*1 S061215. July [No. 1999.] CONSTRUCTION, INC., al., Plaintiffs,
CATES et and Cross-defendants v. Appellants, al., Defendants,
TALBOT PARTNERS et Cross-complainants Respondents; COMPANY, Plaintiff,
TIG INSURANCE Cross-defendant Appellant, al., Defendants, TALBOT et PARTNERS Cross-complainants Respondents.
Counsel Plaintiff, Law Offices of William J. Allard and William J. Allard for Construction, Cross-defendant and Cates Inc. Appellant Cave; Chertok; Feliton, Johnson, Bryan William I. Bottum & Steve Jerry Garcia; Gonzalez, Horvitz & R. Daniel J. Ari R. Levy, Barry Levy, Kleiman Plaintiff, and Andrea M. Gauthier for Cross-defendant and TIG Appellant Insurance Company. *6 A.
Michael Mathews for & Crum Forster Insurance as Amicus Curiae on Plaintiff, behalf of Insurance Cross-defendant and TIG Appellant Company. Levit, & Long Quinn Doan A. Lesser and John H. for Association of Plaintiff, California as Amicus Curiae on behalf of Cross- Surety Companies defendant and TIG Insurance Appellant Company. & Richard S. Busch and William R. Moore for Amwest
Busch Berger, Plaintiff, Cross- Insurance as Amicus Curiae on behalf Surety Company defendant and TIG Insurance Appellant Company. Conners,
Anderson, & G. T. DiBiase and McPharlin David Wayne Murphy, Curiae on Mark E. Aronson for National Bond Claim Association as Amicus Plaintiff, Insurance behalf of Cross-defendant and TIG Company. Appellant Platt, Jr.; & Evan M. and Donald M. Tager F. Brown Hugh Young, Mayer, Council, Inc., Curiae on for Product as Amicus Falk Liability Advisory Plaintiff, Cross-defendant and TIG Insurance behalf of Appellant Company. Rosenthal, & Paul E. B. Glad and Cheryl Dyer Berg Sonnenschein Nath Insurers, Insurance and Alliance of American Fireman’s Fund Company Curiae on behalf of Association of Insurers as Amici National Independent Plaintiff, Cross-defendant and TIG Insurance Appellant Company. Robinson, Peter C. for American Haley Osthimer & Tatum and Wright, Insurance America as Amici Association and the Association of Surety Plaintiffs, and Curiae on behalf of Cross-defendants Appellants. Arabian; Leanse, Kaufman; Alevra; Armand & John S. Marcus M. Shoop Buchalter, Nemer, Bernard E. LeSage Fields & Younger Paul Shoop; Defendants, PAA Talbot Partners and Respondents Cross-complainants Interpro. Haskell; Esner, Parma, Schwartz,
Price, E. & J. Christopher Postel Terry Defendants, B. Esner for N. and Stuart Chang Andrew Higa Chang, of Montecito and Mountain Bank Cross-complainants Respondents Financial Corporation.
Opinion tort to the contract and case issues BAXTER, J. relating presents This under a bond estate a commercial to a real developer contractor on a multimil of a general guaranteeing For the reasons set forth construction lion dollar condominium project. below, contractually obligates that the bond at issue we conclude failure to promptly attributable to the contractor’s general pay date. further We agreed its contract obligations and faithfully perform law, tort for that, not recover in conclude as a matter developer *7 faith and fair good dealing implied breach of covenant surety’s conclusions, these reverse the judgment bond. In we light performance affirmed tort it award of underlying of the Court of insofar as Appeal an award for breach of covenant implied permitted damages. punitive Background
Factual and Procedural the Court of The is taken in from following background large Appeal part opinion. 1989, Construction, (Talbot) (Cates)
In Talbot Partners hired Cates Inc. build a condominium in Malibu on Talbot project property purchased $1 million. The construction contract called for Cates complete project it have months. Talbot received ready occupancy eight financing bank). for the (the construction the Bank of Montecito through financing secured a deed of on the conditioned on the was trust was property issuance of a bond in favor of the bank.
At the time the construction contract Talbot Cates to signed, was required furnish a bond and a labor and materials bond. Trans- payment (Transamerica),1 america Insurance a commercial Company surety company, issued the bonds in favor of Talbot and the bank as as obligee co-obligee. $27,000 Talbot on the bonds. Transamerica and also Cates paid premium executed an which Transamerica to recover indemnity agreement allowed from Cates all faith disbursements made under the bonds. good
Construction on the on Cates and Talbot began May 1989. project trial, agreed various extensions on the date. At Talbot waived completion claim for June any damages through 1990.
A fund control Cates to submit agreement required monthly applications to Talbot for reimbursement of costs incurred. Funds were to be disbursed after only review of the Talbot and the bank and after confirma- requests by construction, tion of the the course Cates work. progress During submitted 22 The 23d which were submitted. payment requests paid submitted in both November of was because request, early paid Talbot’s and had Cates’s records showed that Talbot several already paid hundred thousand dollars more than the After cost work. attempts failed, resolve Cates to abandon the as of disagreements threatened project 4, 1990, December additional unless amounts were paid. Company.
1Transamerica known as TIG Insurance is now *8 29, 1990, after the contract should have been On November six months to default and Talbot Transamerica that Cates intended advised completed, it under the contract. Talbot that Talbot had owed already everything paid December, Cates under the bond. In demanded that Transamerica perform lien in the amount of abandoned the and recorded a mechanic’s project $645,367. 9, 1991, Trans- January
After discussions on many among parties, had breached the contract america informed Talbot of its that Talbot position to intercede or arrange to make Transamerica refused failing payments. contract, existed be- of the claiming legitimate dispute performance and communications continued. Cates and Talbot. Correspondence tween 14, 1991, Cates, Talbot gave at Transamerica’s February request, On Cates its assigned rights notice of its default. Also in voluntary February, 1, 1991, the bank March Talbot and Talbot to Transamerica. On against of the that as a result of the delayed completion informed Transamerica contract, and the bank was Talbot in default on its loans construction was $935,000 in mechanics’ to foreclose. At that time there was over proceeding Cates’s lien. including liens against project, business, 14, 1991, time Cates out of Trans- On March which was its mechanic’s this action on Cates’s behalf to foreclose on america filed 19, 1991, On March began process completing lien. Transamerica to the bond. job pursuant performance 10, 1991, in Cates’s Transamerica lawsuit
On May joined plaintiff Talbot, action for breach of the construction causes of alleging against lien, contract, relief. declaratory They foreclosure on the mechanic’s Cates against the bank as a defendant. Talbot cross-complained later named recov- Transamerica for of the construction contract against for breach bond, and the labor and breach of that bond under ery faith good of the covenant materials bond and breach implied payment 1991, the bank bond. In December of in the dealing and fair breach of the bonds. Transamerica for cross-complained against time, 18, 1991, Talbot on the At that the bank foreclosed project. On June of the $7,753,282. and some Construction was complete the bank owed also lacked permit project defective required repair. work was for certificates sign-offs occupancy. before retired claims were tried the contract
By parties, stipulation a jury. without sitting Court Justice David Eagleson, California Supreme Justice ruled Transamerica and Cates on all of their causes Eagleson of action. Those not been have rulings appealed. *9 Cates,
On Talbot’s cause of action Justice found that against Eagleson alia, Cates breached the contract inter to construct the by, failing project defects; and free of than good rates quality charging substantially higher rates; standard local and to use the construction funds to subcon- failing pay tractors, in mechanics’ liens on the He resulting determined that all project. 1, 1990, Cates, June delays were caused and that if Cates had not beyond by contract, breached the would have been available for Talbot to project sell on or before June 1990. Transamerica,
On Talbot’s causes of action Justice against made Eagleson the following Transamerica breached the findings. by failing adequately investigate Talbot’s declaration that Cates was in default and by in the mechanic’s lien joining suit without such an investiga- occurred, tion. Had such an it investigation would have disclosed that Cates default, was in that Cates’s abandonment was and that at the unjustified, abandonment, time of the work, Cates had been the full cost of an paid plus $267,730, additional sum of and was owed no further amounts. Trans- america also breached by failing Cates’s contract promptly complete when Cates’s default would have been after readily apparent investiga- tion. Transamerica determined arbitrarily what work it would under perform the performance bond and failed to Cates’s fully contract. In complete addition, Transamerica breached the labor and materials bond by payment lien promptly claimants. paying
Justice Eagleson determined that Transamerica’s breaches of the perfor- mance bond awarded, caused the loss of the and the project damages that its breaches of the labor and materials bond contributed to payment Talbot’s damages. Transamerica was liable for all caused damages contract, Cates’s breaches construction and was not exonerated or excused from under the bonds. $3,142,021
Justice Eagleson awarded damages favor of Talbot and sum, $2,596,600 against Transamerica and Cates. Of that represented difference between the fair market value the would have had on June project 1, 1990, date, if it had been on that discounted to take account complete into units, the cost of holding selling and the amount Talbot would have $276,730, owed the bank on that date.2 The remainder of the reflected award overdrawn, $268,691, which Cates had which Talbot on the paid project after June 1990. Eagleson
2Justice confirmed this amount profit. was not a calculation of claims, bank, found that the to the bank’s Justice regard Eagleson With the same duties had the same as Talbot and was owed co-obligee, rights $1.2 He the bank million for damages impairment Transamerica. awarded $252,295 work. of its interest and for Cates’s defective security claims, tried its tort cause of action After trial of the contract Talbot E. Jr. Transamerica to a before the Honorable William Burby, jury motion, or the not informed of the findings On Transamerica’s was jury trial. The also in the breach of contract parties stipulated compen- award $1. amount of After evidence hearing tort in the total satory all the the jury the entire course of conduct between parties, regarding *10 faith breached the covenant of good determined that Transamerica implied of malice and in so. The doing and fair and was dealing guilty oppression $28 in damages. awarded million jury punitive the amount of modified the to reduce judgment The Court Appeal to the trial court for $15 to million and remanded damages punitive in all interest. The was affirmed recalculation of judgment prejudgment here, determined Talbot the Court of other As relevant Appeal respects. $2,596,600 for attrib- Transamerica damages was awarded properly to the construction contract. utable to Cates’s failure timely complete determined, are insur- on its conclusion that bonds surety court also based ance, Talbot could recover tort breaches damages such as obligees the court found dealing. Finally, covenant of faith fair good implied damages, punitive sufficient evidence of malice oppression support $15 million on federal due process but reduced the awarded amount grounds.
