Republic Insurance v. Board of County Commissioners

GILBERT, Chief Judge. The overriding question in this appeal is whether a surety 1 is permitted to limit its liability to the face value of a bond. A secondary issue is: does Maryland recognize an action by an obligee to recover from a surety for the latter’s “bad faith”? The Facts The developers of a subdivision in St. Mary’s County known as Discovery were required to post performance bonds with the County as obligee.

The purpose of the bonds was to secure the construction of subdivision roads. The project was to be completed by March 25, 1982, which deadline was extended to September 1, 1982. Prior to that time, however, the developer advised the County that the road and grading improvements would not be completed. Acting on that anticipatory breach, the County, on August ⁴³⁰ 17, 1982, demanded that Republic Insurance Co., the surety, honor its obligation under the bonds.

The county engineer estimated that the cost of completing the streets in Discovery would be $57,112.00. That figure was communicated to Republic. Two months later, in November 1982, the county engineer raised his estimate to $62,518.60 for the completion of the streets and $8,635.00 for the costs of grading. The estimate was supplied to an engineer retained by Republic.

Approximately fourteen months later Republic engineers determined that the County’s figures were “acceptable.” The Public Works Agreement, as signed by A.L.E.R., Inc. and by the County, provided in part: “[The County] shall have the right to require indemnification as to loss or expense incurred by the County by reason of the failure of the Party of the First Part [A.L.E.R., Inc.] to perform this Agreement____” Notwithstanding that Republic is not a ■ party to that agreement, the County contends that the surety is liable for consequential damages resulting from A.L.E.R., Inc.’s default. The “Amended Declaration” did not allege “bad faith” by Republic. It merely asserted that, despite the Public Works Agreement, the surety “failed to construct the improvement or pay their estimated value.” Furthermore, the County averred that Republic’s “failure to complete ... or to pay ... in a timely fashion” caused the County to sustain damages of $103,506.50. Republic moved for partial summary judgment on the grounds that it was neither a party to the Public Works Agreement nor did it sign that agreement.

Republic declared that its liability was limited to the face value of the bonds. When the case was called in the Circuit Court for St. Mary’s County, Republic consented to the entry of a judgment against it in the amount of $65,800.00. The case proceeded to trial on a single count, which the County ⁴³¹ referred to as, “the Count alleging bad faith on the insurance company.” The jury resolved the dispute in the County’s favor. In this Court, Republic assails the jury’s award of consequential damages, which exceeds the face value of the two bonds, and the judge’s jury instructions on the issue of “bad faith.” Other issues were also raised by Republic but in view of our disposition, it is unnecessary to consider them.

The Law The Court of Appeals routinely applies traditional rules of contract interpretation to surety agreements ensuring performance and payment bonds. Lange v. Board of