Court Opinion

ID: 9627698
Source: CourtListenerOpinion
Date Created: 2023-08-22 08:51:00.616997+00
Date Added: 2024-06-11T18:06:49.324114
License: Public Domain

MOSK, J., Concurring and Dissenting.
I concur in the majority’s analysis of the contract damages question. I dissent, however, from their analysis of the availability of a tort remedy.
The majority explain at length what is unquestioned in the first instance: that “liability insurance is not identical in every respect with suretyship.” *62(General Ins. Co. v. Mammoth Vista Owners’ Assn. (1985) 174 Cal.App.3d 810, 824 [220 Cal.Rptr. 291].) The question is whether the two forms of protection are sufficiently similar that a developer-obligee under a construction performance bond may hold the surety liable in tort for bad faith failure to honor its obligations under that bond. Most jurisdictions that have considered this question would reject the majority’s view that they are not sufficiently similar. I do likewise.
I
Though the majority do not appear particularly enthusiastic about the law that bad faith failure to perform an insurance contract is actionable in tort, they do not question that bedrock principle, which has been California law for many years. (Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 429-430 [58 Cal.Rptr. 13, 426 P.2d 173]; Hunter v. Up-Right, Inc. (1993) 6 Cal.4th 1174, 1180 [26 Cal.Rptr.2d 8, 864 P.2d 88].)
Thus, it is beside the point whether, as they urge, insurance contracts are exceptional in giving the protected party a tort remedy if the protecting party acts in bad faith to fail to perform. All that is germane is whether this was an insurance contract. It was.
“Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.” (Ins. Code, § 22.) Surety insurance is one type of insurance. “Surety insurance includes: HD (a) The guaranteeing of behavior of persons and the guaranteeing of performance of contracts (including executing or guaranteeing bonds and undertakings required or permitted in all actions or proceedings or by law allowed), other than insurance policies and other than for payments secured by a mortgage, deed of trust, or other instrument constituting a lien or charge on real estate.” (Id., § 105.) The use of the phrase “other than insurance policies” does not signify that a surety bond is not an insurance policy, only that surety insurance does not include a bond to guarantee that an insurance policy will be honored. (See Check Protection Service, 16 Ops.Cal.Atty.Gen. 172 (1950).)1
The developer, Talbot Partners (Talbot), was seeking to protect itself against the contingency of the default of Cates Construction, Inc. (Cates), the *63builder and principal. Transamerica Insurance Company (Transamerica) was the guarantor that if that event occurred, it would supply the money to complete the development. That is insurance. (Ins. Code, §§ 100, subd. (5), 105, subd. (a); Code Civ. Proc., § 995.120; Amwest Surety Ins. Co. v. Wilson (1995) 11 Cal.4th 1243, 1249, fn. 5 [48 Cal.Rptr.2d 12, 906 P.2d 1112].)
Further support for the view that Transamerica was an insurer may be found in the Restatement of Security and case law. Section 82 of the Restatement explains the nature of suretyship. Comment i (pp. 233-234) defines a “compensated surety,” of which Transamerica is an example: “The term . . . mean[s] a person who engages in the business of executing surety contracts for a compensation called a premium .... Compensated sureties are generally incorporated. . . . ft[] . . . [0]ne engaged in the business of executing surety contracts can be expected to have contemplated and taken account of, in the premium charged, certain elements of risk . . . .” (And see Leo, The Construction Contract Surety and Some Suretyship Defenses (1992-1993) 34 Wm. & Mary L.Rev. 1225, 1229 [“For the most part, insurance companies underwrite surety bonds in exchange for a premium”].)
Thus, as the North Dakota Supreme Court explains, “a paid surety or bonding company is generally treated as an insurer rather than according to the strict law of suretyship. [Citations.] ... ‘A bond entered into by a compensated surety and guaranteeing the performance of a contract is a contract of insurance rather than of ordinary suretyship and is to be interpreted according to the rules relating to the former instead of the strict rules applicable to the latter. For most purposes, contracts of guaranty and suretyship are construed by the same principles as apply to insurance contracts, where they are written by companies which engage in the business of suretyship or guaranty, that is, for compensation and profit.’ ” (Szarkowski v. Reliance Ins. Co. (N.D. 1987) 404 N.W.2d 502, 504.) “ ‘The doctrine that a surety is a favorite of the law, and that a claim against him is strictissimi juris, does not apply where the bond or undertaking is executed upon a considerationf] by a corporation organized to make such bonds or undertakings for profit. While such corporations may call themselves “surety companies,” their business is in all essential particulars that of insurers.’ ” *64(Transamerica Premier v. Brighton School (Colo. 1997) 940 P.2d 348, 351-352 [940 P.2d 348].)
