and noticed IFIC when each breach was ripe, and on several occasions invited any claims agent of IFIC as an original promisor pursuant to the [Payment Bond] to intervene in the arbitration.” Id. at ¶ 6. Eastern further claimed that IFIC attended proceedings in Allegheny County on Eastern’s petition to confirm and enter judgment on the arbitration award. Id. at ¶ 5. With respect to IFIC’s contention that Eastern’s bad faith claim should be dismissed, Eastern responded that the surety risk undertaking was insurance.
On August 27, 2013, the trial court issued an order on IFIC’s motion for partial judgment on the pleadings and Eastern’s motion for partial summary judgment. The court granted IFIC’s motion for partial judgment to the extent IFIC sought certification for an interlocutory appeal. The trial court, however, denied IFIC’s motion insofar as it sought the dismissal of Counts 5 and 6, concluding that IFIC was bound by the arbitration award entered against Ionadi and that IFIC chose not to participate in the arbitration, despite notice and opportunity. Trial court Opinion, 8/27/13, at 7-8. The court found that “the arbitration award entered against Ionadi is ‘at least prima facie evidence against [IFIC].” Id. at 8. The trial court denied the motion with respect to the dismissal of Count 7, bad faith, concluding that the issue had to be further litigated. With respect to Eastern’s motion for partial summary judgment, the trial court ordered the disposition thereof be held in abeyance in light of its decision to certify for interlocutory appeal issues raised in IFIC’s motion for partial judgment on the pleadings. Id. at 10-11.
IFIC subsequently petitioned this Court for permission to appeal from the trial court’s August 27, 2013 order. We, however, denied relief. See Eastern Steel Constructors, Inc. v. Int’l Fid. Ins. Co., No. 81 MDM 2015 (Pa. Super. filed November 8, 2013). On January 22, 2014, the trial court denied Eastern’s motion for partial summary judgment. In so doing, the court again reasoned in part that “the arbitration award entered in favor of [Eastern] and against Ionadi is prima facie evidence against IFIC.” Trial Court Opinion, 1/22/14, at 5. The court determined that the arbitration award was not conclusive evidence against IFIC, and the issue would need to be more fully developed at trial. Id.
On December 22, 2014, Eastern renewed its motion for partial summary judgment based on IFIC’s subsequent answers to interrogatories and subsequent document production. On February 4, 2015, the trial court denied the motion.
On March 9, 2015, IFIC filed a motion in limine, seeking to exclude evidence of the arbitration award and the resulting judgment. The trial court, despite its prior rulings, granted the motion, explaining without citation to any legal authority:
Ever mindful of the previous rulings of this [c]ourt, after thorough examination of the Pennsylvania authority, it is clear in this case that [Eastern] may not rely upon, and not even introduce, the outcome of the arbitration process. Our fundamental tenants of due process require that before the [c]ourt will accept and rule on evidence against any party, that the party has every opportunity to challenge, and to test, that evidence. Here, that has not been the case. [Eastern] urges that IFIC was on notice that the arbitration was to be conducted, but there were conditions and restrictions placed on IFIC that inclined IFIC to not participate. No contractual obligation bound [IFIC] to arbitrate, and no role was played by [IFIC] in the selection of the Arbitrator. Furthermore, no evidence was introduced or challenged by [IFIC] during the arbitration process. In fact, this [c]ourt is not aware that [IFIC] knows anything more about the arbitration than is contained in the two-page Award dated November 9, 2011.
Equally as significant to this [c]ourt is the fact that [IFIC] cannot be made to stand in the shoes of [Ionadi], as all evidence is that Ionadi essentially rolled over for the entry of a “Default Award” against them. This [c]ourt cannot fathom a trial strategy and delivery which is available to [IFIC] that would allow it to effectively demonstrate to any jury that the Award of the Arbitrator was incorrect, inflated, or in any way improper. If the Award is introduced to the jury, [IFIC] would be limited to the barest of collateral attacks on the court-sanctioned citadel of the arbitration. That outcome offends every sense of due process known to Pennsylvania law.
