Insurance Bad Faith Demand Letter - South Dakota

INSURANCE BAD FAITH DEMAND LETTER

State of South Dakota

[LAW FIRM LETTERHEAD]

PRIVILEGED AND CONFIDENTIAL
SETTLEMENT COMMUNICATION — FOR RESOLUTION PURPOSES ONLY
PROTECTED UNDER S.D.R.E. RULE 408 AND F.R.E. 408

VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED
AND VIA EMAIL TO: [________________________________]

Date: [__/__/____]

[INSURANCE COMPANY NAME]
[________________________________]
[________________________________]
[________________________________]

Attention: [________________________________], [________________________________]
AND TO: [________________________________], President/CEO/General Counsel
Re: FORMAL NOTICE OF BAD FAITH AND DEMAND FOR PAYMENT — SOUTH DAKOTA LAW
Insured: [________________________________]
Claimant: [________________________________]
Policy Number: [________________________________]
Claim Number: [________________________________]
Date of Loss: [__/__/____]
Policy Limits: $[________________________________]
Amount Demanded: $[________________________________]
Response Deadline: [__/__/____] at 5:00 p.m. Central Time

Dear [________________________________]:

I. INTRODUCTION AND NATURE OF THIS DEMAND

This firm represents [________________________________] ("our client") in connection with the above-referenced insurance claim arising under South Dakota law. This letter is a formal demand for payment of all benefits wrongfully withheld and constitutes written notice of [________________________________]'s ("the Company" or "[________________________________]") bad faith conduct in handling this claim under South Dakota common law and S.D. Codified Laws Title 58.

South Dakota recognizes insurance bad faith as an intentional tort — not merely a contract dispute. Isaac v. State Farm Mut. Auto. Ins. Co., 522 N.W.2d 752 (S.D. 1994). This means the Company faces exposure far beyond the face value of the policy, including consequential damages, emotional distress damages, and uncapped punitive damages under S.D. Codified Laws § 21-3-2. The South Dakota Supreme Court has upheld substantial punitive damage awards against insurers in factual circumstances considerably less egregious than those present here. Bertelsen v. Allstate Ins. Co., 2013 SD 44, 833 N.W.2d 545 (affirming punitive damages for one-year failure to contact insured after promising investigation).

This is a time-sensitive demand. The Company must tender $[________________________________] on or before [__/__/____] to resolve this matter. After that date, this demand is withdrawn and our client will pursue all available legal remedies without limitation.

II. SOUTH DAKOTA BAD FAITH LAW — LEGAL FRAMEWORK

A. Bad Faith as an Intentional Tort

Under South Dakota law, every contract of insurance includes an implied covenant of good faith and fair dealing. An insurer's breach of this covenant is an intentional tort actionable separate and apart from breach of contract. Isaac, 522 N.W.2d at 757–58. The tort and contract claims are distinct, and damages for bad faith are not limited to policy benefits. Champion v. United States Fidelity & Guaranty Co., 399 N.W.2d 320, 322 (S.D. 1987) ("[A]n insurer that breaches its duty of good faith and fair dealing may be liable in tort, even though it is also a breach of contract.").

B. The Isaac Two-Part Test

To establish first-party bad faith in South Dakota, our client must prove:

Prong 1: The absence of a reasonable basis for the Company's denial of (or delay in paying) policy benefits or for failure to comply with a duty under the contract; and

Prong 2: The Company's knowledge of, or reckless disregard of, the lack of a reasonable basis for its conduct.

Isaac v. State Farm, 522 N.W.2d at 759. Both prongs are satisfied here, as detailed in Section V.

C. No Ignorance Defense — Bertelsen

The Company cannot claim ignorance of controlling claims-handling statutes or standards as a defense to bad faith liability. Bertelsen v. Allstate Ins. Co., 2013 SD 44 at ¶ 23 ("An insurer cannot rely upon claimants to provide a copy of the applicable laws, especially in the absence of a request."). The Company is charged with knowledge of S.D.C.L. § 58-33-67 and all applicable claims-handling standards regardless of what its adjusters claim to have known.

