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O'Connor v. Star Insurance Co. (12/26/2003) sp-5765
O'Connor v. Star Insurance Co. (12/26/2003) sp-5765
Notice: This opinion is subject to correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
e-mail corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
KEVIN and YVETTE O'CONNOR, )
) Supreme Court No. S-10500
Appellants, )
) Superior Court No. 4FA-99-1514
CI
v. )
) O P I N I O N
STAR INSURANCE COMPANY, )
) [No. 5765 - December 26, 2003]
Appellee. )
________________________________)
Appeal from the Superior Court of the State
of Alaska, Fourth Judicial District,
Fairbanks, Niesje J. Steinkruger, Judge.
Appearances: William R. Satterberg, Jr.,
The Law Offices of William R. Satterberg,
Jr., Fairbanks, for Appellants. John C.
Pharr, Law Offices of John C. Pharr,
Anchorage, for Appellee.
Before: Fabe, Chief Justice, Matthews,
Eastaugh, Bryner, and Carpeneti, Justices.
EASTAUGH, Justice.
I. INTRODUCTION
Star Insurance Company issued a licensing surety bond
to a general contractor under AS 08.18.071. Kevin and Yvette
O'Connor sued Star alleging, among other things, that Star
tortiously breached a duty they claimed Star owed them to
impartially investigate their claim against the contractor. The
superior court ruled that the undisputed facts showed that Star
acted reasonably. It consequently granted summary judgment to
Star on the O'Connors' tort claims against Star. The O'Connors
appeal. We affirm the summary judgment, because the O'Connors
have not established that Star owed them an actionable tort duty
to investigate their claim against the contractor.
II. FACTS AND PROCEEDINGS
Contractors must obtain a state-issued certificate of
registration to perform contracting work in Alaska.1 Alaska
Statute 08.18.071 requires general contractors to file either a
$10,000 cash deposit or a $10,000 surety bond with the
Commissioner of the Department of Community and Economic
Development before receiving a certificate of registration.2
Under AS 08.18.071(a)(3), the bond is conditioned on payment of
all amounts "adjudged" against the contractor for negligent or
improper work, or for breach of contract. Per AS 08.18.071(b),
the cash deposit has the same implicit purpose. We refer here to
a surety bond satisfying AS 08.18.071 as a "licensing bond."
Homestead Builders, Inc. was a construction contractor
licensed to do business in Alaska. It obtained a $10,000
licensing bond from Star Insurance Company to satisfy AS
08.18.071. The bond was in effect from February 11, 1997 to
February 11, 2000. In its bond application Homestead Builders
agreed to indemnify, defend, and hold harmless Star against any
monetary loss due to a claim or demand against the bond, and
against any legal expenses incurred by Star relating to the bond.
Kevin and Yvette O'Connor hired Homestead Builders and
one of Homestead Builders's owners, Ken Born, to perform
construction work on their home. The work occurred in 1997 and
1998. The O'Connors were unhappy with the work and sued
Homestead Builders, Born, and Star in superior court, alleging
that the construction "was deficient, unworkmanlike, and in
violation of acceptable building standards, code requirements,
and various promises [made] . . . with respect to the quality of
construction." The complaint sought damages exceeding $50,000
and alleged that Star was liable to the O'Connors to the full
extent of the licensing bond Star issued to Homestead Builders.
After Homestead Builders and Born filed an answer to
the O'Connors' complaint, Star exercised its rights under the
indemnity agreement Homestead Builders signed and tendered
defense of the O'Connors' suit to Homestead Builders. Homestead
Builders's attorney then entered an appearance for Star and filed
on Star's behalf an answer to the O'Connors' complaint.
Two other claimants, whose claims were unrelated to the
O'Connors' suit, also filed claims against the licensing bond
Star issued to Homestead Builders. Homestead Builders and Born
filed for bankruptcy July 28, 2000.
Star then filed a complaint for interpleader in state
district court naming the O'Connors among the defendants. Star's
interpleader complaint alleged that the multiple claims against
the licensing bond exceeded the value of the bond. Star's
complaint asked that Star be permitted to pay $10,000 into the
registry of the court, and sought an order exonerating the bond.
