Double H Masonry, Inc. v. Liberty Mutual Insurance Company et al, No. 5:2015cv05004 - Document 132 (D.S.D. 2016)
Court Description: Memorandum Opinion and Order granting in part and denying in part 32 Motion to Dismiss. Signed by U.S. District Judge Lawrence L. Piersol on 9/30/2016. (JLS)
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Double H Masonry, Inc. v. Liberty Mutual Insurance Company et al Doc. 132 UNITED STATES DISTRICT COURT DISTRICT OF SOUTH DAKOTA WESTERN DIVISION * DOUBLE H MASONRY,INC * * Plaintiff, * CIV 15-5004 * * * MEMORANDUM OPINION AND ORDER * * LIBERTY MUTUAL INSURANCE * COMPANY * * Defendant * * * ****************************************************************************** Before the Court is Defendant's Motion to Dismiss Count II of Plamtiffs Second Amended Complaint pursuant to Fed R Crv P 12(b)(6) failure to state a claim for which relief can be granted Defendant imtially filed a Motion to Dismiss Counts II and III of Plaintiffs Amended Complaint Doc 32 Plaintiff filed a Response to Motion to Dismiss' Doc 34 Defendant filed a Reply to Plaintiffs Response Doe 39 Plaintiff then moved to amend its amended complaint Doc 59 This Court granted Plaintiffs motion to amend and ordered Plaintiff to serve the Second Amended Complamt as proposed Doc 60 Plaintiffs Second Amended Complaint contams only Counts I and II Doe 61 The parties then stipulated that the facts and law contained m Docs 32, 34, and 39 applied to the allegations contamed m Count 11 of Plaintiffs Second Amended Complamt and that bnefing was complete Doc 63 The Court has considered all filings and for the reasons set forth below. Defendant's motion is demed in part and granted m part 'LR 7 1(B)(1)lumts briefs to 25 pages unless prior approval has been obtamed with the Court Plamtiffs response was 39 pages and Plamtiff did not obtam pnor approval with this Court to file a bnefm excess ofthe 25 page limit Dockets.Justia.com BACKGROUND Milender White Construction Company ("Milender White") is a general building construction contractor and Double H Masonry, Inc ("Double H") is a masonry subcontractor Liberty Mutual Insurance Company ("Liberty Mutual") is the bonding company for Milender White Milender White entered m a construction contract with the Oglala Sioux Tnbe - Department of Public Safety ("the Tnbe")for constmction of the Pme Ridge Justice Center (the "Project") located on the Pme Ridge reservation m South Dakota In March of 2012, Double H submitted a bid for masonry work on the Project This bid included $1,112,500 00 for the cost of mtenor masonry walls and entryway stone by umt of measure, and $1,021,125 00 for the cost of extenor masonry walls and block and insulation by umt of measure Double H's bid expressly excluded the costs of rebar matenals, beating, sbeltenng, and caulking Milender White and the Tnbe accepted Double H's bid and it was incorporated mto the subcontract In May of 2012, Milender White obtained a payment bond for the Project through Liberty Mutual for the sum of $30,466,297 00 The general purpose ofthe payment bond was to guarantee that Milender White would pay its subcontractors aU amoimts due and owing for labor and matenals ^ The payment bond also stated that after being provided a wntten notice of a claim. Liberty Mutual will "[sjend an answer to the Claimant within sixty (60) days after receipt of the Claim, stating the amounts that are undisputed and the basis for challenging any amounts that are disputed,^ and Pay or arrange for payment of any undisputed amounts Under the terms of the subcontract. Double H commenced work on the Project Pursuant to the pnme contract, the Tnbe agreed to pay for all matenals for the project Further, pursuant to vanous oral contracts, wntten agreements, and change orders, Milender White also agreed to pay Double H for additional work on the Project In November of 2013, conflicts arose between Double H and Milender White and the Tnbe regarding Double H's entitlement to payments for work performed and matenal provided on the Project On November 26, 2014, Double H ^ Payment Bond § l,Doc 61-1 The Contractor and Surety, jomtly and severally, bmd themselves, their hems, executors, admimstrators, successors and assigns to the Owner to pay for labor, matenals and equipment furnished for use m the performance of the Construction Contract, which is mcoiporated herem by references subject to the followmg terms ^ W §7 1 provided Liberty Mutual, Milender White, and the Tnbe with notice of its claim on the payment bond Pursuant to Section 7 1 of the payment bond. Liberty Mutual had sixty days in which to respond to Double H's notice of claim On January 9, 2015,^ Double H filed suit against Liberty Mutual for breach of the bond Doc 1 On January 26, 2015—sixty days after Double H filed Its notice of claim—no employee of Liberty Mutual had responded to the notice of claim mdicatmg the amounts that were undisputed and the basis for challengmg any amounts that were disputed ® On February 20, 2015, Liberty Mutual filed a Motion to Stay Pending Arbitration between Double H and Milender White Doc 14 On May 26, 2015, Double H filed an amended complamt adding Count II - Contractual and/or Tortious Bad Faith and Count III - Violation of Unfair Trades Practices Act (SDCL §§ 58-33-67, -46 1) Doc 29 at 32-34 In Count II, Double H alleged that Liberty Mutual owed Double H a duty of good faith and fan dealmg and that this duty was violated when Liberty Mutual failed to send an answer to Double H withm sixty days after it received Double H's notice of claim, failed to independently and reasonably investigate Double H's claims, failed to pay for