United States District Court, District of New Jersey, D.
March 1, 2000
UNITED STATES OF AMERICA FOR THE USE OF DON SIEGEL CONSTRUCTION CO., INC., PLAINTIFF,
ATUL CONSTRUCTION CO., AND HARLEYSVILLE INSURANCE COMPANY, DEFENDANTS.
The opinion of the court was delivered by: Irenas, District Judge.
Presently before the Court is defendant Harleysville Insurance
Company's ("Harleysville") motion for partial summary judgment. The Court
has subject matter jurisdiction over this case because plaintiff is
asserting claims under the Miller Act, 40 U.S.C. § 270 (a) et seq.
See 28 U.S.C. § 1331. The Court has supplemental jurisdiction over
plaintiff's state law claims pursuant to 28 U.S.C. § 1367. For the
reasons set forth below, this motion is denied.
Defendant Atul Construction Company ("Atul") was hired by the United
States of America to replace water lines at Fort Dix, New Jersey. The
project was known as the "Garden Terrace, Water Line Replacement Project."
(Complaint, ¶ 4). On or about November 27, 1997, Atul contracted
with plaintiff Don Siegel Construction Company ("plaintiff" or "Siegel")
to provide labor on the project. (Id. at ¶ 7). In accordance with
this contract, Atul was to provide plaintiff with all necessary
Plaintiff brought this suit pursuant to the Miller Act,
40 U.S.C. § 270a et seq. The Miller Act "governs the payment rights
of persons who supply labor and material for the construction of most
Federal construction projects." U.S. ex rel New Deal Plumbing Supp. Co.
v. Nazon, No.Civ.A. 98-2083, 1999 WL 988729, at *2 (D.N.J. Oct.22,
1999). Under the Act, a prime contractor having a contract in excess of
$25,000.00 must post a payment bond with a surety. The purpose of the
bond is to ensure that all persons supplying labor and material to the
prime contractor are paid for their services. The Act has been construed
liberally "to protect those whose labor and materials go into public
projects." J.W Bateson Co. v. United States ex ret. Bd. of Trustees of
Nat. Automatic Sprinkler Indus. Pens. Fund; 434 U.S. 586, 594, 98 S.Ct.
873, 55 L.Ed.2d 50 (1978). In this case, in accordance with the Miller
Act, Atul purchased surety bonds from defendant Harleysville. (Compl.,
According to plaintiff, Atul has refused to pay $83,347.95 it owes
plaintiff for contract work performed on the Fort Dix project. (Id. at
¶¶ 13-14). On or about August 28, 1998, plaintiff filed with
Harleysville and Atul a written bond claim notice of monies due and owed
on the project. (Id. at ¶ 5). On January 25, 1999, plaintiff filed
the instant complaint seeking, inter alia, recovery of the $83,347.95 for
subcontract work performed. To date, Harleysville has not paid plaintiff
on the payment bond.
"[S]ummary judgment is proper `if the pleadings, depositions, answers
to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment as a
matter of law.'" Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct.
2548, 91 L.Ed.2d 265 (1986) (quoting Fed.R.Civ.P. 56(c)).
In deciding a motion for summary judgment, the Court must construe the
facts and inferences in a light most favorable to the non-moving party.
Pollock v. American Tel. & Tel. Long Lines, 794 F.2d 860, 864 (3d Cir.
1986). The role of the court is not "to weigh the evidence and determine
the truth of the matter, but to determine whether there is a genuine
issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106
S.Ct. 2505, 91 L.Ed.2d 202 (1986).
In the instant motion, defendant Harleysville seeks to dismiss Count
III of plaintiff's complaint. In Count III, plaintiff seeks damages from
Harleysville for its alleged bad faith delay in responding to
plaintiff's claim on the payment bond. Plaintiff claims that Harleysville
owes an independent duty to the beneficiaries of surety bonds and that
Harleysville is liable for its tortious bad faith conduct in breaching
that duty. Defendant argues that New Jersey law does not permit recovery
for a claim of bad faith damages against a surety.*fn1
The question of whether a subcontractor can, sue a surety for bad faith
conduct has yet to be considered by the New Jersey Supreme Court.*fn2 In
fact, an extensive search by this Court has failed to produce any New
Jersey cases dealing with this precise issue. In the absence of relevant
state caselaw, our task is to predict how New Jersey's highest court
would resolve this question. Gares v. Willingboro Township, 90 F.3d 720,
725 (3d Cir. 1996).
