Section 8371 Bad-Faith Liability Does Not Extend to Surety Bonds (and the Limits of Binding Sureties to a Principal’s Arbitration Award)

1) Introduction

Eastern Steel Constructors, Inc. v. International Fidelity Insurance Company came to the Supreme Court of Pennsylvania on cross-appeals from a Superior Court decision that had affirmed, reversed, and vacated in part a Centre County judgment and remanded. The dispute arises from a Pennsylvania State University construction project where Ionadi Corporation served as contractor and International Fidelity Insurance Company (“Fidelity”) issued a payment bond guaranteeing payment for covered project inputs. Eastern Steel Constructors, Inc. (“Eastern”), a subcontractor-claimant, obtained an arbitration award against Ionadi (the “Ionadi Award”) and then sought to hold Fidelity liable under the bond.

Justice Brobson’s writing is a concurring and dissenting opinion. He concurs with the Majority on a threshold statutory issue: 42 Pa. C.S. § 8371 (Pennsylvania’s insurance bad faith statute) does not apply to surety bonds. He dissents from the Majority’s resolution of the bond-enforcement issues—principally whether Fidelity can be bound by Eastern’s arbitration result against Ionadi and whether the bond obligates Fidelity to pay Eastern’s arbitration-related attorneys’ fees and contractual interest.

2) Summary of the Opinion (Justice Brobson)

  • Concurrence: Justice Brobson joins the Majority’s conclusion that Section 8371 does not apply to surety bonds.
  • Dissent: He would hold that the Ionadi Award is not conclusive and binding on Fidelity because Fidelity did not agree to arbitrate and the bond preserves a judicial forum for disputes under the bond.
  • Dissent: He would further hold Fidelity is not liable for Eastern’s attorneys’ fees incurred in the Ionadi arbitration and not liable for contractual interest derived from the subcontract, because the bond’s promise is limited to paying for “labor, materials and equipment” as defined by the bond and does not expand to “all sums due” in the manner the Majority adopts.
  • Remand posture advocated: Because the Superior Court treated certain Fidelity defenses as moot once it deemed the Ionadi Award binding, Justice Brobson would remand for consideration of Fidelity’s cross-appeal merits (including a dispute over proof of quantities/weights).

3) Analysis

A. Precedents Cited

1. Suretyship is construed by intent, but liability is not expanded by implication

Justice Brobson anchors his dissent in long-standing Pennsylvania suretyship and bond-construction principles:

  • Thommen v. Aldine Trust Co., 153 A. 750 (Pa. 1931): suretyship is construed according to the parties’ intent; enforced “according to its strict terms”; liability not extended by implication—while also warning against “forced and unreasonable construction” to relieve the surety. Justice Brobson uses Thommen to frame both (i) a strict-text approach and (ii) a contextual approach that still remains tethered to what the surety actually agreed to.
  • Frederick Inv. Co. v. Am. Surety Co. of N.Y., 169 A. 155 (Pa. 1933): bonds are construed with reference to contemporaneous circumstances; contract interpretation may consider the “context” to effectuate the parties’ purposes. Justice Brobson cites this to justify looking at the bond’s structure (e.g., dispute mechanisms, reservations of defenses, forum selection) rather than importing later subcontract terms.
  • Commonwealth, to Use of Pa. Mfrs.' Ass'n Cas. Ins. Co. v. Fid. & Deposit Co. of Md., 50 A.2d 211 (Pa. 1947): the bond obligation cannot be extended beyond its plain words; even where a contract is incorporated, courts cannot create obligations not imposed by the bond’s terms. Justice Brobson relies heavily on this to reject reading “all sums due” as an expansion to attorneys’ fees and subcontract interest when the bond’s operative promise is limited to “labor, materials and equipment.”

