[No. 76973-7. En Banc.]
Argued May 23, 2006. Decided September 20, 2007.
[1] Guaranty and Suretyship — Surety — Nature of Agreement. The undertakings of compensated sureties are regarded as "in the nature" of insurance contracts subject to the rules applicable to simple contract law. (See lead opinion of Chambers, J., and dissenting-in-part opinion of Alexander, C.J.) [2] Guaranty and Suretyship — Surety Bonds — Construction — Question of Law or Fact — Review — Standard of Review. The interpretation of a surety bond is a question of law that is reviewed de novo. (See lead opinion of Chambers, J., and dissenting-in-part opinion of Alexander, C.J.) [3] Costs — Attorney Fees — Question of Law or Fact — Review — Standard of Review. Whether a party is entitled to an award of attorney fees is a question of law that is reviewed de novo. (See lead opinion of Chambers, J., and dissenting-in-part opinion of Alexander, C.J.) [4] Guaranty and Suretyship — Contractor's Bond — Construction — In General. A contractor's performance bond is construed as a whole and, if reasonably possible, in a way that effectuates all of its provisions. Unambiguous bond language is construed in accordance with the parties' plain intent. Bond language that is ambiguous is construed in favor of the surety's liability under the bond. (See lead opinion of Chambers, J., and dissenting-in-part opinion of Alexander, C.J.) [5] Guaranty and Suretyship — Contractor's Bond — Condition — What Constitutes — Status as Promise — Breach — Remedies. A contractor's performance bond can contain conditions as well as promises. A condition is an event that must occur or a circumstance that must exist in order for the promisor to have a duty to perform. A promise is a manifestation of intention to act or to refrain from acting in a specified way. A condition is classified according to its origin and effect: it can be express, implied in fact, or constructive. A condition is "precedent" if its occurrence triggers a duty of performance that had not arisen previously. A condition is "subsequent" if its occurrence defeats a duty of performance that had arisen previously. When a contract provision is both a condition and a promise, the remedies available for its breach vary by whether the breach is "material." If the breach is "material," the promisee has an election: the promisee may treat the breach as a failure of a condition that excuses further performance and terminate the contract or the promisee may waive the condition, allow performance to continue, and sue for damages when performance is finished. Regardless of whether the breach is "material," the promisee may recover damages; i.e., any unjustified failure to perform when performance is due is a breach of contract that entitles the injured party to damages. (See lead opinion of Chambers, J., and dissenting-in-part opinion of Alexander, C.J.) [6] Guaranty and Suretyship — Contractor's Bond — Condition — Performance of Contract — Effect — In General. A contractor's performance bond containing language binding the surety to the obligee for a specified amount and stating that "the condition of this obligation is such that, if [the] principal shall promptly and faithfully perform said [contract,] then this obligation shall be null and void; otherwise it shall remain in full force and effect," obligates the surety subject to only one condition: that the principal promptly and faithfully perform the contract. Use of the word "otherwise" expressly eliminates all other conditions. Read as a whole, the bond states that the surety's obligation commences when it executes the bond and continues until the principal promptly and faithfully performs the contract. (See lead opinion of Chambers, J., and dissenting-in-part opinion of Alexander, C.J.) [7] Guaranty and Suretyship — Contractor's Bond — Enforcement — Remedies Provision — Applicability — Specified Circumstances — Necessity. A provision in a contractor's performance bond stating that the obligee is entitled to certain remedies and measures of damages if the obligee, having performed its own obligations under the contract, declares the principal to be in default under the contract applies only according to its strict terms; i.e., the provision applies only when (1) the principal is "in default under the contract," (2) the obligee declares the principal to be in default under the contract, and (3) the obligee has performed its own obligations under the contract. It does not apply, by negative but necessary implication, under other circumstances. Under such other circumstances, the common law defines the remedies and measures of damages that are available to the obligee. (See lead opinion of Chambers, J., and dissenting-in-part opinion of Alexander, C.J.) [8] Guaranty and Suretyship — Contractor's Bond — Construction — Meaning of Words — "Breach" — "Default" — Response by Obligee — Effect. The terms "breach" and "default" have distinct meanings in construction suretyship law. Not every breach of a construction contract constitutes a default sufficient to require the surety to step in and provide a remedy. To constitute a legal default, there must be a material breach or series of material breaches of such a magnitude that the obligee is justified in terminating the contract. When a material breach occurs that places the principal (or contractor) in default under the contract, the obligee is permitted (but not required) to terminate or cancel the contract. In such a case, the obligee "declares" the principal to be in default when, having elected to treat the breach as "material," the obligee announces an intent to terminate the contract. The obligee may, however, elect not to treat the breach as "material" and opt, instead, to continue the principal's performance under the contract and to seek damages after the work is concluded. (See lead opinion of Chambers, J., and