COA: Common law duty of good faith doesn’t extend to surety-obligee relationship

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The common law duty of good faith that applies to insurance does not extend to the relationship between a surety company and bond obligee, the Court of Appeals of Indiana has ruled in affirming a trial court’s decision. But the COA dismissed a related appeal, finding it lacked jurisdiction.

Posterity Scholar House LP, the owner of a construction project, hired a general contractor to build two apartment buildings. The contract stipulated the contractor had to obtain performance and payment bonds for the project, which the contractor got through FCCI Insurance Company.

Under the bonds, the surety company became secondarily liable to the project owner for the general contractor’s performance. Posterity was the bond obligee.

After the general contractor allegedly defaulted on the contract, Posterity filed two categories of bond claims with FCCI: one under the performance bond and a series of claims under the payment bond.

FCCI denied the performance bond claim after its investigation allegedly revealed that Posterity, not the general contractor, was the party in default on the contract. FCCI also denied the payment bond claims because of Posterity’s alleged failure to provide certain information required by the bond.

Posterity sued FCCI for breach of contract and tortious bad faith in its handling of the claims.

FCCI moved for partial summary judgment on Posterity’s bad faith claim, arguing a surety doesn’t owe its bond obligee a common law duty of good faith under Indiana law. The Allen Superior Court agreed and granted the motion.

Posterity filed a cross-motion for partial summary judgment in its breach of contract claim, but the trial court denied that motion.

On Posterity’s appeal, the Court of Appeals affirmed the trial court’s grant of FCCI’s partial summary judgment motion on the bad faith claim but dismissed the appeal of the denial of Posterity’s motion for partial summary judgment on the breach of contract claim.

In a Wednesday opinion, the COA first took up the bad faith claim, which came down to how Indiana law and other courts have treated the surety-obligee relationship.

The opinion noted some states extend an insurer’s common law duty of good faith to the surety-obligee relationship, relying on the inclusion of sureties in their regulatory schemes governing insurance, while others emphasize the “fundamental differences” between suretyship and insurance.

The Court of Appeals listed three reasons in disagreeing with Posterity’s argument that suretyship is analogous to insurance.

First, the opinion cited the Indiana Supreme Court, which distinguished between insurance and suretyship in Meyer v. Bldg. & Realty Serv. Co., 209 Ind. 125, 133, 196 N.E. 250, 253-54 (1935). The Supreme Court held that while insurance is “a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from an unknown or contingent event,” a contract of suretyship is “one to answer for the debt, default, or miscarriage of another.”

Second, in disagreeing with Posterity’s argument that suretyship and insurance should be treated the same because Indiana law includes surety bonds as a class of insurance, the Court of Appeals again cited the Supreme Court. This time it looked to Erie Ins. Co. v. Hickman, 622 N.E.2d 515 (Ind. 1993), in which the Supreme Court held that an insurer owes its insured a common law duty of good faith.

But the Court of Appeals ruled that doesn’t extend to the relationship between surety and obligee in this context.

“Though suretyship is regulated as a class of insurance under the Indiana Insurance Code, there are fundamental differences between the two types of transactions,” the opinion said.

Third, the Court of Appeals ruled the relationship between a surety and its bond oblige doesn’t reflect the “special relationship” the Supreme Court relied on in Erie to establish the duty of good faith in the context of insurance.

In dismissing Posterity’s appeal of the trial court’s denial of the motion for partial summary judgment as to its breach of contract claim, the COA determined it lacked jurisdiction because the denial was not a final judgment.

Posterity cited State v. Keller, 845 N.E.2d 154 (Ind. Ct. App. 2006), in arguing that when a trial court certifies an order for appeal, that certification applies to the entire order and is not limited to any specific questions designated by the court.

The Court of Appeals noted Keller concerned the certification of an interlocutory appeal under Appellate Rule 14, not a judgment made final under Appellate Rule 2, via Trial Rule 54(B).

“Posterity did not seek, and the trial court did not grant, Appellate Rule 14(B) certification of the trial court’s interlocutory order denying Posterity’s motion for partial summary judgment as to its breach of contract claim,” the opinion said. “Moreover, this Court did not accept jurisdiction over any such interlocutory appeal. Keller is therefore inapplicable.”

Judge Leanna Weissmann wrote the opinion. Judges Nancy Vaidik and Terry Cone concurred.

The case is Posterity Scholar House, LP v. FCCI Insurance Company, 21A-PL-2731.

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