Opinion ID: 1427999
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Heading: Inclusion of Suretyship in the Insurance Code

Text: As Talbot correctly observes, Surety is listed as a separate class of insurance under the Insurance Code. (Ins.Code, § 100, subd. (5).) Performance bonds are listed within that class. (Ins.Code, § 105, subd. (a).) [11] The Insurance Code defines Insurance to mean a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event. (Ins.Code, § 22, italics added; see also id., § 23 [defining insurer as the person who undertakes to indemnify another by insurance and insured as the person indemnified].) In contrast, a surety bond is a contract whereby one promises to answer for the debt, default, or miscarriage of another. (Civ.Code, § 2787; Cal.Code Regs., tit. 10, § 2695.1, subd. (c); Washington Internal Ins. Co. v. Superior Court (1998) 62 Cal. App.4th 981, 989, 73 Cal.Rptr.2d 282, citing Airlines Reporting Corp. v. United States Fidelity & Guaranty Co., supra, 31 Cal. App.4th at p. 1464, 37 Cal.Rptr.2d 563.) Therefore, a surety's posture as to an obligee on a performance bond is not necessarily one of indemnitor. (See Leatherby Ins. Co. v. City of Tustin (1977) 76 Cal.App.3d 678, 686-687, 143 Cal.Rptr. 153; cf. Airlines Reporting Corp. v. United States Fidelity & Guaranty Co., supra, 31 Cal.App.4th at p. 1464, 37 Cal.Rptr.2d 563 [bond ensuring payment for airline tickets not equivalent to a liability insurance policy].) Although surety is included within the Insurance Code as a class of insurance, it long has been settled that the parties in surety arrangements have certain rights and defenses that do not attend the typical insurance relationship. For instance, an insurer generally has no right of subrogation against the insured for covered losses even if the insured's negligence contributed to such losses. A surety, however, is entitled to reimbursement from its principal for amounts paid to the obligee upon the principal's default. [12] (Civ.Code, §§ 2847, 2848; Washington Internal. Ins. Co. v. Superior Court, supra, 62 Cal. App.4th at p. 989, 73 Cal.Rptr.2d 282; see Schmitt v. Insurance Co. of North America, supra, 230 Cal.App.3d at pp. 256-257, 281 Cal.Rptr. 261.) Moreover, a surety is entitled to assert as defenses to payment of a surety bond all defenses available to its principal (Civ.Code, § 2810; U.S. Leasing Corp. v. duPont (1968) 69 Cal.2d 275, 290, 70 Cal.Rptr. 393, 444 P.2d 65 [where the principal is not liable on the obligation, neither is the guarantor]; Flickinger v. Swedlow Engineering Co. (1955) 45 Cal.2d 388, 394, 289 P.2d 214), as well as its own independent defenses (e.g., Civ.Code, § 2819 [allowing exoneration of a surety if by any act of the creditor [obligee], without the consent of the surety the original obligation of the principal is altered in any respect]). The unique substantive aspects of surety relationships and surety bonds are addressed in a number of Civil Code provisions. (See Civ.Code, §§ 2787-2856 [rights and duties of sureties generally].) Courts have found these and other distinctions relevant in a variety of contexts. One court, for instance, determined that the public policy of denying insurance coverage for willful wrongs (Ins.Code, § 533) is not offended by requiring a surety on a public works payment bond to pay an interest penalty based on the contractor's conduct. ( Washington Internal Ins. Co. v. Superior Court, supra, 62 Cal.App.4th at pp. 989-990, 73 Cal.Rptr.2d 282.) Another concluded that a surety has no duty to protect the principal under a motor vehicle dealer's bond as if the principal were an insured under an insurance policy. ( Schmitt v. Insurance Co. of North America, supra, 230 Cal.App.3d at p. 258, 281 Cal.Rptr. 261.) A third court held that a particular performance bond ensuring payment for airline tickets was not equivalent to a liability insurance policy that covered theft losses. ( Airlines Reporting Corp. v. United States Fidelity & Guaranty Co., supra, 31 Cal.App.4th at p. 1464, 37 Cal. Rptr.2d 563.) Thus, while surety is listed as a class of insurance for