The unique facts of this case, together with a dearth of applicable case law upon which to rely, leave this [c]ourt only to retreat to the foundational principles of the law. There it finds no basis for allowing [Eastern] to introduce the Award which would conclusively prejudice the open minds of any jury toward the outcome determined by the Arbitrator. [IFIC] would be left without any realistic opportunity to scrub that conclusion from the jurors’ minds.
Trial Court Opinion, 3/9/15, at 1-2. This order was a marked departure from the court’s previous rulings on this issue.
On March 10, 2015, the matter proceeded to a jury trial, where Eastern attempted to introduce into evidence a white binder full of Tinney’s delivery tickets that, according to IFIC, previously had not been produced in discovery or identified as trial exhibits. On March 11, 2015, the trial court recessed the trial to permit IFIC time to review the Tinney documents and conduct additional discovery. See Trial Court Order, 3/11/15. On March 16, 2015, the trial court issued an order reserving for trial the issue of attorneys’ fees under Section 6.3 of the Payment Bond. See Trial Court Order 3/16/15. The court explained that it would be able to determine at trial whether IFIC failed to discharge its obligations under the Payment Bond. Id.
On May 7, 2015, IFIC moved for partial summary judgment as a matter of law with respect to Counts 4 and 7 of the amended complaint. Eastern, in Count 4, sought recovery for attorneys’ fees and costs under Section 6.3 of the Payment Bond and Count 7, as noted earlier, was the bad faith claim. Eastern’s claims for indemnification and bad faith centered on IFIC’s alleged failure to promptly and timely comply with the requirement of Section 6 of the Payment Bond. In support of its summary judgment motion, IFIC argued that the evidence “demonstrates an absence of any genuine issue of material fact as to IFIC’s compliance with Section 6 of the [Payment] Bond.” IFIC Summary Judgment Motion, 5/7/15, at ¶ 7. Subsequently, the trial court declared the previously commenced jury trial to be a mistrial when Eastern dismissed its counsel. See Trial Court Order, 6/1/15.
Following a hearing, the trial court granted IFIC’s motion for partial summary judgment. With respect to Count 4, the trial court concluded that IFIC satisfied its obligations under Section 6 of the Payment Bond by investigating “the claim promptly and notif[ying] Eastern [ ] within sixty days that it was disputing the entire amount of the claim due to lack of sufficient documentation to substantiate the claim[.]” Trial Court Opinion, 10/15/15, at 5-6. This ruling was a reversal of its March 16, 2015 order on this issue. On the bad faith claim (Count 7), the trial court revisited its prior rulings and concluded that Section 8371 “was not intended to include surety bonds.” Id. at 7.
On September 21, 2016, IFIC filed a motion in limine to exclude delivery tickets. In particular, IFIC challenged the admissibility of Tinney’s delivery documents that had been proffered during the March 2015 trial. IFIC contended that the delivery tickets were inadmissible because they were irrelevant, could not be authenticated properly, and constituted hearsay. Following a hearing, on April 11, 2017, the trial court denied the motion. The court concluded that the delivery tickets were relevant insofar as they created a presumption that the rebar delivered to the Project by Tinney was shipped for installation. Moreover, the court determined that the delivery tickets were self-authenticating documents and satisfied the business records exception to the rule against hearsay. See Trial Court Opinion, 4/11/17, at 5.
On August 4, 2017, Eastern filed a motion in limine regarding the arbitration award and resulting judgment. Eastern argued that, despite the trial court’s ruling that the arbitration award should not be shown to the jury, Eastern—to prove its claims—had to “introduce evidence and argue in the presence of the jury about matters relating to the arbitration other than the result, including Eastern’s initiation of arbitration against Ionadi, the conduct of the arbitration and the fact that the arbitration proceeded to a result.” Eastern’s Motion In Limine, 8/4/17, at ¶ 9 (emphasis added). On the same day, Eastern also filed a motion in limine to exclude expert testimony of Jim Bertoline on the amount of rebar installed at the Project. After yet another hearing, the trial court granted Eastern’s motion on September *841 21, 2017. The court explained that Eastern’s motion in limine
seeks clarification of this [c]ourt’s ruling barring reference to the arbitration award. At trial, [Eastern] wishes to inform the jurors that an arbitration took place, as arbitration is required by the contract between [Eastern] and Ionadi. [Eastern] believes that if this fact is wholly excluded from trial, the jurors may believe that [Eastern] did not abide by the contract.