dissenting-in-part opinion of Alexander, C.J.) [9] Guaranty and Suretyship — Contractor's Bond — Enforcement — Declaration of Default — Necessity — Contractual Promise. Where a contractor's performance bond gives the obligee the option, as opposed to the obligation, of declaring the principal to be in default upon a breach of the contract by the principal, thereby implicating certain specified remedies, the obligee does not fail to fulfill an obligation imposed by law or breach any promise made to the principal when, upon the principal's breach of the contract, the obligee does not declare the principal to be in default but, instead, allows the contract to remain in effect and then sues for damages following completion of the contract. (See lead opinion of Chambers, J., and dissenting-in-part opinion of Alexander, C.J.) [10] Guaranty and Suretyship — Contractor's Bond — Enforcement — Declaration of Default — Necessity — Remedies Provision — Effect. Under a contractor's performance bond that binds the surety unless and until the principal promptly and faithfully performs the contract but that also provides for specified remedies and measures of damages if the obligee declares the principal to be in default for a breach of the contract by the principal, the obligee is not required to declare the principal in default for a breach of the contract prior to substantial completion of the contract in order to be able to recover for the breach against the bond after the work under the contract is completed. The obligee has the option of allowing the principal to continue working despite the breach and to seek damages as a remedy therefor after the work is completed. A preceding declaration of default is not required when the obligee takes this approach. (See lead opinion of Chambers, J., and dissenting-in-part opinion of Alexander, C.J.) [11] Guaranty and Suretyship — Contractor's Bond — Action To Obtain Benefit of Bond — Expenses of Plaintiff — Attorney Fees — In General. An obligee of a contractor's performance bond who is compelled to assume the burden of legal action to obtain the benefit of the bond is entitled to an award of reasonable attorney fees, at trial and on appeal, if the bond was issued by a corporate surety in exchange for a premium, the dispute is over a contractual right to coverage under the bond, and the obligee prevails in the action. The amount to award in fees is determined without regard to the amount of the bond. (See lead opinion of Chambers, J., and dissenting opinion of Sanders, J.) ALEXANDER, C.J.; and J.M. JOHNSON, J., dissent in part by separate opinion; MADSEN, SANDERS, and FAIRHURST, JJ., dissent by separate opinions. Nature of Action: The prime contractor on a construction project sought to recover against a subcontractor's performance bond for additional costs incurred by the prime contractor in completing the work that the subcontractor was hired to perform. Superior Court: The Superior Court for Clark County, No. 99-2-01395-0, Roger A. Bennett, J., on April 14, 2003, entered a judgment in favor of the plaintiff. The judgment included an award of attorney fees based on the terms of the construction subcontract, which was incorporated into the performance bond. The court ruled that the plaintiff 's total recovery of damages and attorney fees could not exceed the amount of the bond. The plaintiff's request for attorney fees on the equitable basis that the plaintiff was required to pursue legal action to obtain coverage under the bond was denied by the trial court. Court of Appeals: At 125 Wn. App. 907 (2005), the court affirmed the judgment in all respects except for the attorney fee award and remanded the case for further proceedings regarding attorney fees, holding that the plaintiff was not required to have declared the subcontractor in default under the contract before substantial completion thereof in order to recover against the bond; that the plaintiff was entitled to an award of attorney fees on the equitable basis that the plaintiff was required to pursue legal action to obtain coverage under the bond; and that the attorney fee award, when added to the damages award, could exceed the amount of the bond. Supreme Court: Holding that the plaintiff was not required to formally declare the subcontractor in default before the surety could be liable on the performance bond and that the plaintiff is entitled to an award of attorney fees on the equitable basis of having to pursue legal action to obtain the benefit of the surety bond, the court affirms the decision of the Court of Appeals. Joseph C. Calmes- and Magnus R. Andersson- (of Hanson Baker Ludlow Drumheller, PS), for petitioners. Jeffrey K. Hanson- and Joseph A. Yazbeck, Jr.- (of Yazbeck Cloran & Hanson, LLC); and Nell A. Oram-, for respondent. Jerret E. Sale- and Deborah L. Carstens- on behalf of The Surety Association of America, amicus curiae. En Banc ¶1 CHAMBERS, J. — Colorado Structures, Inc. (Structures) contracted with Wal-Mart to build a store in Vancouver, Washington. Structures subcontracted ¶2 We affirm the decision of the Court of Appeals that Structures was not required to formally declare Action in default before West's liability on the performance bond was triggered. We also affirm the Court of Appeals' holding that Olympic Steamship Co. v. Centennial Insurance Co., 117 Wn.2d 37, 811 P.2d 673 (1991), applies to surety bonds and to this case. FACTS ¶3 Wal-Mart planned a grand opening of its store on October 14, 1998, and Structures agreed to finish construction by September 8, 1998. Under the contract, Structures faced enormous financial penalties if the construction work was not completed in time for this grand opening. Action was hired for the off-site sewer work. Because this work was substantial, Structures required Action to secure a performance bond in the amount of the contract. West issued the bond in the penal