D. Clear Breach of Contract as Evidence of Bad Faith

Bertelsen further holds that a clear breach of the insurance contract is strong evidence of bad faith. 2013 SD 44 at ¶ 18. The Company's failure to pay benefits clearly owed under this policy is both a breach of contract and evidence of the bad faith tort.

E. Unreasonable Delay as Independent Bad Faith

An unreasonable delay in investigating, evaluating, or paying a claim is tortious bad faith under South Dakota law, regardless of whether the claim is ultimately paid. Champion, 399 N.W.2d at 322. The Company cannot insulate itself from bad faith liability simply by eventually paying something — the manner and timing of payment matter.

F. S.D.C.L. § 58-33-67 — Unfair Claims Settlement Practices

While S.D.C.L. § 58-33-67 does not create a private right of action, violations of the statute are direct evidence of bad faith under the Isaac two-part test, and they subject the Company to regulatory sanction by the South Dakota Division of Insurance (SDDOI). The statute requires insurers to:

• Acknowledge and begin acting on claims communications within 30 days
• Adopt and implement reasonable investigation standards
• Attempt in good faith to effectuate prompt, fair, and equitable settlements when liability is reasonably clear
• Provide a written explanation for any denial or inadequate offer
• Refrain from compelling litigation by offering substantially less than amounts ultimately recovered

G. Attorney's Fees — S.D.C.L. § 58-12-3

Where the Company's refusal to pay is vexatious or without reasonable cause, South Dakota law awards our client a reasonable attorney's fee as part of costs — a departure from the general American Rule. Given the documented strength of this claim, any continued refusal to pay will be vexatious.

H. Punitive Damages — S.D.C.L. § 21-3-2

South Dakota imposes no statutory cap on punitive damages. A jury may award punitive damages upon proof of malice, oppression, or fraud. S.D.C.L. § 21-3-2. Malice may be actual (intent to injure) or presumed (imputed to those who act willfully or wantonly to the injury of another). Dahl v. Sittner, 474 N.W.2d 341 (S.D. 1991). The facts detailed herein establish a pattern of conduct constituting at least willful and wanton disregard of our client's rights. Punitive exposure is significant and uncapped.

I. Statute of Limitations

• Contract claim: 6 years from breach — S.D.C.L. § 15-2-13
• Tort (bad faith) claim: 3 years from discovery of bad faith conduct — S.D.C.L. § 15-2-14
• The bad faith tort accrued no earlier than [__/__/____] (date of first provable bad faith act) and no later than [__/__/____] (date our client retained counsel).

III. POLICY INFORMATION AND COVERAGE

A. Policy Details

B. Coverage Is Not Fairly Debatable

This claim is clearly covered under the policy. The Company ☐ acknowledged coverage / ☐ issued a reservation of rights / ☐ denied coverage. Having ☐ acknowledged coverage, the Company is obligated under South Dakota law to promptly investigate, evaluate, and pay all amounts owed.

The coverage analysis leaves no legitimate basis for the Company's position:

Under Isaac, a claim is "fairly debatable" only if there is a legitimate dispute as to entitlement. 522 N.W.2d at 759. No such debate exists here.

IV. FACTUAL BACKGROUND AND DETAILED CLAIM HISTORY

A. The Underlying Loss

On [__/__/____], [________________________________] ("our client") suffered a covered loss when [________________________________].

[________________________________]
[________________________________]
[________________________________]

Our client promptly reported this claim to the Company on [__/__/____] (Claim No. [________________________________]), assigned to adjuster [________________________________].