regulatory purposes, there is no doubt that it differs in material respects from other forms of insurance. ( Amwest Surety Ins. Co. v. Wilson (1995) 11 Cal.4th 1243, 1260, 48 Cal.Rptr.2d 12, 906 P.2d 1112 ( Amwest ); see generally 1 Couch, supra, § 1:18, p. 1-31; 1 Cal. Insurance Law & Practice (1998) § 1.01[4], p. 1-9 (California Insurance Law).) Consistent with the Civil Code and the case law, regulations promulgated pursuant to the Insurance Code make special note of the unique relationship which exists under a surety bond between the insurer [surety], the obligee or beneficiary, and the principal. (Cal.Code Regs., tit. 10, § 2695.1, subd. (c).) They also are explicit in distinguishing suretyship from traditional insurance: In contrast to other classes of insurance, surety insurance involves a promise to answer for the debt, default or miscarriage of a principal who has the primary duty to pay the debt or discharge the obligation and who is bound to indemnify the insurer. ( Ibid.; see also Cal.Code Regs., tit. 10, § 2695.2, subd. (j) [defining [insurance policy to exclude surety bond or bond].) In recognition of the distinctions between suretyship and traditional insurance, the regulations exempt sureties from the set of standards promoting the prompt, fair and equitable settlement of claims by insurers and instead provide that sureties are governed by a separate set of claims handling and settlement standards. (Cal. Code Regs., tit. 10, § 2695.1, subd. (c).) While some of the standards relevant to sureties are identical or similar to those applicable to insurers (e.g., Code Cal. Regs., tit. 10, § 2695.10, subd. (a) [prohibiting discriminatory claims settlement practices]); id., subd. (c) [requiring written notice to claimants of need for additional time to determine whether a claim should be accepted or denied]; id., subd. (d) [requiring diligent investigation of a claim]), sureties have been excepted from many of those standards. For instance, since a surety typically must sort through the conflicting claims of the principal and the obligee, regulatory standards do not hold a surety to the same 40-day period applicable to insurers for accepting or denying claims but recognize that substantially more time may be appropriate. (Compare Cal.Code Regs., tit. 10, § 2695.7, subd. (b) [40 days for insurers] with id., § 2695.10, subd. (b) [60 days for sureties].) More significantly, a surety is not subject to the standard prohibiting insurers from attempting to settle a claim by making a settlement offer that is unreasonably low. (Compare Cal.Code Regs., tit. 10, § 2695.7, subd. (g) with id., § 2695.10.) In addition, a surety is not subject to the standard requiring insurers to provide written notice to unrepresented claimants of any statute of limitation or other time period requirement that may be used to defeat a claim. (Compare Cal.Code Regs., tit. 10, § 2695.7, subd. (f) with id., § 2695.10.) Despite the fact that surety bonds have been distinguished from insurance policies in statutory, regulatory and decisional law, Talbot argues, in effect, that tort remedies for breaches in the performance bond setting are appropriate simply because surety bonds are categorized and regulated as a class of insurance under the Insurance Code. (See Ins.Code, §§ 100, subd. (5), 105, subd. (a).) We disagree. As one text in the surety field has observed, [t]he inclusion of suretyship in the Insurance Code is derived from the need for control of the surety business by a state agency and does not imply that the underlying natures of insurance and suretyship are the same. (Conners, supra, § 1.4, p. 6.) The legislative branch is free to regulate suretyship, and, assuming a rational basis, may require sureties and surety bonds to adhere to the same regulations and requirements that apply to insurers and insurance policies. [13] Case law makes clear, however, that tort remedies for breach of the implied covenant are permitted in the insurance policy setting for policy reasons pertaining to the distinctive nature of such contracts and the relationship between the contracting