Discussion debt, default, for the “one to answer A is who surety promises another, (Civ. therefor.” as security miscarriage hypothecates property “ Code, executed bond is a ‘written instrument A surety debt, to answer for agrees in which surety principal ” default, v. Northwestern Na (Butterfield of the or miscarriage principal.’ 974, 280].) In (1980) Cal.Rptr. tional Ins. Co. [161 the surety remains while the risk of loss with principal, suretyship, in the or performance lends its credit so as guarantee payment merely America (Schmitt v. Insurance Co. North that the defaults. event 261].) In the absence of Cal.Rptr. 230 Cal.App.3d default, (Ibid.) has no obligation. construction to the relating performance case three
This presents questions in (the (the surety) and Transamerica Cates principal) bond executed by in the of Cates’s default under which Transamerica to answer event agreed First, (the its Talbot is Transamerica construction with obligee).3 liable under the bond for attributable contractually performance damages Second, Cates’s failure to June 1990? complete project by recover in tort for a breach of the covenant of faith and obligee good surety’s Third, fair in the context of a construction bond? if tort dealing available, $15 is the instant award of million in recovery damages punitive in nevertheless excessive trial that Trans- light parties’ stipulation america’ $1? s tortious conduct resulted in actual We shall damages address these issues in order.
A. Caused Liability by Contractor’s Damages Delay that, contract,
Transamerica does not under the construction dispute $2,596,600 Cates is liable to Talbot for lost (representing equity) caused Cates’s failure to the condominium June complete project by issue, however, At 1990. is whether Transamerica is liable under the perfor mance bond for those so-called “delay damages.” Transamerica disputes bond, view, because the its did not Cates’s guarantee prompt but assured merely of the condominium completion project the event of Cates’s default. The issue is one of contract interpretation. *11 bonds,
Performance like all contracts of are construed with surety, reference to the same rules of govern other interpretation types (Roberts 557, contracts. (1925) v. T. & Security S. Bank Cal. 566 196 [196 575, 673], Cal. 238 P. overruled on another in Peter ground Kiewit Sons’ Co. Pasadena 241, v. Junior City (1963) Dist. Cal.2d College 59 245 [28 714, Code, 18]; 2837.) 379 P.2d Civ. Cal.Rptr. To ascertain the nature and § extent of Transamerica’s terms liability, we look first to the express (Roberts Bank, bond. performance v. T. Security & S. Cal. at supra, 196 p. “ undertaken, Properly construction of a ‘does performance mean that, that words are to be distorted out of natural their meaning, by can be read implication, something into the contract that it will not reason bear; ably but it means that the contract shall be construed fairly with view to effect the it was object and to given accomplish purpose which ” 566, which it (Id. was designed.’ Sather Co. v. citing Banking Briggs (1903) 724, Co. 138 Cal. 352]); (1957) 730 P. Bloom see v. Bender 48 [72 793, 568]; Cal.2d 803 P.2d Ins. Employers City Co. v. [313 Pacific 145, (1984) 387]; Berkeley 158 152 Southern Cal. Cal.App.3d Cal.Rptr. [204 (1974) First Nat. Bank 4].) v. Olsen 41 241 Cal.App.3d Cal.Rptr. [116 It has long been settled in California that where a bond incorporates thereto, another contract reference “the bond and the contract express 3 bond, Although co-obligee party bank was under the it is not a proceedings. these 40 as a construed whole fairly reasonably be read together
should Bank, T. & S. (Roberts Security v. to the intention of the parties.” according States v. United Reporting Corp. Cal. at see Airlines (1995) Cal.Rptr.2d Co. Fidelity Guaranty Cal.App.4th [37 the of the to which 563].) To ascertain the nature and extent itself, the undertaking by “examine the language bound courts must has of the terms faithful agreement, performance the light [construction] Bank, Cal. at T. & S. (Roberts Security it of which guarantees.” 1045]; 566-567; Cal. P. Ryan see v. Shannahan pp. at pp. City Berkeley, supra, Ins. Co. v. Employers Pacific rule, be neither of a must 150-151.) obligation As general “[t]he than that of the more burdensome in amount nor in other respects larger Code, 2809.) (Civ. . . . .” case, and Talbot between Cates the construction contract In this time therein “of the all limits were specified explicitly contemplated factor further evi That time was a critical was of the Contract.” essence that “no other among things, clause denced in a contractual specifying, nor or implied express of conduct or between dealings parties, course the basis for . . . shall be or additions to Work of alterations acceptance that, The contract further stipulated the Contract Time.” . . . any change bond in to obtain a Cates was required Talbot’s request, upon million) for the ($3.9 security “as of the contract sum the full amount Documents.” of the Contract faithful performance terms that stated in clear Transamerica bond given be “held and (as surety) agreed and Transamerica (as Cates principal) million, for the $3.9 (as in the amount obligee) bound unto” Talbot firmly to bind themselves “jointly agreed Cates and Transamerica whereof *12 payment y bond, to the referred expressl the bond. The which and severally” by made part and reference “by [it] Cates and Talbot contract between Tran assumed by of the [t]hereof,” obligation that the condition declared said that, faithfully perform shall and promptly if samerica “is such [Cates] void; it shall otherwise Contract, be null and this shall obligation then bond further (Italics added.) The provided: and remain effect.” full force under be, to be in default declared by shall and “Whenever [Talbot] [Cates] thereunder, Contract, obligations having performed the [Talbot]’s [Talbot] default, 1) or shall promptly the remedy [H] may promptly [Transamerica] conditions, 2) terms and accordance with its ffl] the Contract in Complete its terms accordance with the Contract in for a bid or bids completing Obtain bidder and such conditions, a contract between . . . for arrange and and . sufficient funds pay . . as Work [Talbot], progresses and make available
41 the cost of the balance less but not completion price; other costs and exceeding, including Surety which be damages may for hereunder, liable the amount set forth in the first hereof paragraph [$3.9 (Italics added.) million].” whole,
Taken as a the bond and together construction contract underlying are and read as fairly Transamerica to answer for reasonably requiring suffered damages Talbot as a direct result of Cates’s failure to by promptly faithfully contract. the bond did not perform Although explicitly mention the subject delay Transamerica knew from the con- damages, contract, bond, struction which had been “made a that time was part” “of the essence” of the contract and that the bond’s was to purpose provide for the “faithful” security of the contract in the event Cates’s default. The bond itself made clear that Transamerica’s would obligation become “null and void” if Cates only were “promptly faithfully said Contract.” And perform notably, bond called for Tran- specifically samerica, remedied, if the default was not to either for complete arrange of the contract “in terms accordance with its completion conditions”— without for providing any From such exceptions. language rea- parties could sonably that failure to expect complete agreed project deadline would affect Transamerica’s to Talbot under the bond.4 liability the bond’s reference to Finally, “other costs and for which the be liable hereunder” also Surety may reflected an that the understanding bond Transamerica’s contemplated damages.
Courts in California have not hesitated to find sureties liable contractually for damages attributable to their principals’ delay construction performing 625, contracts. (E.g., (1917) Bird v. American Surety Co. 175 Cal. 631 [166 1009]; (1907) P. Tally 1049]; v. Ganahl 151 Cal. P. [90 Pacific Ins. Co. v. Employers City Berkeley, 150-152 pp. liable for [surety which included amounts occasioned liquidated damages Amerson v. Christman principal’s delay]; 261 Cal.App.2d accord, 378]; Cal.Rptr. School Dist. Intern. Fid. Downingtown v. (Pa.Commw.Ct. 1996) A.2d [finding similar lan- guage surety’s liability support delay damages].) however,
Transamerica, we should in Ameri- argues adopt reasoning can Home Assur. Co. Larkin (Fla. 1992) Gen. So.2d Hosp. *13 (American Home), held that a which could not be held liable for surety delay language 4The “terms and conditions” in the bond undermines Transamerica’s claim that the bond incorporated identify the construction contract the simply project it would have to complete if Cates were to default. 42 Home, unless the bond so In American the explicitly provides.
Florida Court that the of a the view usual Supreme expressed purpose bond is ensure the of the construction only completion performance the at (593 contract contractor’s default. So.2d In of that upon p. light limited the court construed bond that language obligated perceived purpose, the costs of either reasonable complete project pay that the bond completion “clearly explaining] merely guar- performance (Ibid. anteed the of the contract and more.” completion construction nothing Christman, 811].) analysis of Amerson v. 261 [rejecting supra, Cal.App.2d of that the bond in assuming, Even purposes argument, performance American Home similar the bond at issue language contained substantially here, are not we Florida court to have viewed the appears persuaded. of a bond and to have determined purpose performance narrowly surety’s to the without reference construction contract.5 While obligations underlying reflect in Florida A (cf. that the rule L & v. Southern Contracting 106, 112, 1994) (5th Concrete Services Cir. 17 F.3d fn. [commenting bond, Home turn but American did not on of the language particular stated to be a of obviously general rather what was intended proposition law]), California holds v. firmly (Ryan established otherwise. precedent Shannahan, Bank, 102; Cal. at T. supra, Security Roberts & S. p. 566-567; Cal. Corp. at Airlines v. United States Reporting pp. Co., at Fidelity Guaranty Employ- Cal.App.4th Pacific 150-151.) Ins. Co. v. Berkeley, supra, ers City pp. Transamerica further that if Talbot had wanted a suggests guarantee Cates’s then it could and should have used another available covering delay, “damages standard form bond that the would expressly stating pay (See of the delayed caused Contractor.” nonperformance performance Architects, Here, however, of the A312.) Am. Inst. AIA doc. No. the terms and the contract reflected a guarantee. construction such incorporated is of no That the form was not used precise language foregoing consequence.6 5Hence, underlying specified the court note whether that time was did not significant. essence or whether such a clause would have been 6Indeed, purport note are other available bond forms that to assure we there standard (“work general contracted between a contractor and an owner performance work bonds) be necessarily guaranteeing underlying that the contract will
performance” without Conners, (See Surety Fidelity Practice promptly faithfully. Cal. Bond performed 2.5, 1969) (Conners) (“Performance (Cont.Ed.Bar [compare example A Contract” id., 7.1, 7.5, bond)]; bond) (“Performance work example pp. §§ B of Work” [a with “guarantees bond is limited form bond” because it the “most guarantee each and performed” perform “does not that the work will be but will
43 the Faith and Fair Dealing Breach Covenant Good B. Implied Breach 1. Current Law Tort Remedies Regarding for California it faith and fair now is well established that a covenant By good Corp. v. Interactive Data (1988) (Foley is contract. dealing every implicit 654, 211, Murphy 47 683 v. (Foley); Cal.3d 765 P.2d Cal.Rptr. [254 373] 937, 424, Allstate Ins. Co. (1976) 17 553 P.2d Cal.3d 940 Cal.Rptr. [132 559, Brown v. 584]; 878].) Superior Court (1949) 34 Cal.2d 564 P.2d [212 the essence of covenant is that neither to a contract will do implied party the of the injure other to receive the benefits of the anything right contract.7 452, (Silberg Ins. Co. (1974) v. Cal.3d 460 [113 California Life Court, 711, Brown 1103]; 521 P.2d 34 Cal.2d at Superior supra, v. Cal.Rptr. 564.) p.
