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Florida Developer Allowed to Sue for Bad Faith; Surety Failed to Obtain Independent Investigation
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September 22, 2008
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Howrey LLP
The developer of a shopping center declared the contractor in default for poor workmanship during construction, including structural defects and building code violations. The developer gave written notice of the default to the surety and demanded that the surety take action in accordance with the terms of the performance bond within five business days. The surety responded within four days, stating that it was “in the process of conducting an investigation into developer’s allegations and that it would follow up with the developer within three days.”
When the developer did not receive a response within the promised time, the developer wrote a second letter stating that: 1) the surety had not taken any action or advised of the action it intended to take regarding the contractor’s default; and 2) if the surety failed to take action within 15 days of the letter, the surety would be deemed to be in default on the bond.
One month later, the surety wrote the developer and took the position that the contractor had performed as required by the contract or that its subcontractors would correct any defects. The surety recommended that the developer “cooperate” with the contractor in resolving the claims. The developer responded that the contractor had made only a token effort to correct the defects. Subsequently, it accused the surety of sitting idly by and ignoring its obligations.
The developer commenced an arbitration proceeding against the contractor and received an arbitration award of $1,417,842. The arbitrators expressly denied the surety’s defenses and bound the surety to the award to the same extent as the contractor. The contractor paid the arbitration award.
The developer then sued the surety under Florida Statutes Annotated §624.155(1)(b)(1) for bad faith refusal to attempt to settle. The developer asserted that the surety had ignored its obligations under the bond by attempting to delay the arbitration; by repeatedly failing to address the developer’s complaints about defective work; and by doing so without conducting an independent investigation into the developer’s complaints. The surety moved for summary judgment, and the U.S. District Court granted the motion. The developer appealed. The U.S. Court of Appeals for the 11th Circuit certified five questions to the Florida Supreme Court, which answered the questions. The 11th Circuit then reversed and remanded the case for trial. Dadeland Depot, Inc. v. St. Paul Fire and Marine Insurance Co., 483 F.3d 1265 (11th Cir. 2007).
First, the Court of Appeals held that the developer, as obligee of a surety bond, is considered an insured and has the right to sue the surety for bad faith refusal to settle claims under §624.155(1)(b)(1). It relied on the Florida Supreme Court’s analysis, which pointed to statutory language, legislative history and treatment of the issue in other jurisdictions.
Second, the Court of Appeals held that the arbitration award against the contractor was sufficient to establish the validity of the developer’s underlying claim and thereby satisfied a condition precedent to a §624.155(1)(b)(1) suit.
Third, the Court of Appeals held that the developer had not forfeited its §624.155(1)(b)(1) claim by failing to pursue it as a breach of contract claim in the arbitration. It noted that the claim had not accrued by the time of the arbitration.
Fourth, the Court of Appeals held that the developer did not have to allege and prove that the surety’s misconduct constituted a general practice in order to make a §624.155(1)(b)(1) claim.
Fifth, the Court of Appeals held that the surety was collaterally estopped from raising the same defenses in the bad faith case as were rejected in the arbitration. However, it noted that the Florida Supreme Court held that the surety was permitted to attempt to prove in the §624.155(1)(b)(1) case that it had a reasonable and good faith factual basis for the defenses it asserted.
The Court of Appeals also held that there were sufficient factual disputes to preclude summary judgment. The Court of Appeals noted the developer had put forward evidence that the surety never directly communicated with the developer in response to its default letter and that the surety did not hire any consultants, engineers or other experts to investigate the claimed construction defects. It also noted that there was evidence the surety did not timely respond to the developer’s claims.
The Court of Appeals noted that the performance bond might not, by its express terms, have required the surety to conduct an investigation into the developer’s claim. However, it noted that, under Florida law, the duty to investigate the insured’s claim can arise by virtue of the insurer’s common law duty of good faith and fair dealing. It noted that Florida’s bad faith statute obligates an insurer to act in good faith and with due regard for the interest of the insured. The duty of good faith requires an insurer to “use the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of its own business.” Under Florida law, the surety’s conduct should be evaluated under all of the circumstances of the particular case, the Court of Appeals wrote,.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey’s Construction Practice Group, click here.
©2008 Howrey LLP
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