five undisputed claims, and filed a motion to stay this litigation Id at 243-45,f 249, 252-53,% 255 On June 9, 2015, Liberty Mutual filed this Motion to Dismiss ^ Doc 32 On July 28, 2015, this Court heard oral argument regarding the Motion to Stay On November 4, 2015, this Court issued a five-page Memorandum Opimon and Order grantmg Liberty Mutual's Motion to Stay the proceedmgs between Double H and Liberty Mutual and ordered that it would subsequently rule on the present Motion to Dismiss Count II of the Second Amended Complaint Doc 75 ^ Double H filed suit forty-four(44) days after providmg Liberty Mutual its notice of claim The only response Double H received to its notice ofclaim on the Liberty Mutual bond was a February 4, 2015 letter from a Milender White attorney The letter mdicated that five claims for payment were undisputed, however, the letter conditioned payment ofthose five clauns on Double H's agreement to deductions m pay, to complete additional work for no pay, to agree to less payment than agreed for one mvoice, and to agree to no payment for two other mvoices ^ Double H's amended complaint also contamed Count HI- Violation of Unfan Trade Practices Act(SDCL §§ 5833-67,-46 1) On October 8, 2015, after briefing was completed on Liberty Mutual's Motion to Dismiss Counts II and III of Amended Complamt,see Docs 32, 34, and 39, Double H filed a Second Amended Complamt which disposed of Count III On October 21,2015, the parties stipulated that the facts and law contamed m Docs 32, 34, and 39 applied to the allegations contamed m the present Motion to Dismiss Count n ofthe Second Amended Complamt DISCUSSION Liberty Mutual maintains that pursuant to Federal Rule of Civil Procedure 12(b)(6) this Court must dismiss Count II because it fails to state a legally sufficient cause of action, namely that no cause of action exists m South Dakota for a bad faith claim against a surety While South Dakota law reeogmzes a bad faith cause of action m the insurance context, it has not been determmed whether a surety bond is also subject to a bad faith cause of action "When there is no state supreme court case dnectly on point, our role is to predict how the state supreme court would rule if faced with the [same issue]" Cotton v Commodore Express, Inc , 459 F 3d 862, 864(8th Cir 2006) Standard of Review In eonsidenng a motion under Rule 12(b)(6), the factual allegations of a complamt are assumed true and construed m favor of the plaintiff, "even if it strikes a savvy judge that actual proof of those facts is improbable " Bell Atlantic Corp v Twombly, 550 U S 544, 556 (2007), cited with approval in Data Mfg, Inc v United Parcel Serv, Inc , 557 F 3d 849, 851 (8th Cir 2009) "While a complamt attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plamtifPs obligation to provide the 'grounds' of his 'entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do[]" Twombly, 550 U S at 555 (internal citations oimtted) The complamt must allege facts, which, when taken as true, raise more than a speculative nght to relief Id (mtemal citations omitted^, see also Benton v Merrill Lynch & Co, Inc , 524 F 3d 866, 870(8th Cir 2008) Although a plaintiff, m defending a motion under Rule 12(b)(6), need not provide specific facts m support of its allegations. Rule 8(a)(2) "still requires a 'showing,' rather than a blanket assertion, of entitlement to relief" Twombly,550US at555n3 (further explaining that "[wjithout some factual allegation in the complamt, it is hard to see how a claimant could satisfy the requirement of providmg not only 'fair notice' of the nature of the claim, but also 'grounds' on which the claim rests "), see also Ashcroft v Iqbal, 556'U S 662, 678 (2009)("the pleadmg standard Rule 8 announces does not require 'detailed factual allegations,' but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation ") As such, a claim must have facial plausibility to survive a motion to dismiss Ashcroft, 556 U S at 678 Determmmg whether a claim has facial plausibility is "a context-specific task that requires the reviewing court to draw on its judicial expenence and common sense" Id at 679 Bad Faith Cause of Action in Insurance Law South Dakota law has developed a bad faith cause of action most notably m the insurance context Stene v State Farm Mutual Auto Ins Co , 1998 SD 95, 19, 583 N W 2d 399, 403 (noting that "[a] cause of action agamst an insurance company for bad faith failure to pay a claim IS recogmzed m South Dakota Matter ofCert ofa Question ofLaw, 399 N W 2d 320, 322(S D 1987)") "The bad faith causes of action have been created and defined by the courts m South Dakota, without nurturmg (or impedunent) by the South Dakota legislature " Roger M Baron, When Insurance Companies Do Bad Things The Evolution ofthe "Bad Faith"Causes of Action in South Dakota, 44 S D L Rev 471, 471-72(1998-1999), see also Trouten v Heritage Mut Ins Co, 2001 SD 106, f 30, 632 NW2d 856, 862 (explaimng that "[t]h[e] implied covenant of good faith is a prmciple of contract law and, with the exception of insurance contracts, we have consistently refused to recogmze an independent tort action for its breach ") (emphasis added) Litigation of bad faith claims can be presented m either a first or third-party bad faith context ^ Hem v Acuity, 2007 SD 40,f 9, 731 N W 2d 231, 235 A first party bad faith claim is essentially an mtentional tort and occurs when an insurance company engages m wrongdomg dunng the process of paying a claim to its insured Id (citmg Gruenberg v Aetna Ins Co , 510 P 2d 1032, 1036 (Cal 1973))^ In order to prove a first-party bad faith claim, an insured must show "an absence of a reasonable