LAWRENCE L. PIERSOL, District Judge.
Before the Court is Defendant's Motion to Dismiss Count II of Plaintiff's Second Amended Complaint pursuant to FED R Civ P 12(b)(6) failure to state a claim for which relief can be granted Defendant initially filed a Motion to Dismiss Counts II and III of Plaintiffs Amended Complaint Doc 32 Plaintiff filed a Response to Motion to Dismiss
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 in a construction contract with the Oglala Sioux Tribe — Department of Public Safety ("the Tribe") for construction of the Pine Ridge Justice Center (the "Project") located on the Pine Ridge reservation in South Dakota In March of 2012, Double H submitted a bid for masonry work on the Project This bid included $1,112,50000 for the cost of interior masonry walls and entryway stone by unit of measure, and $1,021,12500 for the cost of exterior masonry walls and block and insulation by umt of measure Double H's bid expressly excluded the costs of rebar materials, heating, sheltering, and caulking Milender White and the Tribe 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 $30,466,29700 The general purpose of the payment bond was to guarantee that Milender White would pay its subcontractors all amounts due and owing for labor and materials
Under the terms of the subcontract, Double H commenced work on the Project Pursuant to the prime contract, the Tribe agreed to pay for all materials for the project Further, pursuant to various oral contracts, written 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 Tribe regarding Double H's entitlement to payments for work performed and material provided on the Project On November 26, 2014, Double H provided Liberty Mutual, Milender White, and the Tribe with notice of its claim on the payment bond Pursuant to Section 71 of the payment bond, Liberty Mutual had sixty days in which to respond to Double H's notice of claim On January 9, 2015,
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, -461) Doc 29 at 32-34 In Count II, Double H alleged that Liberty Mutual owed Double H a duty of good faith and fandealing and that this duty was violated when Liberty Mutual failed to send an answer to Double H within 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, ¶¶ 249, ¶¶ 252-53, ¶¶ 255
On June 9, 2015, Liberty Mutual filed this Motion to Dismiss
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 in South Dakota for a bad faith claim against a surety While South Dakota law recognizes a bad faith cause of action in the insurance context, it has not been determined 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)
In considering a motion under Rule 12(b)(6), the factual allegations of a complaint are assumed true and construed in 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 complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiffs obligation to provide the `grounds' of his `entitle[menf] to relief reqmres 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 omitted) The complaint must allege facts, which, when taken as true, raise more than a speculative right to relief Id. (internal citations omitted), see also Benton v Merrill Lynch & Co, Inc., 524 F.3d 866, 870 (8th Cir 2008)
Although a plaintiff, in defending a motion under Rule 12(b)(6), need not provide specific facts in support of its allegations, Rule 8(a)(2) "still requires a `showing,' rather than a blanket assertion, of entitlement to relief" Twombly, 550 U S at 555 n 3 (further explaining that "[w]ithout some factual allegation in the complaint, it is hard to see how a claimant could satisfy the requirement of providing 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 Determining whether a claim has facial plausibility is "a context-specific task that requires the reviewing court to draw on its judicial experience and common sense" Id. at 679
South Dakota law has developed a bad faith cause of action most notably in 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 against an insurance company for bad faith failure to pay a claim is recognized in South Dakota Matter of Cert of a Question of Law, 399 N.W.2d 320, 322 (S D 1987)") "The bad faith causes of action have been created and defined by the courts in South Dakota, without nurturing (or impediment) by the South Dakota legislature" Roger M Baron, When Insurance Companies Do Bad Things The Evolution of the "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, ¶ 30, 632 N.W.2d 856, 862 (explaining that "[t]h[e] implied covenant of good faith is a principle of contract law and, with the exception of insurance contracts, we have consistently refused to recognize an independent tort action for its breach") (emphasis added) Litigation of bad faith claims can be presented in either a first or third-party bad faith context
A first party bad faith claim is essentially an mtentional tort and occurs when an insurance company engages in wrongdoing during the process of paying a claim to its insured Id. (citing Gruenberg v Aetna Ins Co, 510 P.2d 1032, 1036 (Cal 1973))
