Opinion
Court of Appeals Case No. 21A-PL-2731
03-01-2023
POSTERITY SCHOLAR HOUSE, LP, Appellant-Plaintiff, v. FCCI INSURANCE COMPANY, Appellee-Defendant.
Attorneys for Appellant: John P. Higgins, Stoll Keenon Ogden PLLC, Indianapolis, Indiana Attorneys for Appellee: Michael J. Weber, Krysta K. Gumbiner, Dinsmore & Shohl LLP, Chicago, Illinois
Attorneys for Appellant: John P. Higgins, Stoll Keenon Ogden PLLC, Indianapolis, Indiana
Attorneys for Appellee: Michael J. Weber, Krysta K. Gumbiner, Dinsmore & Shohl LLP, Chicago, Illinois
Weissmann, Judge.
[1] In Erie Ins. Co. v. Hickman , 622 N.E.2d 515 (Ind. 1993), the Indiana Supreme Court held that an insurer owes its insured a common law duty of good faith in performing its obligations under an insurance policy. Id. at 519. As a matter of first impression, we are asked whether the duty recognized in Erie extends to the relationship between surety and obligee in the context of performance and payment bonds on a construction project. We conclude it does not.
[2] Though suretyship is regulated as a class of insurance under the Indiana Insurance Code, there are fundamental differences between the two types of transactions. Most notably, the relationship between a surety and its bond obligee does not reflect the "special relationship" on which our Supreme Court relied in recognizing a duty of good faith in the insurance context. Id. at 518. We therefore affirm the trial court's entry of partial summary judgment in favor of the surety in this case.
Facts
[3] Stated generally, the owner of a construction project hired a general contractor to construct two apartment buildings. Their construction contract required the general contractor to obtain performance and payment bonds for the project, which the general contractor obtained from a surety company. Under these bonds, the surety company became secondarily liable to the project owner for the general contractor's performance of the construction contract. Thus, the project owner was the bond obligee.
[4] When the general contractor allegedly defaulted on the construction contract, the project owner filed two categories of bond claims with the surety company:
• A single claim under the performance bond, demanding that the surety company complete performance of alleged defective or incomplete work on the construction project; and
• A series of claims under the payment bond, demanding that the surety company pay the general contractor's unpaid subcontractors.
(collectively, the bond claims).
[5] The surety company denied the performance bond claim after its investigation allegedly revealed that the project owner, not the general contractor, was the party in default of the construction contract. The surety company also denied the payment bond claims due to the project owner's alleged failure to provide certain information required by the bond. However, the surety company indicated that it would reconsider all of the bond claims if the project owner provided additional information. This litigation followed.
[6] The project owner—Posterity Scholar House, LP (Posterity)—sued the surety company—FCCI Insurance Company (FCCI)—for breach of contract and tortious bad faith in its handling of the bond claims. FCCI moved for partial summary judgment as to Posterity's bad faith claim, arguing that a surety does not owe its bond obligee a common law duty of good faith under Indiana law. The trial court agreed with FCCI and granted FCCI's motion. Meanwhile, Posterity filed a cross-motion for partial summary judgment as to its breach of contract claim, which the trial court denied. Posterity appeals both rulings.
Discussion and Decision
[7] When reviewing the grant or denial of a summary judgment motion, we apply the same standard applicable to the trial court. Wagner v. Yates , 912 N.E.2d 805, 808 (Ind. 2009). Summary judgment is proper only when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Ind. Trial Rule 56(C). All facts and reasonable inferences are construed in favor of the nonmoving party. Wagner , 912 N.E.2d at 808. We must reverse the grant of a summary judgment motion if the record discloses an incorrect application of the law to those facts. Id.
I. Bad Faith Claim
[8] In challenging the trial court's grant of FCCI's motion for partial summary judgment, Posterity argues that a surety owes its bond obligee a common law duty of good faith by extension of the duty an insurer owes its insured. This is a matter of first impression under Indiana law and is one on which other states are divided. States that extend an insurer's common law duty of good faith to the surety-obligee relationship tend to rely heavily on the inclusion of sureties in their states’ regulatory schemes governing insurance. See, e.g. , Transamerica Premier Ins. Co. v. Brighton Sch. Dist. 27J , 940 P.2d 348 (Colo. 1997) ; Dodge v. Fid. & Deposit Co. of Md. , 161 Ariz. 344, 778 P.2d 1240 (1989). States holding a contrary view champion the fundamental differences between suretyship and insurance. See, e.g. , Cates Constr., Inc. v. Talbot Partners , 21 Cal.4th 28, 86 Cal.Rptr.2d 855, 980 P.2d 407 (1999) ; Great Am. Ins. Co. v. N. Austin Mun. Util. Dist. No. 1 , 908 S.W.2d 415 (Tex. 1995).