basis for denial of policy benefits and the knowledge or reckless disregard of a reasonable basis for demal " Matter of Certification ofa Question ofLaw , 399 N W 2d 320, 324(S D 1987), see also Hem, 2007 SD 40,f 9, 731 N W 2d at 235 (explaimng that "an msurer is permitted to challenge claims that are fairly debatable[,] [hjowever, a fnvolous or unfounded refusal to comply with a duty under an insurance contract constitutes bad faith ") For purposes of this motion, only first party bad faith will be addressed 'Cahforma was the first state to recognize the tort of bad faith m the first-party context ^ suit, mcludmg South Dakota Several states followed Both parties agree that m the msuranee context, a cause of action for bad faith exists under current South Dakota law Doc 32 at 7("South Dakota allows a cause of action against an insurance company for bad faith failure to pay an insurance claim "), Doc 34 at 11-35 (arguing that a surety bond is insurance under South Dakota Law and a surety can therefore be sued under a bad faith action) The issue now before this Court is whether a surety bond is a type of msuranee and thus subject to a bad faith cause of action As detailed by the parties' bnefs, several junsdietions have addressed the issue, however, it is one of first impression m South Dakota Junsdietions Not Recognizing a Bad Faith Claim m a Suretv Context California In Its imtial bnef. Liberty Mutual argues that "suretyship is essentially credit and not msuranee " and therefore South Dakota should not recognize a bad faith cause of action Doe 32 at 9 In defense of its position. Liberty Mutual cites almost exclusively to the California Supreme Court ease of Gates Constr, Inc v Talbot Partners, 21 Cal 4th 28 (Cal 1999) In Gates, Talbot Partners ("Talbot") hired Cates Construction, Inc ("Cates") to build a condominium and Transamenca Insurance Company("Transamenca")issued the bond on Cates' behalf Id at 35 Conflicts arose between the parties and Talbot demanded that Transamenca perform under the bond Id at 35-36 Citmg the existence of a legitimate dispute between Cates and Talbot, Transamenca refused to pay the claim Id at 36 Theremafler, a lawsuit between all parties ensued Id Included m Talbot's suit against Transamenca was a tort claim for breach of the implied covenant of good faith and fair dealing under the performance bond Id At tnal, a jury found Transamenca liable for the breach and awarded Talbot $28 million m pumtive damages Id at 38 The court of appeals reduced the amount of punitive damages to $15 million, but affirmed the judgment in all other respects Id Transamenca appealed Id On appeal, the California Supreme Court reversed and found that "[a] construction performance bond is not an msuranee pohey[,]" and thus an extra-judicial remedy in tort is unavailable m the surety context Id at 60-61 In refusing to extend a tort recovery, the court found that "whatever benefits might accrue from permitting such remedies, harmful economic results appear at least as likely to occur" Id at 58 The court noted that. Unlike insurance relationships, which involve the interests of only two parties, the surety relationship is a tnpartite one implicating the separate legal interests of the pnncipal, the obligee and the surety When contract disputes anse between an obligee and a prmcipal as to whether the pnncipal is m default, it may prove difficult for the surety to determine which party is m the nght and whether its own performance is due under the bond [CJonstruction disputes may be complicated enough to resolve when all three parties are on a level playing field But it is rational to assume that making tort remedies available may encourage obligees to allege a pnncipal's default more readily than they would in the absence of such remedies It is also reasonable to conclude that allowmg obligees to wield the club of tort and punitive damages may make it easier to pressure sureties mto paymg questionable default claims, or paymg more on properly disputed claims, because the sureties will be reluctant to nsk the outcome of a tort action With such mcreased leverage, obligees will have sufficient power to detnmentally affect the interests of pnncipals when disagreements anse dunng construction Claims of default by the obligee may impair the pnncipal's ability to secure bonding on other projects, thus automatically disqualifying the pnncipal from bidding on all public projects and many pnvate ones Moreover, indemmty agreements executed by pnncipals often give sureties the nght to pursue them for reimbursement of any loss, mcludmg legal expenses and the costs of investigation In efforts to avoid bad faith liability, sureties may stnve to "find" bond coverage for obligees while, at the same time, chargmg their investigation costs to the pnncipal Accordingly, even if the surety's investigation ultimately leads to the conclusion that the pnncipal is not in default, the faultless pnncipd may still suffer adverse consequences These considerations, which have no parallel m disputes mvolvmg insurance policies, weigh agamst the recogmtion of extracontractual liability m the performance bond context Fmally, allowmg tort recovery m the construction bond context may open the door to mcreased (and sometimes successive) litigation, which m turn may increase the cost of obtaimng bonds Id at 58-59 (citations omitted) In further defense of its holding, the court first noted that Cahforma law recogmzes tort remedies for breach of the covenant of good faith and fair dealmg m the insurer/insured context based on the nature of insurance policies Id at 44 In particular, the court found that