The O'Connors filed an answer to Star's interpleader
complaint, and claimed that they should be awarded all interpled
sums. The O'Connors also counterclaimed, alleging that Star, as
the surety, owed them "a duty under Alaska law to fairly, fully,
and impartially investigate the claim of [the] O'Connors and all
other[] [claims] against the bond." Their counterclaim alleged
that Star failed to investigate their claim despite clear
notification, and that Star's failure to investigate was in bad
faith. The O'Connors later argued that Star owed them a duty of
good faith and fair dealing, and that the breach of that duty
entitled the O'Connors to maintain a bad faith tort action
against Star.
Star moved for summary judgment on the O'Connors' bad
faith counterclaim in the interpleader action. Star argued that
the tort of bad faith did not exist in the licensing bond
context. It argued alternatively that even if a bad faith cause
of action did exist in the licensing bond context, Star did not
breach a duty it owed to the O'Connors.
After filing their counterclaim in the district court
interpleader action, the O'Connors filed an amended complaint in
their superior court action against Homestead Builders, Born, and
Star. The amended complaint added "Count II," which asserted a
bad faith claim against Star for its alleged failure to "fairly,
fully, and impartially investigate the claim of [the] O'Connors
and all other[] [claims] against the bond." The O'Connors'
counterclaim in the interpleader action and Count II in their
amended complaint both alleged that Star owed the O'Connors a
duty to investigate the third-party claims against the licensing
bond Star issued to Homestead Builders, and that Star breached
this duty in bad faith by not investigating the O'Connors' claim
against Homestead Builders.
Star's interpleader action was consolidated in the
superior court with the O'Connors' original suit against
Homestead Builders, Born, and Star. Star then moved for summary
judgment on Count II of the O'Connors' amended complaint. Star
argued that the O'Connors could not demonstrate a genuine issue
of material fact as to the O'Connors' tort damages claim against
Star, or as to Star's liability for punitive damages.
Star later amended its interpleader complaint to add
two other defendants who had made claims against the licensing
bond Star issued to Homestead Builders.
The superior court granted summary judgment to Star on
the O'Connors' bad faith counterclaim to Star's interpleader
complaint. The superior court ruled that the tort of bad faith
existed in the context of licensing bonds, but that the
undisputed facts showed that Star did not breach a duty it owed
to the O'Connors. The superior court later granted summary
judgment to Star on Count II of the O'Connors' amended complaint
which, like the O'Connors' interpleader counterclaim, alleged a
bad faith failure to investigate.
The O'Connors appeal the grants of summary judgment on
their bad faith claims.
III. DISCUSSION
A. Standard of Review
We apply our independent judgment when reviewing a
lower court's interpretation of statutes and other related legal
questions.3 We review rulings on questions of fact under the
clearly erroneous standard.4 We "may affirm the superior court
on any basis appearing in the record."5
B. The O'Connors Have Not Established the Existence
of an Actionable Tort Duty.
The superior court held that Star acted reasonably and
thereby discharged the duty it owed the O'Connors. But although
the superior court granted summary judgment to Star on that
ground, it also held that "the tort of bad faith exists in the
licensing bond context."
The O'Connors have appealed the ruling that Star acted
reasonably. The issue whether Star owed the O'Connors an
actionable tort duty was not initially briefed on appeal. We
consequently ordered supplemental briefing on the question
whether licensing bond sureties owe a duty of good faith and fair
dealing to parties who have negligence claims against bonded
contractors.
In holding that the tort of bad faith existed in the
licensing bond context, the superior court relied on our decision
in Loyal Order of Moose v. International Fidelity Insurance Co.6
The superior court correctly noted that all contracts in Alaska
contain an implied covenant of good faith and fair dealing as a
matter of law.7 It then observed, citing Loyal Order of Moose,
that a covenant of good faith and fair dealing may give rise to a
tort claim for bad faith.8 The superior court relied on our
holding in Loyal Order of Moose that "an implied covenant of good
faith and fair dealing exists between a surety and its obligee on
payment and performance bonds" in the construction context.9 The
superior court treated licensing bonds like payment or
performance bonds, and concluded that Star owed the O'Connors a
duty of good faith and fair dealing and that breach of that duty
would give rise to a tort action for bad faith.