Both parties agree that in the insurance 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 insurance and thus subject to a bad faith cause of action As detailed by the parties' briefs, several jurisdictions have addressed the issue, however, it is one of first impression in South Dakota
In its initial brief, Liberty Mutual argues that "suretyship is essentially credit and not insurance" and therefore South Dakota should not recognize a bad faith cause of action Doc 32 at 9 In defense of its position, Liberty Mutual cites almost exclusively to the California Supreme Court case of Cates Constr, Inc v Talbot Partners, 21 Cal.4th 28 (Cal 1999) In Cates, 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 Citing the existence of a legitimate dispute between Cates and Talbot, Transamenca refused to pay the claim Id. at 36 Thereinafter, a lawsuit between all parties ensued Id. Included in 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 in punitive 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 insurance policy[,]" and thus an extra-judicial remedy in tort is unavailable in 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,
Id. at 58-59 (citations omitted)
In further defense of its holding, the court first noted that California law recognizes tort remedies for breach of the covenant of good faith and fair dealing in the insurer/insured context based on the nature of insurance policies Id. at 44 In particular, the court found that the existence of unequal bargaining power, public interest, the fiduciary relationship between the contracting parties, and the inability of an insured to obtain other recourse in the marketplace provided the basis for allowing this additional remedy in tort Id. In addressmg these policy concerns, the court first distinguished insureds, "who must accept insurance on a `take-it-orleave-it'" basis, from obligees, who "decide the form of the bond which they will accept from the pnncipal[,]" and concluded that "a typical performance bond bears no indicia of adhesion or disparate bargaining power that might support tort recovery by an obligee" Id. at 52-53 Next, the court distinguished the purposes of insurance and surety in that insurance is purchased to protect 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 principal Id. at 53-54 The court also observed that in the event of a claim, msureds have but one avenue to pursue payment, the insurer Id. at 54 Conversely, an obligee in a surety relationship has recourse against both the surety and the principal and "may contract with others in the marketplace to obtain completion of its construction project and thereafter recover the reasonable cost of completion against the principal and the surety" Id. at 55
The court also analyzed the inclusion of suretyship in the California Insurance Code but found its presence in the Code unconvincing
Liberty Mutual also cites to a Texas Supreme Court case in support of its argument that South Dakota should join with other states in finding that a surety is not insurance and thus not subject to the tort of bad faith In Great Am Ins Co v N Austin Mun Util District No 1, 908 S.W.2d 415 (Tex 1995), Great American Insurance Company ("Great American") issued a bond m favor of the North Austm Municipal Utility District No 1 ("MUD") for a wastewater construction project Id. at 416 After various conflicts arose, MUD sued Great American, among others, for breach of the duty of good faith and fair dealing Id. at 417-18 At trial, a jury found that Great American had breached its duty and awarded MUD damages Mat 418 The court of appeals affirmed Id. On appeal to the Texas Supreme Court, Great American argued that "the contractual relationship between a commercial surety and its bond obligee does not give rise to a common law duty of good faith and fair dealing" Id.
The Texas Supreme Court found that while Great American was liable under the bond, "as a surety, Great American 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 bargaining 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 Cates, the Great American court explained the differences between an insurance contract and a surety bond
Id. at 418-19 (citations omitted)
Lastly, the court noted that although some jurisdictions have imposed a duty based generally on the inclusion of suretyship in state insurance codes, it found that the "differences between suretyship and insurance ment consideration[]" Id. at 420 Thus, similar to Cates, analyses of the various policy considerations were more persuasive than the mere presence of "surety" in the Code Id, see also Cates, 21 Cal 4th at 52 (explaining that "[we] must evaluate whether the policy considerations recognized in the common law support the availability of tort remedies in the context of a performance bond")
Liberty Mutual also cites a 2009 federal district court opinion from the Middle District of Pennsylvania in support of its motion In US ex rel SimplexGnnnell, 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 SimplexGnnnel, LP ("SG") to provide labor and materials Id. Aegis Security 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 bond 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) arguing that a surety bond does not constitute insurance under Pennsylvania law Id.