the existence of unequal bargainmg power, public interest, the fiduciary relationship between the contracting parties, and the inability of an insured to obtain other recourse m the marketplace provided the basis for allowmg this additional remedy m tort Id In addressmg these policy concerns, the eourt first distinguished msureds, "who must accept insurance on a 'take-it-or- leave-it'" basis, from obligees, who "decide the form ofthe bond whieh they will accept from the pnncipal[,] and concluded that'a typical performance bond bears no indicia of adhesion or disparate bargaimng power that might support tort recovery by an obligee" Id at 52-53 Next, the court distinguished the purposes of msuranee and surety m that msuranee is purchased to proteet against unforeseeable losses or catastrophes, whereas a surety more closely resembles a credit arrangement so as to guarantee payment in the event of default by the pnncipal Id at 5354 The court also observed that m the event of a claim, msureds have but one avenue to pursue pajonent, the insurer Id at 54 Conversely, an obligee m a surety relationship has reeourse against both the surety and the pnncipal and "may contract with others m the marketplaee to obtain completion of its construetion projeet and thereafter recover the reasonable eost of completion agamst the pnneipal and the surety" Id at 55 The eourt also analyzed the melusion of suretyship m the California Insurance Code but found Its presence m the Code uneonvincmg Id at 47 Notmg that "parties m a surety arrangement[] have eertam nghts and defenses that do not attend the typical msuranee relationship[,]" the court concluded that the mere presence of suretyship m the Code was not determinative Id at 52 Rather, the court found it "must evaluate whether the policy considerations reeogmzed m the common law support the availability of tort remedies m the eontext of a performance bond" Id Texas Liberty Mutual also eites to a Texas Supreme Court case m support of its argument that South Dakota should join with other states m finding that a surety is not msuranee and thus not subjeet to the tort of bad faith In Great Am Ins Co v N Austin Mun Util District No 7,908 S W 2d 415(Tex 1995), Great Amenean Insurance Company("Great Amenean")issued a bond m favor of the North Austm Municipal Utility Distnct No 1 ("MUD") for a wastewater construction project Id at 416 After vanous confliets arose, MUD sued Great Amenean, among others, for breaeh of the duty of good faith and fair dealing 7(7 at 417-18 At tnal, a jury The court noted that one text m the surety field observed that "[t]he inclusion ofsuretyship in the Insurance Code IS denved fi-om the need for control ofthe surety business by a state agency and does not imply that the underlymg natures ofinsurance and suretyship are the same" Id at 50 found that Great Amencan had breached its duty and awarded MUD damages Id at 418 The court of appeals affirmed Id On appeal to the Texas Supreme Court, Great Amencan argued that "the contractual relationship between a commercial surety and its bond obligee does not give nse to a common law duty of good faith and fair dealing" Id The Texas Supreme Court found that while Great Amencan was liable under the bond, "as a surety. Great Amencan ha[d] no common law duty of good faith and fan- dealing and that the Insurance Code [wa]s inapplicable " Id at 428 In so holding, the court found that none of the factors which created the special relationship between an insurer and insured— "unequal bargaimng power, the nature of the insurance contracts, and the insurance company's exclusive control over the claim evaluation process"—^were present Id at 418 Further, similar to the court in Gates, the Great Amenean court explamed the differences between an msurance contract and a surety bond While a liability msurance contract involves only two parties, the insurer and the insured, suretyship involves a tnpartite relationship between a surety, its pnncipal, and the bond obligee, m which the obligation of the surety is mtended to supplement an obligation of the pnncipal owed to the bond obligee Unlike a liability msurance contract, m which the obligation of the msurer to the insured is the pnmary obligation of mdemmty to the insured for loss, the obligation of a surety to a bond obligee is secondary to the obligation owed by its pnncipal A party sustaimng a loss covered under a liability msurance contract can look only to its msurer for recourse A bond obligee has a remedy against its pnncipal Id at 418-19 (citations omitted) Lastly, the court noted that although some junsdictions have imposed a duty based generally on the inclusion of suretyship m state msurance codes, it found that the "differences between suretyship and msurance ment consideration[ ]" Id at 420 Thus, similar to Gates, analyses of the vanous policy considerations were more persuasive than the mere presence of "surety" m the Code Id, see also Gates, 21 Cal 4th at 52(explaimng that "[we] must evaluate whether the policy considerations recogmzed m the common law support the availability of tort remedies m the context of a performance bond ") Pennsylvania Liberty Mutual also cites a 2009 federal distnct court opinion from the Middle District of Pennsylvania in support of its motion In US ex rel SimplexGrinnell, LP v Aegis Ins Co , 2009 WL 90233(MD Pa Jan 14, 2009), Coleman Construction Company, Inc ,("Coleman") entered into a contract with the U S Navy for renovation of a fire alarm system Id at *1 Coleman subcontracted with SimplexGrmnel, LP ("SG") to provide lahor and matenals Id Aegis Secunty Company ("Aegis") issued the bond for the