Supreme Court of Pennsylvania Decision in Eastern Steel Constructors, Inc. V. International Fidelity Insurance Company

By Frank Tanzola of IAT Surety

This article should not be used as legal advice. All parties should consult legal counsel of their choice and seek expert advice on legal and compliance issues.

As is widely known among surety practitioners, the Supreme Court of Pennsylvania (hereinafter “the Court”) issued its decision in the captioned litigation on February 18, 2026¹, the first surety case to be considered by the Court in decades. What isn’t generally known is that following the issuance of the Court’s opinion, the plaintiff filed an Application for Re-Argument of the ruling on the issue of the applicability of Pennsylvania’s insurance bad faith statute to surety bonds. After briefing took place, the Application for Re-Argument was denied, effectively making the decision final on April 10, 2026.

The case concerned a payment bond claim for the installation of rebar on a project wherein Pennsylvania State University was the obligee, International Fidelity Insurance Company (hereinafter “surety” or “IFIC”) was the surety and the bond form was the AIA 312 payment bond. Before the Court were three (3) issues on appeal from the prior September 1, 2022 Superior Court of Pennsylvania opinion², as follows:

1. Whether Pennsylvania’s insurance bad faith statute applies to surety bonds.
2. Whether the surety was bound by an arbitration award entered against its principal.
3. Whether and to what extent the surety was liable for attorney’s fees and interest.

The Superior Court had ruled on the above three issues as follows:

1. Pennsylvania’s insurance bad faith statute³ does not apply to surety bonds.
2. The surety was bound by the arbitration award entered against its principal.
3. The surety was liable for attorney’s fees incurred by the plaintiff in pursuing the principal and for pre-judgment interest from the date of the arbitration award at the statutory rate rather than the higher rate provided in the subcontract. The plaintiff was not entitled to attorney’s fees incurred in litigating against the surety.

More than a year after oral argument took place in October of 2024, the Court issued its opinion upholding the rulings of the Superior Court in all respects, with four Justices joining in the Court’s Majority Opinion. Two Justices issued a separate Concurring and Dissenting Opinion (hereinafter “the CDO”), concurring with the Court’s ruling on the bad faith issue but dissenting from the majority on the second and third issues. Along with the Majority Opinion, the CDO is also the subject of further discussion below.

The Court’s Rulings on the Issues Presented

1. Whether Pennsylvania’s insurance bad faith statute applies to surety bonds

In analyzing the issue of whether Pennsylvania’s insurance bad faith statute applies to surety bonds, the Court started from the mandate of Pennsylvania’s Statutory Construction Act⁴ that statutory interpretation strictly involves discerning the legislature’s intent. Based upon the plain meaning of the statutory language, the Court unequivocally rejected the plaintiff’s argument that the legislature intended Pennsylvania’s insurance bad faith statute to apply to surety bonds, adopting the view of both the Superior Court and all other state and federal courts that had previously considered the issue. More specifically, and as stated in both the surety’s brief and an amicus brief submitted on behalf of the Surety and Fidelity Association of America, the Court’s opinion points out that the Pennsylvania insurance bad faith statute refers repeatedly to insurance policies, insurers and insureds, and nowhere mentions sureties. In holding that insurance does not include surety bonds within the plain meaning of the statute, the Court looked to the Black’s Law Dictionary definitions of insurance and insurance policies in contrast to the definitions of sureties and surety bonds, as well as to United States Supreme Court precedent⁵ and to the Court’s own prior rulings to the effect that insurance and surety are distinct. The Court also recognized the distinction between the tripartite nature of suretyship as opposed to the direct obligation of an insurer to its insured.

The Court’s opinion similarly disposed of the plaintiff’s in pari materia argument based upon the specific inclusion of surety within the meaning of insurance under Pennsylvania’s Unfair Insurance Practices Act⁶ (“the UIPA”). In fact, and as pointed out in IFIC’s brief, the Court found that reading the statutes together actually cuts against the plaintiff’s argument. Since the legislature specifically included surety with insurance in the UIPA, they could just as easily have included it in the bad faith statute. Accordingly its omission from the latter should be construed as intentional.

