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South Dakota Network, LLC v. Twin City Fire Insurance Company Co.

United States District Court, D. South Dakota, Southern Division

September 22, 2017




         Plaintiff, South Dakota Network, LLC (SDN), brought this action against Twin City Fire Insurance Company Co., seeking a declaration that Twin City owes a duty to defend SDN in a lawsuit. In addition, SDN seeks damages for breach of contract, bad faith and vexatious refusal to pay, and violation of public policy. Twin City moves for summary judgment on all of SDN's claims. Docket 21.[1] In response, SDN requests this court to deny Twin City's motion for summary judgment or alternatively, under Fed.R.Civ.P. 56(d), defer consideration of Twin City's motion for summary judgment until SDN receives additional facts to oppose the motion. Docket 31. For the reasons that follow, the court denies in part and grants in part Twin City's motion for summary judgment and denies SDN's motion.


         Construing the facts in a light most favorable to the non-moving party, SDN, the facts are as follows:

         SDN is a limited liability company whose seventeen members are local exchange carriers (LECs) in South Dakota that provide telecommunication services to customers in their respective service territories. Docket 8. To assist its members, SDN operates a tandem switch in Sioux Falls to provide an efficient method for LECS and long-distance companies, referred to as interexchange carriers (IXCs), to exchange long distance telecommunication traffic. When IXCs, like AT&T, transmit calls from one local area to another local area, they pay for delivering, or “terminating”, the call under a properly filed and approved tariff or under contractual arrangements.

         Twin City is an insurance company that issued insurance policies to SDN that included Directors, Officers and Entity Liability Coverage, effective annually from January 9, 2005 through January 9, 2016. Docket 9 at 3. The first policy at issue in this case was effective from January 9, 2013, through January 9, 2014 (2013-2014 D&O Policy). Docket 22-1 at 30. The second policy at issue here was effective from January 9, 2014, through January 9, 2015 (2014-2015 D&O Policy). Docket 22-1 at 81.

         Twin City's insurance policies issued to SDN are known as claims made and reported policies. Docket 22-1 at 30. The 2013-2014 D&O Policy provides that:

[C]overage applies only to a claim first made against the insureds during the policy period . . . [and] notice of a claim must be given to the insurer as soon as practicable after a notice manager becomes aware of such claim, but in no event later than sixty (60) calendar days after the termination of the policy period . . . .

Id. The 2014-2015 D&O Policy requires notice no later than ninety (90) days after termination of the policy period. Docket 22-1 at 106.

         Under the definitions section of the 2013-2014 D&O Policy, a “claim” includes any (i) insured person claim, (ii) entity claim, or (iii) derivative demand. Docket 22-1 at 45. The sections applicable to this case are the “Entity Claim” and “Insured Person Claim.” The 2013-2014 D&O Policy defines both “Entity Claim” and “Insured Person Claim” as any:

(1) written demand for monetary damages or other civil relief commenced by the receipt of such demand; (2) civil proceeding, including an arbitration or other alternative dispute proceeding, commenced by the service of a complaint, filing of a demand for arbitration, or similar pleading; or (3) criminal proceeding commenced by the return of an indictment, or formal administrative or regulatory proceeding commenced by the filing of a notice of charges, or similar document; against an Insured Entity [or an Insured Person].

Docket 22-1 at 46. Both parties agree that the only clause at issue here is (1). See Docket 28 at 13 (stating “[s]ubparts 2 and 3 of the definition of Entity Claim are easily dismissed as inapplicable.”); Docket 35 at 4 (stating the question is whether the November 2013 letter and the 2013 complaint fall within the portion of the “claim” definition of “written demand for monetary damages or other civil relief . . .”).

         In the 2014-2015 D&O Policy, “Entity Claim” and “Insured Person Claim” are defined as “any: (1) written demand for monetary damages or other civil non-monetary relief commenced by the receipt of such demand . . . .” Docket 22-1 at 99. Sections two and three of “Entity Claim” and “Insured Person Claim” are the same as the 2013-2014 D&O Policy defined above. Id.

         Both policies define a “Wrongful Act” as an actual or alleged “error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed by an Insured Person in their capacity as such . . . or matter claimed against an Insured Person, solely by reason of their serving in such capacity . . . .” Docket 22-1 at 47-48, 101. The policies also express that “Interrelated Wrongful Act” means “Wrongful Acts that have as a common nexus any fact, circumstance, situation, event, transaction, goal, motive, methodology, or cause or series of causally connected facts, circumstances, situations, events, transactions, goals, motives, methodologies or causes.” Docket 22 at 35, 86. Finally, both policies provide that:

All Claims based upon, arising from or in any way related to the same Wrongful Act or Interrelated Wrongful Acts shall be deemed to be a single Claim for all purposes under this Policy first made on the earliest date that . . . any of such Claims was first made, regardless of whether such date is before or during the Policy Period . . . .

Docket 22-1 at 39-40, 91.

         One of SDN's members, James Valley Cooperative Telephone Company (JVCTC), is affiliated with Northern Valley Communications (NVC) (collectively the “James Valley Parties”). NVC engages in access stimulation, or traffic pumping, to leverage its tariffed access services. In this business practice, NVC-which is located in a rural service area with high access rates-sets up service agreements with local third parties that have high-volume customers, such as conference call companies. In the agreements, NVC provides the third parties with more access minutes, but does not reduce its access rates. This gives NVC greater access revenues, which it then shares with the local third parties as compensation. The IXCs, which must pay these tariffed access rates, end up financing NVC's access stimulation services. See Docket 28 at 2-3; Docket 29 at 10.

         AT&T has refused to pay NVC's access charges in relation to NVC's access stimulation since March 2013. AT&T has also refused to pay SDN for its tandem switching charges since April 2013. Docket 30-3 at 5. SDN and the James Valley Parties then began working together to resolve their billing disputes with AT&T. When these negotiations stalled, SDN's Board of Managers sent a letter to NVC's General Manager, James Groft, on November 25, 2013. Docket 22-3 at 21. In this letter, SDN told NVC that SDN planned to prepare a proposal to settle the dispute with AT&T, and if AT&T agreed to the proposal, SDN would bring it to NVC to review and possibly accept. SDN also told NVC that if NVC rejected the proposal, SDN “is authorized by its board to take whatever legal or other action it deems necessary to require NV[C] to terminate the traffic.” Docket 22-3 at 21.

         In response to SDN's letter, counsel for the James Valley Parties wrote a letter to SDN on November 27, 2013 (November 2013 letter). Docket 22-1 at 21. Accompanying the letter was an unsigned, unfiled, draft Complaint (2013 draft Complaint) that the James Valley Parties asserted they were prepared to file against SDN if SDN did not change its planned course of action. Docket 22-1 at 7. The November 2013 letter provides, in relevant part:

The purpose of this letter is to demand that SDN cease and desist with the course of action set forth in your letter and to provide further assurances that it will not engage in the unlawful conduct described therein.
Given the long history of a mutually-beneficial relationship between my clients and SDN, my clients were both surprised and disappointed at the Board's decision to try to impose such a mandate on NVC and on its stated intent to actively work in a manner that is adversarial to NVC's interest in obtaining payment for its tariffed services. Thus, for purposes of ensuring that the Board is aware of the basis for our response, and the cease and desist demand contained herein, I summarize a few of the most pertinent facts:
. . . .
(5) In furtherance of its repeatedly-stated position that members and affiliates must use SDN for exchange of access traffic, SDN's Board of Directors approved, and the members ratified in May of this year, an amendment to the Operating Agreement that expressly requires members and affiliates to utilize SDN for their ...

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