The majority conclude that liability insurance, unlike surety insurance, is “characterized by elements of adhesion and unequal bargaining power, public interest and fiduciary responsibility.” (Maj. opn., ante, at p. 52.)
I doubt that the first element is found in all insurance contracts (though undoubtedly it is found in many), but even if so, it is beside the point. The Court of Appeal observed that it knew of no authority for the view that if an insurance contract is negotiated, the insured forfeits its rights to a tort recovery. The majority have not presented any such authority, and I question whether any exists. In any event, the majority do not show any evidence that the performance bond terms in this case were negotiated, and appear to concede the point (maj. opn., ante, at p. 53 [referring to “the typical performance bond”]). It is unlikely that a mammoth insurer like Transamerica—an economic entity that counts money in the billions of dollars and dwarfed the now defunct Talbot and Cates when they were in business— would engage in negotiations for the relatively small custom involved here.
The majority’s public interest analysis is similarly unpersuasive. To begin with, they decide it is proper to distinguish surety insurance from other forms “because insureds generally do not seek to obtain commercial advantages by purchasing policies; rather, they seek protection against calamity. [Citations.] But while the typical insurance policy protects an insured against accidental and generally unforeseeable losses caused by a calamitous or catastrophic event such as disability, death, fire, or flood, the general purpose of a construction performance bond ‘is to protect the creditor [the owner/obligee] against the danger that he will be unable to collect from the debtor [the general contractor/principal] for any failure in the performance of the contract.’ [Citations.] In requiring a performance bond, then, the obligee ‘seeks the commercial advantage of obtaining a contract with the principal which provides additional financial security.’ ” (Maj. opn., ante, at pp. 53-54.)
The foregoing passage fails to persuade. Qualified with the words typical and generally that lard the majority opinion, it sets forth putative distinctions that in fact do not exist.2 Talbot purchased this insurance for peace of mind and security, not profit. “A special relationship exists between a commercial *65surety and an obligee that is nearly identical to that involving an insurer and an insured. [Citations.] When an obligee requests that a principal obtain a commercial surety bond to guarantee the principal’s performance, the obligee is essentially insuring itself from the potentially catastrophic losses that would result in the event the principal defaults on its original obligation.” (Transamerica Premier v. Brighton School, supra, 940 P.2d at p. 352.) 3
In a construction performance bond transaction, the developer-obligee seeks a performance bond for the same reason anyone else buys casualty insurance: to shift to another the risk of an unpredictable and potentially severe loss, here the contractor’s default. The surety accepts the risk under the same business principle as a casualty insurer: that the premiums collected for the coverage of numerous such risks will, together with the investment income generated by holding this money as capital, allow for a profit. The surety, like any other insurer, counts on having sufficient reserves to cover these risks without threat to its own financial security. The surety may also further spread the risk through reinsurance, as, according to the Court of Appeal, Transamerica did here.
In such a contract, whether or not titled “insurance policy,” certainty is of the essence from the obligee-insured’s point of view. The developer seeks a bond in order to be certain of timely, dependable performance of the construction contract. As this case demonstrates, the financial viability of the entire project may depend upon the surety’s good faith performance of these duties.
As with any other form of insurance, the surety bond system allows one party to shift to another a contingent risk that the first party, the developerobligee, cannot itself bear. The social good served by such contracts is the same served by other classes of insurance: greater freedom of activity by more participants than would be possible if each had to bear all the risks of its own enterprise.