2. Whether the surety was bound by the arbitration award entered against its principal.

Despite the express provision in the payment bond providing that any suit or action against the surety must be brought in a court of competent jurisdiction in a location where the work or part of the work was performed, the Court held that the arbitration award obtained against the principal was binding upon the surety. In doing so, the Court agreed with the Superior Court, which had overturned the ruling of the trial court holding that the arbitration award was not binding upon IFIC.

A careful reading of the Court’s opinion on this point indicates that, as with its interpretation of the attorney’s fees issue as discussed hereafter, its ruling derives largely from the mistaken precept that “a surety’s liability is co-extensive that that of its principal.” Unfortunately, IFIC’s trial counsel (who is not the same counsel that handled the Supreme Court appeal) did not object to a jury instruction to this effect, ultimately resulting in the Court’s relying heavily and repeatedly upon this mistaken proposition. As the Court states:

The obligation of the surety [is] co-extensive with that of its principal. By making Ionadi and Fidelity jointly and severally liable for “all labor, materials and equipment” to be used in the construction project, the payment bond established that any subcontractor claiming entitlement to payment from Ionadi could pursue that payment from Fidelity. The payment bond relieves Fidelity from this obligation only if and when Ionadi pays “all sums due” the Claimant. This phrase-all sums due-is not defined in the payment bond. The place to look to ascertain what sums may be due to a particular Claimant is the subcontract between that Claimant and Ionadi.

As to the first part of the above analysis, a surety’s obligation is not simply co-extensive with that of its principal but is rather defined and limited by the terms of the bond. Therefore, and as more accurately stated in IFIC’s brief, a surety’s liability is actually a subset of its principal’s liability. The Court’s statement that “all sums due” is not defined in the bond is also incorrect, since it is defined by the reference in paragraph 1 to payment for “labor, materials and equipment,” which as the CDO points out is further defined by paragraph 15.1 of the subject payment bond.

The Court’s Majority Opinion also treats the 1909 case of Conneaut Lake Agricultural Ass’n v. Pittsburg Surety Co., 225 Pa. 592, 74 A. 620 (1909) as controlling precedent on this issue. The Conneaut Lake case involved a performance bond for the construction of a race track, which bond incorporated by reference a contract providing for disputes to be determined by the project engineer. There is no indication that the bond at issue in Conneaut Lake contained a clause requiring claims against the surety to be bought in a court of competent jurisdiction.

In dismissing IFIC’s efforts to distinguish Conneaut Lake based upon the terms of the bond, the Court states in its footnote 62 that “This is a distinction without a difference. Whether performance or a payment bond, the surety bond assures performance of contractual obligations.” Respectfully it is hard to understand how a bond that incorporates by reference a contract containing a dispute resolution clause versus a bond that does not incorporate such contract and further provides for a court of competent jurisdiction as the sole forum of dispute resolution can possibly be a distinction without a difference in determining the precise issue of whether the surety is bound by the ruling of the alternate forum. The CDO, whose analysis starts from the proposition that the bond itself is a contract and cannot be expanded beyond its strict terms, understood this. As stated by the CDO:

To my mind, requiring Fidelity to participate in arbitration or be bound by the Ionadi Award under the circumstances presented is an affront to Fidelity’s contractual and constitutional rights.

The Court was also not troubled by the fact that the arbitration award was entered by default after the principal filed for bankruptcy protection, the plaintiff obtained emergent relief to lift the automatic stay and proceeded to obtain the arbitration award very shortly thereafter. The Court goes on to emphasize that surety’s counsel (which again was not the same counsel that represented IFIC in connection with the appeal) did not object to the lifting of the stay or subsequent confirmation of the arbitration award. However, it is unclear what the Majority believes the surety could have argued that would have prevented either event, no less how the surety could have been in a position at that time to defend an action which its principal had been actively defending up until its bankruptcy filing. Neither is it at all likely that the surety could have challenged the jurisdiction of the arbitrators, as suggested by the Court at one point. As stated in the CDO, the arbitrators were fully vested with jurisdiction over disputes between the principal and the claimant by the terms of the subcontract to which those parties (but not the surety) had subscribed.