B. Chronological Timeline of Bad Faith Conduct

The following timeline documents the Company's pattern of unreasonable conduct:

V. SPECIFIC BAD FAITH CONDUCT — ISAAC TWO-PART TEST

A. Prong 1: No Reasonable Basis for the Company's Conduct

1. Unreasonable Denial / Underpayment

The Company has ☐ denied / ☐ underpaid / ☐ delayed payment of our client's claim. There is no reasonable basis for this conduct because:

[________________________________]
[________________________________]
[________________________________]

The Company's own file materials — including [________________________________] — demonstrate the validity and value of this claim. The Company's position is contradicted by its own investigation.

2. Inadequate Investigation

The Company's investigation was deficient in the following respects, each of which independently establishes the absence of a reasonable basis for its coverage position:

☐ The Company failed to obtain an independent cause-and-origin investigation before denying coverage
☐ The Company relied on [________________________________], who had a conflict of interest: [________________________________]
☐ The Company's adjuster, [________________________________], was not qualified to evaluate [________________________________]
☐ The Company failed to consider [________________________________] evidence that was submitted by our client on [__/__/____]
☐ The Company did not consult with qualified experts before [________________________________]
☐ [________________________________]

3. Unreasonable Settlement Offers

The Company's settlement offers bear no reasonable relationship to the documented value of this claim:

A discount of [____]% from the documented value of this claim is unreasonable as a matter of South Dakota law and industry standards.

B. Prong 2: Knowledge or Reckless Disregard

The Company knew, or recklessly disregarded, that its conduct lacked a reasonable basis, as demonstrated by:

☐ Internal claims notes reflecting [________________________________] — the adjuster was aware of the claim's value yet recommended underpayment
☐ The Company's own reserve of $[________________________________] for this claim, set on [__/__/____], far exceeds the offer made
☐ The Company's supervisor, [________________________________], reviewed and approved the inadequate offer on [__/__/____] despite [________________________________]
☐ The Company's [________________________________] unit flagged this claim for [________________________________] — but the flag was ignored
☐ Per Bertelsen, the Company is charged with knowledge of S.D.C.L. § 58-33-67; failure to follow its own requirements is reckless disregard
☐ [________________________________]

VI. STATUTORY VIOLATIONS — S.D.C.L. § 58-33-67

The Company has committed the following specific violations of S.D.C.L. § 58-33-67, each of which is subject to regulatory action by the SDDOI and serves as evidence of the bad faith tort:

☐ § 58-33-67(1) — Misrepresentation: The Company misrepresented the following policy provisions to our client: [________________________________]

☐ § 58-33-67(2) — Failure to Acknowledge (30-Day Rule): The Company failed to acknowledge our client's claim communications dated [__/__/____] and [__/__/____] within 30 days as required

☐ § 58-33-67(3) — Inadequate Investigation Standards: The Company failed to adopt or apply reasonable investigation standards, as evidenced by [________________________________]

☐ § 58-33-67(4) — Refusing to Pay Without Investigation: The Company denied/underpaid the claim without completing a reasonable investigation

☐ § 58-33-67(5) — Failure to Attempt Good Faith Settlement: When liability and the amount owed became reasonably clear on [__/__/____], the Company failed to make a good faith settlement offer

☐ § 58-33-67(6) — Compelling Litigation: The Company compelled our client to retain counsel and threaten litigation by offering substantially less than the amount owed

☐ § 58-33-67(7) — Failure to Explain Denial: The Company failed to provide a written explanation of the basis for its denial/reduction, despite our written request of [__/__/____]

☐ § 58-33-67(8) — [________________________________]: [________________________________]

These violations have been documented and will be reported to the SDDOI. S.D.C.L. § 58-33-68 provides that in determining the action to be taken against a violator, the SDDOI shall consider the insurer's failure to remedy the violation.

VII. DAMAGES

A. Contract Damages — Policy Benefits Owed

B. Consequential Damages (Bad Faith Tort)

Under South Dakota common law, the bad faith tort entitles our client to all foreseeable consequential damages caused by the Company's wrongful conduct, not merely the withheld policy benefits:

C. Emotional Distress Damages

South Dakota recognizes emotional distress damages in bad faith insurance cases where the insurer's conduct was extreme and outrageous. Our client has suffered significant emotional distress as a direct result of the Company's conduct, including:

[________________________________]
[________________________________]

These damages are conservatively estimated at $[________________________________].

