Principal-Surety Relationship Is Not Sufficient to Warrant a Claim of Bad Faith in Tort

U.S. ex rel. Custom Grading, Inc. v. Great American Ins.Co. (D. N.M., July 10, 2013)

A subcontractor sued an insured and its surety insurer who issued a project bond. The subcontractor alleged that the insured failed to pay the subcontractor for labor and materials. insured executed an indemnity agreement regarding bond payment. The insured sued the insurer for, among other things, breach of good faith and fair dealing for interfering with the insured’s ongoing discussions with the subcontractor to resolve claim and payment issues. The insurer investigated and communicated with subcontractors because they were making claims on the surety bond. Since the Indemnity Agreement allowed the insurer to investigate these claims, they did not breach any covenant of good faith and fair dealing. The insurer’s motion to dismiss the tort claim for breach of good faith and fair dealing was dismissed, but the bad faith claim sounding in contract was sustained. A cause of action for breach of this duty sounding in contract is recognized when the claim is based on the Indemnity Agreement. A tort claim is only available where a special relationship exists. A relationship as principal and surety, respectively, is not a special relationship.

Comment: In interpreting the New Mexico Unfair Insurance Practices Act, the court underscored that when determining if a contract falls under the UIPA, the code articulates a functional approach which means looking to the substance of the contract rather than to its label.