The superior court then quoted our statement in Loyal
Order of Moose that a "surety may satisfy its duty of good faith
to its obligee by acting reasonably in response to a claim by its
obligee, and by acting promptly to remedy or perform the
principal's duties where default is clear."10 The superior court
held that the undisputed facts showed that Star acted reasonably.
The court ruled that Star acted reasonably (1) in tendering
defense of the O'Connors' claim to Homestead Builders under the
terms of Star's indemnity agreement with Homestead Builders; (2)
in not paying on the bond before Homestead Builders's negligence
was established; and (3) in filing an interpleader action to
resolve the multiple claims against the bond after Homestead
Builders filed for bankruptcy. It consequently granted summary
judgment to Star on the O'Connors' bad faith tort claims.
The O'Connors argue that Star owed them a duty to
"independently investigate" their claim against Homestead
Builders, and that Star breached this duty by tendering to
Homestead Builders the defense of the O'Connors' claim without
conducting its own investigation. In opposing Star's motion for
summary judgment, the O'Connors argued in the superior court that
"not once did Star make a reasonable independent investigation
into [the O'Connors'] claims." (Emphasis in original.)
Similarly, the O'Connors argued that
[a]n examination of the disclosures made by
Star . . . reveals not one piece of
information related to any effort by Star to
at any time independently investigate [the
O'Connors'] claim. Star's only response to
the allegation of bad faith and failure to
independently investigate is to state that
Star tendered the defense to its principal,
and later commenced the interpleader suit.
(Emphasis added.)
The O'Connors' supplemental appellate arguments
regarding the duties Star owed as licensing bond surety generally
track the reasoning of the superior court. The O'Connors discuss
the similarities between an insurer's duties to its insured and a
surety's duty to its obligee; they rely heavily on our holding in
Loyal Order of Moose. They argue that Star, as surety, owed them
a duty of good faith and fair dealing, and that Star's breach of
this duty gives rise to a tort action for bad faith. We held in
Loyal Order of Moose that a "failure by a surety minimally to
investigate its principal's alleged default may constitute bad
faith if that investigation would confirm the obligee's
allegations in material part."11 Relying on this holding, the
O'Connors assert that we "must find that Star is directly bound
to independently investigate claims submitted by the O'Connors,
and others affected as well, and to be directly responsible for
losses incurred due to Homestead Builders's negligent or improper
work." (Emphasis in original.)
Our holding in Loyal Order of Moose addressed payment
and performance bonds for construction contracts. We held that
sureties on those bonds owe their obligees a duty of good faith
and fair dealing, and that breach of that duty gives rise to an
action for bad faith.12 We reasoned that the surety owed its
obligee a duty of good faith and fair dealing because the surety
relationship involved there was like insurance, and insurers are
subject to bad faith tort liability.13
The O'Connors' reliance on Loyal Order of Moose is
misplaced because payment and performance bonds differ from
licensing bonds of the sort Star issued here.
We noted in Loyal Order of Moose that "[p]ursuant to the parties'
contract, for included additional consideration, Darling [the
contractor and principal] obtained performance and payment bonds
from IFI [the surety] naming Moose Lodge as `obligee.' "14 The
purpose of the performance bond was to ensure that the work was
completed, and the purpose of the payment bond was to ensure that
the subcontractors were paid for materials and labor.15
In comparison, licensing bonds are statutorily
mandated, and their value is determined by statute, rather than
by the value of any given project or the number of the
contractor's projects.16 And unlike a project owner who requires
the contractor to obtain specific payment or performance bonds
covering the project, an owner like the O'Connors does not pay
additional consideration for licensing bonds because, at least in
theory, only a licensed contractor may perform construction work.17
Consequently, a person hiring a construction contractor, at least
in theory, cannot hire an unlicensed contractor.18 There is no
incremental additional licensing bond cost attributable to a
particular project.
Similarly, the licensing bond suretyship arrangement is
not structured to guarantee the performance of, or payment for, a
particular construction contract. Rather, as we held in Jones v.
