Great American Insurance Co. v. E.L. Bailey & Co.
841 F.3d 439
| 6th Cir. | 2016Background
- E.L. Bailey & Co. (Bailey) contracted with Michigan to build a prison kitchen; Great American Insurance Co. (GAIC) issued performance and payment bonds and, under a 2006 Agreement, was assigned Bailey’s claims against the State and given the right to settle them if Bailey allegedly breached.
- The State claimed substantial completion occurred April 4, 2012 (after allowed extensions) and withheld roughly $358,000 in liquidated damages; Bailey disputed both the dates and the withheld amount and never achieved final completion.
- Mediation apportioned most delay to Bailey and recommended a $220,400.75 settlement; GAIC later negotiated a $358,000 settlement with the State and informed Bailey the day before a scheduled facilitation that Bailey’s claims had been released with prejudice.
- GAIC also settled subcontractor claims under the payment bond (paid ~$645,287 and incurred over $260,000 in expenses); GAIC had previously demanded substantial collateral from Bailey, which Bailey did not provide.
- GAIC sued Bailey in federal court seeking indemnification for payments made on subcontractor claims and a declaratory judgment confirming GAIC’s right to settle Bailey’s claims; Bailey asserted bad faith as an affirmative defense to the declaratory/indemnity action.
- The district court granted summary judgment to GAIC (finding GAIC had the right to settle and awarding indemnification), rejected Bailey’s bad-faith claim; Bailey appealed only the bad-faith ruling.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Waiver: May Bailey raise bad-faith on appeal though it downplayed it below? | Bailey contends bad-faith was preserved as an affirmative defense and should be considered. | GAIC argued Bailey had waived or not adequately developed bad-faith below. | Court: Issue not waived — Bailey gave sufficient notice below and district court considered it. |
| Proper forum / ripeness: Can bad-faith be litigated in GAIC’s declaratory action or only later in indemnity? | Bailey argued declaratory forum was premature; some authorities say bad-faith is for later indemnity actions. | GAIC and court: fairness allows adjudication here because declaratory and indemnity claims were joined and settlement could offset indemnity. | Court: Bad-faith was properly considered in this joined action. |
| Standard for bad faith under Michigan law | Bailey relied on Michigan bad-faith standards (Commercial Union) — bad faith is more than negligence and can include acting to protect own interests at expense of principal. | GAIC acknowledged duty of good faith but emphasized plaintiff bears burden to prove state of mind and that honest errors aren’t bad faith. | Court: Applied Michigan law — bad faith is a state of mind; plaintiff bears burden and mere disagreement with settlement is insufficient. |
| Sufficiency of evidence (concealment, investigation, settlement amount) | Bailey claimed GAIC negotiated secretly, failed to investigate liquidated-damages law, and accepted an unreasonably low settlement. | GAIC showed adversarial negotiations, higher settlement than mediator’s recommendation, and that Bailey had notice/opportunity (collateral demands) to prevent settlement. | Court: Bailey presented no evidence of GAIC’s bad state of mind or prolonged concealment; disagreement over amount and unsupported allegations of inadequate investigation do not create a genuine issue of bad faith. |
Key Cases Cited
- V & M Star Steel v. Centimark Corp., 678 F.3d 459 (6th Cir.) (summary-judgment standard review in Sixth Circuit)
- Commercial Union Ins. Co. v. Liberty Mut. Ins. Co., 393 N.W.2d 161 (Mich. 1986) (defines bad faith in insurance context: more than negligence; state of mind inquiry)
- Bd. of Educ. v. Chaussee, 177 N.W. 975 (Mich. 1920) (Michigan rule against apportioning liquidated damages when both parties at fault)
- Hutton Contracting Co. v. City of Coffeyville, 487 F.3d 772 (10th Cir.) (discusses modern trend allowing apportionment of per diem liquidated damages)
- Savedoff v. Access Grp., Inc., 524 F.3d 754 (6th Cir.) (federal courts must follow state supreme court precedent on state-law questions)