APPEAL FROM THE CIRCUIT COURT OF THE FIRST JUDICIAL CIRCUIT AURORA COUNTY, SOUTH DAKOTA THE HONORABLE SEAN M. O'BRIEN Judge
The opinion of the court was delivered by: Zinter, Justice
CONSIDERED ON BRIEFS ON AUGUST 11, 2011
[¶1.] In 2001, the South Dakota Public Assurance Alliance (SDPAA), a local
government risk pool, negotiated with Aurora County (County) to provide what is
essentially insurance coverage.*fn1 During negotiations, the two entities had a
number of communications concerning coverage for zoning matters. County alleges
that in the communications County disclosed a potential claim involving a preexisting zoning
dispute between County and a local dairy farm, E.L. Thompson
Farms, Ltd. (Thompson Farms). In 2002, after coverage was finalized, Thompson
Farms sued County over the zoning dispute. County defended but was found liable
for damages that are yet to be determined. SDPAA then filed this action, seeking a
declaration that it did not have a duty to defend or indemnify.*fn2 SDPAA's coverage
defenses were based on three alternative theories: (1) that County failed to provide
timely notice of the claim and SDPAA was prejudiced by the delay; (2) that County
failed to disclose material facts relating to the claim; and (3) that the Thompson
Farms claim was a "known loss" or "loss in progress" at the time coverage was
negotiated. In a jury trial on these coverage defenses, the circuit court admitted a
letter signed by County confirming its request for retroactive coverage and
disclaiming knowledge of any pre-existing incidents that could result in a loss. At
the same time, the court excluded as parol evidence the parties' pre-contract
communications regarding coverage for zoning issues, including communications
that could be interpreted as having disclosed the Thompson Farms zoning dispute.
The jury found for SDPAA on all three theories. We reverse and remand for a new
trial because the excluded coverage communications were not parol evidence offered
to change the terms of the contract.
Facts and Procedural History
[¶2.] County was negotiating for liability and property insurance in late 2000 and early 2001. In December 2000, Aurora County Auditor Susan Urban invited SDPAA to make a presentation to the Aurora County Commissioners.
[¶3.] American Risk Pooling Consultants, Inc. (ARPCO) was the administrator and manager for SDPAA, handling marketing as well as underwriting, risk management, and risk assessment. Through a subcontract, Hagan Benefits, Inc. (Hagan) also handled marketing and some underwriting responsibilities for SDPAA. Ladene Bachtell, on behalf of Hagan and SDPAA, made the presentation to the County Commissioners on February 6, 2001. During February and March, various memos, faxes, letters, and oral communications were exchanged between County and Bachtell, as well as between Bachtell and her assistant Joanne Gries. Some of the communications involved discussions regarding coverage for zoning disputes and "inverse condemnation."
[¶4.] The Aurora County Commission accepted a quote from SDPAA and paid the premium on February 28, 2001. The principal coverage documents were the Legal Defense and Claim Payment Agreement (Agreement) and the Intergovernmental Contract for the SDPAA (Contract), but other documents were involved. Urban sent a letter to Bachtell explaining that County did not have all the documents that Bachtell requested the County sign and return. Bachtell sent a responsive letter to Urban on March 2, 2001, acknowledging receipt of the premium check. Bachtell also enclosed the Contract, as well as a property rider, a resolution, and an updated statement of values. All required documents were signed and returned to SDPAA.
[¶5.] On March 6, 2001, Bachtell sent Urban another letter (a cover letter) regarding County's understanding of the retroactive coverage. The cover letter stated in part:
Enclosed is a letter regarding the retroactive coverage that the County has requested. This letter is verification that the County understands that this coverage applies to unknown, unreported claims only. Please have this letter sign [sic] and returned to our office as soon as possible.
County Commissioner Delayne Persson signed the enclosed letter (hereinafter referred to as the March 6 Letter). It stated:
We are requesting Retroactive Coverage to 3/1/91 for Officials and Law Enforcement Liability.
We understand that this coverage applies to UNKOWN, UNREPORTED losses only. We are not aware of any incidents that may result in a loss under this area of coverage prior to 3/1/01.
