In Fidelity & Deposit Co., et al. v. Douglas Asphalt Co., et al., No. 09-10919 (11th Cir. Jul. 28, 2009), the Eleventh Circuit affirmed the District Court’s judgment in favor of the insurers, who sought to recover from their insured payments made under payment and performance bonds when the insured allegedly defaulted and failed to complete a project. The Court, in rejecting the insured’s argument that the insurers acted in bad faith, found that the insurers’ estimate of costs necessary to complete the project were not clearly excessive, that the insured was obligated to contest the default for failure to complete work, and that the insurer could take control of the project to ensure its completion. For a complete copy of the opinion, please click here.

According to the decision, the Georgia Department of Transportation (“DOT”) contracted with the insured-defendant-contractor to perform work on an interstate highway. When the insured failed to complete the work and failed to pay its suppliers and subcontractors, the DOT terminated the contract. However, because the plaintiff-insurers had executed payment and performance bonds in connection with the insured’s work, the insurers were required to pay $15,424,798 to remedy the insured’s default and, thereafter, they brought suit against the insured to recover their losses.

After trial, the District Court found in favor of the insurers and the insured appealed, alleging that the District Court’s judgment was erroneous because the insurers acted in bad faith by: (1) seeking excessive costs to remedy the alleged default; (2) failing to contest the default; and (3) refusing to permit the insured to remain involved with the interstate project, either as a contractor or in a consulting capacity. On appeal, the Eleventh Circuit affirmed the District Court’s judgment in favor of the insurer on the grounds that the insured failed to demonstrate that the District Court’s findings were clearly erroneous.

At trial, the insured maintained the project was 98% complete, and argued that the insurer’s assertions that the project was only 90% complete and required over $15 million to remedy the default were excessive and in bad faith. The District Court, however, found that the interstate project was approximately 90% to 92% complete.

On the issue of contesting the default, the District Court held that the performance bonds and indemnity policy at issue required the insured, rather than the insurers, “to request a contest of the default, and to post collateral security to pay any judgment rendered in the course of contesting the default.”

Finally the District Court held that the insurers “had a contractual right to take possession of all the work under the contract and arrange for its completion.” Accordingly, the insurer’s “refusal to permit [the insured] to remain involved with the interstate project” was not bad faith.