(Article from Insurance Law Alert, March 2026)
For more information, please visit the Insurance Law Alert Resource Center.
Holding
The Pennsylvania Supreme Court held that surety bonds are not subject to Pennsylvania’s insurance bad faith statute and that a surety may be bound by an arbitration award entered against its principal—including attorneys’ fees awarded in arbitration—even when the bond states that “litigation against the surety will proceed in a court of law.” Eastern Steel Constructors, Inc. v. Int’l Fid. Ins. Co., Nos. 103 MAP 2023, 104 MAP 2023, 2026 Pa. LEXIS 274, (Pa. Feb. 18, 2026).
Background
Contractor Ionadi Corp. entered a construction contract with Penn State University. Fidelity issued a surety bond to Ionadi to guarantee payment to subcontractors. The bond provided that Ionadi and Fidelity were jointly and severally liable to subcontractors for “all sums due,” and stated that “litigation against the surety [Fidelity] will proceed in court of law.”
Ionadi later subcontracted with Eastern Steel Constructors but defaulted on owed payments to Eastern. Eastern initiated arbitration against Ionadi pursuant to the subcontract. Ionadi failed to defend the arbitration. Fidelity received notice of the arbitration but declined to participate.
The arbitrator awarded Eastern the unpaid subcontract balance, interest and penalties, attorneys’ fees, and arbitration costs and expenses. Eastern then sued Fidelity in state court to enforce the arbitration award and asserted a claim under Pennsylvania’s insurance bad faith statute, 42 Pa. Cons. Stat. § 8371.
The trial court ruled that the arbitration award, including attorneys’ fees and interest, was enforceable against Fidelity and also held that the bad faith statute does not apply to suretyship. The intermediate court affirmed.
Decision
The Pennsylvania Supreme Court affirmed.
First, the court held that Pennsylvania’s insurance bad faith statute does not apply to surety bonds. Section 8371 permits courts to award interest, attorneys’ fees, and punitive damages “[i]n an action arising under an insurance policy.” The Court relied on case law to distinguish insurance from suretyship and emphasized that while the legislature did not define “insurance policy” in the bad faith statute, it expressly included suretyship within the definition in the Unfair Insurance Practices Act (UIPA). The court reasoned that the legislature’s explicit inclusion of suretyship in the UIPA—but not in § 8371—indicates that surety bonds were intentionally excluded from the bad faith statute.
Second, the court held that Fidelity was bound by the arbitration award entered against its principal. Relying on Pennsylvania case law, the court found that Fidelity had notice of the arbitration proceeding and an opportunity to defend its interests but chose not to participate and did not challenge the resulting award. The court explained that a surety that declines to participate in arbitration after receiving notice “cannot complain when an award is entered against its principal.”
Finally, the court held that the scope of Fidelity’s liability was governed by the bond’s promise to pay “all sums due.” Because the subcontract allowed recovery of attorneys’ fees and interest, those amounts were part of the sums owed to Eastern.
A dissenting opinion disagreed with the majority’s conclusion that the arbitration award binds Fidelity. The dissent argued that a payment bond, like all contracts, should be interpreted according to the parties’ intent and that the bond expressly preserved Fidelity’s right to litigate in court. The dissent also emphasized that the bond limited Fidelity’s obligations to amounts owed for “labor, materials, and equipment.” According to the dissent, the majority improperly expanded the phrase “all sums due” beyond the bond’s enumerated obligations and effectively required Fidelity to honor an arbitration award despite not agreeing to arbitrate.
Comments
Both the majority and dissent agreed that the bad faith statute did not apply to surety bonds, and the case provides a marker that bad faith claims may not be cognizable against surety providers. As to the arbitration award ruling, the case reminds that parties who have notice of an arbitration but decline to participate may be found to have done so at their own peril.