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Floyd Demaray and v. De Smet Farm Mutual

July 20, 2011

FLOYD DEMARAY AND JAMES HAGEMANN,
PLAINTIFFS AND APPELLEES,
v.
DE SMET FARM MUTUAL INSURANCE COMPANY,
DEFENDANT AND APPELLANT.



APPEAL FROM THE CIRCUIT COURT OF THE THIRD JUDICIAL CIRCUIT LAKE COUNTY, SOUTH DAKOTA HONORABLE TIM D. TUCKER Judge

The opinion of the court was delivered by: Konenkamp, Justice.

ARGUED ON MARCH 23, 2011

[¶1.] Insureds sued their insurance company for breach of its duty to defend in a pollution suit. The circuit court granted summary judgment for the insureds, ruling that it appeared from the face of the complaint brought by a third party against the insureds that the alleged claim, if true, fell within policy coverage, and therefore, the insurance company breached its duty to defend. On appeal, we reverse because the policy language is unambiguous, and the complaint asserted no claim that would arguably invoke coverage.

Background

[¶2.] On July 16, 2007, the Alvine Family Limited Partnership brought suit against Floyd Demaray and James Hagemann for negligence, res ispa loquitur, nuisance, and trespass, alleging "repeated tortious activity in discharging of pollutants into lakes and streams" on Alvine's property. The complaint also averred that Hagemann's cattle operation, which is on land leased by Demaray, "intermittently ha[d] discharged and will continue to discharge animal and other wastes and process waste water" into lakes and streams on Alvine's property. According to Alvine, "[t]he recreational, aesthetic and environmental interests [of its property] are being and will be adversely affected by [Hagemann's] past and continuing illegal discharges." Alvine sought an injunction banning any discharge of further pollutants, an order requiring Demaray and Hagemann to clean the water, and compensatory and punitive damages.

[¶3.] Demaray and Hagemann own separate, but identical, insurance policies with De Smet Farm Mutual Insurance Company. On July 23, 2007, Demaray and Hagemann notified De Smet of Alvine's lawsuit. The next day De Smet gave notice by mail of its intent to decline defense of the suit. It asserted that it owed no duty to defend under the insurance contract because the alleged injury arose out of "the discharge, dispersal, release, or the escape of pollutants into or upon land, water or air." Demaray and Hagemann obtained their own defense counsel. They defended the matter through trial, where a jury ruled in their favor. We affirmed in Alvine Family Limited Partnership v. Hagemann , 2010 S.D. 28, 780 N.W.2d 507.

[¶4.] In March 2010, Demaray and Hagemann sued De Smet alleging that the company breached its duty to defend them in the Alvine lawsuit. They sought indemnification for all costs and fees incurred as a result. On stipulated facts, both sides moved for summary judgment. While acknowledging that the insurance contract contains a pollution exclusion, Demaray and Hagemann argued that an exception to the exclusion invoked De Smet's duty to defend. That exception covers "bodily injury or property damage arising out of the sudden and accidental discharge, dispersal, release or escape into or upon land . . . of pollutants used in or intended for use in normal and usual farming activities[.]" Relying on this same language, De Smet asserted that the alleged pollution was not from a "sudden and accidental" discharge, but from intermittent and repeated discharges, as stated in the Alvine complaint.

[¶5.] The circuit court ruled that the Alvine complaint alleged a claim that, if proved true, would have fallen within the exception's coverage. Thus, the court held that De Smet owed Demaray and Hagemann a duty to defend. It granted Demaray and Hagemann's motion for summary judgment. De Smet appeals asserting that the allegations in the Alvine complaint did not give rise to a duty to defend under the insurance policy.

Analysis and Decision

[¶6.] De Smet maintains that the circuit court erred when it interpreted the Alvine complaint to allege a claim for pollution discharge that was "sudden and accidental." Because the Alvine complaint used words such as "intermittently," "repeated," "past," and "continuing," De Smet argues that such language cannot be construed to mean Alvine arguably alleged a claim for a "sudden and accidental" discharge or release. Moreover, De Smet faults the court for considering certain evidence from the Alvine trial in support of its decision. In that trial, testimony was given that a sudden rainstorm caused flooding and washed manure onto Alvine's property. The court relied on this testimony to find support in the Alvine complaint that a sudden and unexpected pollution occurred. But De Smet contends that the focus must be on the initial discharge, not any subsequent migration of the pollution.

