The theory of “bad faith” is by now well established in the areas of liability and casualty insurance. Although the relief available takes different forms in different jurisdictions, a common thread is the exposure of the insurance carrier to extra-contractual damages as a result of its conduct in handling a claim. Depending on the jurisdiction, these extra-contractual damages can include one or more of the following: penal interest and attorneys' fees; consequential damages for breach of contract; and recovery in tort. Even in the most restrictive jurisdiction the exposure is substantial, and in the most expansive it can be catastrophic. The impact of such potential liability is not unlike that of a claim for punitive damages, but without the procedural and substantive safeguards in place for exemplary awards. A bad faith claim raises the stakes considerably. The purpose of this Article is to examine the exposure of the construction surety to a claimant under a payment bond for extra-contractual damages as a result of “bad faith.” Reported decisions involving bad faith claims against sureties, as opposed to liability and casualty insurers, are fewer in number, and are divided as to the surety's liability. This Article focuses on the law of Maine concerning bad faith, and its applicability to the payment bond surety. It also discusses reported state and federal decisions from other jurisdictions that specifically address the payment bond surety's liability for bad faith. Finally, it considers the impact of the federal Miller Act on such claims, where applicable. It is the conclusion of this Article that under Maine law, as well as the law of other jurisdictions where analogous, a surety is not liable to a payment bond claimant for extra-contractual damages for bad faith.
John J. Aromando,
The Surety's Liability for "Bad Faith": Claims for Extra-Contractual Damages by an Obligee Under the Payment Bond,
Me. L. Rev.
Available at: https://digitalcommons.mainelaw.maine.edu/mlr/vol47/iss2/14