D. Punitive Damages — S.D.C.L. § 21-3-2

The Company's conduct constitutes the following aggravating factors supporting punitive damages:

☐ Malice — Actual: The Company intentionally [________________________________] knowing it would harm our client
☐ Malice — Presumed: The Company acted willfully and wantonly in disregard of our client's rights by [________________________________]
☐ Oppression: The Company used its superior bargaining position to [________________________________]
☐ Fraud: The Company misrepresented [________________________________] to our client
☐ Pattern of Conduct: This is not an isolated incident — the Company has a documented pattern of [________________________________] in South Dakota, as evidenced by [________________________________]

South Dakota imposes no statutory cap on punitive damages. S.D.C.L. § 21-3-2. The only constraint is that damages be "reasonable" under S.D.C.L. § 21-1-3 — a standard that leaves substantial room for the jury to punish the Company's conduct. Based on prior South Dakota verdicts in similar bad faith cases, punitive damages in this matter could range from $[________________________________] to $[________________________________].

E. Attorney's Fees — S.D.C.L. § 58-12-3

The Company's refusal to pay is vexatious and without reasonable cause. Our client is entitled to recover a reasonable attorney's fee as part of costs under S.D.C.L. § 58-12-3. This entitlement accrues independently of the bad faith tort claim.

F. Total Damages Summary

VIII. FORMAL DEMAND FOR PAYMENT AND RELIEF

Based on the foregoing, we hereby demand that [________________________________]:

A. Monetary Payment

Pay the total sum of $[________________________________] within [____] calendar days of the date of this letter, allocated as follows:

Note: This demand excludes punitive damages, which our client reserves the right to seek in full from a South Dakota jury.

B. Additional Non-Monetary Relief

In addition to the monetary payment, the Company must:

☐ Provide a full and complete copy of the claim file upon request
☐ Issue written confirmation that all coverage has been fully paid and all claims are resolved
☐ Correct all adverse reports to Verisk (ISO), CLUE, or other insurance industry databases arising from this claim
☐ Provide written assurance that this policy will not be non-renewed on account of this claim
☐ [________________________________]

IX. TIME-LIMITED NATURE OF THIS DEMAND

THIS DEMAND EXPIRES AT 5:00 P.M. CENTRAL TIME ON [__/__/____].

The Company must provide written acceptance of this demand, including a specific dollar amount and payment timeline, before the deadline. Acknowledgment of receipt is not acceptance.

Consequences of Non-Response or Rejection

If the Company fails to accept this demand:

1. Immediate litigation will be filed in [________________________________] County Circuit Court, South Dakota (or U.S. District Court for the District of South Dakota), asserting claims for:
   - Breach of insurance contract
   - Insurance bad faith (intentional tort) under Isaac and Bertelsen
   - Violations of S.D.C.L. § 58-33-67
   - Attorney's fees under S.D.C.L. § 58-12-3
   - Punitive damages under S.D.C.L. § 21-3-2 (no statutory cap)

2. Formal regulatory complaint filed with:
   - South Dakota Division of Insurance (SDDOI)
   - 124 S. Euclid Avenue, 2nd Floor, Pierre, SD 57501
   - Phone: (605) 773-3563 | Fax: (605) 773-5369
   - dlr.sd.gov/insurance | doi_complaint.aspx
   - National Association of Insurance Commissioners (NAIC)

3. This demand will be withdrawn in its entirety. No further settlement offer will be made at or near these amounts. Our client will seek punitive damages without limitation in addition to all other relief.

4. The reservation of rights to seek all statutory penalties, interest, costs, and attorney's fees is expressly preserved.

