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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. 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).