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Contractor’s Bad Faith Claim Premised On Subcontractor Performance Bond Does Not Exist Under Alabama Law

In Goudy Construction, Inc. v. Raks Fire Sprinkler LLC, Plaintiff Goudy Construction, Inc. (“Goudy”) served as the general contractor for a project for which Defendant Raks Fire Sprinkler LLC (“Raks”) submitted a bid to install a fire sprinkler system. 2019 WL 6841067 (N.D. Ala. 2019). Goudy accepted Raks’ bid and entered into a contractual agreement that required Raks to provide commercial liability insurance for the duration of the Project and was also required to provide a performance bond with Goudy as the owner. Raks complied with these requirements, purchasing the performance bond from Defendant Aegest Security Insurance Company (“Aegest”).

After the sprinkler system installation began, Raks fell significantly behind schedule. It also failed to make timely payments to its employees. Raks eventually abandoned the job site.

Goudy filed a formal claim with Raks’ CGL insurer, but later learned that Raks lost its liability insurance shortly after beginning the project for failure to pay the premium. Goudy also filed a claim with Aegest, providing documentation of Raks’ incomplete installation, and other evidence showing Raks’ work did not comply with the approved design specifications.

Aegest began an investigation of Raks’ performance. After discovering that Goudy executed a “Final Waiver and Release of Lien,” Aegest denied Goudy’s claim. Aegest stated that the waiver and release represented Goudy’s acceptance of Raks’ performance under the contract.

Goudy then filed suit against Aegest alleging bad faith. Aegest responded by filing a Motion to Dismiss based on Alabama law does not allow a bad faith claim based on a performance bond.

Alabama law only allows claims for bad faith in the context of “insurance” claims. The issue was whether Raks’ performance bond is construed as an insurance contract under Alabama law. Because the tort of bad faith in Alabama requires “an insurance contract between the parties and a breach thereof by the defendant,” the Court had to determine, as a threshold matter, if the performance bond issued by Aegest constitutes “insurance” under Alabama law.

Prior cases under Alabama law concluded that surety bonds did not constitute insurance, and that a breach of a surety bond did not give rise to the “tort of bad faith.” Subsequent cases continually refuse to extend the tort of bad faith beyond classic insurance policies. Still, Goudy argued that sureties are included in the insurance portion of the Alabama Code, and that sureties have “superior bargaining power” when negotiating surety bonds, so public policy requires a tort remedy.

However, the Court rejected Aegest’s argument, holding that the inclusion of sureties in the insurance portion of the Alabama Code is not dispositive, and reiterated that numerous Alabama state and federal courts have held consistently that a bond is not insurance. The Court granted Aegest’s Motion to Dismiss.