Because covenant of faith fair a good is dealing essentially that term aims to effectuate the contractual intentions of parties, for its breach has almost been to contract “compensation always limited (Foley, Freeman rather than supra, tort remedies.” 47 Cal.3d at see Mills, Inc. v. Belcher Oil Co. 85, 420, (1995) 11 Cal.4th Cal.Rptr.2d [44 Hunter 669]; Inc. 900 P.2d Up-Right, 6 Cal.4th (Hunter).) 864 P.2d At court Cal.Rptr.2d this present, recog 88] nizes one to that rule: tort available only exception general remedies are a breach of the covenant (Hunter, cases insurance involving policies. 1180-1181; at Foley, Cal.4th 47 Cal.3d In the pp. at an insured setting, recover not otherwise policy may damages contract”]; Sobel, every Delay Chargeable term of the Damages Owner Bond to Performance Surety (1984) (Sobel) 21 Cal. Western performance L.Rev. work bond “is [The narrower than usual guaranteeing bond faithful performance contract because it necessarily guarantee every does not the principal perform that will each and term of the (Fn. omitted.)].) contract.” agreed Had the parties language to a bond with more similar to a bond, arguments work obliga- Transamerica’s for a narrow of its construction may (But tions Employers City Berkeley, supra, have had more force. see Ins. Co. v. Pacific [finding work performance expressly that a that referred to and bond incorporated containing a liquidated damages construction contract a sufficient clause was recovery liquidated damages allow principal’s occasioned delay].) light In may delay, of our conclusion that liable for need Transamerica be held Cates’s we damages ground decide whether the award on the upheld be alternative Transamerica’s breaches of the bond caused issue. where, 7Although obligee certainly beneficiary as an qualifies intended of a here, bond, obligee obligee right the bond names the confers on the upon of action not, Here, obligee strictly party argued has not speaking, to the bond. Transamerica asserting such bars Talbot of action for of the covenant circumstance from cause breach good dealing. fair faith and .
44 action, in a as damages available contract such emotional distress resulting (see (1973) from insurer’s v. Ins. Co. Gruenberg bad faith conduct Aetna 566, 480, 1032]) 580 510 and 9 Cal.3d P.2d Cal.Rptr. punitive [108 fraud, Code, (see if has been or the insurer Civ. there malice by oppression, 3294). this As our tort context is acknowledge, recovery particular decisions considered for a of reasons. Unlike most other appropriate variety policy services, characterized contracts for an insurance goods policy adhesion, (Foley, elements of interest fiduciary public responsibility. 684-685, 47 Cal.3d at v. Mutual Omaha Ins. Co. supra, citing Egan pp. of 691, 809, 24 Cal.3d 620 P.2d see (1979) (Egan); 820 Cal.Rptr. [169 141] 668, 659, (1969) Ins. Barrera v. State Farm Mut. Automobile Co. 71 Cal.2d 106, 674].) In fn. 5 456 P.2d are Cal.Rptr. general, policies [79 rather, are obtained for peace purchased profit advantage; they (See mind in the event of an accident or other security catastrophe. 819; 47 24 v. Foley, supra, Cal.3d at Cal.3d at Crisci supra, p. Egan, p. 425, 13, 173].) (1967) Co. 434 426 P.2d Security Ins. 66 Cal.2d Cal.Rptr. [58 Moreover, its an insured faces “economic dilemma” when insurer unique (Foley, and fair supra, breaches covenant of faith implied good dealing. 692.) 47 Unlike other contract who seek typically may Cal.3d parties breach, an be in the in the event of a insured will not recourse marketplace able for a loss already to find another insurance company willing pay (Ibid.) incurred. addition, insurer duty
In we have observed that tort and of is based on its insured’s defense settle ordinarily assumption Co., (Crisci Ins. 66 Security ment of third claims. negotiations party 432, 3.) obligates Cal.2d at fn. of those assumption responsibilities its as to the welfare of insured insurer to at least much consideration give it not to the insured of the benefits to its own interests so as gives deprive (1958) Co. 50 (Comunale of the insurance v. Traders & General Ins. policy. 883]; 24 see Egan, Cal.2d 659 P.2d 68 A.L.R.2d [328 Cal.3d at p. of tort availability this court has never recognized
Significantly, in the context of a construction remedies breaches occurring (See T. M. bond or other so-called “contract & any suretyship.” Pacific P. (1923) Cal. 285 Bonding Co. v. & Ins. Co. 192 [219 972] [a is a “contract of the faithful given guarantee Ins. It Court of decisions—General three only Appeal suretyship”].) appears (1985) Assn. Cal.App.3d Co. v. Mammoth Vista Owners’ [220 (Mammoth Vista), Trust Co. v. Mortgage Cal.Rptr. 291] Pacific-Southern (1985) Insurance Co. North America Cal.App.3d Cal.Rptr. [212 Loan Assn. (Pacific-Southern) Downey Casualty v. Ohio Savings 754] Ins. (Downey)—have Co. Cal.Rptr. 835] however, cases, addressed tort claims in the Those setting. pro- suretyship *16 vide little guidance. Vista,
In Mammoth
one of the three
involved a
only
decisions that
bond, the
that
construction
Court of
determined
a surety
Appeal
was
in tort for
of Insurance Code section
subject
liability
violations
790.03,
(h),
subdivision
and
which
unfair
claims settle-
prohibits
deceptive
ment
in the
business
insurance. Mammoth
does not aid
practices
Vista
In
Talbot’s
the first
Vista
Mammoth
refrained from
position.
place,
expressly
a
whether
to a
deciding
subject
common law tort action for breach
(See
the covenant of
and
good faith
fair
174
at
dealing.
Cal.App.3d
pp.
Second,
822-827.)
of tort
in the
availability
recovery
insurance policy
cases
from
derives
policy considerations
to the
charac-
pertaining
particular
teristics of such contracts and the
between the
relationship
contracting
it
parties;
has never been
the existence of
predicated
legislation
upon
the insurance business.8
regulating
Mammoth Vista’s
has
Finally,
reasoning
been undermined
Moradi-Shalal v.
Fireman’s Fund
Companies
Ins.
(1988)
116,
58],
The other two Pacific-Southern, 166 Cal.App.3d 1072, and Downey, supra, 189 likewise are Both Cal.App.3d unhelpful. bonds, bonds, cases involved fidelity and the appellate courts there found sufficient of bad simply evidence faith malicious conduct the defendant sureties. (Pacific-Southern, supra, 166 Cal.App.3d Vista, Mammoth 8In Appeal wrong the Court remarked that actionable contained in 790.03, (h), Insurance section “merely Code subdivision a was of the tort of codification implied (174 breach of the faith good dealing applied covenant of and fair to insurance.” however, Cal.App.3d at This and courts recognized, other have that the statute does 782, Group Coleman v. (E.g., (1986) not mirror the common Ins. law. 41 Cal.3d Gulf 77, Cal.Rptr. [holding 718 P.2d party [226 62 A.L.R.4th that a third claimant could 1083] Royal not maintain a Globe against though breach of covenant cause of action an insurer even Superior Ins. Co. v. (1979) Court Cal.Rptr. 23 Cal.3d P.2d had [153 329] Code, 790.03, (h), party construed Ins. § subd. allow third actions insurers (1989) Zephyr Superior Park handling settling practices]; unfair claims Court Cal.App.3d [noting 838 & Cal.Rptr. formerly permitted fn. 6 that actions 106] Code, 790.03, (h), under Ins. in provided § subd. some a for relief circumstances basis which claim, claims].) would party not have existed under a common law bad faith even as to first 715-716; 1096-1097.) at While Downey, pp. pp. rule that insurers unreasonably both decisions recited general acting tort, in bad faith toward their insureds are courts subject assumed, the absence on the that the of litigation point, apparently bonds, rule in the context of bonds. applied fidelity Fidelity foregoing however, an insurer are contracts between and an two-party employer dishonesty. It is protect against employee generally recognized fidelity contracts than surety bonds resemble traditional of insurance more bonds relationship surety, between involving tripartite 81-131; al., 81.33[3], (See Torts 1 Couch et Cal. obligee. Levy 1:13, 1:16, 1-25, (3d 1995) (Couch) on Insurance ed. 1-29 pp. [fidelity §§ one of for the to the essentially indemnity employer” bond “is loss personal (fns. omitted)].) “ *17 that ‘a firmly It is established the insurance cases policy represent ” (Freeman of contract & from traditional law.’