In arguing that the New Jersey Supreme Court would not recognize such a
cause of action, defendant Harleysville relies heavily on a case from the
Eastern District of Tennessee. In In re Technology for Energy Corp.,
123 B.R. 979 (Bkrtcy. E.D.Tenn. 1991), the Tennessee Bankruptcy Court
concluded that bad faith damages were not available in an action by a
subcontractor against a surety under New Jersey law. In that case, the
defendant Technology for Energy Corp. ("TEC") agreed to build a radiation
monitoring system for a nuclear power plant that plaintiff, Bechtel
Enginerring Co., was building in New Jersey. The surety, American
Insurance Company ("American"), provided a combination payment and
performance bond on behalf of TEC. Following TEC's declaration of
bankruptcy, Bechtel brought suit against TEC and American to recover on
the bond. American refused to pay any amount of money beyond the amount
of the bond. Bechtel then sought damages for American's alleged bad faith
refusal to make such payments.
The Tennessee Court cited the decision of the New Jersey Supreme Court
in Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 323 A.2d 495
(1974). In that case, an injured resort guest brought
suit against the Rova Farms Resort. The defendant insurance company
provided liability insurance to the resort and also controlled the
resort's defense in the underlying tort suit. The insurance company
steadfastly refused to make a settlement offer for the full policy amount
of $50,000.00. The injured guest ultimately obtained a judgment against
the resort for $225,000.00.
The New Jersey Supreme Court allowed a claim for bad faith damages
against the defendant insurer. The Court characterized a suit for bad
faith damages as a suit sounding in both tort and contract and found that
such a claim was appropriate here given the special relationship between
the insured and the insurance company. Id. 323 A.2d at 511. In this
case, the Court emphasized, the insurance company essentially acted as
the resort's attorney in dealing with the injured guest. Id. at 504. The
Court concluded that "an insurer, having contractually restricted the
independent negotiating power of its insured, has a positive fiduciary
duty to take the initiative and attempt to negotiate a settlement within
the policy coverage." Id. at 496.
The Tennessee Court in In re Technology for Energy determined that the
New Jersey Supreme Court's decision in Rova Farms to recognize a claim
against an insurer for bad faith was driven by the "special relationship"
between the insured and the insurer in that case. 123 B.R. at 986. The
Court predicted that the New Jersey Supreme Court would not recognize a
cause of action for bad faith damages in other contexts where such a
special relationship was not present. For example, the Court noted that
several New Jersey appellate courts had declined to recognize such a
cause of action in cases where no third party was involved. The Tennessee
The decision in Rova Farms dealt with an insurance
company's bad faith refusal to settle a third party's
claim against the policyholder. Suppose no third party
is involved; the insurance company refuses to pay the
policy holder's own claim, known as a first party
Between the policy holder with a first party claim
and the insurance company, no special relationship
exists. There is only the insurance contract. of
course, every contract includes an implied duty of
good faith and fair dealing. Does this mean that the
policyholder has a tort claim or can recover punitive
damages for breach of contract if the insurance
company in bad faith refuses to pay his party claim?
New Jersey's intermediate appellate court says "No."
It has held that a policyholder cannot recover
punitive damages from an insurance company for bad
faith refusal to pay a first party claim. Bad faith by
itself does not justify the recovery of tort damages;
there must also be a special relationship created by
the contract as in Rova Farms.
Id. at 986-87 (citations omitted).
The cases relied upon by the Tennessee Court in reaching this
conclusion have either been explicitly or implicitly overruled by the
decision of the New Jersey Supreme Court in Pickett v. Lloyd's,
131 N.J. 457, 621 A.2d 445 (1993). In that case, the New Jersey Supreme
Court addressed the issue of whether an insured can recover bad faith
damages against an insurer on a first party claim. Contrary to the
prediction of the Tennessee court, the New Jersey Supreme Court concluded
that such a cause of action did exist under New Jersey law.