amount of $472,290 for a premium of $8,034, with West as the surety, Action as the principal, and Structures the obligee. The bond West issued was the American Institute of Architects' Form A311, which has been in use since 1958 and is one of the most commonly used performance bonds. Edward H. Cushman, Surety Bonds on Public and Private Construction Projects, 46 A.B.A.J. 649, 651 (1960). ¶4 Under the subcontract, Action was to begin the sewer work in May 1998 and finish in July 1998. By the end of June, Action was, in the opinion of Structures, "seriously behind schedule." Ex. 9. Structures granted several extensions to Action but required that Action's work be fully completed before September 1, 1998. It was critical to complete the sewer system by September 1, 1998, because it was necessary to test and hook up the sewer before an occupancy permit could be issued for the Wal-Mart store. Despite the extensions, Action continued to face difficulties in completing its work. On August 11, 1998, Structures informed West in writing that it was a "little concerned with Action completing by [the] scheduled completion date." Ex. 13. On August 23, 1998, Structures and Action representatives met to discuss Action's performance. Because of its pressing deadline, Structures decided that instead of incurring the delays associated with terminating Action's subcontract and bringing in a new sewer contractor, Structures would supplement Action's crews in an effort to complete the sewer work as scheduled. ¶5 Unfortunately, even with the assistance of additional crews provided by Structures, Action did not timely complete its work. On September 18, 1998, Structures notified West that the city of Vancouver had rejected some of Action's work because the sewer pipe had been installed at the wrong slope and the sewage would not flow properly. Structures also said that it would "be looking to [West] for compensation of costs which exceed Action['s] subcontract." Ex. 21. ¶6 After West was first notified of Action's problems in August 1998, the record suggests that its response was limited. First, on September 15, 1998, apparently in response to a letter faxed by Structures on September 9, 1998, West opened up a monitoring file and requested a laundry list of documents from Structures, including the bond number in question. Second, on October 9, 1998, West decided that it would write no more bonds to Action. Finally, it appears that West sought and obtained a judgment against the owners of Action for an amount that included potential payment to Structures on the performance bond. ¶7 Structures sued West, Action, and Action's owner. Action and its owner subsequently defaulted and went out of business. They are not a party to this suit. Structures had not formally declared Action to be in default before Action had substantially completed its work. West refused to honor its bond based upon its interpretation of the bond language. A bench trial was held in Clark County Superior Court. The trial court ruled that Action was in material breach; ¶8 The Court of Appeals affirmed the trial court's ruling on the performance bond on slightly different grounds, ANALYSIS DECLARATION OF DEFAULT The performance bond [at] issue here . . . reads as follows: [A] Action Excavating & Paving, Inc. . . . , hereinafter called Principal, and Insurance Company of the West . . . , hereinafter called Surety, are held and firmly bound unto CSI Construction Co. . . . , hereinafter called Obligee, in the amount of . . . $472,290 . . . . [B] WHEREAS, Principal has . . . entered into a subcontract with Obligee . . . , which subcontract is by reference made a part hereof, and is hereinafter referred to as the subcontract, NOW THEREFORE, THE CONDITION OF THIS OBLIGATION IS SUCH THAT, if Principal shall promptly and faithfully perform said subcontract, then this obligation shall be null and void; otherwise it shall remain in full force and effect. [C] Whenever Principal shall be, and declared by Obligee to be in default under the subcontract, the Obligee having performed Obligee's obligations thereunder: (1) Surety may promptly remedy the default, subject to the provisions of paragraph 3 herein, or; (2) Obligee after reasonable notice to Surety may, or Surety upon demand of Obligee may arrange for the performance of Principal's obligation under the subcontract subject to the provisions of paragraph 3 herein; (3) The balance of the subcontract price, as defined below, shall be credited against the reasonable cost of completing performance of the subcontract. If completed by the Obligee, and the reasonable cost exceeds the balance of the subcontract price, the Surety shall pay to the Obligee such excess, but in no event shall the aggregate liability of the Surety exceed the amount of this bond. If the Surety arranges completion or remedies the default, that portion of the balance of the subcontract price as may be required to complete the subcontract or remedy the default and to reimburse the Surety for its outlays shall be paid to the Surety at the times and in the manner as said sums would have been payable to Principal had there been no default under the subcontract. The term "balance of the subcontract price," as used in this paragraph, shall mean the total amount payable by Obligee to Principal under the subcontract and any amendments thereto, less the amounts heretofore properly paid by Obligee under the subcontract. [D] Any suit under this bond must be instituted before the expiration of two (2) years from date on which final payment under the subcontract falls due. [E] No right of action shall accrue on this bond to or for the use of any person or corporation other than the Obligee named herein or the heirs, executors, administrators or successors of Obligee. For ease of reference, we have inserted capital letters at the beginning of each major paragraph. . . . . I