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Table of Contents
- BACKGROUND: THE SURETY RELATIONSHIP 1
- EXTRA-CONTRACTUAL CLAIMS: OVERVIEW 3
- CLAIMS BROUGHT BY OBLIGEES/CLAIMANTS 5
- Common Law Duty of Good Faith and Fair Dealing 5
- Statutory Causes of Action 8
- Article 21.21, Texas Insurance Code 8
- Texas Deceptive Trade Practices Act (DTPA) 9
- Standing: Definition of Consumer 9
- DTPA Violations 12
- Laundry List [§17.46(b)] 12
- Breach of Warranty [§17.50(a)(2)] 14
- Unconscionable Conduct [§17.50(a)(3)] 15
- Producing Cause of Damages 17
- Tortious Interference and Other Tort Claims 18
- Tortious Interference 18
- Civil Conspiracy 20
- Fraud 22
- CLAIMS BROUGHT BY PRINCIPALS/INDEMNITORS 25
- Common Law Duty of Good Faith and Fair Dealing 26
- Contractual Obligation of Good Faith 29
- Special Relationship and Duty of Good Faith 32
- Nexus Between Surety's Conduct and Damages 34
- Statutory Causes of Action 35
- Article 21.21, Texas Insurance Code 35
- Texas Deceptive Trade Practices Act (DTPA) 35
- Tortious Interference and Other Tort Claims 37
- Tortious Interference 37
- Lender Liability and Other Tort Claims 38
- CONCLUSION 42
Abstract
A surety bond is a three party (tripartite) transaction in which the surety obligates itself to a third party (the obligee) to guarantee or answer for the debt or default of another (the principal). A surety bond is always an accessory undertaking which presupposes and is collateral to some contract or transaction between the obligee and the principal.
Under the Texas Insurance Code, an entity which is in the business of acting as a surety must obtain a "Certificate of Authority" from the Texas Department of Insurance. However, even though a surety bond is written by an "insurance company", it is not an insurance policy. A surety bond is a contract of guaranty that a third party (the surety's principal) will perform or comply with an underlying obligation, which may include the payment of a debt or the performance of a contract. Vastine v. Bank of Dallas, 808 S.W.2d 463 (Tex. 1991) Empire Steel Corp. of Texas v. Omni Steel Corp., 378 S.W.2d 905, 911 (Tex. Civ. App. -- Ft. Worth 1964, writ ref'd n.r.e.) Estes v. Oilfield Salvage Co., 284 S.W.2d 201, 204 (Tex. Civ. App. -- Dallas 1955, no writ) A surety bond is, then, a type of guaranty and the law relating to guaranty contracts is usually applied to surety bonds.
Suretyship is a contract in which the surety makes a direct promise to the named obligee(s). With certain types of bonds, such as payment bonds, a specific class of third party beneficiaries may also have rights against the surety arising under the bond. Surety claims brought by obligees and these beneficiaries are subject to the common law of contracts.
Recent decisions of the Texas Supreme Court and other courts in Texas, particularly Great American Ins. v. N. Austin Utility, have significantly limited a surety's exposure to a claim by an obligee or payment bond claimant for extra-contractual damages. The relationship between a surety and the obligee or beneficiary of the bond does not give rise to a duty of good faith and fair dealing. Further, statutory causes of action specifically relating to insurance claims' settlement practices do not apply because suretyship does not fall under the definition of "business of insurance" for purposes of article 21.21, Texas Insurance Code.
Obligees may have standing as "consumers" to bring actions against sureties under the DTPA; however, most of the grounds for recovery under the DTPA do not apply to disputes that arise between sureties and obligees/beneficiaries in connection with claims practices. Other torts, such as tortious interference with the underlying contract, probably are not viable when the surety has a legal right to take the action giving rise to the claim.
Sureties owe obligees and beneficiaries clear contractual duties. When a surety breaches a contractual obligation arising under the terms of the surety bond, the obligee or beneficiary is typically limited to a cause of action for breach of contract -- unless the surety's conduct would have given rise to tort liability independent of the fact that a contractual relationship existed.
While sureties' exposure to extra-contractual claims brought by obligees and beneficiaries has been reduced by recent case law, sureties face increased exposure to such claims from principals and indemnitors as a result of the recent Court of Appeals opinion in Associated Indem. Corp. v. CAT Contracting. In CAT Contracting, the Court held that the relationship between the surety and its principal did give rise to a duty of good faith and fair dealing. Accordingly, a surety's failure to reasonably investigate an obligee's claim, keep its principal informed, and give equal consideration to its principal's interests when settling the obligee's claim may not only result in the surety's forfeiture of any claim for reimbursement from the principal and indemnitors, but also lead to a recovery against the surety by the principal and indemnitors of their actual damages, including the unpaid balance of contract funds, lost profits due to the inability of the principal to obtain future bonding, and damages for mental anguish.
Application for writ of error is currently pending in CAT Contracting. However, even if the CAT Contracting decision is overturned by the Supreme Court, sureties will continue to face potential extra-contractual claims by principals and indemnitors, some of which are analogous to lender liability claims. Further, even when sureties have a legal right to take certain action in their own best interests, they may continue to face exposure for liability to the extent that they fail to exercise ordinary care to avoid reasonably foreseeable injury to the other parties to the surety relationship.
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