major departure principles Mills, Co., 94, at supra, Foley, supra, Inc. v. Belcher Oil 11 Cal.4th p. citing Thus, care 690.) at we have cautioned courts exercise in great 47 Cal.3d p. “ ‘the in whether to extend taken those considering approach exceptional ” at In (11 cases’ to ‘another contract Cal.4th setting.’ Foley, 654, recovery 47 Cal.3d this court of tort an rejected concept supra, of fair breach of the covenant faith and implied good dealing. employer’s that is similar We concluded “the employment relationship sufficiently that of insurer and insured to warrant extension of judicial proposed about tort in concerns eco countervailing additional remedies view law, of tort and contract nomic traditional policy stability, separation already and . . . the numerous terminations protections against improper (Id. 693.)9 at p. afforded employees.” thus is far here whether question exceptional approach the insurance should be extended to setting
reserved for breaches in policy variety Foley, in a Appeal have considered this issue 9Subsequent Courts remedies the context settings unanimously have refused sanction tort outside (1991) (E.g., Superior Cal.Rptr. 678 policy. Copesky Cal.App.3d v. Court 229 [280 insurance overruling holding in Co. v. United [bank/depositor], prior its Commercial Cotton 338] Cotton); (Commercial (1985) Cal.Rptr. Cal.App.3d Bank 163 511 551] [209 California Credit, (1990) Cal.App.3d Inc. 222 1371 Security [272 v. Business Careau & Co. Pacific borrower]; Capital etc. Fund Wholesale Electric Cal.Rptr. Trustees [bank/commercial 387] Brothers, (1990) Cal.App.3d Cal.Rptr. 221 617 [270 566] [stockbro Lehman Inc. v. Shearson (1989) ker/investor]; Cal.App.3d Cal.Rptr. Fargo v. Bank 213 465 [261 735] Price Wells 511, Cotton, customers], and Bar criticizing Cal.App.3d 163 Commercial [bank/loan 16]; (1986) Cal.App.3d Cal.Rptr. Martin v. U-Haul Co. America 1362 [229 rett v. Bank of contract]; [involving (1988) dealership see Cal.Rptr. Cal.App.3d 17] Fresno 396 [251 Credit, Inc., Security Business generally, Careau & Co. v. Pacific 1399, denied].) were [listing where tort remedies fn. 25 additional decisions a bond to assure on given breaches in the context of a performance essence, that construction contract.10Talbot a argues, performance breaches bond context form of insurance and that in the remedies that are available in policy same justify extraordinary Transamerica, hand, cases. bonds are on other argues different from insurance fail to warrant similar fundamentally policies treatment. We to consider these proceed points. Code
2. Inclusion Insurance Suretyship observes, As Talbot is listed as a class of correctly “Surety” separate Code, 100, (Ins. (5).) insurance under the Insurance Code. Perfor- subd. § Code, (Ins. (a).)11 mance are listed bonds within class. subd. § “a The Insurance Code defines “Insurance” to mean contract loss, one whereby indemnify undertakes to another or damage, Code, from arising contingent (Ins. event.” unknown § added; id., italics see also “insurer” as the who [defining “person § “the undertakes to indemnified”].) another insurance” and “insured” as indemnify person contrast, In one surety bond is a prom whereby debt, default, Code, ises to for the (Civ. answer of another. miscarriage 10, 2695.1, (c); Cal. Code Regs., tit. subd. Internat. Washington § Ins. Superior Co. v. Court Cal.Rptr.2d Cal.App.4th 282], Airlines States citing Reporting Corp. Fidelity Guaranty United *18 Co., Therefore, 1464.) a 31 at as to an supra, Cal.App.4th surety’s p. posture (See on a is not one obligee performance bond of “indemnitor.” necessarily 678, (1977) Co. v. Leatherby City Ins. 76 686-687 Cal.App.3d [143 of Tustin 153]; cf. Airlines v. United Cal.Rptr. Reporting Fidelity States Corp. Co., Guaranty 31 at for supra, Cal.App.4th 1464 p. ensuring payment [bond airline tickets not ato insurance equivalent liability policy].) is included within the Code a class of
Although surety Insurance insurance, it long has been settled that the in surety arrangements parties 10Surety contracts take a different number of forms. In addition to construction bonds and bonds, fidelity surety guarantee, whereby of a another common form is loan one (the person surety guarantor) essentially agrees (the or for the default another to answer of (the principal) obligee). public to a lender for the required protection Bonds also are of private occupations, notary publics applicants various industries and as well as for for agencies public analysis subject certain or positions. We restrict our in this case to the of construction bonds. 105, (a), surety 11Insurance Code section subdivision states that insurance includes “[t]he guaranteeing guaranteeing behavior and the of of persons of of contracts (including executing undertakings guaranteeing required bonds and or in all permitted allowed), policies other than insurance proceedings by actions or than law and other trust, payments constituting of a mortgage, secured deed or other instrument lien or added.) (Italics charge on real estate.”
48 do attend the insurance have certain and defenses that rights typical instance, has no of right subrogation For an insurer relationship. generally even if the negligence insured for covered losses insured’s however, A is entitled to reimbursement contributed to such losses. surety, to the from its for amounts obligee upon principal’s principal paid Code, 2847, 2848; (Civ. Internat. Ins. v. Supe default.12 Co. Washington §§ Court, v. Insurance Co. rior at see Schmitt supra, Cal.App.4th Moreover, America, 256-257.) is at a surety North supra, Cal.App.3d pp. bond defenses entitled to as defenses to of a all surety assert payment Code, 2810; (Civ. v. duPont Leasing available its U.S. Corp. principal § 444 P.2d (1968) 69 Cal.2d Cal.Rptr. 65] [“where [70 Flickinger on the neither is the guarantor”]; not liable obligation, principal 214]), as Co. 45 Cal.2d P.2d v. Swedlow Engineering Code, [allowing as its defenses Civ. (e.g., well own independent § “if act of the creditor without [obligee], exoneration of a surety by any in any is altered obligation consent the surety original principal and surety substantive surety respect”]). unique aspects relationships Code, (See are in a number of Civil Code Civ. bonds addressed provisions. 2787-2856 duties of sureties [rights generally].) §§ these distinctions relevant a variety Courts have found and other instance, court, determined that the public contexts. One policy Code, 533) (Ins. is not insurance for willful denying coverage wrongs bond to an on a works payment pay offended requiring public Internat. Ins. (Washington interest based on contractor’s conduct. penalty Court, 989-990.) Another at Superior Cal.App.4th pp. Co. v. motor has under a concluded that a no duty protect principal under insurance as if the were an insured vehicle dealer’s bond America, (Schmitt v. Insurance Co. North policy. ensuring A held third court particular performance to a policy for airline tickets was not equivalent
payment (Airlines Fidelity v. United States that covered theft losses. Reporting Corp. *19 Thus, Co., while Cal.App.4th p. & Guaranty is no for there a class of insurance regulatory purposes, listed as surety other forms of insurance. that in material from respects” doubt it “differs 1243, (1995) Ins. Co. v. 11 Cal.4th (Amwest [48 Wilson Surety Couch, 12, (Amwest); see generally, P.2d Cal.Rptr.2d 1112] 1.01[4], 1:18, 1-31; 1-9 Cal. Insurance Law Practice § § Law).) (California Insurance 2847, Code, (see right §§ law Civ. 12Although implied have a of reimbursement sureties
2848), principals, their of indemnification with they execute written contracts frequently in was done this case. law, and the regulations Consistent with the Civil Code case promulgated to the note of the Insurance Code make pursuant special “unique relationship the or obligee which exists under a bond between the insurer surety [surety], 10, 2695.1, (Cal. subd. and the Code tit. beneficiary, Regs., principal.” § (c).) also are in from traditional They distinguishing explicit suretyship insurance, in insurance: “In contrast to other classes of surety debt, a or miscarriage volves to answer for the default a promise principal who has to debt or primary duty discharge obligation pay (Ibid.; who is bound to see also Code tit. indemnify insurer.” Cal. Regs., 2695.2, subd. to exclude (j) [defining “surety policy” § “[i]nsurance “bond”].) bond” or
In recognition of the distinctions between and traditional insur- suretyship ance, the sureties from the set of standards regulations exempt promoting fair and settlement of equitable claims insurers instead prompt, that sureties are a set provide governed by of claims separate handling (Cal. 2695.1, settlement (c).) standards. Code tit. While Regs., subd. § some of the standards relevant to sureties are identical or similar those to 10, §2695.10, (a) insurers Code Cal. tit. applicable (e.g., subd. Regs., id., [prohibiting claims discriminatory (c) settlement subd. practices]); [re- written notice to quiring claimants need for additional time to determine id., denied]; whether a claim (d) should be or accepted subd. [requiring of a diligent investigation claim]), sureties have been from excepted many instance, those standards. For a since must sort surety typically through conflicting claims of and the do obligee, standards regulatory not hold a same for surety 40-day insurers period applicable claims time accepting but that more denying recognize substantially may 10, 2695.7, be (b) Cal. Code tit. subd. appropriate. (Compare Regs., § [40 id., 2695.10, days (b) sureties].) with subd. More days insurers] § significantly, is not to the from standard insurers subject prohibiting to settle a claim a settlement offer is “unreason- attempting by making 10, 2695.7, id., low.” ably Regs., Cal. Code tit. subd. (Compare (g) with § addition, 2695.10.) In is not to the standard subject § requiring insurers notice to provide written claimants statute unrepresented any limitation other time used to be defeat period requirement 2695.7, id., claim. (f) Cal. Code tit. (Compare Regs., subd. with § 2695.10.) the fact that surety bonds have been from insurance Despite distinguished law, effect, and decisional Talbot policies statutory, regulatory argues, *20 that the tort remedies for breaches in are setting appro- are regulated because bonds and as a class priate simply surety categorized 100, (See Code, (5), of insurance under the Insurance Code. Ins. subd. §§ 105, (a).) subd. We disagree. observed,
As in inclusion of one text the field has surety suretyship “[t]he the for of the surety in Insurance Code is derived from the need control and the natures of a state does not that underlying business agency imply 1.4, 6.) (Conners, and are the same.” insurance suretyship supra, p. § and, is to regulate branch free legislative suretyship, basis, and bonds to adhere to may a rational sureties assuming surety require to and the same and that insurers insurance regulations requirements apply clear, however, law makes that tort remedies for Case policies.13 the breach of the covenant are in insurance policy setting implied permitted for reasons to the distinctive nature of such contracts policy pertaining (See the 47 Cal.3d contracting Foley, supra, the between relationship parties. 684-685; 819; at Co. v. Egan, Security at 24 Cal.3d Careau & pp. supra, p. Credit, Inc., 1395-1399; at Mitsui Business supra, Cal.App.3d pp. Pacific 726, (1989) 212 730-731 Superior Bank v. Court Manufacturers Little, has been on the 793].) significance if any, placed Cal.Rptr. that are the Insurance Commissioner and circumstance insurers licensed Moreover, are to Insurance Code while insurers regulations.14 subject violating are to administrative sanctions for statutory prohibitions subject Code, (see unfair and claims settlement Ins. practices deceptive objectives: 13Generally, regulation designed to one or more of three main insurance serve insurers, (1) marketing discourage overreaching by regard practices and principally to with to (2) (or discrimination); solvency arrangements (e.g., rebating, solidity) to assure imprudent management of its guard against consequences insurers of an insurer’s resources; (3) rating equitable produce equitable classifications that will assure providing charges purchasers while the insurers with fair return premium individual Widiss, (Keeton Regulation, & undertaken. Insurance Law Insurance risks 8.2(a), (Keeton Widiss).) & pp. § 938-939 Amwest, supra, on in 11 Cal.4th in which places emphasis 14Talbot much a footnote casualty generally insurance.” “[sjurety bonds are considered form of we commented footnote, Widiss, 27.) 1.5(d), (11 citing That supra, p. Keeton & p. § Cal.4th at fn. bonds, however, policies, guidance no on the whether like insurance offers issue covenant. Amwest concerned voter-enacted implied warrant tort remedies for breach Code; regulation the Insurance we concluded provisions initiative measure that added rate authority exempt surety companies those Legislature attempting to from exceeded its relying exemption purposes further the of the measure. In provisions because such an did not casualty encompasses & treatise’s upon the Keeton Widiss observation bonds, meaning that the disagree did not with the treatise’s additional observation we (See beyond & far its traditional sense. Keeton “casualty expanded term insurance” has been Widiss, 27; id., 1.) 1.5(d), 8.3(a), though & fn. But even Amwest p. see supra, § also that circumstance does application, measure had broad concluded that initiative repeatedly relationships that contractual emphasized control have inquiry here. We Mills, (See Inc. v. only circumstances. Freeman give exceptional rise tort Co., Foley, p.at 47 Cal.3d Belcher 11 Cal.4th Oil
51
790.03,
790.035, 790.05, 790.07, 790.09),
violations
(h),
statutory
subd.