In addition, the Majority Opinion repeatedly asserts that IFIC could have joined the arbitration and defended the claim but chose not to, while the plaintiff “followed the terms of its Subcontract” by pursuing its claim against the principal in arbitration. However, and again as pointed out by the CDO in its footnote 1, considering that the bond predates the subcontract, it was in fact the plaintiff and not the surety that created the situation by choosing to enter into a subcontract (which subcontract was clearly the plaintiff’s form) providing for arbitration against the principal when it knew or should have known that the bond provided for a court of competent jurisdiction as the exclusive forum for an action thereunder.

As a final point on this issue, the Court asserts that holding the surety is bound by the arbitration ruling is not the same as forcing the surety to arbitrate, which could be considered somewhat disingenuous. Along those same lines, in its footnote 64 the Majority Opinion is critical of the CDO because it “apparently views the arbitration proceeding against Ionadi as an exercise in futility,” while not acknowledging that it could just as easily be said that the Majority Opinion apparently views the subsequent trial as an exercise in futility.

3. Whether and to what extent the surety was liable for attorneys’ fees and interest

In affirming the Superior Court’s ruling on the issue of attorneys’ fees and interest, the Court held as follows:

1. The plaintiff was entitled to its attorney’s fees incurred in pursuing the principal (which in this case consisted of the attorneys’ fees awarded in the arbitration).
2. The plaintiff was not entitled to its attorneys’ fees incurred in pursuing the litigation against the surety because these were not “sums justly due” within the meaning of the bond or subcontract.
3. The plaintiff was entitled to interest against the surety from the date of the arbitration award at the statutory rate of interest rather than the rate provided in the subcontract.

Attorney’s fees and interest are not provided for under the AIA 312 payment bond except where the surety does not timely pay any undisputed amounts and set forth its reasons for disputing any unpaid amounts (circumstances not at issue in this case). Nonetheless the Majority states:

Under Section 3 of the payment bond, Fidelity’s obligation to pay Ionadi’s debts for labor, material and equipment is discharged only when Ionadi pays Eastern “all sums due.” This contractual phrase-“all sums due”-refers to the sums that are due under the Subcontract. Eastern did not get the benefit of its bargain under the Subcontract. Under the payment bond, therefore, Fidelity is jointly and severally liable for this debt.

Of course it is not the surety’s obligation to give a payment bond claimant “the benefit of its bargain” as opposed to complying with the terms of the surety’s bond. Again the Court appears to be influenced here by the false proposition that a surety’s liability is co-extensive with that of its principal. To the extent that subcontracts, purchase orders or other agreements have bearing upon the question of the surety’s liability, it is only to the extent that obligations contained therein are also covered by the terms of the bond, which defines the surety’s obligation.

Further, reading the bond as a whole indicates that use of the phrase “all sums due” plainly is not intended to refer to a subcontract, purchase order or other document that is not incorporated in the bond and the terms of which are beyond the knowledge or control of the surety at the time it issues the bond. Rather, under a correct reading of the AIA 312 bond where all provisions are read together and given effect in accordance with standard rules of contract construction, all sums due must be considered not in isolation but rather jointly with paragraph 1 of the bond wherein, as stated by the CDO at page 7, the principal and surety jointly and severally bind themselves “to pay for labor, materials and equipment furnished for use in the performance of the Construction Contract.” [emphasis added]. Also as pointed out in the CDO, these terms are further defined in paragraph 15.1 of the bond and do not include attorneys’ fees or interest. Finally, the Court glosses over IFIC’s argument that the bond’s definition of labor, materials and equipment references and tracks the language of Pennsylvania’s Mechanics’ Lien statute⁷, which also does not allow for the recovery of attorneys’ fees and interest.

