No. 87-290 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1988 

K-W INDUSTRIES, a Division of 

Associated Technologies, Ltd., 

a corporation, 

Plaintiff and Appellant, 

NATIONAL SURETY CORPORATION, 

Defendant and Respondent. 

APPEAL FROM: United States Court Of Appeals, 

For The Ninth Circuit CA Docket No. 86-3778 

COUNSEL OF RECORD: 

For Appellant: 

Alexander Blewett, 111; Hoyt and Blewett, Great ~alls 

Montana 

For Respondent: 

Robert J. Phillips; Snavely and Phillips, Missoula 

Montana 

Submitted: January 7, 1988 

Decided: May 3, 1988 

Filed: MAY 3 - 1988: 

Clerk 
Mr. Justice John C. Sheehy delivered the Opinion of the 

Court. 

In this case we determine that a business entity which 

is licensed under Montana law to transact the business of 

insurance, and which issues as a part of its business a 

contract of suretyship guaranteeing the performance of an 

underlying contract in Montana (1) is transacting a class of 

insurance business under Montana law; (2) is subject in the 

transaction of its business to the Montana Unfair Claims 

Settlement Practices Act (5 33-18-201, et seq. MCA); and 

(3) is liable in a tort action for violations of S 

33-18-201, MCA, for damages beyond the express terms of the 

suretyship contract. 

This cause is an original proceeding in this Court, 

based upon a question certified to us respecting Montana law 

by the United States Court of Appeals for the Ninth Circuit 

as provided in our Rule 44, M0nt.R.App.P. The said Court of 

Appeals has pending before it an appeal from an order of the 

United States District Court for the District of Montana 

involving the identical parties above designated (cause no. 

86-3778 in said Court of Appeals.) The Court of Appeals, 

finding that it is presented with a question of state law 

that might be depositive of the case, and for which there are 

no clear controlling precedents in Montana judicial 

decisions, has certified to us for our decision the following 

question: 

(1) Are sureties liable under Montana law for 

unfair claim settlement practices? 

In responding to this question, the Montana Supreme 

Court shall not be bound by the manner in which the 

question has been phrased by this Court. Rather, 

the Supreme Court may reformulate the state law 
issue as it sees fit in light of the contentions of 

the parties. 

The background given to us by the Court of Appeals is 

that Keyes-Scanlon, Inc. (not a party to the appeal) was the 

general contractor responsible for building a federal water 

treatment plant in Montana. Pursuant to the federal Miller 

Act, 40 u.s.C. 5s 270a-d, Keyes-Scanlon was required to post 

a bond to protect the interests of all suppliers providing 

labor and materials. Keyes-Scanlon as principal and appellee 

National Surety Corporation (National) as surety executed a 

bond pursuant to the Act. 

Appellant K-W Industries (K-W) subcontracted with 

Keyes-Scanlon to furnish supplies on the project. 

Keyes-Scanlon allegedly refused to pay for certain materials 

delivered by K-W and used in the construction. K-W then 

sought payment from National, Keyes-Scanlon's surety, but 

National likewise refused payment. K-W then filed suit 

against National in federal court pursuant to the Miller Act, 

seeking compensation for services rendered. The parties 

eventually settled the Miller Act suit. 

K-W brought this action in Montana state court, alleging 

that National's "bad faith" conduct prior to and during the 

Miller Act litigation constituted unfair claims settlement 

practices as defined by 33-18-201, MCA, and seeking 

compensatory and punitive damages under state law. National 

removed the action to the federal district court in Montana 

based on diversity jurisdiction. National then moved to 

dismiss the action for failure to state a claim upon which 

relief could be granted, arguing principally that the Miller 

Act provides the exclusive source of remedy for misconduct 

arising out the surety's performance on a Miller bond 

obligation and therefore preempts any state law purporting to 

authorize additional remedies. 
The District Court, agreeing with National that K-W 

failed to state a claim because Congress intended the Miller 

Act to preempt applicable state law in these circumstances, 

dismissed the action. K-W timely appealed to the Court of 

Appeals. 

On appeal, National argues that K-W failed to state a 

claim against it under Montana law for two independent 

reasons: (1) Montana law does not make sureties liable for 

unfair claim settlement practices; and (2) if Montana 

attempts to do so, that attempt is preempted by the federal 

Miller Act. For prudential reasons the Court of Appeals 

declined to address the preemption question until it is 

satisfied that K-W can maintain its action under Montana law. 

Because the application of Montana law governing unfair claim 

settlement practices to the conduct of sureties is an 

unresolved question which may be dispositive of the appeal, 

the issue was certified to the Montana Supreme Court by the 

Court of Appeals. 