2. Arbitration cannot be imposed without a clear agreement; jury-trial concerns

To resist binding Fidelity to the Ionadi arbitration, Justice Brobson emphasizes arbitration’s contractual nature:

  • Lincoln Univ. of Commonwealth Sys. of Higher Ed. v. Lincoln Univ. Chapter of the Am. Ass'n of Univ. Professors, 354 A.2d 576 (Pa. 1976) (quoting Schoellhammer's Hatboro Manor, Inc. v. Local Joint Exec. Bd. of Phila., 231 A.2d 160 (Pa. 1967)): arbitration is a matter of contract; absent an agreement, parties cannot be compelled to arbitrate. Justice Brobson uses this to argue the bond’s silence on arbitration (and its judicial-forum clause) ends the inquiry.
  • Pisano v. Extendicare Homes, Inc., 77 A.3d 651 (Pa. Super. 2013): compelling arbitration against non-waiving parties implicates constitutional jury-trial rights. Justice Brobson cites Pisano to underscore that imposing arbitration consequences on Fidelity (a non-party to the subcontract) is not merely contractual overreach but constitutionally sensitive.
  • Jacob v. Weisser, 56 A. 1065 (Pa. 1904): an arbitrator’s power must be “clearly given”; jury trial cannot be taken away by implication; arbitration terms must be “clear and unmistakable” to oust courts. Justice Brobson uses this to reject the notion that “notice and an opportunity to participate” can substitute for the surety’s consent to arbitrate or to be bound.

3. The Majority’s reliance on arbitration-preclusion against surety

  • Conneaut Lake Agricultural Association v. Pittsburg Surety Company, 74 A. 620 (Pa. 1909): Justice Brobson identifies this as the key authority the Majority uses to treat the Ionadi Award as binding on Fidelity where the surety had notice and an opportunity to participate. His dissent distinguishes the case on principle: notice cannot “override” a surety’s retained contractual right to litigate bond disputes in court, especially where the bond contains no arbitration clause and explicitly channels “suit or action” to a court of competent jurisdiction.

4. Attorneys’ fees and interest: distinguishing broad “sums due” bond language

  • Commonwealth to Use of Fort Pitt Bridge Works v. Continental Casualty Company, 240 A.2d 493 (Pa. 1968): the Majority cites this for the proposition that “sums due” can be broad enough to include interest (and, by extension, other bargained-for subcontract items). Justice Brobson distinguishes it because the bond there permitted suit “[f]or such sum or sums as may be justly due him” without limiting language, whereas Fidelity’s bond expressly makes Fidelity “jointly and severally” liable only for “labor, materials and equipment” and provides a specific definitional section (Paragraph 15.1) that omits attorneys’ fees and contractual interest.

5. The Superior Court’s mootness rationale

  • Eastern Steel Constructors, Inc. v. Int'l Fid. Ins. Co., 282 A.3d 827 (Pa. Super. 2022): Justice Brobson cites the Superior Court’s holding that Fidelity could not “retry” an issue addressed in arbitration because the Ionadi Award was treated as binding, rendering Fidelity’s cross-appeal moot. His dissent would undo that mootness by holding the award not binding on Fidelity.

B. Legal Reasoning

1. Statutory bad faith: Section 8371 vs. suretyship

Although Justice Brobson does not elaborate in this excerpt, he expressly joins the Majority’s conclusion that Section 8371 does not apply to surety bonds. The significance is categorical: the statutory remedy for insurer bad faith is unavailable against a surety as surety.

2. Why (in Justice Brobson’s view) the Ionadi Award cannot bind Fidelity

Justice Brobson’s reasoning is contract-first and forum-specific:

  • The bond is silent on arbitration and affirmatively selects court litigation. The Payment Bond provides that any “suit or action” by a claimant must be brought “in a court of competent jurisdiction” where the work is located. For Justice Brobson, that language preserves Fidelity’s right to litigate claim amount and defenses in court.
  • Fidelity was not a party to the subcontract and the bond did not incorporate it. The subcontract’s arbitration clause cannot bind a non-party surety—particularly where the subcontract was executed after the bond and is not expressly incorporated.
  • Notice and an invitation to participate are not consent. Even if Fidelity had notice and an “opportunity to participate,” that cannot rewrite the bond or waive jury-trial rights. Justice Brobson views the Majority’s waiver theory as illusory because Fidelity could not realistically “remove” the arbitration between Ionadi and Eastern; the arbitrator indisputably had jurisdiction over those contracting parties.
  • Bottom line: Eastern cannot unilaterally change the bond dispute forum by opting to arbitrate with Ionadi.