A. Insurer's Common Law Duty of Good Faith
[9] Our analysis begins with Erie Ins. Co. v. Hickman , 622 N.E.2d 515 (Ind. 1993). In holding that an insurer owes its insured a duty of good faith under Indiana common law, our Supreme Court in Erie emphasized the "unique character" of insurance policies and the "special relationship" between insurer and insured. Id. at 518-19. As the Court later summarized in Cain v. Griffin , 849 N.E.2d 507 (Ind. 2006) :
We found in Erie that an insurer and its insured have a special relationship that imposes on the insurer a duty of good faith dealing because of the arms-length contractual relationship between the two parties, the fiduciary nature of the contract, and the potentially adversarial nature of first-party claims that may occur as a result of the contractual relationship between the parties.
Id. at 515 (citing Erie , 622 N.E.2d at 518-19 ) (finding "[t]he relationship between a third-party beneficiary and the insurer is not one intentionally created by a close, fiduciary, or potentially adversarial contract and, as such, is not the ‘special relationship’ anticipated by this Court in Erie ").
[10] The close, arms-length nature of the insurer-insured relationship is seen during "the initial purchase of a policy." Erie , 622 N.E.2d at 518. The fiduciary nature of the relationship arises from an insurer's duty to defend an insured against third party liability claims. See id. (citing Richey v. Chappell , 594 N.E.2d 443, 447 (Ind. 1992) ). And the adversarial nature of the relationship is marked by an insured's vulnerability when, in the face of calamity, the insured makes a first-party coverage claim. See id. (citing Vernon Fire & Cas. Ins. Co. v. Sharp , 264 Ind. 599, 609, 349 N.E.2d 173, 181 (1976) ).
B. Inapplicability to Surety-Obligee Relationship
[11] Posterity essentially argues that suretyship is analogous to insurance; therefore, a surety owes its bond obligee a common law duty of good faith under Erie . We disagree for several reasons.
1. Suretyship Distinguished
[12] Our Supreme Court long ago distinguished between suretyship and insurance, stating: "Insurance has been defined as a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from an unknown or contingent event; whereas a contract of suretyship is one to answer for the debt, default, or miscarriage of another." Meyer v. Bldg. & Realty Serv. Co. , 209 Ind. 125, 133, 196 N.E. 250, 253-54 (1935). Though similar in some respects, "there is a very wide difference between the two kinds of contracts." Id. at 253 ; see Ind. Univ. v. Ind. Bonding & Sur. Co. , 416 N.E.2d 1275, 1285 n.6 (Ind. Ct. App. 1981) ("[T]he essential nature of the promises differ.").
[13] Insurance involves a bilateral contract by which one party (the insured) shifts its risk of loss to another party (the insurer). City of Gary v. Allstate Ins. Co. , 612 N.E.2d 115, 118 (Ind. 1993). Suretyship is a tripartite arrangement in which one party (the surety) guarantees that a second party (the principal) will perform its contractual obligations to a third party (the obligee). Meyer , 196 N.E. at 253. If the principal defaults on its obligations, the obligee may call upon the surety for performance, after which the surety may seek indemnification from the principal. Damler v. Baine , 114 Ind. App. 534, 51 N.E.2d 885, 888 (1943). Thus, the principal retains the risk of loss.
[14] In this sense, as one oft cited treatise explains, "[a] surety bond is a financial credit product, not an insurance indemnity product." 4A Philip L. Bruner & Patrick J. O'Connor, Jr., Construction Law § 12:7 (2022).
It is true that from the obligee's standpoint ... a surety bond may be thought of as "insurance" against a default by the principal. However, this extra level of protection is really no different from that afforded to a beneficiary under a letter of credit or other similar credit arrangement. The obligee's perceptions of what it is acquiring when it purchases a surety bond do not alter the underlying nature of the transaction. Suretyship is a form of credit enhancement rather than a type of risk financing, e.g., insurance.
Brunner & O'Connor, Jr., supra , § 11:5.
2. Statutes Not Determinative
[15] Largely ignoring the fundamental differences outlined above, Posterity claims suretyship and insurance should be treated in the same manner because the Indiana General Assembly included surety bonds as a class of insurance under the Indiana Insurance Code. See Ind. Code § 27-1-5-1 (Class 2)(K); see also Ind. Code § 27-1-2-3(a) (broadly defining "[i]nsurance" as that which "grant[s] indemnity or security against loss for a consideration").