It is obvious from the background supplied to us by the 

Court of Appeals and the question certified to us, that the 

Court of Appeals has properly reserved unto itself the 

preemption issue. In the Court of Appeals, National argues 

that the Miller Act in this case provides an exclusive 

federal remedy. We expressly make no determination as to 

that issue, since it is completely within the ambit of the 

federal jurisprudence, and not within the question certified 

to us. We therefore approach this cause as one relating to 

the duties and liabilities of a licensed surety doing 

business in Montana, and without any regard to the Miller Act 

implications in the case. 

We examine this case therefore within the frame of the 

issues posed by National as follows: 
(1) Is National Surety an "insurer" within the 

meaning of 33-1-201(6), MCA, and therefore 

subject to suit under § 33-18-201, MCA, for bad 

faith insurance practices? 

(2) If the answer to question number 1 is "yes," 

does 5 28-11-411, MCA, nevertheless operate to 

exempt sureties from liability from 33-18-201, 

MCA, for bad faith insurance practices? 

- Is National an - "Insurer"? 

National concedes in brief that if this Court refers 

only to the statutes for determining whether National is an 

insurer under Montana law, there is little doubt that 

National surely would be designated as an insurer. This for 

the reason that 33-1-201 (6), MCA, defines an "insurer" as 

including every person engaged as an indemnitor, surety, or 

contractor in the business of entering into contracts of 

insurance. Moreover, § 33-1-201(5), MCA, defines "insurance" 

as a contract whereby one undertakes to indemnify another or 

to pay or provide a specified or determinable amount or 

benefit upon determinable contingencies. 

In addition, § 33-1-211, MCA, defines "surety insurance" 

as including insurance guaranteeing the performance of 

contracts, other than insurance policies, and guaranteeing 

and executing bonds, undertakings, and contracts of 

suretyship. 

However, National argues, though those statutory 

provisions make National an insurer, it is not necessarily 

subject to regulations found within Montana's Unfair Claim 

Settlement Practices Act, § 33-18-201, MCA. National argues 

that the statute never uses the term "insurer," and only the 

term "insurance" as a word which qualifies the term 

"policies." National maintains that there are distinctions 

between surety and insurance contracts. It contends that the 

first paragraph of 33-18-101, MCA, indicates that the 
purpose of the chapter is to "regulate trade practices in the 

business of insurance in accordance with the intent of 

Congress as expressed in Public Law 79-15, which was approved 

March 9, 1945." Thereafter National points to Group Life and 

Health Insurance v. Royal Drug Company (1979), 440 U.S. 205, 

99 S.Ct. 1067, 59 L.Ed.2d 261 as holding that insurance is 

that business where a large number of risks are accepted, 

some of which involve losses, and the spreading of such risks 

which enables the insurer to accept each risk at a slight 

fraction of the possible liability upon it. National 

maintains that no court has ever construed the 

McCarran-Fergus Act so as to extend the "business of 

insurance" to a surety. This, National argues, because the 

liability of a surety is not left up to chance or hazard and 

is not a spreading of risk, because the nature, size and 

source of the possible loss to the creditor is known from the 

start. 

On this point we find ourselves in agreement with the 

holding in General Insurance Company of America v. Mammoth 

Vista Owners Association (Cal.App. 1985) , 174 Cal.App. 3rd 

810, 220 Cal.Rptr. 291, that by plain and explicit language, 

the legislature made suretyship a "class" of insurance 

subject to regulation under the code. Therefore, for the 

purpose of the insurance code, one who issues surety bonds is 

in "the business of insurance," and subject to the provisions 

prohibiting unfair and deceptive practices. 174 Cal.App.3d 

at 824, 220 Cal.Rptr. at 298. 

Our statutes clearly commend this result. Section 

33-1-102(1), MCA, provides that no person shall transact the 

business of insurance in Montana "without complying with the 

applicable provisions of this code." Surety insurance is one 

of the various kinds of insurance found in the statutes, and 

S 33-1.-211, MCA, defines "surety insurance" as insurance 
guaranteeing the performance of contracts. The word 

"insurer" includes surety, under 5 33-1-201 (6) , MCA. No 

insurer may transact business in Montana unless authorized by 

a certificate issued by the Commissioner of Insurance. 

Section 33-2-101, MCA. 

Finally, since B 33-18-101, MCA, provides that the 

purpose of the chapter regulating trade practices applies to 

the "business of insurance" and a surety bond, issued by a 

licensed insurer, is a contract issued in the course of the 

business of insurance, the licensed surety is therefore 

subject to the trade practices provisions of our codes. 

Once we determine that an insurer issuing a surety bond 

is transacting the business of insurance in Montana, the 

remainder of our decision in this cause is predictable. 

