976 F. Supp. 2d 598
E.D. Pa.2013Background
- Upper Pottsgrove Township contracted TH Properties (THP) to complete public improvements for the Coddington View — Phase 2 development and required financial security.
- THP substituted cash security with subdivision bonds issued by International Fidelity Insurance Co. (IFIC); the Phase 2 bond principal was reduced to about $614,742.06.
- THP filed Chapter 11 bankruptcy and stopped work; the Township demanded IFIC pay the bond principal so the Township could complete the improvements.
- IFIC refused to pay; the Township sued in state court asserting four counts, including a statutory bad-faith claim under 42 Pa. Cons. Stat. § 8371 (Count IV).
- IFIC removed to federal court and moved under Rule 12(b)(6) to dismiss Count IV, arguing § 8371 applies only to insurance policies, not surety bonds.
- The district court predicted Pennsylvania law and held that surety bonds are not "insurance policies" under § 8371, and granted IFIC's motion to dismiss Count IV.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether 42 Pa.C.S. § 8371 (bad-faith statute) applies to surety bonds | Township: IFIC's refusal to pay is the kind of bad-faith conduct § 8371 targets; the bond names the Township as obligee so there is a direct relationship | IFIC: § 8371 applies only to actions arising under an "insurance policy," and a surety bond is not an insurance policy | Court: § 8371 does not apply to surety bonds; dismissed Count IV |
| Whether the UIPA definition of "insurance policy" (which includes suretyship) makes § 8371 apply to sureties | Township: UIPA's broad definition supports treating surety bonds as insurance policies for bad-faith purposes | IFIC: UIPA and § 8371 have different remedial schemes; legislature omitted a definition in § 8371 intentionally, so UIPA definitions don't carry over | Court: Rejected cross-use of UIPA definitions; legislative silence indicates § 8371 should not be expanded by UIPA language |
Key Cases Cited
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (standard for plausibility on Rule 12(b)(6))
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading standard and legal/conclusory distinction)
- Fowler v. UPMC Shadyside, 578 F.3d 203 (two-step Twombly/Iqbal analysis in Third Circuit)
- Threadgill v. Armstrong World Indus., Inc., 928 F.2d 1366 (persuasive authority on predicting state law)
- Foster v. Mutual Fire, Marine & Inland Ins. Co., 531 Pa. 598 (Pennsylvania Supreme Court distinguishing suretyship from insurance)
- Pearlman v. Reliance Ins. Co., 371 U.S. 132 (recognition that suretyship is generally distinct from insurance)
- Turner Constr. Co. v. First Indem. of Am. Ins. Co., 829 F. Supp. 752 (E.D. Pa. case discussing bad-faith claims against sureties; court did not decide § 8371 applicability)