In its opinion, the court noted that no statutory or common law authority existed in Pennsylvania on whether a surety bond constituted an insurance policy Id. at *3 Citing the "identifiable trend [] toward finding that a surety bond does not constitute an insurance policy," the court analyzed the distinctions between contracts of insurance and surety agreements
The role of the surety is different from that of an insurer because
Id. (quoting Philip L Bruner & Patrick J O'Connor, 4 Bruner & O'Connor on Construction Law § 127 (2003)) Based on these differences, the court declined to "judicially expand[] the bad faith statute to encompass surety bonds[]" and granted Aegis' motion to dismiss Id. at *5
Other jurisdictions that have addressed the issue presented in this motion mclude Nevada and North Carolina
In its response brief, Double H argues that a surety bond is insurance under South Dakota law and therefore subject to a bad faith cause of action Doc 34 at 11 Along with its statutory arguments, which will be addressed infra, Double H cites various South Dakota cases in support of its argument This Court, however, finds these cases unpersuasive 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 Doc 34 at 16 (citing Champion v US Fid & Guar Co, 399 N.W.2d 320 (S D 1987)), Doc 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 various cases that have analyzed, and subsequently allowed, the remedy that Double H seeks
In Dodge v Fid & Deposit Co ofMd, 778 P.2d 1240 (Ariz 1989) (In Banc), Mr and Mrs Dodge ("Dodge") contracted with Homes & Son Construction Company, Inc ("Homes") to build a residence Id. at 1241 Under the provisions of the contract, Homes obtained a performance bond with Fidelity and Deposit Company of Maryland ("Fidelity") Id. Thereinafter, 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 contract and for bad faith Id. The trial court dismissed the bad faith claim and the court of appeals affirmed the dismissal, stating "`[G]iven the difference in the relationship created by casualty insurance and surety insurance, we see no compelling public policy reasons to expand the damages collectible against a surety beyond those traditionally provided for breach of contract'" Id (quoting Dodge v Fid & Deposit Co, 778 P.2d 1236, 1239 (Ariz Ct App 1986))
On appeal to the Supreme Court of Arizona,
In Transamerica Premier Ins Co v Brighton School Dist 27 J, 940 P.2d 348 (Colo 1997) (En Banc), the Supreme Court of Colorado recognized the existence 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 insurance statutes reflected an intent to include sureties in the regulatory scheme governing insurance Id. at 352 (noting that "[s]ection 10-1-102(8), 4A CRS (1994) defines the term `insurer' as `every person engaged as principal, indemnitor, surety, or contractor in the business of making contracts of insurance'")
Next, similar to the Arizona court in Dodge, the court found that "[a] special relationship exist[ed] between a commercial surety and an obligee that is nearly identical to that involving an insurer and an insured[]" in that an obligee, in obtaining a bond, is insuring itself against potential losses Id. Further, the court noted that while an argument may be made that the relationship differs because the parties in a surety agreement are on equal footing in terms of the bargaining 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"
In Szarkowsh v Reliance Ins Co, 404 N.W.2d 502 (N D 1987), Szarkowski Trucking ("Szarkowski") subcontracted with Scherbenske Excavating, Inc ("Scherbenske") to provide hauling services Id. at 503 Scherbenske obtained performance/payment 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 Reliance acted "unreasonably and in bad faith withholding payment of the claim" Id. at 505 The trial 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 "[t]his court has recognized that a paid surety or bonding company is generally treated as an insurer rather than according to the strict law of suretyship[,]" the court held that Szarkowski "ha[d] raised a valid claim in tort which reqmre[d] a trial on the merits" Id.