[¶7.] Demaray and Hagemann contend that the Alvine complaint arguably asserted a cause of action for a sudden and accidental discharge. In their view, the Alvine complaint failed to allege that the discharges were intentional, thus it is immaterial that the words "intermittently," "repeated," and "continuing" were used. They claim that because the complaint alleged a cause of action for negligence, De Smet owed a duty to defend. Demaray and Hagemann also contend that the court was entitled to consider the facts established at the underlying trial, which support that the alleged pollution was the result of a sudden and unexpected event. [¶8.] Statutory construction and insurance contract interpretation are questions of law reviewable de novo. Auto-Owners Ins. Co. v. Hansen Housing, Inc. , 2000 S.D. 13, ¶ 10, 604 N.W.2d 504, 509 (citations omitted). To ascertain whether a duty to defend exists we look to the complaint and "other evidence of record." State Farm Fire & Cas. Co. v. Harbert , 2007 S.D. 107, ¶ 18, 741 N.W.2d 228, 234 (quoting North Star Mut. Ins. Co. v. Kneen , 484 N.W.2d 908, 912 (S.D. 1992)); see also S.D. State Cement Plant Comm'n v. Wausau Underwriters Ins. Co. , 2000 S.D. 116, ¶ 15, 616 N.W.2d 397, 402. An insurer's duty to defend is much broader than its duty to provide coverage. S.D. State Cement Plant Comm'n , 2000 S.D. 116, ¶ 15, 616 N.W.2d at 402 (citation omitted). The duty to defend need only arguably appear on the face of the pleadings. Hawkeye-Sec. Ins. Co. v. Clifford , 366 N.W.2d 489, 491 (S.D. 1985). Assuming the allegations in the complaint are true, if an alleged claim falls within policy coverage, a duty to defend exists. Id.

Any doubts should be resolved in favor of the insureds. Id.

[¶9.] Demaray and Hagemann argue that De Smet has the burden of proving that (1) there was no duty to defend because the claims in the Alvine complaint clearly fall outside policy coverage, and (2) the exception to the policy exclusion did not apply. De Smet, on the other hand, asserts that Demaray and Hagemann bear the burden of proving that the exception to the exclusion invoked its duty to defend. Our case law is clear, the insurer bears the burden of proving that the allegations in the complaint clearly fall outside policy coverage, and therefore, there is no duty to defend. State Farm Fire & Cas. Co. , 2007 S.D. 107, ¶ 18, 741 N.W.2d at 234 (quoting State Farm Mut. Auto Ins. Co. v. Wertz , 540 N.W.2d 636, 638 (S.D. 1995)). However, if the insurer meets that burden, and the insured alleges that an exception applies, the insured bears the burden of proving that coverage exists through the exception. Fireman's Fund Ins. Cos. v. Ex-Cell-O Corp. , 702 F. Supp. 1317, 1328-29 (E.D. Mich. 1988); see also St. Paul Fire and Marine Ins. Co. v. Warwick Dyeing Corp. , 26 F.3d 1195, 1200 (1st Cir. 1994); Aydin Corp. v. First State Ins. Co. , 959 P.2d 1213, 1216-17 (Cal. 1998). [¶10.] Here, the policies issued by De Smet to Demaray and Hagemann cover "property damage caused by an occurrence to which this coverage applies." Coverage L -- Personal Liability. Further, De Smet "will defend a suit seeking damages if that suit resulted from . . . property damage not excluded under this coverage." Id.

De Smet argues that its pollution exclusion precluded coverage. That exclusion provides: "This policy does not apply to . . . property damage which results directly or indirectly from . . . the discharge, dispersal, release, or the escape of pollutants into or upon land, water or air." EXCLUSIONS THAT APPLY TO COVERAGE L -- PERSONAL LIABILITY, 19. The Alvine complaint alleged property damage resulting from the discharge of pollutants onto its land, which means Exclusion ...


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