Insurance Bad Faith Demand Letter - South Dakota

INSURANCE BAD FAITH DEMAND LETTER

State of South Dakota

[LAW FIRM LETTERHEAD]

SETTLEMENT COMMUNICATION — FOR RESOLUTION PURPOSES ONLY
EVIDENTIARY USE MAY BE LIMITED BY SDCL § 19-19-408 AND FED. R. EVID. 408, WHERE APPLICABLE

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). Proven bad faith may support damages beyond policy benefits, including consequential or emotional distress damages when supported by the facts. Punitive damages require the separate statutory and court review described below. Bertelsen v. Allstate Ins. Co., 2013 SD 44, 833 N.W.2d 545.

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 After that date, this demand is withdrawn and our client will pursue all available legal remedies without limitation.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, conduct described in that section may be relevant to an independently established bad-faith tort claim. The South Dakota Division of Insurance (SDDOI) addresses regulatory violations under § 58-33-68. Section 58-33-67 identifies these practices:

• Acknowledge and begin acting on claims communications within 30 days
• Adopt and implement reasonable investigation standards
• Promptly provide a reasonable explanation of the policy basis in relation to facts or law for a denial or compromise offer (§ 58-33-67(3))
• Avoid delaying settlement where liability has become reasonably clear under one coverage portion to influence settlement under another (§ 58-33-67(4))
• Make a good-faith assignment of contributory negligence when assessing liability (§ 58-33-67(6))
• Avoid refusing settlement solely on the ground that another party should assume responsibility unless law and the policy permit it (§ 58-33-67(7))

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

Under S.D.C.L. § 21-3-2, a jury may award punitive damages for oppression, fraud, or malice, actual or presumed, in a qualifying tort action. Before punitive-damages discovery begins or the claim goes to the factfinder, § 21-1-4.1 requires the court, after a hearing, to find by clear and convincing evidence a reasonable basis to believe there was willful, wanton, or malicious conduct. Dahl v. Sittner, 474 N.W.2d 897 (S.D. 1991). Any award must also meet § 21-1-3's reasonableness rule and federal due process limits. State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003).

I. Statute of Limitations

• Contract claim: 6 years from breach — S.D.C.L. § 15-2-13
• Tort (bad faith) claim: Determine the applicable limitations period and accrual date from the claim's facts and controlling decisions before filing. Section 15-2-14(3)'s three-year period expressly concerns personal injury actions; it does not itself establish a discovery-based deadline for every bad-faith claim.

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

Check only conduct supported by the claim record. Section 58-33-67 lists the following unfair or deceptive insurance practices; any separate bad-faith tort must be established under its own elements:

☐ § 58-33-67(1) — Claim communications and investigation standards: The Company failed to acknowledge and act within 30 days upon [IDENTIFY COMMUNICATION], or failed to adopt and adhere to reasonable standards for prompt investigation [FACTS].

☐ § 58-33-67(2) — Payment coverage statement: The Company made a claim payment without stating the coverage under which it was made [FACTS].

☐ § 58-33-67(3) — Explanation of denial or offer: The Company failed promptly to explain the policy, facts, or law supporting a denial or compromise offer [FACTS].

☐ § 58-33-67(4) — Settlement across coverage parts: Liability became reasonably clear under one part of the policy, but the Company delayed settlement to influence another coverage part [FACTS].

☐ § 58-33-67(5) — Required repair shop: The Company conditioned payment on repairs by a particular contractor or repair shop [FACTS].

☐ § 58-33-67(6) — Contributory-negligence assignment: The Company failed to make a good faith assignment of contributory negligence when assessing liability [FACTS].

☐ § 58-33-67(7) — Shifting responsibility: Without permission under law and policy, the Company refused settlement on the basis that another party should assume responsibility [FACTS].

Any checked violation supported by the record may be reported to the SDDOI. When interpreting and enforcing §§ 58-33-66 and 58-33-67, the Division considers all pertinent facts in deciding whether regulatory action is appropriate, including conduct that increases harm. Section 58-33-68 also conditions administrative action for a violation of that section on notice to the insurer and its refusal to correct the situation. Counsel should account for that notice-and-correction provision when requesting Division action on a § 58-33-67 practice; a report alone does not establish that immediate administrative action is available.

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

If supported by evidence, our client seeks compensation for emotional distress proximately caused by the Company's bad-faith tort. S.D.C.L. § 21-3-1 measures damages for a noncontractual wrong by the detriment it proximately causes. The separate tort of intentional infliction of emotional distress has an extreme-and-outrageous-conduct element; that element is not part of the insurance bad-faith test. McDowell v. Citicorp U.S.A., 2007 SD 53, ¶¶ 16, 25. The claimed emotional harm includes:

[________________________________]
[________________________________]

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 [________________________________]

Punitive damages may be considered only if the court first makes the finding required by S.D.C.L. § 21-1-4.1. Any award must satisfy § 21-1-3's reasonableness rule and federal due process limits. State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003). If the necessary proof is developed, the proposed punitive amount is $[________________________________], subject to judicial review.

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
   • Attorney's fees under S.D.C.L. § 58-12-3
   • Punitive damages under S.D.C.L. §§ 21-3-2 and 21-1-4.1, if the required showing is made

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
   • Online complaint form linked from the Division's complaint page (hosted on the NAIC's State Based Systems platform)

3. This demand will be withdrawn in its entirety. No further settlement offer will be made at or near these amounts. Our client reserves any supported punitive-damages claim, subject to the court's statutory gatekeeping and review.

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, 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. Any later punitive-damages request must meet the statutory and constitutional requirements described above.

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/