Although the [c]ourt agrees that excluding all mention of the arbitration could cause jurors to speculate, the [c]ourt also recognizes that allowing the parties to reference the outcome or the conduct at arbitration would likely prejudice the minds of the jurors. Therefore, the [c]ourt will draft a brief statement to be read by the [c]ourt during the trial which will address the binding arbitration clause of the [Subcontract].
Trial Court Opinion, 9/21/17, at 3. Accordingly, the trial court ordered that it would provide the following instruction to the jury:
There has been testimony relating to a [Subcontract] between [Eastern] and [Ionadi]. One provision of this contract requires disputes between the parties to be resolved through binding arbitration. I am instructing you now that [Eastern] has fully complied with the arbitration provision. You are not to use this information for any purpose other than to decide whether Eastern has met its obligations under the [Subcontract].
Id. at 5. On the issue of expert testimony, the trial court concluded that Mr. Bartoline’s testimony was relevant to present IFIC’s theory of payment to Eastern—that is, the amount of rebar installed at the Project instead of the amount of rebar shipped. Id. at 2-3. The court, therefore, denied Eastern’s motion on this issue.
At some point in 2018, the trial judge, Judge Thomas King Kistler, retired from the bench and this matter was reassigned to Judge Brian K. Marshall. On August 17, 2017, Eastern sought reconsideration of the trial court’s March 9, 2015 order issued by Judge Kistler, granting IFIC’s motion in limine seeking to exclude evidence of the arbitration award and judgment thereon. On December 10, 2018, the trial court (Judge Marshall) denied Eastern’s reconsideration motion. The court concluded that it was divested of jurisdiction to entertain the motion because it was patently untimely. Furthermore, the trial court determined that the coordinate jurisdiction rule, which provides that judges of coordinate jurisdiction should not overrule each other’s decisions, prevented it from revisiting Judge Kistler’s March 9, 2015 order and that Eastern failed to establish an exception to that rule. See Trial Court Opinion, 12/10/18, at 2-5.
The parties thereafter filed additional motions in limine, which the trial court, following a hearing, disposed of on February 3, 2020. First, relying on its September 21, 2017 ruling, the trial court denied Eastern’s motion with respect to the amount of rebar installed. The trial court then denied, for a second time, IFIC’s in limine motion relating to delivery tickets, concluding the issue previously was litigated and decided on April 11, 2017. The trial court also denied IFIC’s motion in limine to preclude prejudgment interest, concluding that in the event of a jury verdict in favor of Eastern, Eastern was entitled to prejudgment interest from the time it notified IFIC of Ionadi’s default—that is May 5, 2010—until the time of mistrial, which occurred on May 28, 2015. The court concluded that any delay in proceeding to trial since May 28, 2015 was mostly attributable to Eastern. See Trial Court Opinion, 2/3/20, at 14. The trial court lastly denied IFIC’s in limine motion seeking to limit Eastern’s recovery. IFIC argued that during the aborted March 10, 2015 trial, Eastern’s President Judith Striebinger stated that the total amount due to Eastern was $220,029.09. Id. at 14. Yet, as IFIC pointed out, during a subsequent pretrial statement, dated March 11, 2019, Eastern claimed it was owed $253,758.72. Id. IFIC asked the court to consider as a judicial admission the testimony of Ms. Striebinger and bind Eastern thereto. Eastern countered that because Ms. Striebinger had not been cross-examined, her statement on the amount owed should not be viewed as a judicial admission. The trial court agreed, concluding that her testimony was incomplete and offered during an aborted trial. Id. at 15-16.