parties. (See Foley, supra, 47 Cal.3d at pp. 684-685, 254 Cal.Rptr. 211, 765 P.2d 373; Egan, supra, 24 Cal.3d at p. 819, 169 Cal. Rptr. 691, 620 P.2d 141; Careau & Co. v. Security Pacific Business Credit, Inc., supra, 222 Cal.App.3d at pp. 1395-1399, 272 Cal.Rptr. 387; Mitsui Manufacturers Bank v. Superior Court (1989) 212 Cal. App.3d 726, 730-731, 260 Cal.Rptr. 793.) Little, if any, significance has been placed on the circumstance that insurers are licensed by the Insurance Commissioner and are subject to Insurance Code regulations. [14] Moreover, while insurers are subject to administrative sanctions for violating statutory prohibitions against unfair and deceptive claims settlement practices (see Ins.Code, §§ 790.03, subd. (h), 790.035, 790.05, 790.07, 790.09), statutory violations do not give rise to a private right of action for tort damages. ( Moradi-Shalal v. Fireman's Fund Ins. Companies, supra, 46 Cal.3d 287, 250 Cal.Rptr. 116, 758 P.2d 58.) In assessing whether the availability of tort remedies should turn on the Insurance Code's inclusion of surety contracts as a class of insurance, we are guided by Estate of Barr (1951) 104 Cal.App.2d 506, 231 P.2d 876 ( Barr ) and In re Pikush (1993) 157 B.R. 155, affd. (9th Cir.1994) 27 F.3d 386 ( Pikush ). Those decisions held that the inclusion of a particular contract in the Insurance Code for regulatory purposes does not require its classification as insurance for other purposes. In Barr, supra, 104 Cal.App.2d 506, 231 P.2d 876, the issue was whether the proceeds of an annuity contract paid by an insurance company to the named beneficiary on the death of the annuitant qualified under California's insurance exemption to inheritance taxation as provided in the Revenue and Taxation Code. [15] Even though section 101 of the Insurance Code explicitly described the term life insurance as including the granting, purchasing, or disposing of annuities, the Barr court recognized that resolution of the exemption question turned on the construction of the Revenue and Taxation Code, which used the terms insurance policies and life insurance without reference to annuity contracts: The classification of annuities as life insurance for the purposes of the Insurance Code does not require its classification as insurance for the purposes of the Revenue and Taxation Code, the objects of which are totally different. (104 Cal.App.2d at p. 511, 231 P.2d 876; see also Helvering v. LeGierse (1941) 312 U.S. 531, 61 S.Ct. 646, 85 L.Ed. 996 [reaching a similar conclusion in connection with the federal estate tax exemption].) Similarly, the United States Bankruptcy Appellate Panel of the Ninth Circuit determined in Pikush, supra, 157 B.R. 155, that a debtor under chapter 7 of the Bankruptcy Code could not claim three single-premium annuity contracts as exempt insurance policies pursuant to Code of Civil Procedure section 704.100, subd. (c). Relying in part on Barr, supra, 104 Cal. App.2d 506, 231 P.2d 876, the appellate panel found that the circumstance that the Insurance Code chooses to license and regulate the `granting, purchasing, or disposing' of annuities in a certain manner should have no bearing on the interpretation of California's [debtor] exemption laws. ( Pikush, supra, 157 B.R. at p. 159.) The same reasoning applies here with equal force. Although suretyship is listed in the Insurance Code as a class of insurance, it does not follow that a surety bond equates to a policy of insurance under the common law or common law theories of liability. Nor does it follow that the unique policy reasons which justify extraordinary remedies in the insurance policy context are similarly implicated for bonds guaranteeing the performance of a commercial construction contract. In short, the mere inclusion of surety arrangements in the Insurance Code should not be determinative of the issue before us. Rather, we must evaluate whether the policy considerations recognized in the common law support the availability of tort remedies in the context of a performance bond. ( Foley, supra, 47 Cal.3d at p. 693, 254 Cal.Rptr. 211, 765 P.2d 373.)