Certainty of performance being the essential value of performance bonds, their worth is deeply undermined if sureties can regularly choose to ignore their obligations, having nothing to fear but contract damages that will *66approximate what they would pay in performance. As the Court of Appeal reasoned: “The quasi-public nature of the insurance industry arises from the purpose and nature of the contracts and the duties which the insurer assumes. That is, the quasi-public nature arises frdm the contingent nature of the contract and the public’s interest in promoting the conduct of business and personal affairs with confidence that in the event of calamity, there is protection. These factors apply equally to performance bond surety insurance, which is vital to real estate development.”
Under most circumstances a breach of contract violates no social policy; the law limits the nonbreaching party’s remedies so as to allow for “efficient breach” of the contract. But when a contract exists primarily to provide one party certainty and security in a risky enterprise, the other party’s bad faith breach cannot be efficient, because it negates the very purpose of the contract. A tort remedy is justified-in this context in order to deter such breaches of the covenant. “Recognizing a cause of action in tort for a commercial surety’s breach of its duty to act in good faith compels commercial sureties to handle claims responsibly. When the commercial surety withholds payment of an obligee’s claim in bad faith, contract damages do not compensate the obligee for the commercial surety’s misconduct and have no deterrent effect to prevent such misconduct in the future. As., the Arizona Supreme Court explained in Dodge, contract damages ‘offer no motivation whatsoever for the insurer not to breach. If the only damages an insurer will have to pay upon a judgment of breach are the amounts that it would have owed under the policy plus interest, it has every interest in retaining the money, earning the higher rates of interest on the outside market, and hoping eventually to force the insured into a settlement for less than the policy amount.’ [Dodge v. Fidelity & Deposit Co. of Md. (1989) 161 Ariz. 344 [778 P.2d 1240]] at 1242-43 (quoting Wallis v. Superior Court [(1984)] 160 Cal.App.3d 1109, [1117] [207 Cal.Rptr. 123]).” (Transamerica Premier v. Brighton School, supra, 940 P.2d at p. 353.)
Continuing to consider matters of public interest, the majority also say that “the obligee does not face the same economic dilemma as an insured” (maj. opn., ante, at p. 54), because, inter alia, it can recover against the principal. The whole point of this kind of insurance, however, is to protect an obligee against a principal that has defaulted, which was Transamerica’s duty here. Not surprisingly, Cates went out of business after it defaulted; there was no recourse against it. “As demonstrated by this case, obligees under surety contracts are as susceptible to deceptive and unfair claims settlement practices as insure[d]s and claimants under liability insurance contracts.” (General Ins. Co. v. Mammoth Vista Owners’ Assn., supra, 174 Cal.App.3d at p. 825.)
*67In any event, the majority’s observation is extraneous to what is at issue here. As the Court of Appeal explained, it commonly occurs that an insured can recover against a third party for damages for which his or her insurer is obligated to pay: e.g., the victim of a negligent driver may have recourse against the driver personally and the driver’s insurer, but such recourse does not necessarily bar indemnity from the victim’s own automobile insurer. Whether the insured is entitled to sue in tort for an insurer’s bad faith does not appear to hinge on the possibility of recovery elsewhere.
The majority conclude in effect that Transamerica will be caught between Talbot’s and Cates’s competing claims and will find it “difficult ... to determine which party is in the right and whether its own performance is due under the bond.” (Maj. opn., ante, at p. 58.) That may be, but an insurer faces the same dilemma when its insured is involved in a multivehicle auto accident with disputed facts and claims. Moreover, when the surety considers an obligee’s interests in good faith, it does not necessarily act in bad faith toward the principal. For example, if Transamerica had acted in good faith toward Talbot by properly investigating the merit of Cates’s foreclosure suit before joining it (see post, p. 69), it would not thereby have acted in bad faith toward Cates.
Furthermore, the majority rely on Washington Internat. Ins. Co. v. Superior Court (1998) 62 Cal.App.4th 981 [73 Cal.Rptr.2d 282], Airlines Reporting Corp. v. United States Fidelity & Guaranty Co. (1995) 31 Cal.App.4th 1458 [37 Cal.Rptr.2d 563], and Schmitt v. Insurance Co. of North America (1991) 230 Cal.App.3d 245 [281 Cal.Rptr. 261] (Schmitt).
