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Surety Cannot be Liable for Bad Faith Under PA Law

September 12, 2022

On September 1, 2022, the Superior Court of Pennsylvania held, as a matter of first impression, that a surety is not subject to Pennsylvania’s bad faith statute, 42 Pa.C.S.A. § 8731. In Eastern Steel Constructors, Inc. v. International Fidelity Insurance Co., the Superior Court reasoned that § 8731 expressly applies to “an insurance policy,” and, consistent with U.S. and Pennsylvania Supreme Court holdings, “suretyship is not insurance.” The Superior Court noted that “[i]f 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.”

This case arises from a construction project pay dispute between Ionadi, the prime contractor, and Eastern Steel Constructors, Inc. (“Eastern”), a subcontractor. After Ionadi failed to make payments, Eastern made a claim under the payment bond. Following partial payment by International Fidelity Insurance Co. (“IFIC”), Ionadi’s surety, Eastern won an arbitration award against Ionadi for the remaining sum. However, Eastern was unsuccessful in its attempts to collect on the judgment from IFIC. Eastern then initiated this state court action against IFIC, which included a count for bad faith under § 8731. The Superior Court affirmed the trial court’s grant of summary judgment in favor of IFIC on the bad faith claim finding that the bad faith statute did not apply to sureties.

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