The first issue is whether [West] is liable on its bond. [West] claims it is not, "because [Structures] did not declare Action in default before substantial completion of the bonded offsite contract." A bond is a contract that governs the surety's liability to the obligee. A We turn first to relevant contract principles. A contract, including a bond, should be construed as a whole A contract, including a bond, can contain conditions as well as promises. A condition is an event that must occur, or a circumstance that must exist, in order for the promisor to have a duty to perform. A condition is classified according to its origin and effect. It can be express, implied in fact, or constructive. When a contract provision is both a condition and a promise, the remedies available for its breach vary by whether the breach is "material." If the breach is "material," the promisee has an election: He or she may treat the breach as a failure of a condition that excuses further performance, and thus terminate the contract, Any unjustified failure to perform when performance is due is a breach of contract which entitles the injured party to damages. If the breach is slight or insubstantial, it is called a partial breach, for which plaintiff's damages are restricted to compensation for the defective performance. If the breach is material, it is called a total breach, which gives to the injured party an election to substitute for his contractual rights the remedial right to damages for total failure of performance. He has the alternative election of treating the contract as continuing, however, in which case his damages are limited as for a partial breach. B Having reviewed relevant contract principles, we next examine the bond. It incorporates the offsite subcontract by reference, By its plain terms, Paragraph A of the bond makes [West] immediately liable to [Structures]. It states that [West] is "held and firmly bound unto [Structures] . . . in the amount of . . . $472,290." By its plain terms, Paragraph B conditions the liability created by Paragraph A on one—and only one—express condition subsequent. Paragraph B states that "the condition of this obligation is such that, if [the] Principal shall promptly and faithfully perform said subcontract, then this obligation shall be null and void; otherwise it shall remain in full force and effect." When Paragraph C applies, it provides for certain remedies and measures of damage. C With this background, we turn to [West]'s claim that it is not liable on the bond because [Structures] failed to declare a "default." To analyze that claim, we make several inquiries. (1) Did Action materially breach the offsite contract? (2) Did [Structures] declare Action to be in default under the offsite subcontract? (3) If [Structures] did not declare Action to be in default, did it fail to fulfill an obligation imposed by law? (4) If [Structures] did not declare Action to be in default, did it breach a promise made in the offsite subcontract or the bond? (5) If [Structures] did not declare Action to be in default, did it fail to fulfill a condition included in the offsite subcontract and thereby relieve [West] of its duty to pay under the bond? After making these inquiries, we briefly examine the payment bond and a particular case on which [West] is relying. 1 Our first inquiry is whether Action materially breached the offsite contract. The trial court so determined, and no one assails that determination in this appeal. Accordingly, we hold that Action materially breached the offsite contract. 2 Our second inquiry—whether [Structures] declared Action to be in default under the subcontract—has three parts. (a) When is a principal in default under a subcontract? (b) When does an obligee "declare" a principal to be in default under a subcontract? (c) Did [Structures] make such a declaration here? Turning to (a), we distinguish between "breach" and "default." Utilizing the concept of "material breach" that we discussed above, the Fifth Circuit explained in L&A Contracting Co. v. Southern Concrete Services, Inc.: Although the terms "breach" and "default" are sometimes used interchangeably, Agreeing with L&A in this respect, The answer to (b) follows logically from the answer to (a). If a principal is "in default under the subcontract" when he or she has materially breached the subcontract, thereby permitting but not requiring the obligee to terminate the subcontract, an obligee "declares" a principal to be in default when, having elected to treat the breach as "material," the obligee announces his or her intent to terminate the subcontract. Turning to (c), we observe that even though Action's breach was material, [Structures] never elected to treat it as such. Nor did [Structures] declare an intent to terminate the offsite subcontract. Instead, [Structures] opted to continue Action's performance and seek damages at the end. Necessarily then, [Structures] did not declare Action to be in default under the offsite subcontract. 3 Our third inquiry is whether [Structures], by not declaring Action to be in default, failed to fulfill an obligation imposed by law. As discussed above, the law permits but does not require a nonbreaching promisee/obligee to declare a default (i.e., to declare a material breach and announce its intention to terminate the contract). Instead, the law gives the promisee/obligee the option to declare a default, terminate the contract, and sue for damages (if any) incurred to date; or, alternatively, to continue the contract in effect and sue for damages incurred when performance is finished. By electing the latter course of action, [Structures] did not fail to fulfill an obligation imposed by law. 4 Our fourth inquiry is whether [Structures], by not declaring Action to be in default, breached a promise made in the offsite subcontract or in the bond. Like the law itself, the subcontract gave [Structures] the option to declare a default, but it did not obligate [Structures] to declare a default or terminate the subcontract; as quoted above, it stated only that if Action failed to perform, [Structures] "may . . . terminate this Subcontract." 