3. Why (in Justice Brobson’s view) attorneys’ fees and subcontract interest are outside the bond

Justice Brobson reads the Payment Bond as imposing a limited payment obligation:

  • Operative promise: Fidelity (with Ionadi) is bound to pay for “labor, materials and equipment” furnished for the project.
  • Definition section matters: Paragraph 15.1 expands “labor, materials or equipment” to include utilities, rental equipment, design services required for performance, and other lienable items—but still does not include attorneys’ fees or contractual interest.
  • Express attorneys’ fee provision (limited trigger): The bond contains its own attorneys’ fee provision tied to Fidelity’s failure to discharge obligations in responding to a bond claim—circumstances Justice Brobson says are “not presently at issue.” This express treatment of fees supports his inference that other fees (like arbitration-prosecution fees) are not covered.
  • Rejecting “all sums due” as an expansion clause: Paragraphs 2 and 3 state Fidelity’s obligation becomes void if Ionadi pays “all sums due.” Justice Brobson interprets that phrase as describing Ionadi’s discharge condition, not as redefining Fidelity’s covered categories beyond “labor, materials and equipment.” He argues the Majority’s reading “decouples” the phrase from the defined scope of Fidelity’s obligation.
  • Distinguishing Fort Pitt Bridge Works: Unlike the broader “justly due” language there, Fidelity’s bond includes limiting language and a detailed definition section, signaling a narrower undertaking.

C. Impact (Practical and Doctrinal)

The binding statewide impact of this case cannot be fully assessed from the excerpted writing alone because Justice Brobson’s analysis is partly dissenting. Still, his reasoning highlights fault lines that are likely to recur in Pennsylvania construction surety disputes:

  • Claimants’ strategy choice (arbitrate principal vs. sue surety) has consequences. If courts follow the Majority’s approach (as characterized by Justice Brobson), a claimant may be able to leverage arbitration against the principal to bind the surety when the surety has notice. If courts follow Justice Brobson’s approach, claimants must prove their bond claim against the surety in court even after arbitrating with the principal.
  • Bond drafting and project documentation will matter more. Justice Brobson’s view encourages express drafting if the parties intend: (i) arbitration to bind the surety; or (ii) subcontract fee/interest terms to be recoverable on the bond.
  • Section 8371 line-drawing: On the issue he joins, the opinion reinforces that statutory “insurance bad faith” remedies do not attach to suretyship—steering litigants toward contract and traditional surety doctrines rather than punitive statutory bad faith claims.

4) Complex Concepts Simplified

  • Surety bond / payment bond: A three-party instrument where a surety guarantees that the principal (contractor) will pay certain project costs owed to claimants (often subcontractors/suppliers). The surety’s duty depends on the bond’s terms.
  • Incorporation by reference: A bond can “pull in” another contract’s terms if it clearly identifies and incorporates that contract. Justice Brobson stresses the bond incorporated the “Construction Contract,” not the later subcontract with Eastern.
  • Arbitration is consensual: Parties arbitrate only if they agreed to. Courts are cautious because arbitration waives (or substitutes for) a judicial forum and can affect the right to a jury trial.
  • “Joint and several” liability: A claimant may pursue either obligor (principal or surety) for covered amounts, but only within the scope of what that obligor promised (here, Justice Brobson says Fidelity promised only what the bond defines).
  • Prejudgment interest: Interest added for the time between when money was due and when judgment is entered. Justice Brobson’s disagreement is tied to whether the arbitration award can fix a “definite sum” binding on Fidelity and whether contractual interest from the subcontract can be imposed on the surety.

5) Conclusion

Justice Brobson’s concurrence confirms (and he joins) the Court’s central statutory holding: 42 Pa. C.S. § 8371 does not apply to surety bonds. His dissent, however, articulates a strict, text-centered suretyship framework: a surety should not be bound by a principal’s arbitration award—or exposed to subcontract-based attorneys’ fees and contractual interest—absent clear bond language adopting arbitration and expanding the surety’s payment categories. In practical terms, his opinion spotlights the decisive role of bond drafting (forum clauses, definitions, and fee provisions) and cautions against using notice-based theories to convert a non-arbitrating surety’s court entitlement into arbitration preclusion.