Retrial commenced on February 24, 2020 and, following close of the evidence, the trial court, among other things and without any objection, instructed the jury on the nature of suretyship as follows:
In this case, [Ionadi] and IFIC are separate legal entities who entered into a surety contract. A surety contract is a direct and original undertaking under which the surety provider, IFIC, is primarily and jointly liable with the principal, Ionadi. The liability of IFIC as surety is coextensive with that of Ionadi as principal. And accordingly, the surety, IFIC, is bound to perform whatever may be legally required of its principal, Ionadi.
N.T., Trial, 2/26/20, at 201 (emphasis added). The jury found in favor of Eastern. Id. at 213. On the verdict slip, the jury answered “no” to the question of whether Eastern was paid in full by Ionadi under the Subcontract for Eastern’s work on the Project. See Verdict Slip, 2/27/20, at ¶ 1. Having answered “no,” the jury then proceeded to the second and final question on the verdict slip, which required the jury to state the amount of money that Eastern was entitled to be paid for its work, over and above the amount that Eastern already has been paid. The jury determined that amount to be $253,788.06, which essentially mirrored the damages claimed under the Subcontract and awarded in arbitration. Id. at ¶ 2.
On March 2, 2020, IFIC filed a motion for post-trial relief, which it amended on March 9, 2020. On March 6, 2020, Eastern also moved for post-trial relief and sought to mold the verdict to include prejudgment interest. Following a hearing, the trial court denied the parties’ respective post-trial motions on July 1, 2020, but on July 17, 2020, molded the verdict to $330,427.70, reflecting an award of prejudgment interest of six percent (6%) per annum from May 5, 2010 until May 28, 2015. On July 23, 2020, the molded verdict was reduced to judgment in favor of Eastern.
Slip op. at 11-22.
Eastern appealed, raising, inter alia, the following issues: (1) whether IFIC, as surety, is bound by an arbitration award entered and reduced to judgment against its principal, Ionadi; (2) whether Eastern was entitled to attorneys’ fees under the Subcontract for its efforts to enforce the arbitration award and resulting judgment against IFIC; and (3) whether an “insurance policy” as used in Section 8371 includes surety bonds such that Eastern can maintain a bad faith claim against IFIC.
Superior Court held that IFIC, as surety under the Payment Bond, was bound by an arbitration award entered and reduced to judgment against its principal, Ionadi, when IFIC, as surety, had full knowledge of the proceeding and an opportunity to participate in and defend against the arbitration claims. Accordingly, Superior Court found that the trial court abused its discretion in prohibiting Eastern from introducing and admitting at trial evidence of the arbitration award and the resulting judgment, which was conclusive and enforceable against IFIC. Commonwealth Court reasoned that:
…our precedent and analogous precedent fully support the assurance under the Payment Bond for interest and all costs incurred by Eastern, as provided for under the Subcontract, to pursue all sums due related to Eastern’s performance under the Subcontract. If IFIC intended to limit sums due under its Payment Bond, it could have done so, assuming any such limitation would not be contrary to applicable law.
Slip op. at 45-46. In so holding, Superior Court distinguished those cases relied on by the trial court, opining that:
[The trial court,] citing J.C. Snavely & Sons, Inc. v. Web M&E, Inc., 406 Pa.Super. 271, 594 A.2d 333 (1991), concluded that IFIC was not obligated to pay the 1.5% monthly interest charge contained in the Subcontract between Ionadi and Eastern because IFIC was not a party to that Subcontract. The court determined its conclusion was consistent with In Reliance Universal, Inc. of Ohio v. Ernest Renda Contracting Co., 308 Pa.Super. 98, 454 A.2d 39, 45 (1982), in which we observed that it is the language of the bond that determines the surety’s obligations to a subcontractor and not the terms of the subcontract agreement. We find the trial court’s reliance on Snavely and Reliance to be misplaced.
