Court Opinion

ID: 879580
Source: CourtListenerOpinion
Date Created: 2013-06-04 23:31:22.892697+00
Date Added: 2024-06-11T15:26:46.233033
License: Public Domain

No. 8 7 - 2 9 0

               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. 8 6 - 3 7 7 8

COUNSEL OF RECORD:
        For Appellant:
                Alexander Blewett, 111; Hoyt and Blewett, Great ~ a l l s
                Montana
        For Respondent:
                Robert J. Phillips; Snavely and Phillips, Missoula
                Montana

                                      Submitted:    January 7, 1 9 8 8
                                         Decided:   May 3 , 1 9 8 8

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?

- National
Is           - "Insurer"?
             an
     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 - Expressed - - Surety Contract?
                         As           In The
     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 h e l r l i a b l e 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:

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