Surety Bonds Are Not “Insurance” Under 42 Pa. C.S. § 8371; Non-Consenting Sureties Are Not Bound by Subcontract Arbitration Awards
Introduction
Eastern Steel Constructors, Inc. (a subcontractor, “Eastern”) supplied work on a Pennsylvania State University construction project for the general contractor Ionadi Corporation (“Ionadi”). Ionadi furnished a payment bond (the “Payment Bond”) naming International Fidelity Insurance Company (“Fidelity”) as surety and PSU as owner.
A dispute arose over amounts owed to Eastern. Eastern arbitrated against Ionadi under an arbitration clause in their subcontract and obtained an award (the “Ionadi Award”). Eastern then pursued Fidelity under the Payment Bond, raising questions central to modern construction disputes: (1) whether Pennsylvania’s insurance bad faith statute, 42 Pa. C.S. § 8371, applies to sureties; (2) whether an arbitration award obtained against the principal is conclusive and binding against a non-signatory surety; and (3) whether the surety’s bond obligation includes attorneys’ fees and contractual interest embedded in the principal’s subcontract/arbitration award.
The provided text is Justice Brobson’s concurring and dissenting opinion. He joins the Majority only as to the § 8371 issue and dissents as to the arbitration-award, attorneys’ fees, and interest rulings.
Summary of the Opinion
Concurrence: Justice Brobson agrees that 42 Pa. C.S. § 8371 does not apply to surety bonds.
Dissent: He would hold that the Ionadi Award is not conclusive or binding on Fidelity because Fidelity did not agree to arbitrate and the Payment Bond contemplates litigation “in a court of competent jurisdiction.”
Dissent: He would also hold Fidelity is not liable under the Payment Bond for Eastern’s attorneys’ fees incurred in arbitration against Ionadi or for contractual interest at the subcontract rate, because the bond’s obligation is limited to “labor, materials and equipment” (as defined in the bond) and may not be expanded by implication.
Remedy advocated: He would remand for the Superior Court to consider Fidelity’s cross-appeal issue that had been deemed moot once the arbitration award was treated as binding.
Analysis
1) Precedents Cited
Justice Brobson’s analysis is anchored in two lines of Pennsylvania authority: (a) strict construction of surety obligations according to the bond’s text and purpose; and (b) arbitration as a consensual waiver of court access and jury trial.
Suretyship interpretation (bond text controls; no expansion by implication)
Thommen v. Aldine Trust Co., 153 A. 750 (Pa. 1931): cited for the “axiomatic” rule that suretyship contracts are construed according to the parties’ intent, and that liability is enforced “according to its strict terms” and “not to be extended by implication.” Justice Brobson also uses Thommen to emphasize that strict construction is not a license for a “forced and unreasonable construction” aimed at relieving the surety; the aim is fidelity to the instrument’s “true intent and meaning.”
Frederick Inv. Co. v. Am. Surety Co. of N.Y., 169 A. 155 (Pa. 1933): used to support reading the bond in context—“with reference to the circumstances” and any incorporated contract—so that the bond’s purpose is effected without rewriting its obligations.
Commonwealth, to Use of Pa. Mfrs.' Ass'n Cas. Ins. Co. v. Fid. & Deposit Co. of Md., 50 A.2d 211 (Pa. 1947): supplies the key limiting principle: “the obligation of a bond cannot be extended beyond the plain import of the words used,” and courts cannot create obligations “not imposed” by the bond’s terms. Justice Brobson relies on this to reject importing arbitration consequences, attorneys’ fees, or contractual interest into Fidelity’s bond obligation when the bond does not say so.
Arbitration requires agreement; protects the right to jury trial
Lincoln Univ. of Commonwealth Sys. of Higher Ed. v. Lincoln Univ. Chapter of the Am. Ass'n of Univ. Professors, 354 A.2d 576 (Pa. 1976), quoting Schoellhammer's Hatboro Manor, Inc. v. Local Joint Exec. Bd. of Phila., 231 A.2d 160 (Pa. 1967): invoked for the foundational rule that arbitration is a matter of contract; absent an agreement, a party cannot be compelled to arbitrate.
