BAD FAITH CLAIMS AGAINST SURETIES

BAD FAITH CLAIMS AGAINST BAD FAITH CLAIMS AGAINST SURETIES SURETIES

Philadelphia Surety Claims AssociationJanuary 15, 2014

Stradley Ronon Stevens & Young, LLP 2

Origins of the Bad Faith Claim:Origins of the Bad Faith Claim:

The general common law duty of good faith and fair dealing was

transformed into an affirmative claim sounding in tort

Philadelphia Surety Claims Association


Origins of the Bad Faith Claim:Origins of the Bad Faith Claim:

The new tort was based on the “special relationship” between the

insured and its insurer, which arose out of the unequal bargaining power

at policy inception and during coverage determination



Two Model Acts:Two Model Acts:

• Unfair Trade Practices Act

• Uniform Claims Settlement Practices Act



The Unfair Trade Practices ActThe Unfair Trade Practices Act

National Association of Insurance Commissions adopt the “UnfairTrade Practices Act” establishing rules to regulate unfair trade practices in the insurance industry.

The scope of the model act appears to cover suretyship. Those states that have adopted the act include suretyship within the scope of regulated insurance activities.



The Uniform Claims Settlement Practices ActThe Uniform Claims Settlement Practices Act

National Association of Insurance Commissions later adopts the “Uniform Claims Settlement Practice Act” which was intended to define unfair claims practices with more exactitude.

The model act specifically excludes suretyship. However, not all the states that have adopted the model act have adopted the language excluding suretyship.



Two Model ActsTwo Model Acts

Both model acts say they do not create a private cause of action, but that language has not been consistently adopted.



What is bad faith?



What is bad faith?What is bad faith?

• Refusal to pay a claim without a reasonable basis

• Frivolous and unfounded refusal to pay policy proceeds

• Dishonest purpose or conscious wrongdoing• Unreasonable conduct which the surety knows

to be unreasonable• Failure to investigate for the purpose of

remaining ignorant


What is What is notnot bad faith? bad faith?

• Mere negligence or bad judgment is not bad faith

• Reasonable, but incorrect, interpretation of a policy or law is not bad faith

• Inconsistent claims positions may not be bad faith if there is a reason for a differing position in the current matter

• Delays due to reasonable investigations



What arguments work in favor of the claim?



Arguments In Favor:Arguments In Favor:

Sureties are just like

insurance companies




Suretyship is referenced

in the regulatory scheme




A bad faith tort claim

is needed to keep

sureties honest




A “special relationship”

exists between

a surety and obligee




Sureties have superior

bargaining power

vis-à-vis obligees



Which arguments work

in favor of sureties?



Arguments Against:Arguments Against:

A surety’s liability

should be no greater than

that of its principal




Surety is a credit accommodation,

not insurance




Insurance spreads risk,

but in suretyship the loss remains

concentrated with the principal




The mere reference of

suretyship in the

regulatory framework

is not enough




Sureties have the right

to “test the merits”

of a claim




A tort claim encourages

the payment of meritless

claims and the

overpayment of

questionable claims




Obligees look first

to the principal and

then to the surety, rather

than an insured who

looks only to the insurerPhiladelphia Surety Claims Association



Because of the tripartite

nature of the relationship, the surety must balance conflicting

interests




Sureties do not have

superior bargaining power




Obligees often are

commercially

sophisticated

(with access to

legal advice)Philadelphia Surety Claims Association



Obligees can negotiate terms into the underlying contract that

discourage delay by the surety (e.g. liquidated damages)



QUESTIONS?QUESTIONS?

Feel free to contact:

Patrick Kingsley

Stradley, Ronon, Stevens & Young, LLP

(215) 564-8029

[email protected]


Thanks

Documents

BAD FAITH CLAIMS AGAINST SURETIES