X. DOCUMENT PRESERVATION NOTICE — LITIGATION HOLD

This letter constitutes formal notice that the Company must immediately place a litigation hold and preserve all documents, records, and electronically stored information related to this claim. The obligation to preserve extends to:

• The complete claim file in all versions and drafts, including all notes and diary entries
• All internal emails, Slack messages, Teams messages, or other electronic communications regarding this claim or this policyholder
• All adjuster notes, activity logs, supervisor approvals, and quality assurance reviews
• Reserve and reserve-change documentation with all approvals — reserve information is directly relevant to the Company's knowledge of claim value
• All expert reports, estimates, inspections, photographs, and evaluations
• Claims handling guidelines, procedures, manuals, and training materials for this loss type and coverage line
• All communications with and documents from reinsurers regarding this claim
• Litigation reporting and coverage opinion documents

Failure to preserve will be raised as spoliation and presented to the jury. South Dakota courts have authority to impose sanctions for destruction of relevant evidence.

XI. INVITATION TO RESOLVE

Before litigation is filed and before this matter reaches a South Dakota jury — before the Company's conduct is exposed to the community in which it conducts business — we invite the Company to demonstrate good faith by tendering the amount demanded. The Company has an opportunity to resolve this matter for a known, finite amount. The alternative is a South Dakota jury with uncapped punitive damage authority.

We urge the Company to consult with its senior leadership and outside counsel before allowing this deadline to pass.

Please direct all responses to the undersigned.

Respectfully submitted,

[________________________________]

By: _______________________________________________
[________________________________]
SD Bar No. [________________________________]
[________________________________]
[________________________________], SD [________________________________]
Tel: [________________________________]
Fax: [________________________________]
Email: [________________________________]

Counsel for [________________________________]

ENCLOSURES:

• Policy declarations page and all applicable endorsements
• Complete claim correspondence chronology
• Independent expert report(s): [________________________________]
• Damage documentation and photographs
• Evidence of consequential damages: [________________________________]
• Evidence of emotional distress: [________________________________]
• Reserve and claims file documents obtained to date

CC:

• [________________________________] (Client)
• South Dakota Division of Insurance (reserved — complaint to be filed upon deadline expiration)

SOUTH DAKOTA BAD FAITH LAW — QUICK REFERENCE

SOURCES AND REFERENCES

• S.D. Codified Laws § 58-33-67 (Unfair Claims Practices): https://sdlegislature.gov/Statutes/58-33-67
• S.D. Codified Laws § 58-33-68 (Enforcement Factors): https://law.justia.com/codes/south-dakota/2013/title-58/chapter-33/section-58-33-68
• S.D. Codified Laws § 58-12-3 (Attorney's Fees): https://sdlegislature.gov/Statutes/58-12-3
• S.D. Codified Laws § 21-3-2 (Punitive Damages): https://law.justia.com/codes/south-dakota/title-21/chapter-03/section-21-3-2/
• Isaac v. State Farm Mut. Auto. Ins. Co., 522 N.W.2d 752 (S.D. 1994): https://law.justia.com/cases/south-dakota/supreme-court/1994/18389-1.html
• Bertelsen v. Allstate Ins. Co., 2013 SD 44, 833 N.W.2d 545: https://law.justia.com/cases/south-dakota/supreme-court/2013/26442.html
• Champion v. United States Fidelity & Guaranty Co., 399 N.W.2d 320 (S.D. 1987)
• Chartwell Law — South Dakota Bad Faith Summary: https://www.chartwelllaw.com/bad-faith-claims-map/south-dakota
• Abourezk Law — SD Unfair Trade Practices: https://www.abourezklaw.com/unfair-trade-practices-act-and-other-south-dakota-statues/
• South Dakota Division of Insurance (SDDOI): https://dlr.sd.gov/insurance/
• SDDOI Complaint Portal: https://dlr.sd.gov/insurance/doi_complaint.aspx
• United Policyholders — SD Insurance Consumer Rights: https://uphelp.org/claim-guidance-publications/insurance-consumer-rights-in-south-dakota-2022/