Pisano v. Extendicare Homes, Inc., 77 A.3d 651 (Pa. Super. 2013): cited for the constitutional dimension—compelling arbitration of non-waiving parties infringes jury-trial rights.
Jacob v. Weisser, 56 A. 1065 (Pa. 1904): used to reinforce that an arbitrator’s power must be “clearly given” and that jury trial cannot be taken away “by implication.”
Authorities contested by the Majority (as described in the dissent)
Conneaut Lake Agricultural Association v. Pittsburg Surety Company, 74 A. 620 (Pa. 1909): the Majority (as recounted by Justice Brobson) treats this as supporting binding effect on Fidelity because Fidelity had notice and an opportunity to participate. Justice Brobson rejects that application where the surety is a non-signatory to the arbitration agreement and the bond itself selects a judicial forum.
Commonwealth to Use of Fort Pitt Bridge Works v. Continental Casualty Company, 240 A.2d 493 (Pa. 1968): the Majority (as recounted) uses this to support broad reading of “sums due.” Justice Brobson distinguishes it because the bond language there lacked limiting terms, whereas Fidelity’s Payment Bond expressly limits the surety’s undertaking to “labor, materials and equipment” and defines those terms without including attorneys’ fees or contractual interest.
Eastern Steel Constructors, Inc. v. Int'l Fid. Ins. Co., 282 A.3d 827 (Pa. Super. 2022): discussed to show how the Superior Court deemed Fidelity’s merits challenge moot once it accepted the arbitration award as binding; Justice Brobson’s approach would reopen that merits review on remand.
2) Legal Reasoning
A. The Payment Bond’s text and structure preserve a judicial forum
Justice Brobson reads the Payment Bond as a deliberate allocation of forum and risk. Critical provisions include:
Paragraph 11 (forum selection): “No suit or action shall be commenced by a Claimant under this [Payment] Bond other than in a court of competent jurisdiction in the location in which the work or part of the work is located.” For Justice Brobson, this is an explicit choice of litigation—not arbitration—for disputes under the bond.
Amended Paragraphs 6.1 and 6.3 (right to dispute claims and preserve defenses): Fidelity can challenge disputed amounts and does not waive defenses by failures in claim handling. This, to him, is inconsistent with treating an arbitration award between other parties as automatically conclusive.
Absence of any arbitration language: “The Payment Bond makes no mention of arbitration whatsoever,” so binding Fidelity to arbitration outcomes would extend the bond beyond its plain terms.
Timing and incorporation: The subcontract (with arbitration clause) post-dated the Payment Bond; Fidelity was not a party to the subcontract; and the Payment Bond incorporated the “Construction Contract,” not the later subcontract. Justice Brobson treats these facts as fatal to any “incorporation-by-reference” theory for arbitration.
B. Notice and an “opportunity to participate” cannot substitute for consent
The dissent’s core move is to separate (i) the fairness of providing notice and (ii) the legal necessity of a contractual waiver. Even if Fidelity had notice and could have participated, Justice Brobson would not treat non-participation as a waiver, because Fidelity never agreed that arbitration would be the forum for fixing its bond liability.
He further challenges the Majority’s waiver rationale (as he describes it): the suggestion that Fidelity should have challenged the arbitrator’s jurisdiction or compelled removal to court. Because Eastern and Ionadi undisputedly had an enforceable arbitration agreement, Justice Brobson views it as unrealistic (and unsupported) to expect a third party surety to derail that arbitration. In his framing, the Majority’s approach produces a “no-win” scenario: act or don’t act, the surety loses its bargained-for court forum.
C. Attorneys’ fees and contractual interest are outside “labor, materials and equipment”
Justice Brobson’s damages analysis is textual:
Paragraph 1: Fidelity is “jointly and severally” bound “to pay for labor, materials and equipment furnished for use” in performance of the incorporated Construction Contract. That phrasing, standing alone, does not include attorneys’ fees or contractual interest.