project Id Conflicts arose between the parties and SG filed a claim with Aegis for compensation for work performed Id Aegis did not tender payment under the hond Id SG sued Aegis for bad faith under Pennsylvania's bad faith statute Id Aegis filed a motion to dismiss under Rule 12(b)(6) argumg that a surety bond does not constitute insurance under Pennsylvama law Id In Its opmion, the court noted that no statutory or common law authonty existed in Pennsylvama on whether a surety bond constituted an msurance policy Id at *3 Citing the "identifiable trend [] toward finding that a surety bond does not constitute an msurance policy," the court analyzed the distinctions between contracts ofinsurance and surety agreements The role ofthe surety is different from that of an insurer because 1 The surety bond is a financial credit product, not an msurance (mdemmty) product, 2 The surety has a "contractual" relationship with two parties that often have conflicting interests, causing the surety to balance these mterests when responding to claims, 3 The surety bond form customarily is wntten or furmshed by the obligee rather than the surety 4 The surety customarily is requested to assure performance of construction contracts that are sufficiently large to warrant bonding and typically are entered mto by parties with commercial sophistication, relative parity of bargaimng power and access to ample legal and techmcal advice, 5 The bond premium usually is paid by the contractor to the surety out of the contract pnce, rather than directly by the obligee to the surety, although it is not uncommon for obligees to reimburse contractors for the premium, and 10 6 The pncing of the premium by the surety is not based upon nsk of fortuitous loss, but assumes reimbursement to the surety from the prmcipal and mdemmtors for any loss Id {quoting Philip L Burner & Patnek J O'Connor,4 Bruner & O'Connor on Construetion Law § 12 7(2003)) Based on these differenees, the eourt deelmed to "judieially expand[] the bad faith statute to encompass surety bonds[]" and granted Aegis' motion to dismiss Id at *5 Other Other junsdictions that have addressed the issue presented m this motion mclude Nevada and North Carolma Junsdictions Reeogmzing a Bad Faith Claim m a Suretv Context In its response bnef. Double H argues that a surety bond is insurance under South Dakota law and therefore subject to a bad faith cause of action Doe 34 at 11 Along with its statutory arguments, which will be addressed infra. Double H cites vanous South Dakota cases m support of its argument This Court, however, finds these cases impersuasive As previously noted, it has not been determined whether under South Dakota law a surety bond is subject to a bad faith cause of action Therefore, Double H's attempt to liken the South Dakota Supreme Court's treatment of a worker's compensation claim or a statute of limitations controversy to the present issue IS misplaced Doe 34 at 16 {citing Champion v US Fid & Guar Co , 399 N W 2d 320 (S D 1987)), Doe 34 at 17 {citing Sheehan v Morris Irrigation, 410 N W 2d 569(S D 1987)) More persuasive to this Court is Double H's reference to vanous eases that have analyzed, and subsequently allowed, the remedy that Double H seeks Arizona In Dodge v Fid & Deposit Co ofMd, 778 P 2d 1240(Anz 1989)(In Banc), Mr and Mrs Dodge("Dodge") contracted with Homes & Son Construetion Company,Inc ("Homes")to build a residence Id at 1241 Under the provisions of the contract. Homes ohtamed a performance bond with Fidelity and Deposit Company of Maryland ("Fidelity") Id Theremafter, conflicts arose between Dodge and Homes Id Dodge subsequently made a demand on Fidelity Id Fidelity refused to pay the claim Id Dodge sued Fidelity for breach of "Great Am Ins Co v Gen Builders,Inc ,934 P 2d 257(Nev 1997), Transylvama Cty v LmcoInGen Ins Co, 2005 U S Dist LEXIS 44472(W D N C Sept 29, 2005) 11 contract and for bad faith Id The tnal court dismissed the bad faith claim and the eourt of appeals affirmed the dismissal, stating '"[G]iven the difference m the relationship created by casualty msurance and surety insurance, we see no compelling public policy reasons to expand the damages collectible against a surety beyond those traditionally provided for hreaeh of contract Id {quoting Dodge v Fid & Deposit Co, 778 P 2d 1236, 1239 (Anz Ct App 1986)) On appeal to the Supreme Court of Anzona,^^ the court first noted that pnor case law established that Arizona recogmzed a tort m an insuranee context Id (explaimng that "[w]e have determined that it is reasonable to conclude that there is a legal duty implied m an insuranee contract that the msurance company must act m good faith in dealing with its insured on a claim, and a violation of that duty of good faith is a tort") The court next analyzed the vanous statutes m Its Insurance Code and concluded that "[o]ur statutes make clear our legislature's mtent to melude sureties withm the eoverage ofthe msurance statutes" Id at 1242 Particularly the court noted the presence of"Surety Insurance" within the "Kinds of Insurance" listed under the Code Id The court further provided two additional bases for its reasoning Id First, it held that the surety bond was not obtained for profit or commercial advantage but to provide secunty and protection m the event of a default Id Secondly, it found that imposmg tort damages on a surety who refused to pay a valid claim would deter such conduct Id (explaimng that "[pjermittmg a surety to withhold performance of its obligations without reason would defeat the purpose for which surety insurance is intended ") Colorado In Transamenca Premier Ins Co v Brighton