5 Our fifth inquiry is whether [Structures], by not declaring a default, failed to fulfill a condition to [West]'s liability and thereby relieved [West] of its duty to pay on the bond. As discussed above, Paragraph A of the bond makes [West] liable to [Structures]. Paragraph B explicitly states that [West] will continue to be bound until Action promptly and faithfully performs. By using the word "otherwise," Paragraph B explicitly eliminates all other conditions—including a declaration of default by [Structures]. The preamble to Paragraph C sets forth three events (the principal's default, the obligee's declaration of default, and the obligee's performance) that constitute conditions precedent to the use of the remedies and damages described in Paragraph C, but not conditions precedent to the liability created in Paragraph A. An examination of [West]'s payment bond confirms these conclusions, for it clearly demonstrates that [West] could have added—but did not add—conditions to Paragraph A of the performance bond. Issued simultaneously with the performance bond, the payment bond states in part: [A] Action Excavating & Paving, Inc. . . . , hereinafter called Principal, and Insurance Company of the West . . . , hereinafter called Surety, are held and firmly bound unto CSI Construction Co. . . . , hereinafter called Obligee, for the use and benefit of claimants as hereinbelow defined, in the amount of . . . $472,290 . . . . [B] WHEREAS, Principal has . . . entered into a subcontract with Obligee . . . , which subcontract is by reference made a part hereof, and is hereafter referred to as the subcontract. NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION is such that if the Principal shall promptly make payment to all claimants as hereinafter defined, for all labor and material used or reasonably required for use in the performance of the subcontract, then this obligation shall be void; otherwise it shall remain in full force and effect, subject, however, to the following conditions . . . . [West] relies heavily on L&A Contracting v. Southern Concrete Services, On appeal, the Fifth Circuit failed to analyze the bond's language. We turn first to F & D's appeal. As a surety, F & D's liability is governed by the terms of its bond with L & A. While Southern is, of course, directly liable for its own breach of contract, the bond in this case imposes liability on F & D for Southern's breach only if two conditions exist. First, Southern must have been in default of its performance obligations under the subcontract. Second, L & A must have declared Southern to be in default. The Fifth Circuit concluded that because L&A had failed to declare a default, the second of these conditions had failed, thereby relieving F&D of its duty to perform on the bond. The linchpin of the L&A court's conclusion is its assertion, italicized above, that the events described in the preamble to Paragraph C condition not just the use of the remedies described in Paragraph C, but also the liability described in Paragraph A. Concluding our discussion of the first issue, we reject [West]'s claim that it cannot be liable because [Structures] opted to continue Action's contract instead of declaring Action to be in default; we agree with the trial court that "[Structures] gave [West] adequate notice" Colorado Structures, 125 Wn. App. at 911-24 (some alterations in original). In addition, West contends that Structures materially breached the terms of the subcontract when it supplemented Action's work, without giving Action (or West) 48-hour notice. This argument is without merit. First, the record is not at all clear with regard to the specific timing of Structures' supplementation. Second, we are not convinced that even if there was a breach of the 48-hour notice requirement, that it was anywhere near a material breach. In fact, there is clear evidence that: Action (and West) received written and verbal notice of Structures' concerns with regard to Action's performance and Structures' intent to "subsidize" Action's crews; Action also had concerns with its ability to complete its work as scheduled and welcomed Structures' supplementation; West had every opportunity to object to Structures' supplementation, but did not. Thus, these additional arguments are either without merit, irrelevant to the substantive issues before us, and/or outside the scope of the petition. RAP 13.7(b). Accordingly, we dismiss West's additional claims. ATTORNEY FEES ¶11 The trial court declined to award Olympic Steamship attorney fees but did award attorney fees under the contract. The net result was to limit the attorney fees awarded against West to the penal amount set by the bond. The Court of Appeals reversed, holding that Olympic Steamship does apply. Again, we agree. ¶12 In Olympic Steamship, this court held that "[a]n insured who is compelled to assume the burden of legal action to obtain the benefit of its insurance contract is entitled to attorney fees." Olympic S.S., 117 Wn.2d at 54. Such attorney fee awards are often called Olympic Steamship attorney fees. But Olympic Steamship attorney fees are not awarded merely because an insurer challenges liability or damages. Dayton v. Farmers Ins. Group, 124 Wn.2d 277, 280, 876 P.2d 896 (1994). West and amici argue that Olympic Steamship attorney fees should not be applied in this case. ¶13 They offer several arguments to support their contention. First, they note that while this court and the Court of Appeals have previously applied Olympic Steamship to actions arising out of surety bonds, see, e.g., Estate of Jordan v. Hartford Accident & Indem. Co., 120 Wn.2d 