Pennsylvania Supreme Court Clarifies Key Issues for Sureties in Eastern Steel Decision

By Frank Tanzola, SVP, Surety Claims Legal

This article is provided for informational purposes only and should not be construed as legal advice. Parties should consult legal counsel regarding their specific circumstances.

On February 18, 2026, the Supreme Court of Pennsylvania issued its decision in Eastern Steel Constructors, Inc. v. International Fidelity Insurance Company, one of the most significant Pennsylvania surety cases in recent decades. Following the denial of a request for re-argument by the plaintiff on April 10, 2026, the decision is now final and provides important guidance for sureties, contractors, agents and claimants operating in Pennsylvania.

The case arose from a payment bond claim involving an AIA 312 Payment Bond issued in connection with a Pennsylvania State University construction project. The Court considered three key issues:

1. Whether Pennsylvania's insurance bad faith statute applies to surety bonds.
2. Whether a surety may be bound by an arbitration award entered against its principal.
3. Whether a surety may be responsible for attorney's fees and interest awarded against its principal.

Key Takeaways

1. Pennsylvania's Insurance Bad Faith Statute Does Not Apply to Surety Bonds

The Court unanimously ruled that Pennsylvania's insurance bad faith statute does not apply to surety bonds. In reaching its decision, the Court emphasized that the statute repeatedly references insurance policies, insurers and insureds, while making no reference to sureties or surety bonds.

The Court also noted that where the Pennsylvania legislature intended to include suretyship within insurance-related statutes, it did so expressly. The absence of similar language in the bad faith statute was viewed as intentional.

This portion of the ruling provides welcome clarity for the surety industry and confirms the position previously adopted by Pennsylvania state and federal courts, including the Superior Court in this case.

2. Sureties May Be Bound by Arbitration Awards Against Their Principals

The Court also held that the surety was bound by an arbitration award entered against its principal, despite bond language requiring actions against the surety to be brought in a court of competent jurisdiction.

The decision highlights the importance of monitoring arbitration proceedings involving bonded principals. Where a surety receives notice of an arbitration and has an opportunity to participate or protect its interests, courts in Pennsylvania or applying Pennsylvania law will almost certainly conclude that the resulting award is binding on the surety.

As a practical matter, sureties should carefully evaluate arbitration proceedings involving their principals and consider whether intervention or participation may be appropriate based on the circumstances of the claim.

3. Attorney's Fees and Interest May Be Recoverable Under Certain Circumstances

The Court affirmed that the claimant was entitled to recover attorney's fees incurred in pursuing the principal, as well as prejudgment interest. However, it declined to award attorney's fees incurred in litigating directly against the surety.

The decision underscores the importance of reviewing both bond language and the underlying contract documents. Depending on the language at issue, attorney's fees and interest provisions contained within agreements between a bonded principal and a claimant may affect the scope of potential exposure under payment bonds.

Practical Considerations for Sureties, Contractors and Agents

The decision offers several practical lessons for participants in the construction and surety marketplace:

For Sureties and Agents

• Carefully review payment bond forms.
• Consider whether bond language should be modified to address attorney's fees and contractual interest where appropriate.
• Closely monitor arbitrations involving bonded principals and evaluate participation strategies when necessary.

For Contractors

• Carefully review subcontract and purchase order provisions relating to attorney's fees, interest and dispute resolution.
• Understand that obligations contained within project agreements may have implications for both the contractor and its surety, potentially triggering the indemnity obligations of both the contractor and any other indemnitors to the surety.

Looking Ahead

The Eastern Steel decision provides important guidance regarding the relationship between payment bonds, arbitration proceedings and contract-based damages in Pennsylvania. Most notably, the Court has definitively confirmed that Pennsylvania's insurance bad faith statute does not apply to surety bonds.

At the same time, the decision highlights the importance of carefully reviewing bond forms, contract language and dispute resolution provisions. Sureties, contractors and agents should consider the practical implications of the ruling and evaluate whether adjustments to contract and bond language may be appropriate for future projects.

As Pennsylvania courts and practitioners continue to interpret and apply the decision, Eastern Steel will likely remain a significant point of reference for surety claims and construction disputes in the Commonwealth.