School Dist 27 J, 940 P 2d 348 (Colo 1997)(En Banc), the Supreme Court of Colorado recognized the existenee of a common law tort claim against a commercial surety who fails to reasonably proceed with payment of a claim under a performance bond Id at 353 The court first noted that the msurance statutes reflected an intent to melude sureties in the regulatory scheme govemmg msurance Id at 352 (noting that "[sjection 10-1-102(8), 4A CRS (1994) defines the term 'insurer' as 'every person The question presented before the court,"Can a surety on a contractor's performance bond be liable for the tort of bad faith"^" was a question of first impression m Arizona Id at 1242 12 engaged as pnncipal, mdemnitor, surety, or contractor m the business of making contracts of msurance "') Next, similar to the Anzona court m Dodge, the court found that "[a] special relationship exist[ed] between a commercial surety and an obligee that is nearly identical to that mvolvmg an insurer and an msured[]" in that an obligee, m obtaimng a bond, is msunng itself against potential losses Id Further, the court noted that while an argument may be made that the relationship differs because the parties m a surety agreement are on equal footing m terms of the bargaimng process, "it is the commercial surety who controls the ultimate decision of whether to pay claims made by the obligee under the terms of the surety bond" Id at 353 Lastly, citing to Dodge, the court relied upon a deterrence argument, stating that "contract damages do not compensate the obligee for the commercial surety's misconduct and have no deterrent effect to prevent such misconduct in the future North Dakota In Szarkowsla v Reliance Ins Co , 404 N W 2d 502(N D 1987), Szarkowski Trucking ("Szarkowski") subcontracted with Scherhenske Excavating, Inc ("Scherbenske") to provide hauling services Id at 503 Scherbenske obtained performance/parent bonds from Reliance Insurance Company ("Reliance") Id Thereinafter, conflicts arose and Szarkowski sued Reliance Id at 504 In its complaint, Szarkowski alleged a tort asserting that Rehance acted "unreasonably and m bad faith withholding payment of the claim" Id at 505 The tnal court determined that, as a matter of law, Szarkowski was not entitled to relief Id at 503 The Supreme Court of North Dakota reversed Id at 505 Notmg that "[tjhis court has recogmzed that a paid surety or bonding company is generally treated as an insurer rather than according to the stnct law of suretyship[,]" the court held that Szarkowski "ha[d] raised a valid claun m tort which require[d] a tnal on the ments" Id "Dodge V Fid & Deposit Co of Md ,778 P 2d 1240, 1242-43(Anz 1989)(In Banc) The comt mDodge explamed that contract damages, [0]flfer no motivation whatsoever for the msurer not to breach If the only damages an insurer will have to pay upon a judgment of breach are the amounts that it would have owed under the policy plus interest, it has every interest m retammg the money, earmng the higher rates of interest on the outside market, and hopmg eventually to force the insured mto a settlement for less than the policy amount 13 Alaska hi Loyal Order ofMoose, Lodge 1392 v Int'l Fid Ins Co ,797 P 2d 622(Alaska 1990), the Moose Lodge("Lodge") contracted with Darling Enterpnses ("Darling") for a new facility in Fairbanks Id at 623 Darling obtained a performance/payment bond with International Fidelity Insurance Company("Fidelity") and named the Lodge as the obligee Id Vanous disputes arose durmg the construction process resultmg m a suit by the Lodge against Fidelity for bad faith inaction on the performance bond Id at 626 On appeal to the Supreme Court of Alaska, the court noted that the mitial question was '"[djoes Alaska recogmze the tort of bad faith m the pnncipal and surety context of a commercial construction claim'^'" Id at 626 The court concluded that "an implied covenant of good faith and fair dealmg exist[ed] between a surety and its obligee on payment and performance bonds[,][which][wa]s based m part on Nicholson and m part upon the persuasive reasonmg of the Supreme Court of Anzona m Dodge v Fidelity & Deposit Co of Md" Id (citations omitted) In Nicholson, the court bad previously held that m the insured/insurer context a cause of action for tortious bad faith existed based on the "special relationship between the insured and insurer " Id at 626-27 {cihng State Farm Fire & Casualty Co v Nicholson, 111 P 2d 1152, 1156 (Alaska 1989)) The court also cited favorably to Dodge—"sureties are msurers, insurers are subject to bad faith tort liability, therefore sureties are subject to bad faith tort babibty[] [ajltbougb simple, this proposition is supported by our statutes, case law and sound policy reasons[]"—and further focused on the relationship between a surety to its obligee, finding that "a surety may satisfy its duty of good faith to its obligee by acting reasonably m response to a claim by its obligee, and by acting promptly to remedy or perform the principal's duties where default is clear" Id at 627-28 Other Other junsdictions recognizing a tort claim for bad faith m the suretyship context include Delaware, Hawaii, Montana, Flonda, and Ohio Int'l Fid Ins Co V Dehnarva Sys Corp ,2001 WL 541469, at *9(Del Super Ct May 9, 2001), Bd ofDirs Of Ass'n of Apartment Owners ofDiscovery Bay Condo v Umted Pac Ins Co ,884 P 2d 1134(Haw 1994), K-W Indus, a Div of Associated Techs ,Ltd v Nat'l Sur Corp , 754 P 2d 502(Mont 1988), Dadeland Depot, Inc v St 14 ANALYSIS Contractual Bad Faith In Count II of its Second Amended Complaint, Double H filed a claim for both contractual and tortious bad faith Doc 61 at 27 In every