490, 844 P.2d 403 (1993); Axess Int'l Ltd. v. Intercargo Ins. Co., 107 Wn. App. 713, 30 P.3d 1 (2001), this court has not applied Olympic Steamship specifically to disputes arising out of performance bonds. ¶14 We have considered a somewhat similar question once before. In Estate of Jordan, we found an insurer liable under a fidelity bond and awarded the insured's assignee reasonable attorney fees pursuant to Olympic Steamship. Estate of Jordan, 120 Wn.2d at 492. A "fidelity bond" is "a bond or other form of contract for indemnifying an employer against financial loss due to the dishonesty of an employee." WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY 845 (2003). West contends that this is distinguishable because a fidelity bond, like the one in Estate of Jordan and unlike a performance bond, is generally treated like an insurance contract. However, given the underlying principles of Olympic Steamship and the nature of a performance bond, which guarantees the performance of the principal, we fail to find a material distinction. Indeed, all surety bonds are regarded as "in the nature" of insurance contracts and controlled by the rules of interpretation of such contracts. Nat'l Bank of Wash. v. Equity Investors, 86 Wn.2d 545, 551, 553, 546 P.2d 440 (1976). There seems little basis for us to create an exception for performance bonds. ¶15 West and amici also contend that this court in Estate of Jordan, and the Court of Appeals in Axess, failed to take into account one reason behind the attorney fee rule articulated in Olympic Steamship—that of the unequal bargaining power between an insurance company and its policyholder—before awarding Olympic Steamship attorney fees. ¶16 We note, first of all, that Cates did not consider attorney fees nor address the equitable grounds which might warrant an award of attorney fees. The issue in Cates was whether the trial court properly recognized tort remedies for breach of the covenant of good faith and fair dealing in the context of performance bonds. Id. at 34. The California court balked at the prospect of exposing sureties to tort remedies for what was essentially a breach of contract. In Cates, the punitive damages the plaintiff collected were $15 million (reduced from the jury's award of $28 million), as compared to $2.5 million in damages from the failure to perform the contract. Cates concerns itself with the line between contract and tort; it says nothing about whether attorney fees should be awarded. ¶17 We are also hesitant to rely on California case law in this area because California regulatory and statutory laws are so different from our own. Among the reasons the California Supreme Court rejected tort remedies against sureties was the stiff penalties under California's Unfair Trade Practices Act that penalized improper denials of coverage. Id. at 58 (citing CAL. INS. CODE § 790.03(h)). These penalties, they reasoned, offered incentives to sureties to comply with their bond agreements such that tort remedies were unnecessary. Id. The Cates case did not deal with either the issues or the equities presented in the case before us. In any event, the majority do not show any evidence that the performance bond terms in this case were negotiated, and appear to concede the point (maj. opn., ante, at p. 53 [referring to "the typical performance bond"]). It is unlikely that a mammoth insurer like Transamerica—an economic entity that counts money in the billions of dollars and dwarfed the now defunct Talbot and Cates when they were in business—would engage in negotiations for the relatively small custom involved here. Id. at 64 (Mosk, J., dissenting) (alteration in original). The majority of courts to reach the question faced in Cates have sided with California's dissent. Id. at 60 (citing Transamerica Premier Ins. Co. v. Brighton Sch. Dist. 27J, 940 P.2d 348 (Colo. 1997); Loyal Order of Moose, Lodge 1392 v. Int'l. Fid. Ins. Co., 797 P.2d 622 (Alaska 1990); Dodge v. Fid. & Deposit Co. of Md., 161 Ariz. 344, 778 P.2d 1240 (1989); Szarkowski v. Reliance Ins. Co., 404 N.W.2d 502 (N.D. 1987); K-W Indus. v. Nat'l Sur. Corp., 231 Mont. 461, 754 P.2d 502 (1988)). One convincing reason that stands out is the use of form contracts. The majority in Cates observed that the financial institution issued form bonds but was unconcerned, noting: It is of no significance that the bond terms here appeared on a standard form published by the American Institute of Architects (AIA). That organization, as its name suggests, is not one that exists to advance the interests of surety companies. The AIA generally promulgates its forms pursuant to an inclusive drafting policy that encourages input from a variety of outside groups and individuals. Cates, 21 Cal. 4th at 53 n.16. This case gives us no occasion to consider whether tort remedies should be available, but we agree that the relative positions of the contractor and the surety compel, pursuant to Olympic Steamship, an award of attorney fees when the surety wrongfully denies coverage. The crucial fact is that sureties, like insurance companies, face minimal incentive to perform on their contracts if the maximum loss they may incur is the amount of the bond, especially since the transaction costs of litigation are likely to dissuade contractors who would otherwise assert their right to full payment in court. In such a contract, whether or not titled "insurance policy," certainty is of the essence from the obligee-insured's point of view. The developer seeks a bond in order to be certain of timely, dependable performance of the construction contract. As this case demonstrates, the financial viability of the entire project may depend upon the surety's good faith performance of these duties. As with any other form of insurance, the surety bond system allows one party to shift to another a contingent risk that the first party, the