In Snavely, the subcontractor sought to recover from the contractor’s surety finance charges and attorneys’ fees as part of the “sums as may be justly due”30 under the bond agreement. The bond defined a claimant as a subcontractor who provided labor, material or both for performance of the contract, and provided further, that after a period of 90 days after the last of work or labor was done or performed, or materials furnished, that a claimant may sue on the bond for those sums as may be justly due the claimant. We rejected the subcontractor’s claim for finance charges and attorney’s fees under the bond because the bond did not allow for recovery of those items as sums justly due. We found that under the language of the surety bond, it only guaranteed payment for cost of labor and material used. We held that when viewing the language of the bond in question there was no clear indication necessitating a finding that plaintiff was entitled to be paid finance charges and attorneys’ fees under that labor and material bond agreement.
By comparison, IFIC’s surety bond is not as limited in its language as the bond in Snavely. Here, the Payment Bond not once, but twice obligates IFIC to pay a claimant for “all sums due” without reference or limitation to labor, materials and equipment. As we previously stated, a determination as to all sums due must by necessity refer to the Subcontract. Thus, our conclusion here is not inconsistent with Snavely and in fact, holds true to the language of the Payment Bond that assures payment for all sums due. See St. Paul Fire Marine.
Slip op. at 46-47.
Superior Court held that Eastern was not entitled to attorney’s fees incurred to pursue IFIC for breach of its surety obligation to provide payment of the arbitration award, but that Eastern was entitled to recovery of attorney’s fees to pursue the principal, Ionadi, for all sums due under subcontract. Superior Court explained:
At the outset, we must distinguish Eastern’s entitlement to attorneys’ fees incurred to pursue Ionadi’s payment obligation under the Payment Bond from its claim to recover attorneys’ fees to enforce IFIC’s surety obligation to pay the arbitration award and judgment against its principal, Ionadi.
Our holding that IFIC is liable for the contractual interest and attorneys’ fees as provided for under Paragraph 23 of the Subcontract and included within the arbitration award, is based upon our conclusion that IFIC, as a surety, is jointly and severally liable to Eastern for “all sums due” for Ionadi’s failure to make payment to Eastern. As we explained earlier, this non-limiting language includes those sums due under the Subcontract, because IFIC stands in Ionadi’s shoes as to Ionadi’s payment obligation to Eastern. This, however, cannot be conflated with the attorneys’ fees incurred to sue IFIC for breach of its obligation to provide payment under the bond. While IFIC is jointly and severally liable to provide payment for Ionadi’s payment obligation as per the terms of the Payment Bond, this same obligation does not exist as between Ionadi and IFIC for any default or breach by IFIC, or in simple terms, for IFIC’s nonperformance. The Payment Bond assured payment by Ionadi to Eastern. It did not assure against any breaches or defaults by IFIC. If Eastern wanted to include under the Payment Bond “all sums due” to enforce IFIC’s surety obligation, it needed to expressly state so in the Subcontract. Had it done so, fees to enforce the surety obligation may have been included within those “sums due” under the Payment Bond.
Slip op. at 49-50. Superior Court reasoned that:
The fees incurred by Eastern to enforce IFIC’s surety obligation are not a part of the amounts assured by IFIC under the Payment Bond to step into Ionadi’s shoes to provide payment for Ionadi’s payment obligations. The fees now claimed by Eastern are attributable to its efforts to pursue IFIC to establish its obligation for payment of the arbitration award; fees not assured under the Payment Bond.
Slip op. at 52.
As to Eastern’s bad faith claim, as a matter of first impression, Superior Court found that “[g]iven the ordinary meaning of the term ‘insurance policy,’ and our Supreme Court’s view that suretyship is not subsumed by the definition of insurance, we must conclude that fundamental differences naturally exist between contracts involving insurance and suretyship.” Slip op. at 62. Superior Court further found that application of Section 8371 to sureties would “bring about an absurd result and would deviate from the requirement that Section 8371 be strictly construed,” reasoning that:
…applying strict construction and considering the foregoing principles, special damages for bad faith under Section 8371 would be appropriate only in the context of insurance where the parties—the insurer and the insured—share a direct bilateral relationship. Superior Precast, Inc., 71 F.Supp.2d at 451-52. However, a surety such as IFIC and a protected party such as Eastern share no such direct contractual relationship by which IFIC agreed to pay Eastern. Id. at 452. Similar to Superior Precast, Inc., here IFIC’s relationship was with Ionadi and IFIC had agreed to answer only for those debts to any unrelated party for which Ionadi failed to answer. Id. Logically, therefore, special damages would be inconsistent in the absence of a direct relationship between IFIC and Eastern. If our General Assembly had intended to bring about an opposite conclusion, it would have ensured that suretyship was included in the plain language of Section 8371.