In Pickett a truck-driver sued his insurer for its alleged bad faith
failure to pay collision damage benefits when his tractor-trailer truck
was destroyed in an accident. As in Rova Farms, the Supreme Court
characterized this cause of action for bad faith refusal to pay as
sounding in both tort and contract. Id. at 452. However, the Court
emphasized that the label given to the cause of action was immaterial,
"[c]ompensation should not be dependent
on what label we place on an action but rather on the nature of the
injury inflicted on the plaintiff and the remedies requested." Id. at
The Court concluded that an insured plaintiff could recover damages
against an insurer for its bad faith delay in responding to a claim. The
Court found that such a cause of action was necessary to deter insurance
companies from delaying payment on legitimate insurance claims. In
support of this argument, the Court cited the case of Polito v.
Continental Casualty Co., in which the Third Circuit held that "if
liability is limited to the amount of the loss plus interest, [insurance
companies] are encouraged to take advantage of the insured by delaying
payments." 689 F.2d 457, 461 (3d Cir.1982). The Court also quoted the
Superior Court Judge's rhetorical question to the defendant insurer:
You mean that even if this had taken years that
Lloyds [sic] hadn't paid[.] . . . [I]f you weren't
paid in January, February, March . . . and you weren't
paid in 1987, you weren't paid in 1988, you weren't
paid in 1989; you mean that none of that would make
any difference? That you folks don't have' to pay
until you get around to paying; and that the only
remedy would be for loss of interest? That doesn't
seem to be fair.
Pickett, 621 A.2d at 452-53.
This Court concludes that the New Jersey Supreme Court would apply the
same rationale to a claim for bad faith damages brought by an obligee
against a surety.*fn3 Although the relationship between an obligee and a
surety is not identical to the relationship between an insurer and an
insured, the relationships are closely analogous. See In the Matter of
the Liquidation of Integrity Ins. Co., 281 N.J. Super. 364, 657 A.2d 902,
909 (App. Div. 1995), aff'd 147 N.J. 128, 685 A.2d 1286 (1996)
(holding that sureties in New Jersey are "considered to be in the
business of insurers, and their obligation is to be liberally construed
in accordance with the rules applicable to insurance policies") (citation
omitted); see also Transamerica Premier Ins. Co. v. Brighton Sch. Dist.
27J, 940 P.2d 348, 352 (Colo. 1997) ("A special relationship exists
between a commercial surety and an obligee that is nearly identical to
that involving an insurer and an insured.").*fn4 Furthermore, the
"nature of the injury inflicted" on the insured in Pickett and on the
plaintiff here is nearly identical. Pickett, 621 A.2d at 452. Indeed,
while not dispositive here, the Court notes that the majority of state
supreme courts to have considered the issue have followed precisely the
same reasoning used by the New Jersey Supreme Court in Pickett in
recognizing a bad faith cause of action brought by an obligee against a
surety. See e.g., Transamerica, 940 P.2d at 353 ("When the commercial
surety withholds payment of an obligee's claim in bad faith, contract
damages do not compensate the obligee for the commercial surety's
misconduct and have no deterrent effect to prevent such misconduct in the
future."); Dodge v. Fidelity Deposit Co. of Maryland, 161 Ariz. 344,
778 P.2d 1240, 1242-43 (1989) (holding that absent the availability of
damages for bad faith conduct the surety will have an interest in
retaining the money for as long as possible so that it may earn the
higher rates of interest available on the outside market); Suver v.
Personal Service Ins. Co., 11 Ohio St.3d 6, 462 N.E.2d 415, 417 (1984)
(holding that "to insulate the issuer of a [surety] bond from liability
for the deliberate refusal to pay its obligations arising from the bond
encourage the routine denial of payment of claims for as long as
Those courts which have refused to recognize a cause of action on
behalf of an obligee for the bad faith conduct of a surety have noted
that imposing a duty to act in good faith towards the obligee could
conceivably run counter to the surety's preexisting duty to the
principal. For example, in U.S. ex rel Ehmcke Sheet Metal Works v. Wausau
Ins. Companies, the district court for the Northern District of
California concluded that permitting a subcontractor to sue a surety for
bad faith would create "an unresolvable conflict of interest for the
surety." 755 F. Supp. 906, 911 (N.D.Cal. 1991). In that case, the Court
refused to allow the obligee to sue the surety for bad faith conduct
because "[t]he surety owes the party who obtained the bond a duty of good
faith and fair dealing . . . If the surety may also be liable to a third
party for bad faith, then it may be forced to compromise the duty to one
to fulfill the duty to the other." Id.