contract, there exists "an implied covenant of good faith and fair dealing which prohibits either contracting party from preventing or injuring the other party's nght to receive the agreed benefits of the contract" Gorrett v BankWest, Inc , 459 N W2d 833, 841 (S D 1990) "This implied covenant of good faith is a pnnciple of contract laW " Trouten, 2001 SD 106, f 30, 632 N W2d at 862 "Conduct which merely is a breach of contract is not a tort, but the contract may establish a relationship demanding the exercise of proper care and acts and omissions m performance may give nse to tort liability" Kunkel v United Sec Ins Co o/NJ, 168 NW 2d 723 (S D 1969)(explaimng that "breach of duty may arise from a contractual relationship [but] the gist of an action may be tortious") Any claims that Double H may have for breach of the common law contractual duty will anse under the payment bond, which Double H has already clauned m Count I of its Second Amended Complamt Doc 61 at 25 Liberty Mutual does not dispute Double H's standing to file suit under the bond and recover appropnately Doc 39 at 4 South Dakota law does not recogmze an cxtxa-contractual remedy for bad faith The headmg to Count II of the Seeond Amended Complamt is "Count II—Contractual and Tortious Bad Faith" Doc 61 at 27 To the extent that Count II attempts to allege contractual bad faith, that claim is dismissed Tortious Bad Faith The cases above refleet strong contrary opimons concemmg whether suretyship is a type ofinsurance and thus subject to liability for tortious bad faith Based on the presence ofsurety in j the South Dakota Insurance Code and the policy considerations and the reasomng of other courts, this Court holds that a bad faith claim can be, and is, stated m Coimt II Paul Fire and Marme Ins Co ,945 So 2d 1216(Fla 2006), Suver v Personal Serv Ins Co ,462 N E 2d 415(Ohio 1984) 15 South Dakota Insurance Code The terms "surety" and "surety insurance" both appear in the South Dakota Insurance Code SDCL § 58-1-1 ("This title shall be known as the Insurance Code "), SDCL § 58-1-2(10) ("'Insurer,' every person engaged as mdemnitor, surety, or contractor in the business of entermg into contracts of insurance,"), SDCL § 58-9-31 ("'Surety insurance' mcludes insurance guaranteeing the performance of contracts, other than insurance policies, and guaranteeing and executing bonds, undertakmgs, and contracts of suretyship"), SDCL § 58-21 ("Surety Insurance") While this Court recognizes that "[t]he headmgs of portions of a statute, such as articles, chapters and section may not be used to extend or restrict the language contained m a statute [,]" Deckert v Burns, 62 N W 2d 879, 881 (S D 1954), the Court will not disregard the clear presence of surety provisions withm the insurance statutes Similar to the Dodge and Transamenca courts, supra, that found the inclusion of sureties withm its states msurance statutes as a basis for its findings, this Court too finds the presence of sureties within the South Dakota Insurance Code to be reflective of the Legislature's intent to include sureties under the lunbrella of msurance See Dodge, 778 P 2d at 1242 (explaimng that "[o]ur statutes thus make clear our legislature's intent to include sureties withm the coverage of the insurance statutes "), see Transamenca, 940 P 2d at 352(notmg that "[sjection 10-1-102(8), 4A C R S (1994) defines the term 'insurer' as 'every person engaged as pnncipal, mdenmitor, surety, or contractor m the business of makmg contracts of msurance '") Further, South Dakota's defimtion of"insurer" is nearly identical to the defimtion of"insurer" cited m Transamenca Additionally, m Tracy v T & B Const Co , 182 N W 2d 320 (S D 1970), which is a factually dissimilar case, the South Dakota Supreme Court had the opportunity to analyze the South Dakota Insurance Code, particularly SDCL 58-1-2(10) ("Insurer") and SDCL 58-9-31 ("Surety Insurance"), and stated that [i]n our opmion the legislature clearly and unequivocally by the foregomg statutes defined a[] surety as an insurer and placed them within the purview of SDCL 58-12-3, which reads 'In all actions agamst any msurance company on any policy or certificate of any type ofinsurance ' C R S A § 10-1-102(8), now codified at C R S A § 10-1-102(13), defines "Insurer" as,"every person engaged as principal, mdemnitor, surety, or contractor m the busmess of makmg contracts of msurance" Similarly, SDCL § 58-1-2(10) defines "Insurer" as,"every person engaged as mdenmitor, surety, or contractor m the busmess of entermg mto contracts of msurance" 16 Id at 323 Conversely, Liberty Mutual argues that "[t]here is simply no statutory or other authonty for this proposition that Liberty is subject to South Dakota's common law of had faith" Doc 39 at 3 In support of its argument, Liberty Mutual cites to the South Dakota Supreme Court's opimon m Sheehan v United Pac Ins Co , 439 N W 2d 117 (S D 1989) and Gates, supra Sheehan is inapplicable In Sheehan, the Court addressed dissimilar issues and also noted that, this ease has now come before this court on two occasions Neither appeal has dealt with the merits of Sheehan's claim under the surety bond, which was provided for the performance of labor and installation of matenals under Phase I and II of the contract between Sheehan and Johnson Bros Company and Moms Imgation, Inc, a joint venture Id at 119 Without any attempt by Liberty Mutual to further explam or compare Sheehan to the present ease, it simply cites to the last sentence of the last paragraph of the opimon, which states, "This court agrees that surety bonds differ in their purpose from insurance contracts providing coverage for