Implications of the Court’s Opinion for Sureties, Contractors, and Agents

1. There is clearly and unequivocally no statutory bad faith cause of action against sureties under Pennsylvania law. Any such claims should be subject to dismissal via a motion on the pleadings.
2. Sureties issuing bonds for projects in Pennsylvania will be bound by an arbitration award entered against their principals, regardless of bond terms, where the surety had notice of the arbitration and is considered to have had an opportunity to defend.
3. Under Pennsylvania law, sureties will be liable for attorneys’ fees and interest under the AIA 312 payment bond form and other payment bond forms in that either allow for same or may be subject to such interpretation. The extent of potential liability for attorneys’ fees and interest will depend upon the bond language, subcontract/purchase order language and circumstances of each case.

Actions that Sureties, Surety Agents, and Contractors Should Consider In Light of the Court’s Decision

1. Sureties and surety agents should consider requiring a modification to the AIA 312 payment bond form (as permitted by paragraph 18) on bonded contracts performed in Pennsylvania so as to clearly and unequivocally exclude attorney’s fees (other than pursuant to paragraph 6) or contractual interest. Other bond forms should be carefully scrutinized as to whether they are susceptible to an interpretation allowing for such recovery and modified if necessary.
2. Contractors should likewise carefully scrutinize the language of any subcontracts and purchase orders they enter into, as attorneys’ fees, interest and other provisions therein could expose their surety to broad liability for which the contractor may have personally indemnified the surety.
3. Where Pennsylvania law applies, sureties must assume that they will be bound by any arbitration decision regardless of whether they are a party or subject to arbitration by the terms of the bond and consider intervening directly if their principal may not be adequately defending.

Final Thoughts

The Supreme Court’s holding that the Pennsylvania bad faith statute does not apply to sureties is a great victory for the surety industry. However, the interpretation of the AIA 312 payment bond as allowing for the recovery of interest and particularly attorneys’ fees if contained in a subcontract or purchase order is unfortunate and a misreading of the bond. While in this instance the only attorneys’ fees recovered were those expended solely in pursuing recovery from the principal, the extent to which attorneys’ fees are allowed will depend upon the language of the particular contract and bond form at issue.

The holding that an arbitration award entered against the principal is binding on the surety where the contract containing the arbitration clause was not incorporated in the bond and the bond provided for a court of competent jurisdiction as the sole forum in a dispute between the claimant and surety is also unfortunate. However, since the ruling does at least provide clarity on this point, sureties must closely monitor any such arbitration proceedings and intervene to protect their interests if necessary.

 

Frank J. Tanzola is Senior Vice President, Chief Legal Officer for IAT Surety, a member of IAT Insurance Group. He has been with the company for over 35 years and has headed its Legal & Claims Department for the past 18 years. Prior to joining IAT, he practiced law in the areas of commercial litigation, surety, and construction law. He is admitted to the New Jersey Bar and to the Federal District Court for the District of New Jersey. Tanzola currently serves as Chair of the Surety & Fidelity Association of America Corporate Counsel Advisory Committee. He previously served as Vice Chair of the American Bar Association (ABA) TIPS Fidelity and Surety Law Committee and remains an active member of the ABA TIPS Dispute Resolution and Corporate Counsel Committees. He can be reached at Frank.Tanzola@iatinsurance.com or 973.776.8770.

 

 

End Notes

1 Eastern Steel Constructors v. International Fidelity Insurance Company, 351 A.3d 766 ( 2026).
2 Eastern Steel Constructors, Inc. v. International Fidelity Insurance Company, 282 A.3d 827 (Pa. Super. Ct. 2022).
3 42 Pa. C.S. Section 8371
4 1 Pa. C.S. Section 1501-1991
5 Pearlman v. Reliance Ins. Co., 371 U.S. 132 (1962).
6 40 Pa. C.S. Section 1171.1-1171.15
7 49 Pa. C.S. Section 1101-1902.