developer-obligee, cannot itself bear. The social good served by such contracts is the same served by other classes of insurance: greater freedom of activity by more participants than would be possible if each had to bear all the risks of its own enterprise. Certainty of performance being the essential value of performance bonds, their worth is deeply undermined if sureties can regularly choose to ignore their obligations, having nothing to fear but contract damages that will approximate what they would pay in performance. Cates, 21 Cal. 4th at 65-66 (Mosk, J., dissenting). ¶19 The process for purchasing surety performance bonds is much like the process for purchasing insurance contracts. A contractor seeking a bond contacts an agent whose "job is to help convince a surety company to issue the bond." In re Tech. for Energy Corp., 140 B.R. 214, 215-16 (E.D. Tenn. 1992) (reporting on the "basic rules and practices in the surety business"). The bond application is then reviewed by underwriters for the surety company who decide if the surety will or will not issue the bond. Id. The bonds are purchased with the payment of a premium, after which a surety requires no further performance by the obligee or the principal: the surety upon receipt of the premium has all it will ever get from the contract. See Steven M. Siegfried, Introduction to Construction Law 83 (1987). The surety's position is like an insurance company—it calculates premiums based on the risk that it may have to make a payment. In re Tech. for Energy Corp., 140 B.R. at 215-16. It is, like an insurance company, in a surety's financial interest to withhold payment. Ideally, a surety collects premiums and never pays claims. We found this situation untenable in the context of insurance contracts and, in Olympic Steamship, were compelled to award attorney fees to the insured to "encourage the prompt payment of claims." Olympic S.S., 117 Wn.2d at 53. Such encouragement is equally appropriate for surety bonds. We read Olympic Steamship as including performance bonds. ¶20 When an event occurs that arguably triggers the surety or insurance company's duty to make payments, the parties may dispute whether payment is in fact owed. The disparity of power, at this point in the relationship, is compelling. Sureties may be tempted to withhold payment in every case, gambling that the transaction costs of litigation will dissuade even a percentage of their obligees from asserting their right to payment. If the maximum risk to the surety is the penal amount of its bond, a surety has nothing to lose. The obligee has no leverage over the surety to compel payment, except litigation. If the transaction costs of litigation are too high relative to the bond, obligees will simply cut their losses. ¶21 This unfortunate reality hits the smallest construction companies hardest, as their projects are less expensive and thus so are their bonds. A construction company facing a surety refusing to pay several thousand dollars on a bond, after consulting an attorney, will likely decide that the transaction costs are too great to move forward with litigation. The surety, risking only the value of the bond, may be motivated to withhold payment. As our court held in Olympic Steamship, principles of equity require courts to award attorney fees to the obligee to remedy the disparity inherent to these financial relationships. Olympic S.S., 117 Wn.2d at 52 (citing Hayseeds, Inc. v. State Farm Fire & Cas., 177 W. Va. 323, 352 S.E.2d 73, 77 (1986)). The disparity of power between surety and obligee is, with respect to compulsion of performance, identical to the disparity between insurers and the insured. ¶22 The disparity of bargaining power is relevant, but more important is the disparity of enforcement power. West, amici, and the dissenters place too much emphasis on one phrase found in Olympic Steamship. In Olympic Steamship, we noted, "Other courts have recognized that disparity of bargaining power between an insurance company and its policyholder makes the insurance contract substantially different from other commercial contracts." Olympic S.S., 117 Wn.2d at 52. While our opinion in Olympic Steamship made reference to disparity of bargaining power, it focused far more on preventing an insured from bearing the burden of an insurer's improper refusal to provide coverage. Id. Generally speaking, insurance contracts have a different purpose than most other contracts for indemnity. The insured pays a premium, not to prevent an event, but to provide immediate liquid resources to weather the effects of an emergency. Fire or flood insurance is not to prevent fires or floods but is to provide cash for temporary housing, repair and rebuilding, and replacement of necessary household goods. The victim of a fire or flood needs the benefits of his insurance policy when he is without shelter, not " 'vexatious, time-consuming, expensive litigation with his insurer.' " Id. (quoting Hayseeds, 352 S.E.2d at 79). Part of the purpose of medical insurance is to provide medical care in the event of a medical emergency. If the bills are not promptly paid, medical services may not be available, and one's health and economic well-being is at risk. Disability insurance is to immediately replace the stream of income desperately needed by a family faced with an unexpected disability. If the disability insurance is not received, rent and other bills may not be paid, lawsuits and financial ruin could follow. It is thus the special and unique feature of insurance that money be made promptly available to prevent bad situations from getting worse. A significant purpose of an insurance contract is frustrated if, in order to gain the benefits of the contract, the insured is forced to engage in costly and time consuming litigation. ¶23 West argues that those who enter into commercial contracts containing indemnity agreements are not subject