When is insurance not insurance? According to both Merriam-Webster and Black’s Law Dictionary, insurance is a “contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril.” Under that definition, “insurance” would include surety agreements, where one party agrees to indemnify another party if a third party defaults on a debt or fails to perform on a contract. But not so fast. A recent Pennsylvania federal court decision dismissed a bad-faith claim against a surety, finding that a surety bond is not “insurance” in Upper Pottsgrove Township v. International Fidelity Insurance, No. 13-1758 (E.D.Pa. Oct. 2, 2013).
Last month, U.S. District Judge Stewart Dalzell of the Eastern District of Pennsylvania had to decide whether a surety bond was “insurance.” The case involved an alleged bad-faith refusal by the surety to honor its contract. Upper Pottsgrove Township had engaged a contractor to do work. When the contractor originally agreed to the work in 2006, the township required it to escrow nearly $2.5 million to secure its performance on the project. But, in 2008, the contractor was allowed to substitute a surety bond issued by International Fidelity Insurance Co. (IFIC). A year later, the contractor declared bankruptcy and stopped working on the project. The township looked to the surety to pay on the bond. When IFIC refused, the township started an action for breach of contract and bad faith under Pennsylvania law.