§§
(Moradi-Shalal
do not
of action for tort damages.
rise to
give
private right
287.)
v.
Ins.
46 Cal.3d
Companies,
Fireman’s Fund
supra,
should turn on
In
whether the
of tort remedies
assessing
availability
insurance,
of
the Insurance Code’s inclusion of
contracts as class
we
(1951)
are
Barr
P.2d
guided
Estate
506
by
Cal.App.2d
[231
876]
of
155,
(Barr)
(Bankr.
1993)
(9th
and In re Pikush
Cir.
157 B.R.
affd.
Cir.
9th
1994)
(Pikush).
In
the
issue was whether
supra,
Cal.App.2d
proceeds
an
to the named
annuity
insurance
paid
company
beneficiary
on the death of the annuitant
under California’s insurance
qualified
exemp-
tion to
in
inheritance taxation as
the Revenue and Taxation Code.15
provided
Even
section 101 of the Insurance Code
described the term
though
explicitly
“life insurance” as
“the
including
granting, purchasing,
disposing
annuities,” the
court
Barr
that resolution of the
recognized
exemption ques-
Code,
tion turned on the construction of
Revenue
and Taxation
which
used the terms “insurance
“life
insurance” without reference to
policies”
“The
contracts:
classification of annuities as
annuity
life insurance for the
of the Insurance Code
its
purposes
does
classification as insur-
require
Code,
ance for the
of the
Revenue
Taxation
purposes
objects
which are
(104
different.”
totally
see also
Cal.App.2d
Helvering
Le Gierse
Similarly, Panel Ninth Bankruptcy Appellate Pikush, Circuit determined 157 B.R. that a debtor under supra, 7 of the chapter Code could not claim three Bankruptcy single-premium contracts as insurance Code of annuity policies Civil exempt pursuant 704.100, Barr, (c). Procedure section subd. on Relying part supra, 506, the found that the that the Cal.App.2d appellate circumstance panel Insurance Code “chooses to license and regulate ‘granting, purchasing, of annuities in a certain should disposing’ manner have no on bearing interpretation (Pikush, California’s laws.” exemption [debtor] B.R. at Barr, “[ijnsurance 15As quoted by provisions policy” relevant code defined to mean “a policy proceeds life or accident which are payable insurance reason death of Code, 13721) (Rev. the insured” provided payments proceeds & Tax. former taxes, (id., from policies exempt subject were from inheritance limitations certain 13723, 13724). (Barr, 507-508, *.)
former at pp. §§ fn. *22 is The same here with force. reasoning applies equal Although suretyship insurance, does that a in the Insurance Code a class of it not follow listed as the bond to of insurance under common law policy equates does common law theories of Nor it follow the liability. unique policy context reasons which remedies in the insurance extraordinary justify policy a com are for bonds the similarly guaranteeing performance implicated short, the inclusion of surety arrange mercial construction contract. In mere Insurance in the Code not be determinative of the issue before ments should Rather, in we must evaluate the considerations recognized us. whether policy the in of a the common tort remedies the context availability law support 693.) bond. 47 Cal.3d at (Foley, performance supra, p.
3. Considerations Policy in the As our tort considered recovery decisions explain, appropriate ele by because such contracts are characterized policy setting and fidu ments of adhesion and interest bargaining public unequal power, 684-685; 24 47 Cal.3d at (Foley, Egan, supra, ciary responsibility. supra, pp. Co., 820; Farm Automobile supra, Cal.3d at see Barrera State Mut. Ins. p. v. Cal.2d at fn. now consider whether construction perfor We p. mance bonds are marked such elements. by
a. Adhesion Power Unequal Bargaining insureds insurance on Unlike the vast who must majority accept basis, decide which they “take-it-or-leave-it” the form “obligees can terms an from the thus which they provide will accept principal, require claims, to fees and incentive such timely pay attorneys’ (Shattuck, Bad Does It Alabama? Apply interest.” Faith: Sureties 8; Conners, 1.5, Trans- (Shattuck); Ala. see supra, p. Law. (Colo. 1997) (dis. P.2d Brighton america Premier v. School Kourlis, of the bond J.).) If the does with terms obligee agree opn. the underlying it consent a modification of secured the principal, a different end and seek bargaining altogether principal contract may it to a bond with resources and enable procure whose financial qualifications Comment, Are Sureties (See Surety Contractors: generally, terms. acceptable 469, 484.) (1990) 22 Ariz. St. L.J. Liability General Insurers? Becoming Hence, power negotiate obligees generally possess ample bargaining bond terms. favorable con-
Moreover, underlying bonds typically incorporate contract, have been negotiated the terms and conditions of which struction Because from the surety. any without obligee input bond are the nature and extent of a under surety’s obligations Shannahan, (Ryan determined with reference to such terms and conditions Bank, & S. Cal. 209 Cal. at Roberts v. T. Security 566), do not bonds reflect adhesion and unequal bargaining power that are inherent insurance policies.16 bonds, here, including one at issue contain
Finally, many express defenses, alter- right any waiver certain to notice e.g., suretyship *23 Code, 2856; (See or of time the ation extension made Civ. see obligee. § Sobel, Cal. 131 bonds 21 Western L.Rev. at most supra, today p. [“In sureties waive notice of alterations or of time for performance extensions contractor.”].) the owner to the waivers given by may Such effectively the of harmful contractual deprive against protection potentially Sobel, (See modifications the 21 Cal. obligee. Western L.Rev. at supra, p. 132.) that,
Consideration factors us to conclude unlike an foregoing leads insurance the bears bond no indicia adhesion policy, typical performance or disparate that tort bargaining power might recovery by obligee. support
b. Public Interest and Fiduciary Responsibility Our decisions observe that tort remedies are for breaches in appropriate the insurance context because insureds do not seek to obtain policy generally rather, commercial advantages by seek purchasing policies; they protection 684; (See 47 at 24 against calamity. Foley, supra, supra, Cal.3d p. Egan, 819; Co., at Security 434.) Cal.3d Crisci v. Ins. p. Cal.2d at But supra, p. the while insurance an insured accidental and typical policy protects unforeseeable losses caused a or generally by calamitous event catastrophic death, fire, flood, such as the of a construction disability, general purpose bond “is to the creditor performance protect owner/obligee] against [the danger that he will be unable to collect from debtor general [the failure of the contract.” contractor/principal] any (Regents University Acc. & Indem. Co. of California Hartford 197]; Cal.3d 581 P.2d see Schmitt v. Insurance Cal.Rptr. America, North at Co. supra, p. surety, [the “ essence, lends its credit so as to in the ‘merely event guarantee payment 16It significance published by is of no that the terms here on a appeared bond standard form (AIA). organization, suggests, the American That as Institute Architects its name is not one promulgates companies. generally that exists to advance interests of The AIA its pursuant encourages variety drafting policy input forms to an inclusive that from a of outside al., (See Design/Build AIA Standard 1996 Editions of groups et individuals. McCallum Agreements (Oct. 1996) 38.) Form 16 Construction Law. ” Law, contract];
that the defaults’ on its 1 Cal. Insurance supra, principal bond, then, 1.01[4], [same].) In a 1-10 p. requiring “seeks the commercial a contract obligee advantage obtaining with (Shattuck, security.” which additional financial provides 246.) Ala. Law. at p.
In this that is a 47 Cal.3d court indicated Foley, supra, service in sense individuals contract with insurance “quasi-public” in order to obtain from companies protection “specifically potential specified (Id. words, isolation, economic harm.” While our read in p. might a could service because suggest suretyship qualify quasi-public be viewed as a form economic the context protection, offering of our discussion indicates otherwise. faith claim that when an insurer in bad refuses
Foley emphasized pay limits, offer its cannot turn to settlement within insured accept policy to find another insurance for losses marketplace company willing pay Hunter, (47 incurred. Cal.3d at see 6 Cal.4th at already *24 discussion, however, “eco 1181.) distinguished Our unique type the of a nomic dilemma” from sort of situation in which breach ordinary the commercial contract have adverse financial to may merely significance 692.) As court (Foley, 47 Cal.3d at another nonbreaching party.17 supra, p. it, failure or to is a refusal put contracting party’s unjustified perform “[a] contract, breach of and cannot be transmuted into tort liability by claiming (Arntz that the breach affected the business.” Con detrimentally promisee’s (1996) v. St. Fire Marine Ins. Cal.App.4th Co. Paul Co. 47 tracting 888].) 479 Cal.Rptr.2d [54 a breach the covenant might construction
Although surety’s implied have financial for a the very significance well obligee, does not the same economic dilemma as an insured. In contrast obligee face to an the insurer for in the only insured who can look to typically recovery loss, the an also a right recovery against event of a covered has obligee one, insurance, That is not for unlike which a hollow right principal. losses, the do not write bonds sureties certainty contemplates and obligation for the who unable principals appear perform primary (Conners, insufficient are to meet the of default. contingency whose assets 1.4, 6-7; Cushman, and Private Con- Surety Bonds on Public pp. § 649, 652-653; Leo, see (June 1960) 46 A.B.A. J. Projects struction “If a dealer gave following example point: the illustrate our small contracts 17We business, goods large are vital to the small dealer’s a breach supplier, goods from a those by the or to supplier dealer significance employed the have financial individuals situation, concluded, (Foley, supra, 692.) we p. at In such a the dealer himself.” 47 Cal.3d (Id. 692-693.) pp. only appropriate. permitting remained (1992-1993) Construction Contract and Some Surety Suretyship Defenses bonds, loans, (Leo) Wm. & L.Rev. like are Mary [“contract written based on the financial on the idea integrity principal, premised (fn. omitted)].) that no losses should follow” an Accordingly, obligee’s right is, default, in most cases of recovery against meaningful principal right. addition,
In contract with others in the obligee may marketplace obtain of its construction and thereafter recover the completion project (Cf. reasonable cost of completion surety. v. Phoenix etc. Co. P. Bacigalupi Bldg. Cal.App. effect, then, 892].) In breach of surety’s covenant threatens to implied create no different a dilemma than that default on posed by principal’s construction underlying contract.
Moreover, it is common for construction contracts to contain terms that an owner’s construction funds. protect Owners and contractors generally structure their contracts to for installment to the contractor provide payments as the work as the reaches progresses, typically work specified stages Cal.Jur.3d, (See completion.18 generally, and Construction Building Con- tracts, 37, 54.) “This adds incentive for the contractor payment system work reduces the risk of complete for the owner. nonperformance A of funds held until percentage of all of the work is called completion and is intended both to retainage reduce the risk of nonperformance by contractor and to assure the of the work in accordance completion with (Leo, contract terms.” Wm. & L.Rev. at Mary Progress *25 and serve to payments retainage reduce both the and the owner’s surety’s (Ibid.) risk.