Every insurer in Montana has an implied-in-law duty to act 

fairly and in good faith in handling a claim under a contract 

issued by the insurer. In Lipinski v. Title Insurance 

Company (1982), 202 Mont. 1, 15, 655 P. 2d 970, 977, we said: 

Should there by any doubt, we now expressly hold 

that insurance companies have a duty to act in good 

faith with their insureds, and that this duty 

exists independent of the insurance contract and 

independent of statute. Any statements in our 

cases, to the extent that they may be or appear to 

be in conflict with this holding, are expressly 

overruled. 

In Weber v. Blue Cross of Montana (1982), 196 Mont. 454, 643 

P.2d 198, we held that Blue Cross, though not technically an 

insurance company, had a duty of acting in good faith toward 

those for whom it provided coverage. In Nicholson v. United 

Pacific Insurance Company (Mont. 1985), 710 P.2d 1342, 42 

St.Rep. 1822 we held that if the implied covenant is 

breached, the reasonable expectations of the contracting 

parties are not met. It is also clear in Montana that a 

breach of the applicable provisions of 5 33-18-201, MCA, by 
an insurer is conduct compensable in tort as to third parties 

to the insurance contract. Klaudt v. Flink (1983), 202 Mont. 

247, 658 P.2d 1065. 

It follows therefore that if a surety, transacting the 

business of insurance, violates the provisions of fj 

33-18-201, MCA, the claimant, in addition to his or her 

contract remedies, may be compensated under tort law. Klaudt 

v. Flink, supra. 

Are Sureties Liable Only - As Expressed -- In The Surety Contract? 

However, because National in this case is a surety, 

National contends that its liabilities are limited by the 

following statute: 

28-11-411. Extent of surety's liability. A surety 

cannot be held beyond the express terms of its 

contract, and if such contract prescribes a penalty 

for its breach, he cannot in any case be liable for 

more than the penalty. 

We have held in other cases that 28-11-411, MCA, 

limits the liability of a surety to the express terms of its 

contract. Pioneer Concrete and Fuel, Inc. v. Apex 

Construction Company, Inc. (1983), 204 Mont. 387, 664 P.2d 

938; Swanberg v. National Surety Company (1930), 86 Mont. 

340, 283 P. 761. National contends that we should be now 

guided by Amfac Mortgage Corporation v. Arizona Mall of Tempe 

(9th Cir. 1978), 583 F.2d 426. In that case Amfac had argued 

that a surety on a bond owed an implied duty of good faith to 

the obligee of the bond and that if a breach occurred when 

the surety failed to settle, a tort action arose. The Court 

of Appeals, interpreting Arizona law, denied the tort action, 

saying that Arizona courts would limit liability of a surety 

to the express terms of the surety contract. The Court of 

Appeals also relied on the California case of United States 

Leasing Corporation v. Dupont (1968), 69 Cal.2d 275, 70 

Cal.Rptr. 393, 444 P.2d 65. 
National contends that 5 28-11-411, MCA, is consistent 

with Arizona law construed by the Court of Appeals in the 

Amfac case and should govern here. Again, we refer to and 

agree with the case of General Insurance Company of America 

v. Mammoth Vista Owners Association, supra, where the same 

point was raised, the U.S. Leasing Corporation case was 

considered, and the California Appellate Court held: 

In holding a surety cannot be held liable beyond 

the express terms of its contract, the court merely 

stated the principle that the sureties obligation 

to cover losses occasioned -- by the breach -- of the 

principal is limited to those losses it expressly 

agreed to guarantee. U.S. Leasing does not hold a 

surety cannot be helrliable in tort for its 

independent violation of statutory or common law 

duties in the handling of a claim under the bond. 

(Citation omitted.) Under common law, an insurer 

who breaches the duty of good faith and fair 

dealing may be held liable in tort beyond the 

limits of the policy. (Emphasis in original.) 

174 Cal.App.3d at 826, 220 Cal.Rptr. at 299. In accord, see 

Szarkowski v. Reliance Insurance Company (N.D. 1987), 404 

N.W.2d 502, 505. 

Accordingly we hold and determine that $4 28-11-411, MCA, 

does not limit the liability of a surety if the surety 

commits an independent tort in violation of other provisions 

of the insurance code. 

Therefore we answer the certified question as follows: 
(1) Are sureties liable under Montana law for unfair claim 

settlement practices? 

Answer: Yes. 

The original of this opinion shall be deemed to serve 

the office of a declaratory judgment. Costs of these 

proceedings to K-W Industries. The Clerk of this Court shall 

serve by ordinary mail upon counsel of record copies of this 

opinion, and shall mail upon remittitur four certified copies 

of this opinion to the Clerk of the United States Court of 

Appeals for the Ninth Circuit. The further duties of counsel 

of record are set forth in the order certifying the question 

to us. 

We Concur: 

L . . /I j. , ('7 J+t,*,L PI- Ad >-+" #\ , 

Justices 

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