[16] As previously stated, several states have relied on the inclusion of sureties in their insurance statutes in holding that an insurer's common law duty of good faith applies to the surety-obligee relationship. Others, however, have found such statutory inclusion not determinative. See, e.g. , Cates Constr., Inc. v. Talbot Partners , 21 Cal.4th 28, 86 Cal.Rptr.2d 855, 980 P.2d 407 (1999). Based on our Supreme Court's reasoning in Erie , we agree with the latter camp.
[17] An insurer's common law duty of good faith arises not because insurance is a regulated industry but from the "special relationship" between insurer and insured. See infra ¶¶ 9-10; cf. Erie , 622 N.E.2d at 519 n.1 (recognizing that the Indiana Insurance Code "provides no private cause of action" for unfair claim settlement practices; see Ind. Code §§ 27-4-1-4.5, -5.6, -6, -18). Thus, the inclusion of sureties in the Indiana Insurance Code does not compel us to extend an insurer's duty of good faith to the surety-obligee relationship.
3. No Special Relationship
[18] Without analysis, Posterity asserts that the surety-obligee relationship, like the insurer-insured relationship, is "a traditional arms-length dealing between two parties ... but is also at times one of a fiduciary nature, and, at other times, an adversarial one." Appellant's Br. p. 20 (quoting Erie , 622 N.E.2d at 519 ). [19] To the contrary, the arms-length dealing in a suretyship occurs between surety and principal, not surety and obligee. See Brunner & O'Connor, Jr., supra , § 12:11 (discussing surety bond underwriting). The sometimes fiduciary, sometimes adversarial nature of the insurer-insured relationship is also unique. "[A] surety bears no responsibility to defend an obligee against third party claims and has no right to represent the obligee's interests by virtue of the surety bond." Cates , 86 Cal.Rptr.2d 855, 980 P.2d at 424-25. And whereas an insured can look only to its insurer for recourse in the wake of a loss, a bond obligee has a remedy against its principal as well as its surety. Great Am. Ins. Co. v. N. Austin Mun. Util. Dist. No. 1 , 908 S.W.2d 415, 419 (Tex. 1995).
[20] For these reasons, we find the relationship between a surety and its bond obligee does not reflect the "special relationship" on which our Supreme Court relied in Erie . We therefore conclude that the common law duty of good faith that an insurer owes its insured does not extend to the surety-obligee relationship in the context of performance and payment bonds on a construction project.
[21] Accordingly, the trial court did not err in granting FCCI's motion for partial summary judgment as to Posterity's tortious bad faith claim.
In conjunction with Posterity's claim that FCCI is not entitled to partial summary judgment as to Posterity's tortious bad faith claim, Posterity asserts that FCCI owed it a contractual duty of good faith under the surety bonds. "[A] duty of good faith may apply to a contract where the terms of the contract expressly include such a duty," CW Farms, LLC v. Egg Innovations, LLC , 169 N.E.3d 874, 880 (Ind. Ct. App. 2021), trans. denied. But Posterity does not direct us to—and there does not appear to be—any Indiana authority recognizing a cause of action in tort for the breach of a contract's express duty of good faith. When confronted with this issue in Amaya v. Brater , 981 N.E.2d 1235, (Ind. Ct. App. 2013), this Court concluded the appellants’ claim for tortious breach of their contracts’ express duty of good faith was "duplicative" of their breach of contract claim. Id. at 1239. We conclude the same as to Posterity. Accordingly, we resolve Posterity's claim that FCCI owed it a contractual duty of good faith under the surety bonds in conjunction with Posterity's claim that it is entitled to partial summary judgment as to its breach of contract claim. See infra ¶¶ 22-27.
II. Breach of Contract Claim
[22] Posterity also argues that it is entitled to partial summary judgment as to its breach of contract claim, asserting there are no genuine issues of material fact as to whether FCCI breached the terms of its surety bonds. FCCI, however, correctly counters that this Court lacks jurisdiction over the denial of Posterity's motion for partial summary judgment because it is not a final judgment.
Generally, an order denying summary judgment is not a final appealable judgment because it does not irretrievably dispose of one or more issues between the parties; neither does it determine nor foreclose the rights of the parties. Rather, the denial of a motion for summary judgment merely places the parties’ rights in abeyance pending ultimate determination by the trier of fact. Therefore, a party seeking review of denial of a summary judgment motion must ordinarily do so by way of interlocutory appeal.