The Court finds this reasoning unpersuasive. The duty to exercise good
faith in responding to the claim of an obligee is not a particularly
onerous one. A surety will be found to have breached this duty only if
"no valid reasons existed to delay processing the claim and the [surety]
knew or recklessly disregarded the fact that no valid reasons supported
the delay." Pickett, 621 A.2d at 457-58. Liability for bad faith delay
will not be imposed in cases of "simple negligence." Id. at 457. Thus,
the surety will be free to investigate the validity of the obligee's
claims and any potential defenses to those claims without running afoul
of its duty to act with good faith towards the obligee. "Although the
commercial surety's obligations may be more complex than those of an
insurer, this complexity does not authorize a commercial surety to
disregard its obligation to act in good faith." Bd. of Directors of Ass'n
of Apartment Owners v. United Pac. Ins. Co., 77 Haw. 358, 884 P.2d 1134,
The paramount purpose of a surety agreement is to protect the obligee
in the event of the principal's default. See In the Matter of Integrity,
657 A.2d at 910 (holding that the purpose of a surety agreement is to
ensure that the principal fulfills the contract so that the obligee does
not have to). This purpose would be contravened if a surety could refuse
to respond to a legitimate claim in a timely fashion and incur liability
solely for the amount of the bond plus interest. See Dodge, 778 P.2d at
1241 ("Permitting a surety to withhold performance of its obligations
without reason would defeat the purpose for which surety insurance is
intended."). Thus, this Court concludes that the New Jersey Supreme Court
would, for the reasons set forth in Pickett v. Lloyd's, recognize a claim
for bad faith delay by an obligee against a surety.
Defendant Harleysville argues that even if a cause of action for bad
faith delay exists against a surety under New Jersey law, summary
judgment is appropriate because plaintiff has not shown that defendant
acted in bad faith. Defendant claims that it did not make payment on
plaintiff's claims because representatives of plaintiff indicated to
defendant that plaintiff and Atul were in the process of negotiating a
settlement of the claim. Defendant states that it took no action on the
claim "because it reasonably believed the matter would be resolved."
(Def.'s Mem. Supp. Summ. J. at 5). In addition, defendant claims that in
November of 1998 it learned that a settlement was not likely and it has
actively investigated plaintiff's claims and Atul's possible defenses
since that time. (Id. at 2). According to defendant, this process has
been delayed because it has had trouble obtaining information from Atul
because "Atul has been represented by three different attorneys in the
past ten months." (Def.'s Resp. at 5-6).
Plaintiff states that "from August 1998 (when Siegel filed its claim)
1999 (when Siegel's complaint was filed) Harleysville [ ] deliberately
took no action with regard to Siegel's claim." (Pl.'s opp. at 10). During
this time "period, plaintiff contends that it received one perfunctory
telephone call from defendant which acknowledged receipt of plaintiff's
claim and that, despite plaintiff's requests, no further information was
provided by defendant. (Id.) Furthermore, plaintiff claims that, contrary
to defendant's assertions, it never advised defendant that it should
delay investigating its claims while plaintiff and Atul attempted to
negotiate a settlement. (Id.)
In accordance with the New Jersey Supreme Court's holding in Pickett,
defendant Harleysville cannot be found liable for alleged bad faith
conduct unless "no valid reasons existed to delay processing the claim
and [defendant] knew or recklessly disregarded the fact that no valid
reasons supported the delay." 621 A.2d at 457-58. Although the Court
acknowledges that this is a high standard, the Court is unable to say
that no genuine issues of material fact exist with respect to this claim
so that judgment for defendant should be entered as a matter of law.
Accepting the facts in light most favorable to plaintiff, the non-moving
party, it is possible that a reasonable jury could conclude that defendant
Harleysville acted with bad faith. Accordingly, an entry of summary
judgment is not appropriate at this time.
For the reasons set forth above, defendant's motion for partial summary
judgment is denied. The Court will enter an appropriate order.