Home » Is My Surety the Same As My Insurance Carrier? Not So Much Says a Federal Court in Pennsylvania
As members of the construction industry know, to describe the relationship between a surety and the party to whom it issues a surety bond (the principal) as confusing would be an understatement. In fact, many believe that the surety-principal relationship is similar, if not identical, to the insurer-insured relationship. In a recent federal court opinion – Reginella Construction Company, Ltd. v. Travelers Casualty and Surety Company of America – a contractor learned the hard way that the principal in a surety-principal relationship is not nearly as protected as the insured in an insurer-insured relationship.
In Reginella, the United States District Court for the Western District of Pennsylvania granted a surety's motion to dismiss the claims brought against it by the surety's principal, Reginella, finding, among other things, that a surety does not owe the kind of heightened duty to its principal that an insurance carrier owes to its insured (this heightened obligation is called a fiduciary duty, and we tend to see it in the insurer-insured, attorney-client, trustee-beneficiary, and guardian-ward contexts). In Reginella, the surety, Travelers, issued performance and payment bonds on behalf of its principal, Reginella, for a school district project in Pennsylvania and a turnpike project in Ohio.
On the school district project, Reginella's relationship with the owner broke down, and the project shutdown. On the turnpike project, Reginella's relationship with Travelers soured over a disagreement surrounding a lien filed by one of Reginella's subcontractors. Reginella alleges that Travelers failed to, among other things, (i) pay Reginella's subcontractors in accordance with the payment bonds that Travelers issued, (ii) issue a bond to address a subcontractor lien, and (iii) generally act in the best interests of Reginella in a way that would facilitate payment from the project owners to Reginella.
Ultimately, Reginella sued Travelers for damages in excess of $15 million for lost business, goodwill, future earnings and residual value of its enterprise against Travelers for, among other claims, Travelers' alleged breach of its fiduciary duty owed to Reginella in relation to the bonds issued on the two projects. Travelers moved to dismiss the entirety of Reginella's claims. In applying Pennsylvania law, the Court granted Travelers' motion and dismissed Reginella's claims against Travelers, concluding that a Pennsylvania court would not impose fiduciary duties on a surety because a surety is a guarantor issuing a commercial guaranty, not an insurance carrier issuing an insurance policy.
The Court's decision makes it clear that in Pennsylvania, a surety's obligations to its principal are not the same as the heightened obligations that exist in fiduciary relationships. In a fiduciary relationship, the fiduciary (e.g., an insurer) must act with the utmost fairness and refrain from using his position to the other's detriment and his own advantage. As the Court determined, however, surety relationships are ordinary arm's-length commercial relationships where each party owes the other a less protected duty of good faith and fair dealing. When entering into surety relationships, contractors need to be mindful of this distinction, especially when a surety begins communicating with project owners on its principal's behalf.
Principals like Reginella should carefully monitor the surety's activity and insist on being copied on all communications to and from the surety.
It is important to note that a couple of weeks ago, Reginella asked the Court to reconsider and alter its decision. Therefore, the Court's decision is not yet final, and we will continue to monitor the result.
John A. Greenhall is a Partner with the Firm and a member of the Construction Group. He can be reached at 215.564.1700 or jgreenhall@cohenseglias.com.
Lori Wisniewski Azzara is an Associate at Cohen Seglias Pallas Greenhall & Furman PC. Lori practices in the areas of construction and commercial litigation and has experience in contract negotiation, claims for delay and inefficiency, mechanics' liens, and all types of contractual disputes.
Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law. Dan counsels clients at all tiers of the construction industry, including general contractors, subcontractors, owners, developers, and design professionals.
Tags: "insurer-insured relationship", Bond, Surety
John A. Greenhall is the Secretary of Cohen Seglias Pallas Greenhall & Furman PC as well as a Shareholder and member of the Board of Directors. In addition, he is a Partner in the Firm's Construction Group. His clients hail from all areas of the construction industry and include general contractors, subcontractors, architects, engineers, sureties and owners.
Read more about John A. Greenhall John's Linkedin Profile
Lori Wisniewski Azzara is and a Partner in the Firm's Construction Group. Lori represents owners, developers, contractors, subcontractors, architects, and engineers in construction and commercial litigation matters. Her clients span across Pennsylvania, Ohio, West Virginia, and Kentucky and work on both private and public projects. Lori handles contract negotiation, claims for delay and inefficiency, mechanics' liens, and all types of contractual disputes. She represents clients in various state and federal courts, arbitration and mediation proceedings, and before administrative agencies.
Lori is also a Co-Editor of the firm's construction blog, Construction Law Now.
Read more about Lori Wisniewski Azzara Lori Wisniewski's Linkedin Profile
Daniel E. Fierstein is an associate in the Firm's Construction Group. Dan focuses his practice in the construction industry and has a diverse, industry-wide client base from the owner/developer, to the trade subcontractor, and everything in between. He handles construction cases from a multitude of perspectives and is uniquely qualified to help a broad range of construction industry members navigate their day-to-day issues. Dan does so with sensitivity to cost, resources, and the reality that suing a long-time customer is a last resort. When cases require legal action, he is a zealous advocate, devoted to achieving what his client, not he, views as a "win."
Dan is also Co-Editor of Construction Law Now.
Read more about Daniel E. Fierstein Daniel's Linkedin ProfileDaniel's Twitter Profile
Carpenters' Company Master Builder Dialogues: Building the Buildings of the Future
Amendments to Ohio P3 Legislation Add Bonding Requirements with a Twist
Want to Appeal a Bid Protest Decision Involving A Maryland State Contract? If New Legislation Becomes Law, You May Have to Pay to Play . . .
Virginia Shortens Subsubcontractors' Time to Provide Notice on Public Payment Bond Claims
Delaware Supreme Court Confirms That Sureties May Limit Bond Claimants