Chapter 10 - § 10.4 • COMMERCIAL SURETIES MAY BE SUBJECT TO BAD FAITH CLAIMS

• Jurisdiction: Colorado

§ 10.4 • COMMERCIAL SURETIES MAY BE SUBJECT TO BAD FAITH CLAIMS

In Transamerica Premier Insurance Co. v. Brighton School District 27J, 940 P.2d 348 (Colo. 1997), the court granted certiorari to review the court of appeals' decision in Brighton School District 27J v. Transamerica Premier Insurance Co., 923 P.2d 328 (Colo. App. 1996). The question before the court was whether Colorado recognizes a common law tort claim against a commercial surety that fails to proceed reasonably with the payment of a claim under a performance bond. The court of appeals recognized the existence of such a claim, and the supreme court affirmed.

The case arose out of a contract entered into on May 13, 1991, between School District 27J and Adco Mechanical Contractors, Inc. Adco contracted to perform mechanical work on a project at Brighton High School. Pursuant to statute, Adco provided the school district with a performance bond under which Transamerica acted as a commercial surety to guarantee Adco's performance of the contract. Adco failed to perform the contract properly and on May 19, 1992, the school district advised Adco that it had been removed from the project. The same day, the school district filed a claim with Transamerica on the performance bond.

In July 1992, the School District obtained three bids for remedial work. On July 15, 1992, the school district sent Transamerica a letter informing it that a contractor had been selected to perform the remedial work. Afterward, Transamerica refused to make payments for the remedial work and asserted that Adco had been wrongfully terminated. When the remedial work was completed, the school district sent Transamerica a bill for the work, which Transamerica refused. The school district asserted a claim against Transamerica for bad faith denial of its performance bond claim. Transamerica moved to dismiss the claim for bad faith on the ground that it was not subject to a common law bad faith claim. The trial court denied this motion, and after a jury trial, the school district recovered $311,666.04 on the performance bond and $10,000 on its bad faith claim. On appeal, the court of appeals held that the trial court did not err in submitting the bad faith claim to the jury.

The supreme court noted that every contract in Colorado contains an implied duty of good faith and fair dealing. Traditionally, actions based upon breach of this duty were limited to contract damages. However, the court noted that in Farmers Group, Inc. v....