In Loyal Order of Moose, Lodge 1392 v Int'l Fid Ins Co, 797 P.2d 622 (Alaska 1990), the Moose Lodge ("Lodge") contracted with Darling Enterprises ("Darling") for a new facility in Fan-banks Id. at 623 Darling obtained a performance/payment bond with International Fidelity Insurance Company ("Fidelity") and named the Lodge as the obligee Id. Various disputes arose during the construction process resultmg in 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 initial question was "`[d]oes Alaska recognize the tort of bad faith in the principal and surety context of a commercial construction claim'?'" Id. at 626 The court concluded that "an implied covenant of good faith and fair dealing exist[ed] between a surety and its obligee on payment and performance bonds[,] [which] [wa]s based in part on Nicholson and in part upon the persuasive reasoning of the Supreme Court of Arizona in Dodge v Fidelity & Deposit Co of Md" Id (citations omitted) In Nicholson, the court had previously held that in 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 (citing State Farm Fire & Casualty Co v Nicholson, 777 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 habihty[] [although 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 jurisdictions recognizing a tort claim for bad faith in the suretyship context include Delaware, Hawaii, Montana, Florida, and Ohio
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 right to receive the agreed benefits of the contract" Garrett v BankWest, Inc, 459 N.W.2d 833, 841 (S D 1990) "This implied covenant of good faith is a principle of contract law" Trouten, 2001 SD 106, «]f 30, 632 N W 2d 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 in performance may give rise to tort liability" Kunkel v United Sec Ins Co of NJ, 168 N.W.2d 723 (S D 1969) (explaining 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 arise under the payment bond, which Double H has already claimed in 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 recognize an extra-contractual remedy for bad faith The heading to Count II of the Second 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
The cases above reflect strong contrary opinions concerning whether suretyship is a type of insurance and thus subject to liability for tortious bad faith Based on the presence of surety in the South Dakota Insurance Code and the policy considerations and the reasoning of other courts, this Court holds that a bad faith claim can be, and is, stated in Count II
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 indemnitor, surety, or contractor in the business of entering 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, undertakings, 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 in 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 Transamerica courts, supra, that found the inclusion of sureties within its states insurance 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 umbrella of insurance See Dodge, 778 P 2d at 1242 (explaining that "[o]ur statutes thus make clear our legislature's intent to include sureties within the coverage of the insurance statutes"), see Transamerica, 940 P 2d at 352 (notmg that "[s]ection 10-1-102(8), 4A C R S (1994) defines the term `insurer' as `every person engaged as principal, indemnitor, surety, or contractor in the business of making contracts of insurance'") Further, South Dakota's definition of "insurer" is nearly identical to the definition of "insurer" cited in Transamerica
Id. at 323
Conversely, Liberty Mutual argues that "[t]here is simply no statutory or other authority for this proposition that Liberty is subject to South Dakota's common law of bad faith" Doc 39 at 3 In support of its argument, Liberty Mutual cites to the South Dakota Supreme Court's opimon in Sheehan v United Pac Ins Co, 439 N.W.2d 117 (S D 1989) and Cates, supra Sheehan is inapplicable In Sheehan, the Court addressed dissimilar issues and also noted that,
Id. at 119
Liberty Mutual also cites to Cates for the proposition that the mere inclusion of surety m the insurance code did not require its classification as insurance 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 in a state's msurance code was persuasive in finding a surety to be mcluded as msurance and thus subject to a tortious bad faith claim Further, there is no basis to find that the legislature only included "surety" or "surety insurance" in the South Dakota Insurance Code to simply allow for regulatory supervision or limited application in the insurance context See Cates, 21 Cal 4th at 50 (noting that "`[t]he inclusion of suretyship in the Insurance Code is derived from the need for control of the surety business by a state agency and does not imply that the underlying natures of msurance and suretyship are the same'")
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 reasoning in Dodge in that the purpose of a construction payment/performance bond is not for commercial advantage but rather to provide security and protection in the event of a defaulting principal, 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 of securing to him a benefit becomes responsible for the performance by the latter of some act in favor of a third party or hypothecates property as security 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 determinable amount or benefit upon determinable contingencies" (emphasis added) "To allow the surety to purposefully delay or intentionally manipulate payment to their benefit would undermine the primary purpose of insulating the obligee from the risk of default" Int'l Fid Ins Co v Delmarva Sys 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 bring 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 trial
Additionally, while the Court is cognizant of the differences between a surety relationship and an insurer/insured relationship, it does not believe that the differences warrant total demal of a tort remedy against 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 in that an obligee too relies on a surety to guarantee performance and/or payment in the event of a default The Court finds support from Transamerica, supra In Transamerica, the Supreme Court of Colorado stated
Transamenca, 940 P2d at 352
South Dakota courts have long held that a bad faith cause of action exists in 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 instruments, other policy considerations previously discussed, and an analysis of fellow jurisdictions that had 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 Plaintiff's Second Amended Complaint, Doc 32
