Court Opinion

ID: 9547318
Source: CourtListenerOpinion
Date Created: 2023-08-07 17:45:25.218746+00
Date Added: 2024-06-11T15:17:36.040359
License: Public Domain

Justice KOURLIS
dissenting:
The majority recognizes a common law cause of action in tort for a commercial surety’s failure to act in good faith when processing claims made by an obligee pursuant to the terms of a performance bond. See maj. op. at 353. In support of that result, the majority concludes that “the rationale for providing insureds with a cause of action in tort for an insurer’s bad faith in processing a claim applies with equal force in the commercial surety context.” Id. at 351. Because I believe that there are essential differences between the surety/obligee relationship and the insurer/insured relationship, I would decline to recognize a bad faith claim in this ease. Therefore, I respectfully dissent.
“Colorado, like the majority of jurisdictions, recognizes that every contract contains an implied duty of good faith and fair dealing. § 4-1-203, 2 C.R.S. (1992).” Amoco Oil Co. v. Ervin, 908 P.2d 493, 498 (Colo.1995). However, breach of the duty of good faith does not automatically create tort liability. Rather, in most commercial contracts, breach of the implied duty gives rise to standard contract remedies. See Wheeler v. Reese, 835 P.2d 572, 578 (Colo.App.1992).
We have held that insurance contracts are different from commercial contracts, such that an insurer’s breach of the contractual duty of good faith and fair dealing can form the basis for a separate cause of action sounding in tort. See Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1273-74 (Colo.1985); Farmers Group, Inc. v. Trimble, 691 P.2d 1138,1141 (Colo.1984). “The basis for liability in tort for the breach of an insurer’s implied duty of good faith and fair dealing is grounded upon the special nature of the insurance contract and the relationship which exists between the insurer and the insured.” Trimble, 691 P.2d at 1141.
We have predicated the existence of a special relationship upon various factors, including quasi-fiduciary obligations, protection against unforeseeable loss, and unequal bargaining power. In my view, none of those factors exist in the suretyship context. Specifically, Transamerica did not have a quasi-fiduciary obligation to the school district; Transamerica was not insuring the school district against an unforeseeable calamity, but rather against a completely foreseeable possibility; and the school district was not hampered by an unequal bargaining position, but could have contracted for whatever remedies it felt were necessary to protect against possible loss. Therefore, the elements of a special relationship are not present.
*355Additionally, I disagree with the extension of the remedy because it does not provide a clear stopping point. For example, although the majority limits its opinion to commercial sureties, the reasoning could extend to guarantors and bondsmen who also provide financial security by assuring payment in the event of a party’s default on an agreement, thereby subjecting those guarantors or bondsmen to the possibility of a bad faith tort cause of action in addition to their contractual liabilities for failure to perform their obligations.
For those reasons, I would limit the school district to the remedies provided by the contract.
A.
The majority asserts that “[a] special relationship exists between a commercial surety and an obligee that is nearly identical to that involving an insurer and an insured.” Maj. op. at 352. However, in my view, several of the key elements which make the relationship between insurer and insured “special” are absent from the surety/obligee relationship.
First, unlike the relationship between an insurer and an insured, a relationship between a surety and obligee is not quasi-fiduciary. When an insurance company handles claims of third persons against its insured, the insurance company stands in a position similar to that of a fiduciary because the “insurer retains the absolute right to control the defense of actions brought against the insured, and the insured is therefore precluded from interfering with the investigation and negotiation for settlement.” See Trimble, 691 P.2d at 1141. In Trimble, we quoted the following language from the Supreme Court of Wisconsin:
[Wjhere a person purchases an insurance policy, “[he barters] to the insurance company all of the rights possessed by him to discover the extent of the injury and to protect himself as best he can from the consequences of the injury. He has contracted with the insurer that it shall have the exclusive right to settle or compromise the claim, to conduct the defense, and that he will not interfere except at his own cost and expense.” Anderson v. Continental Ins. Co., 85 Wis.2d 675, 688, 271 N.W.2d 368, 375 (1978) (quoting Hilker v. Western Automobile Ins. Co., 204 Wis. 1, 14, 235 N.W. 413, 414 (1931)).
Id. (emphasis supplied).
Because the insurer retains these valuable rights, it is obligated to act reasonably in denying or delaying payment of a claim. See id. at 1142. By contrast, a surety is in no way responsible for third party claims against an obligee. The obligee does not cede any right to represent his interests to the surety by virtue of the suretyship agreement and retains the rights to pursue, defend, settle, or compromise claims with the principal, surety, or third parties. As the majority recognizes, the surety has obligations both to the obligee and to the principal. See maj. op. at 353 n. 4. Those obligations are defined by the contract of suretyship, and are not of a fiduciary nature. Therefore, to the extent our holding in Trimble was based upon the existence of a quasi-fiduciary relationship arising from the insured’s surrender of rights to the insurer, that holding does not support the majority’s result.
When an obligee files an action against a surety for bad faith failure to pay a claim on a performance bond, the situation is more analogous to a first-party direct coverage case. See Savio, 706 P.2d at 1274 (first-party direct coverage case arises where party claims for himself benefits he is entitled to under the terms of an insurance contract). The rationale for the creation of a tort for bad faith breach of insurance contract in a first-party direct coverage case is the concern that a contract claim for insurance proceeds may not effectively protect an injured party once a calamity has befallen him or her. See id. at 1273. In support of this rationale, in Savio, we quoted the following language from the Supreme Court of Rhode Island:
[I]nsurers, backed by sufficient financial resources, are encouraged to delay payment of claims to their insureds with an eye toward settling for a lesser amount than that due under the policy.... The *356inequity of this situation becomes particularly apparent in the area of disability insurance in which the insured, often pursued by creditors and devoid of bargaining power, may easily be persuaded to settle for an amount substantially lower than that provided for in the insurance contract. Bibeault v. Hanover Insurance Co., 417 A.2d 313, 318 (R.I.1980).