[¶6.] County was, however, aware of an incident that could have led to a loss as a result of the pre-existing zoning dispute with Thompson Farms. A 1998 County zoning ordinance placed restrictions on farming operations, including limitations on farming operations involving more than 1,500 "animal units." Before enactment of the zoning ordinance, Thompson Farms had started the first phase of an expansion of its dairy operation. Thompson Farms asked County to "grandfather in" its dairy operation. Sometime after the ordinance went into effect, Thompson Farms was ready to move into the next phase of its planned expansion but was limited by the new ordinance. On January 22, 2001, counsel for Thompson Farms sent Aurora County State's Attorney John Steele a letter indicating that Thompson Farms was contemplating a suit against County alleging "a taking and damages" as a result of the zoning ordinance. The letter suggested a meeting with the County's Commissioners to talk about alternatives to litigation. Steele shared this letter with the County Commissioners and met with them in executive session to discuss the threatened litigation.
[¶7.] On March 22, 2001, Thompson Farms applied for a building permit to build another barn in order to "fully utilize" its facility. Thompson Farms also asked County for a variance to exceed the 1,500 animal-unit cap. County denied the building permit and variance. Thompson Farms unsuccessfully appealed the denial to circuit court.
[¶8.] In April 2002, Thompson Farms filed suit against County as a result of its inability to expand its operation under the new ordinance. A trial on liability was held in May 2008, Judge Bruce Anderson presiding. In February 2009, Judge Anderson ruled that County's zoning actions violated Thompson Farms' right to substantive due process and constituted a regulatory taking of Thompson Farms' property without just compensation. The court found that the date of the taking was March 22, 2001. The court stayed a jury trial on damages until this declaratory action was resolved.
[¶9.] In March 2009, County gave SDPAA notice of Thompson Farms' claim. SDPAA declined to defend or indemnify, asserting that "County failed to notify [SDPAA] 'as soon as practicable' of a situation that 'may result in a claim'[;] that there was no reasonable excuse for the County's failure to give timely notice; and that [SDPAA] [was] prejudiced by this late notice." SDPAA then filed this action for declaratory judgment regarding its duty to defend and indemnify.
[¶10.] Before trial on this declaratory action, SDPAA moved to prevent County from eliciting any testimony that would tend to contradict the March 6 Letter disclaiming knowledge of any pre-existing incidents that could result in a loss. SDPAA contended that the March 6 Letter was an endorsement to the coverage documents and any pre-contract evidence contradicting the letter would be inadmissible parol evidence. County objected, asserting that the March 6 Letter was itself inadmissible parol evidence and that the letter violated the integration clauses in the coverage documents. The circuit court, Judge Sean O'Brien, ruled that neither the parol evidence rule nor the integration clauses precluded admission of the March 6 Letter. On the other hand, the court ruled that the parol evidence rule prohibited County from introducing the other coverage communications suggesting that County disclosed the Thompson Farms dispute and that SDPAA contemplated coverage. The excluded communications included:
* Testimony by two County Commissioners that they specifically talked with Bachtell about the Thompson Farms' situation
* A note to the file by Gries dated February 20, 2001, stating "Susan [Urban] and one of the commissioners called . . . they [ ] had questions regarding liability for their zoning commission. Please call in the morning." An arrow from the word "questions" was drawn to handwritten words "inverse condemnation"
* A note to the file by Gries dated February 22, 2001, commenting in part: I got a better explanation of the claim from [Urban] and faxed a scenario to Laurie [Eikenberry, employee at ARPCO], who ran it by [Baltasar Capote, an underwriter at ARPCO] and the claims manager -- they both agreed that our policy would cover this claim. I also told Susan [Urban] this. She was pleased! . . .
* A February 22, 2001, fax from Gries to Laurie at ARPCO reciting a zoning situation strikingly similar in many respects to the events involving the Thompson Farms dispute. The note went on to state that:
The finance officer explained to me that their current coverage did not provide coverage for "inverse condemnation" (whatever that means!), but they are going to cover it under the E&O coverage for the zoning commission. They just want to be sure something like this would be covered under the SDPAA if it should come up again.*fn3
[¶11.] The jury found in favor of SDPAA on all three of its coverage defenses, and the court entered a declaratory judgment ordering that SDPAA was under no duty to defend County in the Thompson Farms lawsuit. The court determined that there was no coverage available because: (1) County failed to provide timely notice of the Thompson Farms zoning dispute, and SDPAA was prejudiced by the delay in notice; (2) County failed to disclose material facts relating to the Thompson Farms dispute, entitling SDPAA to void the Contract and Agreement and relieve SDPAA of any obligation thereunder as it related to the ...