Schmitt, however, held that the principals did not, under facts analogous to those of this case, have the right to sue for bad faith. “[I]t is not the duty of the surety to protect the principal as if the principal were an insured under an insurance policy. The surety’s duty runs to the third party obligee, here a purchaser, seller, financing agent or government agent.” (Schmitt, supra, 230 Cal.App.3d at p. 258, italics added.) (Schmitt also held, id. at pages 258-259, that for mixed reasons of law and fact not important here the surety had not acted in bad faith toward the obligees.)
A close reading of Airlines Reporting Corp. v. United States Fidelity & Guaranty Co., supra, 31 Cal.App.4th 1458, reveals that it is inapposite. In that case, the surety undertook to reimburse sales of “issued and validated” (id. at p. 1463) airline tickets if the travel agency failed to pay. An agency employee stole the ticket stock: the tickets were not issued and validated. The obligee nevertheless contended that the surety should reimburse it. *68Disagreeing, the court wrote: “The broad construction [the obligee] urges would convert the document at issue into a liability insurance policy. The two kinds of contracts, however, are conceptually and legally distinct. [Citation.] An insurer undertakes to indemnify another ‘against loss, damage, or liability arising from an unknown or contingent event,’ whereas a surety promises to ‘answer for the debt, default, or miscarriage of another.’ ” (Id. at p. 1464.) The case states that the obligee had not entered into a contract providing broad protection—not that surety insurance is a brand of protection distinct in all respects from liability insurance. The Court of Appeal discussed various differences between liability insurance and surety insurance, but none of them are relevant here.
Washington Internat. Ins. Co. v. Superior Court, supra, 62 Cal.App.4th 981, held that a surety could not defeat a statute requiring that a contractor pay a 2 percent per month penalty to a subcontractor by invoking another statute holding insurers harmless for their insureds’ willful misconduct. The decision quoted the listing of the differences in Airlines Reporting Corp. v. United States Fidelity & Guaranty Co., supra, 31 Cal.App.4th 1458, between surety insurance and liability insurance, but rested its conclusion that the penalty statute prevailed on economic spreading-of-risk principles. (62 Cal.App.4th at p. 990.) It, too, is of little use in evaluating the question before us.
By contrast, the courts of other states that have considered the question before us, in light of statutes similar to those contained in our Insurance Code, have concluded that surety insurers are liable in tort for bad faith failure to perform for an obligee on a construction performance bond of the type at issue here. (Transamerica Premier v. Brighton School, supra, 940 P.2d 348; Szarkowski v. Reliance Ins. Co., supra, 404 N.W.2d 502; Loyal Order of Moose v. Intern. Fidelity (Alaska 1990) 797 P.2d 622, 626-628; K-W Industries v. National Sur. Corp. (1988) 231 Mont. 461, 464-467 [754 P.2d 502, 504-506]; Dodge v. Fidelity & Deposit Co. of Md. (1989) 161 Ariz. 344, 346 [778 P.2d 1240, 1242]; but see Great American Ins. v. N. Austin Utility (Tex. 1995) 908 S.W.2d 415, 418-424.) “The purpose of the construction performance bond . . . was ... to protect plaintiffs from calamity— [the] default on the contract. A contractor’s default has the potential for creating great financial and personal hardship to a homeowner. Surety insurance is obtained with the hope of avoiding such hardships. Imposing tort damages on a surety who in bad faith refuses to pay a valid claim will deter such conduct.” (Dodge v. Fidelity & Deposit Co. of Md., supra, 778 P.2d at p. 1242.)
The facts of this case illustrate the need for a tort remedy. The evidence sufficed to find that Transamerica committed affirmative acts showing, at *69best, gross neglect of Talbot’s interests. The trial judge later mentioned that he “about fell out of my chair when I heard” during trial that Transamerica had joined in a foreclosure suit without investigating the validity of the underlying mechanic’s lien, which turned out to include a claim for $200,000 for work that was never done. Indeed, the trial court’s statement of decision declared that “at a time when Cates was out of business, Cates, through Transamerica’s attorneys, filed suit to foreclose on the mechanic’s lien filed by Cates in the sum of $645,367.66, further clouding Talbot’s title. Transamerica joined Cates’[s] suit to foreclose by filing a first amended complaint on May 10, 1991. Transamerica failed to make any investigation of the validity of the mechanic’s lien before it joined the suit to foreclose on Talbot’s property.” But “[t]he mechanic’s lien filed by Cates (on which Transamerica filed suit to foreclose) was not justified[,] because Cates was not owed any further amounts on the contract” and “Cates ... in fact had caused itself to be paid $276,730 more than the amount to which it was entitled.”