Id.

The majority contends that this same concern arises in the suretyship context because “it is the commercial surety who controls the ultimate decision of whether to pay claims made by the obligee under the terms of the surety bond. For this reason, the commercial surety has a distinct advantage over the obligee in its ability to control performance under the secondary agreement.” Maj. op. at 353.
The concern that a surety may take advantage of a bond obligee in the claims resolution process overlooks fundamental differences between liability insurance contracts and surety bonds. See Great American Ins. Co. v. North Austin Mun. Util. Dist, 908 S.W.2d 415, 418 (Tex.1995). In contrast with a liability insurance contract, which involves only the insurer and insured, “suretyship involves a tripartite relationship between a surety, its principal, and the bond obligee, in which the obligation of the surety is intended to supplement an obligation of the principal owed to the bond obligee.” Id. at 418. The surety’s obligation to the bond obligee is secondary to the obligation owed by the surety’s principal to that obligee. See id. at 418-19. Thus, in contrast with a party sustaining a loss covered under a liability insurance contract who can look only to an insurer for recovery, a bond obligee has a remedy against the principal. See id. at 419. For this reason, an obligee is not necessarily left in the same vulnerable position that an insured may face in the wake of a calamity.
B.
The foreseeability of the loss is another distinction between suretyship and insurance.
Insurance by its very nature protects against unforeseen losses. In contrast, a surety bond secures to the obligee the cost necessary to complete a project. Before the sure-tyship agreement is entered into, the obligee is aware of the losses that may result if the principal breaches the contract. The obligee is also aware of any damages that may result from the surety’s breach of the suretyship agreement. “Generally, the measure of damages for a breach of contract is the loss in value to the injured party of the other party’s performance caused by its failure or deficiency, plus any other incidental or consequential loss caused by the breach, less any cost or other loss that the injured party has avoided by not having to perform. Restatement (Second) of Contracts, § 347 (1981).” General Ins. Co. of America v. City of Colorado Springs, 638 P.2d 752, 759 (Colo.1981).1 The damages that may result from the surety’s breach are reasonably foreseeable, unlike the situation in which calamity strikes and leaves an insured party without the means to face the demands of his or her creditors.
The majority argues that by requiring the principal to obtain a surety bond, the obligee is “essentially insuring itself from the potentially catastrophic losses that would result in the event the principal defaults on its original obligation.” Maj. op. at 352. The fact that losses resulting from a breach of contract may be catastrophic does not make them any less foreseeable. The majority recognizes that “the parties to a suretyship agreement are on equal footing in terms of bargaining power when they enter into the agreement.” Maj. op. at 353. Because the loss is foreseeable, the obligee has the opportunity to bargain for provisions protecting against that loss, unlike an insured who is generally required to accept an insurance contract on a “take it or leave it” basis. See Great American Ins. Co. v. General Builders, Inc., 934 P.2d 257, 263 (Nev.1997) (refusing to allow obligee’s bad faith tort action against surety because there was no “special relationship” where parties had equal bargaining power *357and contractual damages were sufficient to make obligee “whole”). The inclusion of a bad faith claim in the remedies available against a surety will likely mean that all individuals contracting for a surety bond will be required to pay some additional amount for the tort coverage, whether they want that coverage or not.