Short, the purpose of the bonding requirement in AS 08.18 is to
"provid[e] a fund against which claims may be made."19 Moreover,
because AS 08.18.071 permits contractors to file a cash deposit
or a licensing bond to become registered, not all contractors
necessarily obtain licensing bonds.20
The analogy between insurance contracts and suretyships
discussed in Loyal Order of Moose therefore does not apply in the
licensing bond context.21 Nor do we find in Loyal Order of Moose
any basis for placing a duty on licensing bond sureties to
independently investigate third-party claims against bonded
contractors. By "third-party claims" we mean claims made by
individuals, like the O'Connors, who are neither the principal
(contractor) nor the surety (insurer) in a licensing bond
suretyship arrangement of the sort contemplated in AS 08.18.071.
Likewise, we find in AS 08.18.071 no basis for imposing
on licensing bond sureties a duty to independently investigate
third-party claims against bonded contractors. Per AS
08.18.071(a)(3), a contractor's licensing bond must be
conditioned on a promise to pay all "amounts that may be adjudged
against the [contractor] by reason of negligent or improper work
or breach of contract in the conduct of the contracting
business." The statute nowhere states or implies that licensing
bond sureties have a duty to independently investigate claims
made against bonded contractors. The statutory language only
requires that licensing bonds be conditioned on a promise to pay
amounts adjudged against the contractor.
Furthermore, as we noted above, AS 08.18.071(b) gives
contractors the option of filing a cash deposit with the
Commissioner of the Department of Community and Economic
Development "[i]n lieu of the surety bond." If the contractor
places a cash deposit, the commissioner will not pay claimants
from a contractor's cash deposit until a final judgment is
entered.22 The O'Connors acknowledged below that the commissioner
does not owe third-party claimants a duty to investigate claims
against contractors who file cash deposits. Given that AS
08.18.071 permits contractors to choose between filing a cash
deposit or a surety bond, it would be incongruous to impose on
licensing bond sureties a duty to independently investigate third-
party claims even though the commissioner owes no equivalent duty
when contractors file cash deposits.
We therefore discern nothing in AS 08.18 that can be
read to impose on licensing bond sureties a duty to independently
investigate third-party claims against bonded contractors.
Because the O'Connors have not established that Star
owed them an actionable duty to independently investigate the
O'Connors' claim against the bonded contractor, and because we
see no basis in precedent or in statute for imposing such a duty,
we decline to hold that Star by virtue of issuing the licensing
bond owed the O'Connors an actionable duty to independently
investigate the O'Connors' claim against Homestead Builders.
Because we hold that Star owed the O'Connors no
actionable tort duty to independently investigate their claims
against Homestead Builders, it is unnecessary for us to consider
Star's contention that licensing bond sureties should not be
subject to tort damages for breaches of the covenant of good
faith and fair dealing generally. Star's reliance on Cates
Construction, Inc. v. Talbot Partners, in which the California
Supreme Court held that obligees of construction performance
bonds may not recover in tort for a surety's bad faith, implies
that Star is asking us to overrule Loyal Order of Moose.23
Nothing in our decision today should be viewed as inconsistent
with our holding in Loyal Order of Moose.
IV. CONCLUSION
For the reasons discussed above, we AFFIRM the grants
of summary judgment on the O'Connors' bad faith claims against
Star.
_______________________________
1 At all pertinent times, AS 08.18.011 provided in part that
"[a] person may not submit a bid or work as a contractor until
that person has been issued a certificate of registration by the
[Department of Community and Economic Development]." The
legislature amended section .011 in 2003. Ch. 134, 4, SLA
2003. The 2003 amendment inserted the words "as a contractor"
after the word "registration" in the quoted passage.
2 At all pertinent times, AS 08.18.071 provided in part:
(a) Each applicant shall, at the time of
applying for a certificate of registration,
file with the commissioner a surety bond
running to the state conditioned upon the
applicant's promise to pay all
(1) taxes and contributions due the
state and political subdivisions;
(2) persons furnishing labor or
material or renting or supplying equipment to
the applicant; and
(3) amounts that may be adjudged
against the applicant by reason of negligent
or improper work or breach of contract in the
conduct of the contracting business or by
reason of damage to public facilities
occurring in the course of a construction
project.
