Judicial surety bonds have traditionally been perceived as instruments with fixed penalties, explicitly capping the surety’s liability to the bond’s face amount. This understanding has long provided a clear framework for sureties, principals, and obligees alike. Recent judicial interpretations have introduced some complications to that view, challenging the conventional boundaries of surety liability and signaling a potential shift in the legal landscape. We are absolutely perceiving social inflation in judicial surety bonds. As much as we surety folk would like to believe that our special niche is immune from those societal factors that sneak up on liability products, i.e., increased litigation, broader interpretations of liability, exorbitant jury awards, and evolving legal doctrines, to do so is foolish. The surety sector can no longer hide behind the “but strictly limited to the penalty hereon” from aggressive plaintiff attorneys, expanded definitions of negligence, third-party litigation funding and public attitudes toward “rich insurance companies that never pay”.
The Traditional Understanding of Surety Liability
Judicial bonds have functioned as guarantees where the surety assures the obligee of the principal’s obligations, with the surety’s liability strictly confined to the bond’s penal sum. This principle has ensured that irrespective of the circumstances or nuances of the legal case, the surety’s financial exposure would not exceed the predetermined bond amount. This framework has allowed sureties to assess exposure accurately and set premiums accordingly, fostering a stable and predictable surety bonding environment.
Emerging Judicial Interpretations: Beyond the Penal Sum
Recent court decisions have begun to challenge this fixed-limit paradigm, particularly in scenarios involving allegations of bad faith or tortious conduct by the surety. In these instances, courts have explored the possibility of imposing liabilities on sureties that exceed the original bond penalty, more specifically when the surety’s actions (or lack thereof) have exacerbated the obligee’s losses.
Case Studies Illustrating Expanded Surety Liability
Karton v. Ari Design & Construction, Inc.
In this California case, the court held that a surety could be liable for attorney’s fees and costs exceeding the penal sum of the judicial bond. The court reasoned that when attorney’s fees are awarded as statutory costs that they too can be assessed against the surety beyond the bond penalty. This decision underscores the potential for sureties to face liabilities beyond their anticipated exposure, particularly concerning legal fees incurred during disputes.
Dodge v. Fidelity and Deposit Company of Maryland
The Arizona Supreme Court addressed whether a surety could be held liable for tort damages exceeding the bond amount due to alleged bad faith. The court concluded that under Arizona’s insurance statutes a surety can be held liable for such damages, aligning the surety’s obligations more closely with those of traditional insurance policies rather than surety obligations. This case highlights the judiciary’s willingness to impose broader liabilities on sureties, particularly when their conduct is deemed to have contributed to the obligee’s increased losses.
Implications for the Surety Industry
This evolving judicial perspective necessitates a reevaluation of underwriting and surety risk management strategies within the industry. Sureties must now consider the potential for liabilities extending beyond the bond’s penal sum in those jurisdictions that recognize tort claims of bad faith or have statutes aligning surety obligations with those of traditional insurance.
Proactive Measures for Sureties
Thorough evaluations of principals with a special focus on the mitigation of the excess risks associated with defaults and potential bad faith claims is appropriate. Even in those classes of business that generally require the support of collateral security (i.e., appeal or supersedeas bonds, hi-cap temporary restraining order bonds, preliminary injunction bonds, etc.) principal financial condition will be important as well as the imposition of collateral requirements that exceed the penal sum of the bond. Surety companies must ensure that indemnity agreements explicitly address scenarios involving liabilities beyond the bond amount, providing clear recourse for the surety. Open lines of communication with obligees and principals are imperative, during the underwriting to clearly understand the case, venue and bond forfeiture case law AND to promptly address issues which might result in disputes escalating to litigation against surety. Regularly monitoring and analyzing judicial decisions and legislative changes that may impact surety liabilities is imperative.
While court surety bonds have historically been instruments of fixed liability, recent legal developments underscore the importance for sureties to remain vigilant and adaptable. By proactively addressing these emerging challenges, sureties can continue to fulfill their pivotal role in judicial proceedings, balancing the interests of all parties involved.
~C. Constantin Poindexter, CPCU, JD, MA, ASLI, ARe, AFSB