C.
The fact that the General Assembly treats sureties similarly to insurers in some contexts should not thereby subject sureties to bad faith liability.
The definition of insurer contained in section 10-1-102(8), 4A C.R.S. (1994), includes “every person engaged as principal, indemnitor, surety, or contractor in the business of making contracts of insurance.” In addition, section 10-3-1102(2), 4A C.R.S. (1994), defines the terms “insurance policy” and “insurance contract” to include suretyship agreements. These statutes group insurers and sureties together because both enter into contracts to pay a benefit upon a determinable risk contingency, and, hence, both can be similarly regulated. However, it is not the fact that an insurer contracts to pay a benefit upon the occurrence of a particular event that justifies the creation of a tort action for bad faith breach. Rather, in the context of a third-party claim, it is the quasi-fiduciary relationship, and in the context of a first-party claim it is the injured party’s vulnerability following an unforeseen calamity and the unequal bargaining power between insurer and insured. Those circumstances are not present in this case.
D.
I view a tort cause of action for bad faith breach of the insurance agreement as a narrow exception to the general rule that breach of contract does not give rise to tort liability.2 This exception is justified by the special relationship between insurer and insured. Fundamental elements of this relationship are missing from the relationship between surety and obligee. Therefore, I would decline to extend bad faith tort liability to sureties. For this reason, I respectfully dissent.
I am authorized to say that Justice MARTINEZ joins in this dissent.

. The non-breaching party cannot recover for all consequential losses, but rather only those “consequential losses which are the natural, probable, and reasonably foreseeable consequence of a party's failure to perform his contract.” DSCO, Inc. v. Wairen, 829 P.2d 438, 442 (Colo.App.1991).

. The reasoning adopted by the majority in this case may potentially expand this exception far beyond the context of commercial sureties. The majority concludes that the suretyship agreement is indistinguishable from insurance because it "provides the obligee with financial security by eliminating the risk of default in the original agreement between the principal and the obli-gee.” Maj. op. at 353. According to this rationale, a bad faith tort claim may arise from the breach of any contract in which one party agrees to compensate the other upon the occurrence of an identified risk or loss. This would extend potential tort liability for breach of contract to agreements entered into by guarantors and bondsmen, and possibly beyond. For example, the Supreme Court of Alabama applied reasoning similar to that relied upon by the majority to a case in which a car owner brought an action against a service provider based on the provider’s alleged bad faith refusal to pay a claim under a new car mechanical failure service contract. See Schoepflin v. Tender Loving Care Corp., 631 So.2d 909 (Ala.1993). The court concluded that the contract was "insurance” for purposes of a bad faith claim because the service provider, for compensation, assumed the risk that the owner's automobile would sustain a mechanical breakdown and promised to pay for the cost of repairs if a breakdown did occur. Id. at 911.