(b) If the applicant is a general
contractor, the amount of the bond shall be
$10,000; if the applicant is a mechanical or
specialty contractor, the amount of the bond
shall be $5,000. In lieu of the surety bond
the applicant may file with the commissioner
a cash deposit or other negotiable security
acceptable to the commissioner in the amount
specified for the bonds.
(Emphasis added.) The legislature amended section .071 in 2003.
Ch. 134, 4, 5, SLA 2003. The amendment is not material to the
present dispute.
3 Cook Inlet Keeper v. State, 46 P.3d 957, 961 (Alaska 2002);
Fancyboy v. Alaska Vill. Elec. Co-op., Inc., 984 P.2d 1128, 1132
(Alaska 1999).
4 Dunn v. Dunn, 952 P.2d 268, 270 (Alaska 1998) (quoting R.F.
v. S.S., 928 P.2d 1194, 1196 n.2 (Alaska 1996)).
5 Far N. Sanitation, Inc. v. Alaska Pub. Utils. Comm'n, 825
P.2d 867, 869 n.2 (Alaska 1992).
6 Loyal Order of Moose v. Int'l Fid. Ins. Co., 797 P.2d 622
(Alaska 1990).
7 The superior court cited Alaska Pacific Assurance Co. v.
Collins, 794 P.2d 936, 947 (Alaska 1990). We there held that
"[a] covenant of good faith and fair dealing is an implied
component of all contracts as a matter of law."
8 Loyal Order of Moose, 797 P.2d at 626 (noting that breach of
duty of good faith and fair dealing in insurance context sounds
in tort); see also State Farm Fire & Cas. Co. v. Nicholson, 777
P.2d 1152, 1154-56 (Alaska 1989).
9 Loyal Order of Moose, 797 P.2d at 626.
10 Id. at 628 (footnote omitted).
11 Id.
12 Id. at 627-28.
13 Id. In Loyal Order of Moose we compared State Farm Fire &
Casualty Co. v. Nicholson, 777 P.2d 1152, 1157 (Alaska 1989)
(holding "an insurer's bad faith failure to settle a first-party
claim is a tort") with O.K. Lumber Co. v. Providence Washington
Insurance Co., 759 P.2d 523, 525-26 (Alaska 1988) (holding that
liability insurer did not owe duty of good faith and fair dealing
to injured third-party claimant), and concluded: "In our view the
relationship of a surety to its obligee - an intended creditor
third-party beneficiary - is more analogous to that of an insurer
to its insured than to the relationship between an insurer and an
incidental third-party beneficiary." Loyal Order of Moose, 797
P.2d at 628.
14 Loyal Order of Moose, 797 P.2d at 623.
15 Id. at 623-24.
16 AS 08.18.011 (registration required); AS 08.18.071 (bond or
deposit required for registration).
17 AS 08.18.011; AS 08.18.071.
18 Unlicensed contractors are also disfavored under Alaska law.
AS 08.18.151 prohibits unregistered contractors from bringing
actions in state courts for breach of contract or to collect
compensation for work for which registration is required without
proving that the contractor was a registered contractor at the
time of contracting for the performance of the work. See Gross
v. Bayshore Land Co., 710 P.2d 1007, 1013 (Alaska 1985).
19 Jones v. Short, 696 P.2d 665, 668 (Alaska 1985).
20 AS 08.18.071.
21 See Loyal Order of Moose v. Int'l Fid. Ins. Co., 797 P.2d
622, 627-28 (Alaska 1990).
22 AS 08.18.081(b) states: "If a judgment is entered against
the cash deposit, the commissioner, upon receipt of a certified
copy of a final judgment, shall pay the judgment from the amount
of the deposit, in accordance with the priorities set out in (a)
of this section." 12 Alaska Administrative Code (AAC) 21.140(a)
(2000) states: "A claimant who obtains final judgment against a
contractor may tender to the commissioner a certified copy of the
final judgment with the request that payment be made upon the
judgment from the proceeds of the cash deposit."
23 Compare Cates Constr., Inc. v. Talbot Partners, 980 P.2d
407, 410 (Cal. 1999) (holding tort recovery inappropriate for
breach of implied covenant of good faith and fair dealing in
context of construction performance bond) with Loyal Order of
Moose, 797 P.2d at 627-28 (reaching opposite conclusion).
