1. BAD FAITH CLAIMS AGAINST SURETIES Philadelphia Surety Claims Association January 15, 2014

2. Stradley Ronon Stevens & Young, LLP2 Origins of the Bad Faith Claim: Origins of the Bad Faith Claim: The general common law duty of good faith and fair dealing was transformed into an affirmative claim sounding in tort Philadelphia Surety Claims Association

3. Stradley Ronon Stevens & Young, LLP3 Origins of the Bad Faith Claim: Origins of the Bad Faith Claim: The new tort was based on the “special relationship” between the insured and its insurer, which arose out of the unequal bargaining power at policy inception and during coverage determination Philadelphia Surety Claims Association

4. Stradley Ronon Stevens & Young, LLP4 Two Model Acts: Two Model Acts: Unfair Trade Practices Act Uniform Claims Settlement Practices Act Philadelphia Surety Claims Association

5. Stradley Ronon Stevens & Young, LLP5 The Unfair Trade Practices Act The Unfair Trade Practices Act National Association of Insurance Commissions adopt the “UnfairTrade Practices Act” establishing rules to regulate unfair trade practices in the insurance industry. The scope of the model act appears to cover suretyship. Those states that have adopted the act include suretyship within the scope of regulated insurance activities. Philadelphia Surety Claims Association

6. Stradley Ronon Stevens & Young, LLP6 The Uniform Claims Settlement Practices Act The Uniform Claims Settlement Practices Act National Association of Insurance Commissions later adopts the “Uniform Claims Settlement Practice Act” which was intended to define unfair claims practices with more exactitude. The model act specifically excludes suretyship. However, not all the states that have adopted the model act have adopted the language excluding suretyship. Philadelphia Surety Claims Association

7. Stradley Ronon Stevens & Young, LLP7 Two Model Acts Two Model Acts Both model acts say they do not create a private cause of action, but that language has not been consistently adopted. Philadelphia Surety Claims Association

8. Stradley Ronon Stevens & Young, LLP8 What is bad faith? Philadelphia Surety Claims Association

9. Stradley Ronon Stevens & Young, LLP9 What is bad faith? Refusal to pay a claim without a reasonable basis Frivolous and unfounded refusal to pay policy proceeds Dishonest purpose or conscious wrongdoing Unreasonable conduct which the surety knows to be unreasonable Failure to investigate for the purpose of remaining ignorant

10. Stradley Ronon Stevens & Young, LLP10 What is not bad faith? Mere negligence or bad judgment is not bad faith Reasonable, but incorrect, interpretation of a policy or law is not bad faith Inconsistent claims positions may not be bad faith if there is a reason for a differing position in the current matter Delays due to reasonable investigations Philadelphia Surety Claims Association

11. Stradley Ronon Stevens & Young, LLP11 What arguments work in favor of the claim? Philadelphia Surety Claims Association

12. Stradley Ronon Stevens & Young, LLP12 Arguments In Favor: Sureties are just like insurance companies Philadelphia Surety Claims Association

13. Stradley Ronon Stevens & Young, LLP13 Arguments In Favor: Suretyship is referenced in the regulatory scheme Philadelphia Surety Claims Association

14. Stradley Ronon Stevens & Young, LLP14 Arguments In Favor: A bad faith tort claim is needed to keep sureties honest Philadelphia Surety Claims Association

15. Stradley Ronon Stevens & Young, LLP15 Arguments In Favor: A “special relationship” exists between a surety and obligee Philadelphia Surety Claims Association

16. Stradley Ronon Stevens & Young, LLP16 Arguments In Favor: Sureties have superior bargaining power vis-à-vis obligees Philadelphia Surety Claims Association

17. Stradley Ronon Stevens & Young, LLP17 Which arguments work in favor of sureties? Philadelphia Surety Claims Association

18. Stradley Ronon Stevens & Young, LLP18 Arguments Against: A surety’s liability should be no greater than that of its principal Philadelphia Surety Claims Association

19. Stradley Ronon Stevens & Young, LLP19 Arguments Against: Surety is a credit accommodation, not insurance Philadelphia Surety Claims Association

20. Stradley Ronon Stevens & Young, LLP20 Arguments Against: Insurance spreads risk, but in suretyship the loss remains concentrated with the principal Philadelphia Surety Claims Association

21. Stradley Ronon Stevens & Young, LLP21 Arguments Against: The mere reference of suretyship in the regulatory framework is not enough Philadelphia Surety Claims Association

22. Stradley Ronon Stevens & Young, LLP22 Arguments Against: Sureties have the right to “test the merits” of a claim Philadelphia Surety Claims Association

23. Stradley Ronon Stevens & Young, LLP23 Arguments Against: A tort claim encourages the payment of meritless claims and the overpayment of questionable claims Philadelphia Surety Claims Association

24. Stradley Ronon Stevens & Young, LLP24 Arguments Against: Obligees look first to the principal and then to the surety, rather than an insured who looks only to the insurer Philadelphia Surety Claims Association

25. Stradley Ronon Stevens & Young, LLP25 Arguments Against: Because of the tripartite nature of the relationship, the surety must balance conflicting interests Philadelphia Surety Claims Association

26. Stradley Ronon Stevens & Young, LLP26 Arguments Against: Sureties do not have superior bargaining power Philadelphia Surety Claims Association

27. Stradley Ronon Stevens & Young, LLP27 Arguments Against: Obligees often are commercially sophisticated (with access to legal advice) Philadelphia Surety Claims Association

28. Stradley Ronon Stevens & Young, LLP28 Arguments Against: Obligees can negotiate terms into the underlying contract that discourage delay by the surety (e.g. liquidated damages) Philadelphia Surety Claims Association

29. Stradley Ronon Stevens & Young, LLP29 QUESTIONS? Feel free to contact: Patrick Kingsley Stradley, Ronon, Stevens & Young, LLP (215) 564-8029 pkingsley@stradley.com

30. Stradley Ronon Stevens & Young, LLP30 Thanks