Thus, if an owner avoids the contractor as the overpaying project then the owner should progresses, have funds available to toward apply Indeed, in the completion event of the project contractor’s default.19 bond, when the a surety, to undertakes to pursuant the itself complete project so, or funds to enable another contractor the expends to do is entitled surety to reimbursement (See from the Ins. Co. v. retainage. Leatherby City of 18Here, Cates and Talbot Agreement executed a “Standard Form of Between Owner and provided progress payments 30-day Contractor” which to Cates in intervals. addition, recently 19In a enacted provides right statute that an has an owner unwaivable to withhold from the payment statutory percent any subject final the maximum of 150 of amount Code, 3260; (Civ. Cal.Jur.3d, to a bona fide dispute. generally, supra, Building § see Contracts, law].) p. [recognizing Construction protections § similar discussed in case case, In this the contract similarly contemplated withholding between Cates and Talbot the of payments to protection. Cates for Talbot’s
Tustin, Likewise, if the fails to supra, p. surety bond, own, under the on look to the may, its owner/obligee perform and use to find a contractor sums unexpended marketplace replacement if, then, for that contractor original to contractor’s services. Even pay because an should have in its insolvency, pos- defaults owner typically the value of the uncom- roughly session funds approximate it be for an owner work. should not common to pleted Consequently, an after a confront the sort of economic dilemma that insured faces cata- accident, to loss or or for an to be vulnerable a particularly owner strophic inaction.20 surety’s assertions, to Talbot’s there is little basis for
Contrary concluding is between a an relationship surety obligee fiduciary quasi-fiduciary to risk of in nature. a bond serves shift the Although from to the the conditional obligee surety, nonperformance principal’s to the defenses of the nature of the and its assert surety’s obligations right from the insurer-insured distinguish surety-obligee relationship principal from fact that insurance sureties relationship. regulations exempt many the fair settlement standards issuers claims applicable does is the conclusion that a surety consistent with supports policies with to an obligee. stand fiduciary quasi-fiduciary position respect 10, 2695.1, (c); Regs., Cal. Code (Cal. Regs., e.g., compare Code tit. subd. § id., (f), subds. with is not (g) surety obligated tit. 2695.10 § [a defenses and not barred from obligee time-bar notify potential low”].) offers that are “unreasonably settlement making tort in the context basis Additionally, recognizing liability insurance, i.e., insured’s defense the insurer’s liability assumption (Crisci claims Ins. Security and of settlement of third negotiations party Co., fn. & General 66 Cal.2d at see Comunale v. Traders Co., 660), transferable to the Cal.2d at is not Ins. insurer, In to a bears no responsibility contrast setting. third and has right represent defend an claims no obligee against party Thus, bond. to the extent such interests virtue of the the obligee’s *26 in the rise to give quasi-fiduciary obligations fiduciary responsibilities a their absence in setting, surety arrangements supports liability result. different securing replacement costs a obligee may that an incur additional or increased in 20It is true not, is and should occur a contract breached typically But such costs whenever
contractor. context, recognized posing be as any context or in other either in the construction dilemma. economic c. Tort Recovery Consequences Allowing of School, 940 P.2d In Transamerica Premier v. Brighton supra, to tort held that sureties for subjecting Colorado Court Supreme sureties breach of the covenant commercial to handle “compels implied that, (940 353.) claims P.2d at The court also determined responsibly.” p. a claim obligee’s when commercial withholds of an in bad payment faith, contract do not for the misconduct and damages surety’s compensate (Ibid.; no deterrent effect to such misconduct in the future. see have prevent also v. Ariz. 344 P.2d Dodge Fidelity Deposit Co. of Md. below, are 1242-1243].) For the set forth not convinced reasons we tort that remedies are to achieve such necessary objectives. insureds,
Unlike to obligees possess ample bargaining power negotiate that terms of timely obligations encourage (Shattuck, for fees and interest when breaches occur. provide attorneys’ Conners, 1.5, 8; at Ala. Law. p. supra, Transamerica § School, Kourlis, v. (dis. Premier P.2d Brighton supra, 940 opn. J.).) Obligees also may require damages discourage liquidated provision nonperformance sureties. tort un- by Accordingly, appear remedies largely to induce a necessary or to surety’s performance fully compensate surety’s breach of the covenant of faith.21 good
Moreover, it is of a generally recognized primary purpose perfor- mance bond is the risk protect obligee against principal’s on (See default Regents University construction contract. of California Co., Where, here, Acc. & Indem. at Cal.3d Hartford contract, is a bond faithful given of a construction guarantee remedies, then contract which for all within the con- compensate damages at the at least templation reasonably time parties contracting Code, (Civ. 3300), foreseeable them that time provide adequate § compensation for breach the bond.22 are
Nor we that tort to deter misconduct persuaded recovery necessary noted, sureties. As owners and involved in construction wield developers interest, sufficient to demand contractual power bargaining provisions fees and attorney’s liquidated damages. 21 Additionally, obligees prevailing pursuant and costs court recover interest Proc., Code, [interest]; appropriate (E.g., Code statute circumstances. Civ. Civ. § [costs].) indicated, point $3 22The instant this As was precisely. case illustrates Talbot awarded over however, on its parties, stipulated
million contract causes of action Transamerica. The good resulting that tort from breach of the covenant faith and fair Transamerica’s dealing $1. only amounted to
More the Insurance to substantial subjects Code sureties importantly, administrative sanctions and for violations the Unfair Trade of penalties Code, (Ins. Act et Practices Those sanctions include maximum seq.). § $5,000 $10,000 act civil for each act or for each in willful penalties 790.03, Code, (h) (Ins. Code section violation Insurance subdivision 790.035), and the issuance cease and desist orders to further enjoin § (id., 790.05). violations Willful violations of cease desist orders and may § $55,000, in an while violations result additional penalty repeated may to a year. result in the or revocation of a license for suspension surety’s up (Id., 790.07.) § the remedies the considering
In tort potential consequences allowing context, are mindful bond we of cases and indi- performance commentary that, for from such whatever benefits accrue rem- cating might permitting edies, harmful economic effects at least as to occur. appear likely
Unlike insurance which involve the interests of only two relationships, is a one the parties, surety relationship implicating separate tripartite interests of and the When legal principal, obligee surety. to arise between an and a obligee whether disputes principal default, it difficult to may is in for the determine which is party prove and is due the bond. As one in the whether its own under right performance text “There is no scenario for a bond dispute. explains: simple claims, counterclaims, and coun- charges, Most often will involve dispute Often the Seldom will one be in the tercharges. any party altogether right. in a to surface. are defensive when claims parties posture begin the time the is behind schedule. Generally, prior Usually, project drawn called lines have been officially upon perform, have It is no bond claims are clashed. wonder personalities (Cushman Stamm, Handling Fidelity fertile fields surety litigators.” Bonds, 6.4, Claims Performance Surety construction be disputes may complicated As foregoing suggests, But three on a level field. it is to resolve all are enough parties playing when remedies may encourage rational to assume that tort available making would readily default more than allege they obligees principal’s also that allowing of such remedies. It is reasonable conclude absence make it easier to to wield the club of tort obligees punitive claims, more default on sureties into paying pressure paying questionable claims, to risk will be reluctant because the sureties properly disputed Ins. Com- (See tort Fund outcome of a action. Moradi-Shalal Fireman’s context concerns in the 46 Cal.3d at similar panies, supra, [noting *28 insurers]; third actions cf. U.S. party against Ehmcke Sheet for Benefit of (E.D.Cal. 1991) Metal v. Wausau 910-911 F.Supp. [finding for inflated unwarranted settlement demands and potential settlements in the context of tortious breach actions federal Miller Act premised upon Thus, bonds].) to sue in obligees sureties tort permitting may obligees allow to gain additional leverage with sureties that do not in have principals contract disputes.
With such increased leverage, obligees will have sufficient power detrimentally affect the interests of when arise principals disagreements construction. during Claims of default obligee may impair prin to secure cipal’s ability (see, on other bonding Contract projects e.g., Arntz Co., Co. v. St. ing Paul Fire & Marine Ins. supra, 479), at Cal.App.4th thus automatically from disqualifying on all principal bidding public Moreover, projects ones. many private indemnity executed agreements often sureties the principals give them for right reimbursement pursue loss, of any including legal and the costs of expenses In efforts investigation. to avoid bad faith sureties liability, strive to “find” bond may coverage while, time, at the obligees same their charging costs to the investigation if principal. Accordingly, even the surety’s investigation leads to ultimately default, conclusion that the is not in faultless principal may still suffer considerations, adverse consequences. These which have no parallel disputes involving policies, weigh against recogni tion of extracontractual in the bond context.
Finally, tort allowing in the recovery construction bond context may open the door to increased (and successive) sometimes which in turn litigation, may increase the cost of obtaining bonds. For in K-WIndustries v. example, National Sur. (1988) 231 Corp. 502], Mont. 461 P.2d the subcontractor first sued federal court on a bond under the payment Miller Act and then sued in Montana state court alleging violations of statutory prohibitions bad faith insurance But even if practices. their con- obligees bring suit, tract and tort actions in one increased and settlement litigation costs are inevitable. Those costs would be ultimately on passed by contractors to (see U.S. obligees Wausau, Ehmcke Sheet Metal v. for Benefit of 910-911) and F.Supp. pp. contribute to the of bonds. unaffordability 4. Authorities From Other States
We observe that the Texas Court Supreme concluded that recently perfor- mance bond obligees should not be to recover permitted tort from commercial sureties for breaches of the covenant of faith implied good (Great (Tex. 1995)
fair American Ins. Austin dealing. v. N. Utility Wausau, cf. S.W.2d U.S. Ehmcke Sheet Metal v. Benefit of *29 not sue in tort on a surety F.Supp. may payment [subcontractor bond].) notes, however,
As Talbot
courts in other
have concluded
jurisdictions
School,
348;
(Transamerica
otherwise.
Premier v.
P.2d
Brighton
supra, 940
622;
1990)
(Alaska
Order Moose v. Intern.
P.2d
Loyal
Fidelity
Dodge
of
Md.,
1240;
778 P.2d
Fidelity
Deposit
Co.
v.
supra,
Szarkowski
of
502;
1987)
Co. (N.D.
Reliance Ins.
404 N.W.2d
cf. K-W Industries v.
Corp.,
Sur.