Paragraph 15.1 (definition): the bond defines “labor, materials or equipment” expansively (utilities, rental equipment, architectural/engineering services, and “all other items for which a mechanic’s lien may be asserted”), but still does not mention attorneys’ fees or interest—so the bond’s own definitional expansion stops short of those categories.
Paragraphs 2 and 3 (“all sums due”): Justice Brobson reads these as describing the condition that voids the bond obligation (Ionadi pays what is due), not as expanding Fidelity’s affirmative promise into “everything Ionadi owes under its subcontract,” including fee-shifting and enhanced interest.
Bond’s specific attorneys’ fees provision: the bond provides for attorneys’ fees only in particular claim-response circumstances; because those circumstances are not at issue, he treats the specific clause as evidence that fees are not generally included.
D. Why Fort Pitt Bridge Works is different
Justice Brobson distinguishes Commonwealth to Use of Fort Pitt Bridge Works v. Continental Casualty Company on drafting. There, the surety bond allowed suit for sums “justly due,” and the Court read that unqualified language to include interest, noting the surety could have inserted limiting language. Here, in his view, Fidelity did insert limiting language: liability is expressly for “labor, materials and equipment,” and those terms are defined without fees/contractual interest.
3) Impact
Although Justice Brobson’s discussion of arbitration binding effect appears in dissent, it frames a consequential debate for construction and surety practice:
Forum control in bonded projects: If the Majority’s view governs, sureties may be bound by arbitration outcomes between principal and claimant where notice and opportunity to participate exist. If Justice Brobson’s view were adopted, claimants could not convert a bond dispute into arbitration simply by arbitrating with the principal; the surety would retain its bond-selected judicial forum.
Drafting incentives: The disagreement spotlights how parties may draft bonds/subcontracts to align dispute resolution (e.g., express bond consent to arbitration, or explicit exclusions/inclusions of attorneys’ fees and interest).
Scope of recoverable amounts under payment bonds: Justice Brobson’s approach tends to cabin bond exposure to enumerated categories (here, “labor, materials and equipment” as defined), resisting efforts to import subcontract fee-shifting and enhanced interest absent clear bond text.
Statutory bad faith claims: On the point he joins, the holding that § 8371 does not apply to surety bonds narrows the remedial toolkit against sureties, pushing disputes back toward contract remedies and traditional surety principles rather than punitive/statutory bad-faith frameworks.
Complex Concepts Simplified
Surety bond (payment bond)
A three-party obligation: the principal (Ionadi) promises to pay; the surety (Fidelity) guarantees certain payments if the principal defaults; the obligee (here PSU) is protected, and subcontractors may have rights as “Claimants” under the bond’s terms.
“Joint and several”
The claimant can pursue either the principal or surety (or both) for the covered obligation, but only within the scope the bond actually guarantees.
Incorporation by reference
A bond may “pull in” another document (e.g., the Construction Contract). Justice Brobson stresses that incorporation must be clear; a later subcontract is not automatically incorporated, especially where the bond specifies a different forum and never mentions arbitration.
Arbitration as waiver of jury trial
Arbitration replaces court adjudication. Because it waives access to court and a jury, Pennsylvania cases require a clear agreement; it cannot be imposed on a non-consenting party by implication.
Prejudgment interest vs. contractual interest
“Prejudgment interest” is often a statutory or common-law add-on for delayed payment; “contractual interest” is a rate the parties negotiated (here, 1.5% per month in the subcontract). Justice Brobson would not impose the subcontract’s contractual interest on the surety absent bond language adopting it.
Conclusion
Justice Brobson’s separate opinion agrees with the Court’s conclusion that 42 Pa. C.S. § 8371—Pennsylvania’s insurance bad faith statute—does not apply to surety bonds. He departs sharply, however, from treating a subcontract arbitration award as binding on a non-signatory surety and from expanding bond liability to cover attorneys’ fees and contractual interest not clearly embraced by the bond’s text.
The opinion underscores a broader doctrinal message: surety obligations are enforced according to the bond’s language and purpose, and arbitration consequences cannot be imposed on a surety without a clear, contractual surrender of the surety’s chosen judicial forum and attendant jury-trial protections.