Our Legislature permits punitive damages to be imposed for oppressive, fraudulent, or malicious conduct, the only limitation being that they be “for the sake of example and by way of punishing the defendant.” (Civ. Code, § 3294, subd. (a).) Because today’s decision means that no tort remedy exists at all for bad faith breach of a construction performance bond, there is no need to discuss punitive damages. Nevertheless, I note that in imposing them, the jury found, under the instructions given and its special verdicts, that Transamerica behaved oppressively and maliciously; i.e., that its conduct was “vile, base, contemptible, miserable, wretched, or loathsome” and of such a character “that it would be looked down upon and despised by ordinarily decent people.” In sum, it found Transamerica’s conduct outstandingly bad.
Moreover, it is not clear to me that contract damages will make an obligee whole (e.g., if the developer loses profits or rents), or that an obligee will be able to force a surety to issue a bond that would make it whole if a principal defaults.4
*70I would hold that a tort remedy is available for the type of misconduct this case presents.
Kennard, J., and Werdegar, J., concurred.
Respondents’ petition for a rehearing was denied September 29, 1999. Mosk, J., Kennard, J., and Werdegar, J., were of the opinion that the petition should be granted.

I disagree with the majority’s view that title 10 California Code of Regulations section 2695.2, subdivision (j), declares a surety bond is not an insurance policy. Sections 2695.1-2695.17 are regulations concerning, as their heading states, “Fair Claims Settlement Practices Regulations.” These regulations interpret Insurance Code section 790.03, subdivision (h), which prohibits unfair claims settlement practices by those conducting the “business of insurance” (id., § 790.03). Section 2695.2, subdivision (j), of the regulations says that an insurance “policy” does not include, “\f\or the purposes of these regulations,” “ ‘surety bond’ *63or ‘bond.’ ” (Italics added.) Perhaps this is because of the way unfair claims challenges are settled under statutes or regulations. But section 2695.2, subdivision (i), of the same regulations defines an insurer as including the licensed issuer of “surety bond[s] in this state . . .”; i.e., one engaged in “the business of insurance” (ibid.).
The regulations recognize surety insurance as insurance, albeit of a distinct kind. “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.” (Cal. Code Regs., tit. 10, § 2695.1, subd. (c).)

The majority invoke the qualifiers typical or typically 10 times in their opinion. And they use general or generally no fewer than 16 times as qualifying adjectives or adverbs. But I cannot take it on faith, as they apparently do, that this case is atypical or unrepresentative. *65Typically and generally, moreover, have the unfortunate effect of distracting attention from what has occurred and removing the discussion to an abstract level, where propositions become general and hard to dispute.

Moreover, any implication in the majority’s discussion that the relationship between surety and obligee is analogous to that of debtor and creditor is incorrect. Talbot was seeking to protect itself against a contingency, and Transamerica was contracting to supply that protection. That is not a debtor-creditor relationship.

Transamerica also argues that Civil Code section 2808 bars Talbot from recovering in tort. That statute provides in relevant part: “Where one assumes liability as surety upon a conditional obligation, his liability is commensurate with that of the principal. . .”—-i.e., it cannot be greater.
Civil Code section 2808, however, is a limitation on a recovery for contract damages. Like section 2809, which provides, “The obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; and if in its terms exceeds it, it is reducible in proportion to the principal obligation,” section 2808 stands for the rule of *70contract law that “the surety’s express contractual liability may not exceed that of the principal.” (General Ins. Co. v. Mammoth Vista Owners' Assn., supra, 174'Cal.App.3d at p. 827, italics omitted.) “Section 2809 does not purport to restrict the surety’s independent liability for violation of duties imposed by law.” (Ibid., italics omitted.) The same is true of section 2808.