Bd. of Trs. of Ball State Univ. v. Strain , 771 N.E.2d 78, 81 (Ind. Ct. App. 2002) (internal quotations and citations omitted).
[23] Indiana Appellate Rule 5(A) provides that "the Court of Appeals shall have jurisdiction in all appeals from Final Judgments of Circuit, Superior, Probate, and County Courts, notwithstanding any law, statute or rule providing for appeal directly to the Supreme Court of Indiana." Under Appellate Rule 2(H),
[a] judgment is a final judgment if (1) it disposes of all claims as to all parties, or (2) the trial court in writing expressly determines under Trial Rule 54(B) ... that there is no just reason for delay and in writing expressly directs the entry of judgment ... under [Indiana] Trial Rule 54(B) as to fewer than all the claims or parties ....
[24] Trial Rule 54(B) similarly provides:
A judgment as to one or more but fewer than all of the claims or parties is final when the court in writing expressly determines that there is no just reason for delay, and in writing expressly directs entry of judgment, and an appeal may be taken upon this or other issues resolved by the judgment; but in other cases a judgment, decision or order as to less than all the claims and parties is not final.
[25] Here, the trial court issued a joint order granting FCCI's motion for partial summary judgment as to Posterity's bad faith claim and denying Posterity's motion for partial summary judgment as to its breach of contract claim. This order concluded with the following two paragraphs:
This Court has examined the motions, the replies, the designations, the applicable law, and the parties’ arguments. The Court now DENIES Posterity's Motion for Partial Summary Judgment as to the derivative liability of FCCI; and the Court GRANTS FCCI's Motion for Partial Summary Judgment with regards to the lack of a duty of good faith owed by FCCI to Posterity or Bunn.
Pursuant to Trial Rule 54(B), when multiple claims or multiple parties are involved, the Court may direct the entry of final judgment as to one or more but fewer than all of the claims or parties upon an express determination that "there is no just reason for delay" and upon an express direction for the entry of judgment. As there is no just reason for delay, the Court now expressly directs the entry of final judgment as to less than all the issues, claims or parties, as consistent with this Order in regards to the issue of a duty of good faith owed by FCCI to Posterity [.]
App. Vol. 25, p. 216 (emphasis added).
[26] Though the trial court's order contains the "magic language" of Trial Rule 54(B), that language only applies to the grant of FCCI's motion for partial summary judgment as to Posterity's bad faith claim. Because the trial court did not direct its Trial Rule 54(B) language to the denial of Posterity's motion for partial summary judgment as to its breach of contract claim, that ruling is not a final judgment. See Ramsey v. Moore , 959 N.E.2d 246, 253 (Ind. 2012) (recognizing final judgment certification as to one claim but not others when it was "apparent from the structure and language of the order that the trial court intended the 54(B) language to apply solely to that claim").
[27] Citing this Court's decision in State v. Keller , 845 N.E.2d 154 (Ind. Ct. App. 2006), Posterity asserts that when a trial court certifies an order for appeal, that certification applies to the entire order and is not limited to any specific questions designated by the court. See id. at 160. But Keller concerned the certification of an interlocutory appeal under Appellate Rule 14, not a judgment made final under Appellate Rule 2, via Trial Rule 54(B). Id. at 160 ("[A]ppellate courts are under no obligation to accept the issue as framed by the trial court" because "the language of [Appellate] Rule 14(B) clearly identifies certification of an order, not of specific issues or questions.").
[28] Appellate Rule 14(B) states: "An appeal may be taken from other interlocutory orders if the trial court certifies its order and the Court of Appeals accepts jurisdiction over the appeal." Posterity did not seek, and the trial court did not grant, Appellate Rule 14(B) certification of the trial court's interlocutory order denying Posterity's motion for partial summary judgment as to its breach of contract claim. Moreover, this Court did not accept jurisdiction over any such interlocutory appeal. Keller is therefore inapplicable.
[29] As this Court lacks jurisdiction to review the trial court's denial of Posterity's motion for partial summary judgment as to its breach of contract claim, we dismiss Posterity's appeal of that order.
Conclusion
[30] We affirm the trial court's grant of FCCI's motion for partial summary judgment as to Posterity's tortious bad faith claim. And we dismiss Posterity's appeal of the trial court's order denying Posterity's motion for partial summary judgment as to its breach of contract claim.
Vaidik, J., and Crone, J., concur.