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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
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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
Philadelphia Surety Claims Association
Stradley Ronon Stevens & Young, LLP 4
Two Model Acts:Two Model Acts:
• Unfair Trade Practices Act
• Uniform Claims Settlement Practices Act
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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.
Philadelphia Surety Claims Association
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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.
Philadelphia Surety Claims Association
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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.
Philadelphia Surety Claims Association
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What is bad faith?
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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
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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
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What arguments work in favor of the claim?
Philadelphia Surety Claims Association
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Arguments In Favor:Arguments In Favor:
Sureties are just like
insurance companies
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Arguments In Favor:Arguments In Favor:
Suretyship is referenced
in the regulatory scheme
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Arguments In Favor:Arguments In Favor:
A bad faith tort claim
is needed to keep
sureties honest
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Arguments In Favor:Arguments In Favor:
A “special relationship”
exists between
a surety and obligee
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Arguments In Favor:Arguments In Favor:
Sureties have superior
bargaining power
vis-à-vis obligees
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Which arguments work
in favor of sureties?
Philadelphia Surety Claims Association
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Arguments Against:Arguments Against:
A surety’s liability
should be no greater than
that of its principal
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Arguments Against:Arguments Against:
Surety is a credit accommodation,
not insurance
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Arguments Against:Arguments Against:
Insurance spreads risk,
but in suretyship the loss remains
concentrated with the principal
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Arguments Against:Arguments Against:
The mere reference of
suretyship in the
regulatory framework
is not enough
Philadelphia Surety Claims Association
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Arguments Against:Arguments Against:
Sureties have the right
to “test the merits”
of a claim
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Arguments Against:Arguments Against:
A tort claim encourages
the payment of meritless
claims and the
overpayment of
questionable claims
Philadelphia Surety Claims Association
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Arguments Against:Arguments Against:
Obligees look first
to the principal and
then to the surety, rather
than an insured who
looks only to the insurerPhiladelphia Surety Claims Association
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Arguments Against:Arguments Against:
Because of the tripartite
nature of the relationship, the surety must balance conflicting
interests
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Arguments Against:Arguments Against:
Sureties do not have
superior bargaining power
Philadelphia Surety Claims Association
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Arguments Against:Arguments Against:
Obligees often are
commercially
sophisticated
(with access to
legal advice)Philadelphia Surety Claims Association
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Arguments Against:Arguments Against:
Obligees can negotiate terms into the underlying contract that
discourage delay by the surety (e.g. liquidated damages)
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QUESTIONS?QUESTIONS?
Feel free to contact:
Patrick Kingsley
Stradley, Ronon, Stevens & Young, LLP
(215) 564-8029
pkingsley@stradley.com
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Thanks