to Olympic Steamship attorney fees. It reasons that a contract to issue a performance bond is just like any other commercial contract. We disagree. Generally, the primary purpose of a business contract is the purchase and sale of some interest or the furtherance of some commercial enterprise; indemnity clauses in such agreements are secondary to the primary purpose. Unlike indemnity agreements found in most commercial contracts, the sole purpose of the insurance agreement is prompt payment if the triggering event occurs. Often, those entering into such commercial agreements who want immediate funds to cover adverse events will buy insurance. ¶24 There is little to distinguish construction performance bonds from other forms of insurance. ¶25 The case at hand amply demonstrates the extent to which obligees rely on prompt and certain payment. Structures was the general contractor obligated to build a store for Wal-Mart. If it failed to finish the work on time, it faced huge penalties. Structures needed to subcontract out some of the work. Structures knew if its subcontractor failed to perform in a timely manner, Structures needed the additional resources to perform the work on time. A mere indemnity agreement, from Action, whereby Action indemnified Structures for any breach, would have been insufficient. Instead, West was brought into the relationship. West agreed to perform Action's obligations under the subcontract. ¶26 Next, we turn to the contention that this case involves a claims dispute, as opposed to a coverage dispute, and that, therefore, even if this court holds that Olympic Steamship applies to surety bonds, it should not apply in this case. Cf. Olympic S.S., 117 Wn.2d at 52. We disagree. West refused to pay any claim based upon its legal interpretation of the bond. Since the question is a legal one, which required Structures to litigate to obtain a declaratory judgment ruling regarding the meaning of the contract, it is a coverage dispute. Generally, when an insured must bring suit against its own insurer to obtain a legal determination interpreting the meaning or application of an insurance policy, it is a coverage dispute. This case would be in the nature of a claims dispute if West had agreed to pay under the bond but had a factual dispute with Structures as to the amount of the payment. See Dayton, 124 Wn.2d at 280. In the words of Judge Morgan: Olympic Steamship applies when an insurer or similar obligor contests the meaning of a contract, but not when it contests other questions as, for example, its liability in tort or the amount of damages it should pay. Given that [West] has vigorously contested the meaning of its bond throughout the case, [Structures] has been able to obtain the benefit of the bond, for which it paid a significant premium, only through legal action. Accordingly, Olympic Steamship applies here. Colorado Structures, 125 Wn. App. at 928 (emphasis added) (footnote omitted). We agree. ¶27 Lastly, in McGreevy, where this court awarded reasonable attorney fees in addition to the limits of the insurance policy, we reasoned, "when an insurer unsuccessfully contests coverage, it has placed its interests above the insured. Our decision in Olympic Steamship remedies this inequity by requiring that the insured be made whole." McGreevy, 128 Wn.2d at 39-40. Likewise, West placed "its interests" above that of Structures. Id. Structures should be awarded attorney fees under Olympic Steamship, so as to be made "whole." Dayton, 124 Wn.2d at 280 (holding that a court has power to award attorney fees when authorized by "contract, statute, or recognized ground of equity"). Without the application of Olympic Steamship and awarding attorney fees in addition to the policy limits of a surety bond when appropriate, an insurer would have absolutely no incentive to refrain from litigation over even the most clear coverage provisions. The dissent also argues the subcontract itself limits liability to the amount of the bond, but we read the subcontract differently. The provision, which does not assume the existence of a bond, states that the contractor shall be entitled to attorney fees "in connection with any matter or dispute arising under the Subcontract." CP at 608. No monetary limit is imposed on these fees. The only limiting mechanism is found in the bond, which states that "in no event shall the aggregate liability of the Surety exceed the amount of this bond." CP at 82. "Aggregate liability," however, is defined in the context of the bond as the cost of remedying the principal's default minus the subcontract price. Id. Attorney fees result from the surety's refusal to pay when obligated to; it is not a compensation for the principal's default and thus is not included in the equation that results in the "aggregate liability" discussed in the bond. Neither the subcontract nor the bond imposes any limit on the amount of attorney fees a court may award. CONCLUSION ¶28 We conclude that under the plain language of the contract, Structures was not required to formally declare Action in default to trigger the performance bond issued by West. Olympic Steamship attorney fees apply to performance bonds. We affirm the Court of Appeals and remand for any other proceedings not inconsistent with this opinion. C. JOHNSON, BRIDGE, and OWENS, JJ., concur. ¶29 ALEXANDER, C.J. (concurring in part, dissenting in part) — ¶30 In Olympic Steamship Co. v. Centennial Insurance Co., 117 Wn.2d 37, 52, 811 P.2d 673 (1991), this court extended "the right of an insured to recoup attorney fees that it incurs because an insurer refuses to defend or pay the justified action or claim of the insured." Although our court did not set out its reasons for reaching this conclusion in great detail, it should be readily apparent to a reader of the opinion that this departure from the American rule governing entitlement to attorney fees