Furthermore, Section 8371 is a statutorily-created tort action. Ash, 932 A.2d at 885. It applies only in the context of insurance, excluding claims for breach of an ordinary contract, such as surety bonds. Id.; see Superior Precast, Inc., 71 F.Supp.2d at 452. This exclusion is commensurate with Pennsylvania law where punitive damages are awarded typically only in tort actions. Ash, 932 A.2d at 881 (citation omitted). Thus, it would be illogical to extend a bad faith action to ordinary contracts. Put differently, because a surety stands in the shoes of its principal, and an obligee could not have brought a bad faith claim—attendant with a right to seek punitive damages—against the principal, it follows that such a cause of action also should be unavailable against the surety. Permitting an obligee to recover punitive damages against a surety would expose the surety to greater liability than its principal. This would be incompatible with Pennsylvania law, where “it is axiomatic that the liability of a surety is not greater than that of a principal.” McShain v. Indem. Ins. Co. of N. Am., 338 Pa. 113, 12 A.2d 59, 61 (1940). As the district court in Superior Precast, Inc. reasoned:
[A surety] should not be subject to either a bad faith claim or punitive damages simply because [an obligee chooses] to proceed against it rather than against its principal. The term insurance policy under [Section] 8371 cannot reasonably be construed to include surety contracts, because such a construction would subject [a surety] to greater liability than [its principal] might otherwise have had, in violation of this principal of suretyship law. Further, to hold to the contrary would 1) provide [an obligee] with a windfall based solely on its decision to proceed against [a surety] rather than [the principal] and 2) provide [the obligee] and other parties protected by surety bonds with a financial incentive to proceed against a surety rather than against the principal in attempting to recover for breach of contract. This would be an unreasonable result, one the state legislature presumptively did not intend and one that this court must avoid in construing the terms of [Section] 8371
Id. at 71 F.Supp.2d at 452-53.
Slip op. at 65-67. Superior Court concluded:
the ordinary meaning of the term “insurance policy” does not include suretyship. Additionally, given the general distinctions between suretyship and insurance, we do not construe as ambiguous the term “insurance policy,” “so as to invoke the in pari materia canon.” Superior Precast, Inc., 71 F.Supp.2d at 454. The district court in Superior Precast, Inc. aptly explained:
[W]here a statutory term is specially defined in one statute but undefined in a later statute, a court must assume that the omission was intended by the legislature and that the special definition applies only to the one statute and not to the latter statute. The General Assembly provided in the UIPA a special, broad definition of insurance policy, one expressly including within it contracts of suretyship, but left that term undefined in [Section] 8371. This court will presume that omission was intentional and that the broader definition of insurance policy is limited to the UIPA only. Therefore the ordinary meaning of insurance policy, recognizing the wide difference between insurance and suretyship, controls the construction of [Section] 8371.
Id. (internal citations and quotation marks omitted; footnote added).
Slip op. at 68.
The Pennsylvania Supreme Court granted allocatur to consider the following issues, raised by IFIC:
(1) Whether a surety is liable for attorneys’ fees and/or contractual interest under the terms of a payment bond that covers only labor, materials and equipment?
(2) Whether a surety is bound by a default judgment entered in an arbitration to which the surety was not a party and despite a provision in the bond specifying that litigation against the surety will proceed in a court of law?
The Supreme Court also granted Eastern’s Cross-Petition for Allowance of Appeal, as to the following issue:
Whether Pennsylvania’s insurance bad faith statute, 42 Pa.C.S. § 8371, applies to surety contracts/policies issued by insurance companies?
For more information, contact Kevin McKeon or Dennis Whitaker.