general liability claims, as urged by the appellee" Id at 119 That statement has nothing to do with the holdmg and thus is dieta and unpersuasive to this Court Liberty Mutual also cites to Gates for the proposition that the mere inclusion of surety m the insurance code did not require its classification as msuranee for all purposes Doc 32 at 11 This, without more, is again unpersuasive As previously noted, numerous courts have held that the inclusion of surety m a state's insurance code was persuasive m finding a surety to be mcluded as msuranee and thus subject to a tortious bad faith claim Further, there is no basis to find that the legislature only mcluded "surety" or "surety msuranee" m the South Dakota Insurance Code to simply allow for regulatory supervision or limited application in the insurance context See Gates, 21 Cal 4th at 50(noting that "'[t]he inclusion of suretyship m the Insurance Code IS derived from the need for control of the surety business by a state agency and does not imply that the underl3nng natures of msuranee and suretyship are the same '") Two years pnor to its decision, the Court also ruled on Sheehan v Moms Irr, 410 N W 2d 569(S D 1987) {Sheehan I) In Sheehan I, the Court addressed whether a surety could shorten a statute oflumtations otherwise allowed under South Dakota law Id at 570 The Court held that the two-year limitation period m Umted Pacific's bond was void /£?at571 17 Policy Considerations The inclusion of surety in the South Dakota Insurance Code is persuasive but not the only consideration This Court finds additional support for its holding from Dodge,supra The Court agrees with the reasonmg in Dodge in that the purpose of a construction payment/performance bond IS not for commercial advantage but rather to provide security and protection m the event of a defaulting pnncipal, similar to the purpose of insurance Pursuant to SDCL § 56-2-1, a suretyship is defined as "a contract by which one who at the request of another and for the purpose ofsecuring to him a benefit becomes responsible for the performance by the latter of some act m favor of a third party or hypothecates property as secunty therefor" (emphasis added) Similarly, under SDCL § 58-1-2(8), insurance is defined as "a contract whereby one undertakes to indemnify another or to pay or provide a specified or determinahle amount or benefit upon determmable contingencies" (emphasis added) "To allow the surety to purposefully delay or mtentionally mampulate payment to their benefit would undermine the pnmary purpose of msulatmg the obligee from the nsk of default" Int'l Fid Ins Co v Delmarva Corp, 2001 WL 541469, at *9 (Del Super Ct May 9, 2001) Furthermore, Dodge also supports this Court's belief that by imposmg tort damages on a surety who refuses to reasonably mvestigate and pay a valid claim would function as a deterrent Unlike the Cates court, this Court does not believe that harmful economic repercussions will result if claimants are allowed to bnng a bad faith cause of action against a surety Instead, this Court finds that the availability of a bad faith claim against a surety will act as a type of"check" that is a reasonable means to deter bad faith handling of legitimate claims The fact that a bad faith claim can be made does not mean the claim will proceed beyond summary judgment to tnal Additionally, while the Court is cogmzant of the differences between a surety relationship and an msurer/msured relationship, it does not believe that the differences warrant total demal of a tort remedy agamst a surety for breach of a bond The Court instead finds that there is a special relationship between a surety and obligee, similar to that of an insurer and its insured m that an obligee too relies on a surety to guarantee performance and/or payment m the event of a default The Court finds support from Transamerica, supra In Transamerica, the Supreme Court of Colorado stated 18 A special relationship exists between a commercial surety and an obligee that is nearly identical to tW involving an msurer and an msured When an obligee requests that a pnncipal obtam a commercial surety bond to guarantee the pnncipal's performance, the obligee is essentially insurmg itself from the potentially catastrophic losses that would result m the event the prmcipal defaults on Its original obligation When the prmcipal actually defaults, the commercial surety must assume or correct any flaws m performance pursuant to the terms of the original contract, thereby elimmating the obligee's nsk ofloss m the venture Transamenca,940 P2d at 352 CONCLUSION South Dakota courts have long held that a bad faith cause of action exists m the insurance context The question presented to this Court was whether suretyship was subject to bad faith liability for an alleged breach of a payment bond Based upon an analysis of the South Dakota Insurance Code, the nature of surety mstruments, other policy considerations previously discussed, and an analysis of fellow junsdictions that bad addressed the issue, this Court finds that suretyship is a type of insurance and thus Double H is allowed to proceed on its tortious bad faith claim IT IS ORDERED that Defendant's Motion to Dismiss Count II of Plamtiffs Second Amended Complaint, Doc 32 1 Is demed with regard to Plaintiffs claim for tortious bad faith, and 2 Is granted insofar as Plamtiff attempts to state a claim m Count II for contractual bad faith, and any such claim is dismissed Dated this pC/ day of September,2016 BY THE COURT iLawrence L Piersol Umted States District Judge ATTEST JOSEPH By Courts ,Deputy 19
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