After we find ourselves reviewing foregoing that tort fail to by recovery, give the decisions allow unpersuaded they consideration to the material differences between insurance appropriate and bonds between differing and the relations policies performance addition, thereto. In of the decisions undue parties many place emphasis statutes of insurance. as a class upon regulating suretyship
5. Bond Not Recover Tort Obligees May in Performance before us is this: Is for a breach of tort question recovery appropriate covenant of fair in the context of a dealing faith and implied good are construction bond? In that we re- answering performance question, exists legally agreements minded that law to enforce binding “[c]ontract (Applied between tort law is to vindicate social parties; designed policy.” Saudi Ltd. 7 Cal.4th Corp. v. Litton Arabia Equipment 454].) P.2d Cal.Rptr.2d mind, we answer the
With guiding principle question A is not an Nor is construction bond negative. policy. adhesion, marked interest or it a contract otherwise elements public that an extracontractual is necessitated remedy such fiduciary responsibility, their in the interests social have Obligees ample power protect policy. sureties, and for the most are deterred through interests negotiation, part, of stiff and administrative statutory from threat acting unreasonably by license and revocation. including sanctions penalties, suspension tort our a new action acknowledge recognize We unwillingness mean that instances misconduct occur. may yet isolated Nonetheless, in reasons tort the absence policy supporting compelling which is better equipped we leave it recovery, Legislature, up data the effects of a shift in the balance of gather study significant power sureties, between to determine owner/obligees, contractor/principals whether authorized tort statutorily remedies would benefit the real estate development industry. we hold that for a
Accordingly, breach of the recovery surety’s implied covenant of good faith and fair is limited to dealing those properly damages within the time at the contemplation parties or at least given (See foreseeable them at that time. reasonably Applied Ltd., v. Litton Saudi Arabia Equipment Corp. 7 Cal.4th at Civ. Code, 3300 for breach of an from obligation arising [measure contract].)
C. Punitive Damages
The law this governing subject has been summarized as aptly follows. which are exemplary damages, designed “[P]unitive punish conduct, deter defined statutorily are available types wrongful only Code, actions ‘for breach of an not obligation (Civ. from contract.’ arising 3294, (a), tort, subd. added.) italics In the absence of an independent punitive damages not be awarded for may breach of contract ‘even where wilful, fraudulent, defendant’s conduct in the contract breaching was ” malicious.’ Ltd., (Applied v. Equipment Corp. Litton Saudi Arabia 398, Cal.4th at (1956) see Crogan v. 47 Cal.2d P.2d Metz [303 1029].) Since Talbot may recover in tort for Transamerica’s breach of the covenant of faith implied good and fair rule dealing, foregoing compels a reversal of the award of punitive in its damages entirety.
Disposition The judgment of the Court of is reversed insofar as it affirmed the Appeal award of tort for breach damages covenant and implied permitted award of The punitive damages. matter is remanded to that court for further proceedings consistent with this opinion. J., Chin, J., Brown, J., C.
George, concurred. MOSK, J., Concurring Dissenting. I concurin the majority’s analysis dissent, however, of the contract I from their question. analysis of a tort availability remedy. The majority what is in the first instance: explain length unquestioned that “liability insurance is not identical in every with respect suretyship.” (1985) Owners’ Assn. (General Ins. Co. v. Mammoth Vista 810, forms of 291].) is whether two Cal.Rptr. question [220 under a construc- are similar that a sufficiently developer-obligee protection failure liable in tort for bad faith tion hold that have con- under that bond. Most jurisdictions to honor its obligations are not they view majority’s sidered this would reject question similar. I do likewise. sufficiently
I about the law do not enthusiastic Though majority appear particularly tort, actionable in an insurance contract is that bad faith failure to perform California law bedrock which has been do not they principle, question 425, (1967) Co. 66 Cal.2d 429-430 (Crisci Security Ins. many years. 173]; Inc. 6 Cal.4th P.2d Hunter v. Up-Right, Cal.Rptr. [58 88].) 864 P.2d Cal.Rptr.2d whether, Thus, contracts are they urge, it is beside the point if the remedy party a tort giving protecting exceptional protected party this was an All that is is whether germane acts in bad faith to fail to perform. insurance contract. It was. *31 another undertakes to indemnify is a contract one whereby
“Insurance loss, unknown from a or contingent or damage, liability arising against Code, “Surety one of insurance. (Ins. 22.) insurance is Surety type event.” § and the (a) The behavior guaranteeing persons insurance includes: HD or (including executing guarantee- of contracts guaranteeing in all actions or proceed- or undertakings bonds and ing required permitted and other than for allowed), than insurance or other policies law ings by trust, consti- or other instrument a deed of mortgage, secured by payments 105.) The use of the (Id., phrase a lien or on real estate.” charge § tuting bond is not an that a surety than insurance does not signify “other policies” a bond to does not include that insurance surety insurance policy, only (See Protection honored. Check will be that an insurance guarantee policy Service, (1950).)1 16 Ops.Cal.Atty.Gen. itself (Talbot), was seeking protect Talbot Partners
The developer, Construction, (Cates), the Inc. of the default of Cates the contingency Regulations section title California Code of disagree majority’s the view that 1I with 2695.2, policy. Sections 2695.1- a bond is not an insurance (j), declares subdivision states, Settlement Practices concerning, heading “Fair Claims regulations as their are 2695.17 790.03, (h), Code section subdivision regulations interpret Insurance Regulations.” These conducting by the “business practices those unfair claims settlement prohibits which 2695.2, says (id., regulations 790.03). (j), of the subdivision Section § insurance” “ include, ‘surety bond’ regulations,” purposes these “policy” does not insurance “\f\or (Transamerica) was builder and Transamerica Insurance Company principal. occurred, that if that it would money event guarantor supply Code, 100, (5), (Ins. That is insurance. subd. complete development. §§ 105, Proc., 995.120; (a); subd. Code Civ. Amwest Ins. Co. v. Wilson Surety 1243, 1249, 1112].) (1995) 11 Cal.4th fn. 5 906 P.2d Cal.Rptr.2d Further for the view that Transamerica was an insurer be support found the Restatement of and case law. Section 82 of Security 233-234) Restatement the nature of Comment i explains suretyship. (pp. a defines of which Transamerica is an “The “compensated surety,” example: . term . . who in the business of engages executing surety person mean[s] contracts for a called a .... sureties compensation premium Compensated are . . . . generally . . in the business of incorporated. engaged ft[] [0]ne contracts can be and taken executing surety have expected contemplated of, (And account in the charged, certain elements of risk . . . .” premium Leo, see The Construction Contract and Some Surety Suretyship Defenses (1992-1993) 34 Wm. & Mary L.Rev. most part, [“For underwrite bonds in for a companies exchange premium”].) Thus, as the North Dakota Court “a Supreme explains, paid surety bonding treated as an insurer rather than company generally according the strict law of ... ‘A bond entered into suretyship. by [Citations.] compensated surety of a contract is a guaranteeing contract of insurance rather than of inter ordinary is to be suretyship to the rules preted according to the former instead of the strict rules relating to the latter. For most applicable contracts and sure purposes, guaranty contracts, are construed tyship same to insurance principles apply where are they written in the which business of companies engage ” is, (Szarkowski suretyship guaranty, compensation profit.’ “ Reliance (N.D. 1987) Ins. Co. 404 N.W.2d ‘The doctrine that *32 law, is a him surety favorite of the and that a claim is strictissimi against juris, does not where the bond a or is executed apply undertaking upon to make bonds or undertak organized such corporation considerationf] for ings While such call com profit. themselves corporations “surety ” their is in business all essential that of insurers.’ panies,” particulars ” (Italics added.) Perhaps way challenges ‘bond.’ this is because of the unfair claims are 2695.2, (i), regulations. regula settled under statutes or But section subdivision of the same .”; including tions defines an “surety insurer as the licensed issuer of in this state . . bond[s] i.e., engaged (ibid.). one in “the business of insurance” insurance, regulations recognize surety The insurance as albeit of a distinct kind. “In insurance, surety contrast to other promise classes of insurance involves a to answer for the debt, miscarriage primary duty pay default or of a who the the debt or has discharge obligation (Cal. indemnify Regs., and bound who is insurer.” Code tit. 2695.1, (c).) subd. (Colo. 1997) P.2d (Transamerica Premier v. School Brighton 348].) 351-352 P.2d insurance, insurance, unlike that
The conclude majority bargaining elements of adhesion unequal power, “characterized ante, at and fiduciary (Maj. opn., interest responsibility.” public in all insurance contracts (though that the first element is found I doubt so, The in but even if it is beside many), point. it is found undoubtedly that if an of no for view authority observed that it knew Court of Appeal its to a tort the insured forfeits rights insurance contract is negotiated, and I authority, have not such any question The recovery. majority presented event, do not show evidence any exists. In any majority whether any bond terms in this case were negotiated, appear the performance ante, to “the 53 [referring typical concede the (maj. opn., point Tran- a mammoth insurer like bond”]). It is unlikely performance billions of dollars that counts in the money samerica—an economic entity and Cates when were business— they the now defunct Talbot and dwarfed here. small custom involved for the negotiations relatively would engage To begin is similarly unpersuasive. interest analysis majority’s public from other with, decide it is to distinguish they proper to obtain commercial advan- do not seek generally forms “because insureds rather, calamity. seek they protection tages by purchasing policies; an insured against insurance policy protects But while typical [Citations.] a calamitous unforeseeable losses caused by accidental and generally flood, death, fire, or the general disability, event such as catastrophic the creditor bond ‘is to a construction protect [the performance purpose from the he be unable to collect that will danger owner/obligee] against in the failure any general contractor/principal] debtor [the bond, then, the obligee In the contract.’ requiring [Citations.] with the principal obtaining the commercial advantage ‘seeks ” ante, at pp. financial security.’ (Maj. opn., additional which provides 53-54.) the words Qualified typical with fails persuade.
