Allegheny Casualty Company v. Vedadi
2:16-cv-02270
D. Ariz.May 1, 2017Background
- Titanium Builders entered contracts requiring performance/payment bonds for an apartment project; Allegheny issued the bonds as surety after Titanium agreed to an indemnity agreement.
- A dispute on the project produced bond claims that Allegheny did not pay; Allegheny sued Titanium for indemnity under the indemnity agreement.
- Titanium asserted counterclaims including breach of the covenant of good faith and fair dealing and a tort-based bad-faith claim.
- Allegheny moved under Rule 12(c) for judgment on the pleadings to dismiss Titanium’s tort-based bad-faith claim (Counterclaim III insofar as it seeks tort damages).
- The key legal question: whether Arizona law permits a tort bad-faith claim by a principal or by an indemnitor against a surety (as opposed to an obligee).
- The court concluded that Arizona law does not recognize a tort bad-faith claim by a principal or indemnitor against a surety and dismissed the tort portion of Counterclaim III; contractual claims remain pending.
Issues
| Issue | Allegheny's Argument | Titanium's Argument | Held |
|---|---|---|---|
| Whether a principal or indemnitor may bring a tort bad-faith claim against a surety | Arizona law limits tort bad-faith liability of a surety to obligees who contract for protection, not commercial advantage; principals/indemnitors contracted for commercial advantage, so no tort claim | Dodge language says surety owes good faith to principal; thus tort claim should be viable | Court: No tort claim. Dodge’s relevant language is dictum; Cushman and Arizona precedent treat good-faith breaches by sureties as contractual, not tort, absent a special obligee relationship. Tort claims dismissed |
Key Cases Cited
- Dodge v. Fidelity & Deposit Co. of Md., 778 P.2d 1240 (Ariz. 1989) (recognized tort bad-faith liability of a surety to an obligee in a special protective relationship)
- Cushman v. Nat’l Surety Corp., 417 P.2d 537 (Ariz. 1966) (liability of a surety is measured and limited by its contract; good-faith duty enforced contractually)
- Rawlings v. Apodaca, 726 P.2d 565 (Ariz. 1986) (every contract contains an implied covenant of good faith and fair dealing)
- Burkons v. Ticor Title Ins. Co. of Cal., 813 P.2d 710 (Ariz. 1991) (breach of implied covenant of good faith is ordinarily remedied by contract action)