JUNE 2015 BAD FAITH CASES: COURT DISMISSES CLAIM FOR BAD FAITH BREACH OF A SURETY BOND BECAUSE NO SUCH CAUSE OF ACTION IS RECOGNIZED IN NEW JERSEY (New Jersey Federal)
In U.S. Sewer & Drain, Inc. v. Earle Asphalt Company, the Court dismissed a claim for bad faith breach of a surety bond after the Court found that no such cause of action is recognized in New Jersey. The case arose out of a public construction contract to widen and improve a section of public highway. As required by the New Jersey Bond Act, a payment bond to the New Jersey Turnpike Authority (“NJTA”) was required.
The contractor/defendant arranged for the plaintiff subcontractor to “provide materials and services for the installation of pipelining as part of the project.” However, the contractor refused to pay the subcontractor after a dispute arose about job performance. The subcontractor subsequently made a claim on the payment bond, which the surety refused to pay. The subcontractor brought claims against both the contractor and the surety, including a claim for bad faith breach of a surety bond. The surety sought to dismiss this claim because New Jersey does not recognize a cause of action for bad faith breach of a surety bond.
The contractor cited a case in which the Appellate Division rejected an argument that bail bond issuers were exempt from New Jersey’s Unfair Claims Settlement Practices Act (“USCPA”). The Court found this case to be irrelevant because the statutory provision at issue there did not create a private cause of action. Moreover, the ruling in that case concerning the applicability of the USCPA to sureties was superseded by N.J.A.C. 11:2-17.2.
The Court addressed the only other case finding a cause of action for bad faith breach of a surety bond, which “noted that the New Jersey Supreme Court had recognized the bad faith cause of action against insurers” in a case decided in 1993. However, neither the New Jersey Supreme Court nor any other state court in New Jersey has followed this holding, and two more recent decisions explicitly declined to follow the ruling.
Therefore, the Court found that no cause of action for bad faith breach of a surety bond is recognized in New Jersey, and dismissed the bad faith claim.