The foregoing passage distinctions it sets forth putative opinion, that lard generally majority of mind this insurance peace not exist.2 Talbot purchased that in fact do *33 a commercial exists between “A relationship security, special and profit. they typically 10 times in opinion. their And qualifiers typical or majority 2The invoke the But I adjectives or adverbs. qualifying as general generally no fewer than 16 times use do, faith, unrepresentative. atypical case is they that this apparently on as cannot take it and and an that is identical to that an insurer surety obligee nearly involving that a obtain a an insured. When an obligee requests principal [Citations.] commercial bond to the the obli guarantee surety principal’s performance, is itself from the losses gee essentially insuring catastrophic potentially would result in the the defaults on its original obligation.” event School, (Transamerica Premier v. P.2d at Brighton supra, p. 352.) transaction,
In a construction bond the performance developer-obligee seeks a bond for the same reason else performance casualty anyone buys insurance: to shift to another the risk of an unpredictable potentially loss, severe here the contractor’s The under default. the risk surety accepts the same business as a that the col- insurer: principle casualty premiums will, lected of numerous such risks coverage with together investment income this allow for a generated by holding money capital, insurer, The like other counts on sufficient re- profit. surety, any having serves to financial cover these risks without threat to its The own security. reinsurance, as, also further surety may risk spread through according the Court of Transamerica did here. Appeal, contract,
In such a whether or not titled “insurance is policy,” certainty the essence from the obligee-insured’s view. seeks point developer bond in order to be certain of of the timely, dependable performance demonstrates, construction financial contract. As this case viability entire faith of these project may depend upon surety’s good duties. insurance,
As with other form of one any allows system to shift to another a risk that the first party contingent party, developer- cannot itself bear. obligee, The social served such contracts is the good same served other classes of insurance: freedom of greater activity by more than would be if each had to bear all the risks of participants possible its own enterprise. bonds,
Certainty the essential value of performance being their worth is undermined if sureties can choose to deeply regularly ignore their obligations, to fear but contract that will having nothing moreover, Typically generally, distracting have the unfortunate attention from effect level, removing what has occurred and propositions discussion to an abstract where general become dispute. and hard to 3Moreover, any implication majority’s in the that the relationship discussion between obligee analogous seeking to that of debtor and creditor is incorrect. Talbot was protect contingency, contracting protec itself and Transamerica supply was tion. That is not a relationship. debtor-creditor *34 the Court of As Appeal what would they pay performance. approximate arises from the of the insurance industry reasoned: “The nature quasi-public assumes. and the duties which the insurer and nature of the contracts purpose is, nature of the arises frdm the contingent That nature quasi-public the conduct of business and the interest in promoting public’s there is calamity, confidence that in the event of affairs with personal insur- surety These factors apply equally protection. ance, is vital to real estate development.” which no social a breach of contract violates policy;
Under most circumstances
for “efficient
remedies so as to allow
the law limits the nonbreaching party’s
one
a contract exists
provide
breach” of the contract. But when
primarily
bad faith
the other
in a
security
risky enterprise,
party’s
party certainty
efficient,
it
cannot be
because
negates
very purpose
breach
to deter such
this context in order
A tort
remedy
justified-in
contract.
in tort for a
a cause of action
of the covenant. “Recognizing
breaches
commer
of its
to act in
faith
duty
good
compels
commercial surety’s breach
When the commercial
to handle claims responsibly.
cial sureties
faith,
do
in bad
contract damages
of an
claim
obligee’s
withholds payment
misconduct and have
for the commercial surety’s
the obligee
compensate
As.,the Arizona
in the future.
deterrent effect to
such misconduct
no
prevent
‘offer no motivation
contract damages
Court
Dodge,
Supreme
explained
insurer will
If the
for the insurer not to breach.
only
whatsoever
that it
have
breach are the amounts
would
judgment
have
pay upon
interest,
interest in retaining
it has every
under the policy plus
owed
market, and
on the outside
hoping
rates of interest
higher
money, earning
than the
into a settlement for less
policy
to force the insured
eventually
(1989)
Continuing as an insured” economic dilemma does not face same that “the obligee alia, because, ante, it can recover 54), against inter (maj. opn., however, insurance, is to protect of this kind The whole principal. point defaulted, Transamerica’s was that has which an obligee defaulted; it business after Cates went out of here. Not duty surprisingly, case, obligees this it. “As demonstrated there no recourse against was and unfair claims are as susceptible deceptive under contracts and claimants under settlement practices insure[d]s Assn., Owners’ (General v. Mammoth Vista Ins. Co. contracts.” at p. *35 is at issue to what event, is extraneous observation the majority’s In any an insured occurs that commonly it explained, As the Court Appeal here. insurer is his or her for which for a third can recover against party recourse have driver of a negligent the victim to obligated pay: e.g., insurer, does such recourse but and the driver’s the driver personally insurer. automobile own from the victim’s bar necessarily indemnity not does bad faith an insurer’s to in tort for entitled sue the insured is Whether elsewhere. of recovery not to on hinge possibility appear be between caught Transamerica will in effect that conclude majority The ... to it “difficult and will find claims and Cates’s competing Talbot’s is due and whether its own performance is in the right determine which party be, ante, but an insurer 58.) That may at bond.” (Maj. opn., p. under the auto in a multivehicle its insured is involved dilemma when faces same Moreover, consid- surety when and claims. facts accident with disputed faith, bad faith act in necessarily it does not interests in good ers an obligee’s faith good had acted if Transamerica For example, toward principal. suit foreclosure the merit of Cates’s investigating Talbot by properly toward bad have acted in not (see 69), thereby it it would before joining post, p. Cates. faith toward
Furthermore, Ins. Co. v. Supe Internat. Washington on majority rely 282], Report Airlines (1998) Cal.Rptr.2d 981 Cal.App.4th rior Court [73 (1995) Co. Guaranty Cal.App.4th Fidelity v. United States ing Corp. America 563], Co. North and Schmitt v. Insurance Cal.Rptr.2d [37 (Schmitt). Cal.Rptr. 230 Cal.App.3d 261] not, however, to Schmitt, analogous did under facts held that the principals case, is not the duty for bad faith. have the sue right “[I]t those of this under an an insured as if the were principal protect here obligee, the third party runs to surety’s duty insurance The policy. seller, (Schmitt, agent.” or agent government financing purchaser, 258-259, held, at added.) (Schmitt also id. pages italics at not here the had of law and fact important that for mixed reasons faith toward the obligees.) acted in bad Fidelity & v. United States Reporting Corp. of Airlines reading
A close In it is Co., reveals that inapposite. Guaranty Cal.App.4th reimburse of “issued and validated” case, sales undertook the surety An agency failed to pay. if the travel 1463) agency airline tickets (id. at p. not issued and validated. the tickets were ticket stock: stole the employee it. should reimburse that the surety contended nevertheless obligee The the court Disagreeing, wrote: “The broad construction obligee] urges [the would convert document at issue into a liability policy. contracts, however, two kinds of are distinct. conceptually legally loss, An insurer undertakes to another dam indemnify ‘against [Citation.] event,’ age, from an unknown or arising whereas a ” contingent debt, default, surety (Id. ‘answer for the promises of another.’ miscarriage The case states that the had obligee not entered into a *36 broad providing insurance is a protection—not brand of surety distinct in all from protection insurance. The respects liability Court discussed Appeal various differences between insurance and liability surety insurance, but none of them are relevant here. Court, Internat.
Washington Ins. Co. v. Superior supra, Cal.App.4th 981, held that a could not defeat surety a statute that a contractor requiring a 2 month to a subcontractor pay percent per another penalty by invoking statute insurers for holding harmless their insureds’ willful misconduct. The decision of the differences in quoted listing Airlines Reporting Corp. v. Co., 1458, United States & Fidelity Guaranty supra, between Cal.App.4th insurance, insurance and but rested its conclusion that the statute on penalty (62 economic prevailed spreading-of-risk principles. It, too, 990.) at is of little Cal.App.4th use in evaluating question before us. contrast, the courts of other states
By that have considered the question us, before Insurance light of statutes similar to those contained in our Code, have concluded that insurers are liable in tort for bad faith failure to for an on a construction perform obligee bond of the School, (Transamerica at issue here. type Premier v. Brighton supra, 348; Co., P.2d v. Reliance Ins. 404 N.W.2d Loyal Szarkowski 622, 626-628; Order (Alaska 1990) Moose v. Intern. Fidelity 797 P.2d 461, K-W Industries v. (1988) National Sur. 231 Mont. Corp. 464-467 [754 502, 504-506]; P.2d v. & Co. Dodge Fidelity Deposit 161 Ariz. of Md. 1240, 1242]; P.2d but see Great American Ins. v. N. Austin (Tex. 1995) Utility 418-424.) S.W.2d “The of the construc purpose tion bond . . . was ... from protect plaintiffs calamity— default on the contract. A contractor’s default has the potential [the] financial and creating great homeowner. personal hardship Surety insurance is obtained with the such hope avoiding hardships. Imposing tort on a in bad faith surety who refuses a valid claim will pay Md., deter such conduct.” (Dodge Fidelity Co. Deposit P.2d at p.
The facts of this case illustrate the need for a tort remedy. evidence sufficed to find that Transamerica committed affirmative acts showing, later mentioned The trial best, judge Talbot’s interests. neglect gross Transamerica trial that during I heard” out of chair when my he “about fell the validity investigating suit without had in a foreclosure joined lien, a claim out to include turned mechanic’s which underlying Indeed, trial court’s statement $200,000 done. that was never for work Cates, business, time out of Cates was declared that “at when decision the mechanic’s to foreclose on filed suit attorneys, Transamerica’s through title. $645,367.66, Talbot’s further clouding the sum of lien filed Cates in first amended filing suit to foreclose by joined Transamerica Cates’[s] investigation to make any Transamerica failed on 1991. May complaint on the suit to foreclose lien before it joined of the mechanic’s of the validity (on which lien filed Cates But mechanic’s Talbot’s property.” “[t]he because Cates was foreclose) not justified[,] Transamerica filed suit to was ... in fact had on the contract” and “Cates further amounts any owed $276,730 it was than the amount which caused itself to be more paid entitled.” *37 to be damages imposed oppressive,
Our Legislature permits punitive conduct, fraudulent, be “for being they limitation only malicious Code, (Civ. defendant.” and way the sake of example punishing that no tort (a).) remedy decision means subd. Because today’s bond, there is exists at all for bad faith breach of a construction performance Nevertheless, I note that in imposing no need to discuss damages. punitive verdicts, them, found, and its under the instructions jury given special i.e., that its con- maliciously; that Transamerica behaved oppressively wretched, “vile, base, miserable, or loathsome” and duct was contemptible, of such a character “that it would be looked down upon despised sum, it Transamerica’s conduct outstand- decent In found ordinarily people.” bad. ingly
Moreover, obligee will make an it is not clear to me that be rents), or that an will obligee whole if the loses (e.g., profits developer if a a bond that make it whole principal able to force a to issue would defaults.4 recovering in tort. bars Talbot from argues also that Civil Code section 2808 4Transamerica liability surety upon a part: one assumes provides
That statute in relevant “Where .”—-i.e., it principal. that of the . obligation, his is commensurate with conditional greater. cannot be 2808, however, recovery damages. Like on a for contract Code section is limitation Civil larger amount be neither obligation “The of a must provides, section which its terms exceeds principal; than that of the and if in respects nor in other more burdensome it, the rule of obligation,” section 2808 stands for proportion is reducible in to the it I would hold that a tort remedy available for the of misconduct this type case presents.
Kennard, J., J., and Werdegar, concurred. for a Respondents’ petition was denied rehearing 1999. September Mosk, J., Kennard, J., J., Werdegar, were that the opinion petition should be granted. *38 surety’s express liability may that “the law contractual not exceed that of the (General Assn., principal.” Ins. 174'Cal.App.3d Co. v. Mammoth Vista Owners' omitted.) purport surety’s independent italics “Section 2809 does not to restrict the (Ibid., omitted.) imposed by for violation of duties italics The same law.” is true of section 2808.