I. Bad Faith Claims Against Sureties
South Carolina recognized in American Fire & Casualty Co. v. Johnson that an indemnitor may assert, as a defense, a breach of good faith and fair dealing against the surety when the surety paid a claim against a bond.151 Neither the American Fire Court nor any other South Carolina case discusses what factors will be considered when evaluating an indemnitor's defense of breach of good faith and fair dealing against a surety.
Possible factors to be considered in determining whether a surety made a reasonable, good faith settlement under the terms of the bond and the indemnity agreement may include: (1) the obligations of the surety as provided by the terms and coverage of the bond; (2) whether the principal has made more than generalized demands that the surety deny the claim; (3) the cooperation, or lack thereof, by the principal, in dealing with the surety; and (4) the thoroughness of the investigation performed by the surety.152
In Masterclean, Inc. v. Star Insurance Co., the South Carolina Supreme Court held that "a principal cannot sue a surety in tort for a bad faith refusal to pay a first party claim."153 The Court reasoned that "the nature of the principal-surety relationship itself would mandate finding a bad faith cause of action by a principal against its surety does not sound in tort."154 Although the Court in Masterclean does recognize that a principal may use "bad faith as a shield in contract against a surety seeking indemnification," a principal "may not use bad faith as a sword to extract damages from a surety in tort."155
In Masterclean, the principal on a performance surety bond brought a bad faith claim against a surety for failure to pay a claim on the bond. The principal asserted that sureties were akin to insurers and thus a performance bond was insurance, an argument that would allow the principal to sue in tort. South Carolina does recognize a bad faith claim by a first party for refusal to pay insurance benefits, and the Masterclean Court refers to this as a "Nichols claim."156
The Plaintiff in Masterclean asserted three arguments to support its position that a surety agreement was an insurance contract: (1) sureties are regulated by the S.C. Insurance Code; (2) courts treat surety agreements as insurance contracts at common law; and (3) public policy interests. The Court in Masterclean addressed each of these arguments and determined that a principal cannot bring a bad faith claim against a...
