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Western National Mutual Insurance Co. v. TSP, Inc.

Supreme Court of South Dakota

November 8, 2017

TSP, INC., Defendant and Appellee.



          DOUGLAS M. DEIBERT of Cadwell, Sanford, Deibert & Garry, LLP Sioux Falls, South Dakota JAMES T. MARTIN of Gislason, Martin, Varpness & Janes, PA Minneapolis, Minnesota Attorneys for plaintiff and appellant.

          MICHAEL L. LUCE DANA VAN BEEK PALMER of Lynn, Jackson, Shultz & Lebrun, PC Sioux Falls, South Dakota Attorneys for defendant and appellee.

          KERN, JUSTICE.

         [¶1.] Western National Mutual Insurance Co. (Western National) insured BHI Inc. under a commercial general liability (CGL) policy. In 2005, Regency Plymouth Ventures Ltd. (Regency) hired BHI to serve as a general contractor to build four condominiums near Alexandria, Minnesota. TSP Inc. was the project architect. BHI hired LandTeam Surveying Co. (LandTeam) to do the project's land surveying. LandTeam made a surveying error, and two of the condos were located too close to the property line and did not comply with county setback requirements. In order to compensate for the error, BHI and TSP agreed to provide the funds for Regency to purchase a buffer strip of land to complete the project. Although TSP and BHI agreed to share the expense, TSP paid Regency the entire amount. Accordingly, TSP sued BHI for damages arising from LandTeam's error. BHI forwarded the suit to Western National for defense, which it refused to provide. After several years, BHI and TSP settled the case, agreeing that TSP could pursue any potential remedy against Western National that BHI might have under the CGL policy. Western National brought a declaratory judgment action against TSP, seeking a judgment that its CGL policy did not provide coverage for TSP's claims. The parties filed cross-motions for summary judgment. The circuit court granted summary judgment for TSP. Additionally, the court awarded TSP attorneys' fees and costs pursuant to SDCL 58-12-13 and SDCL 58-33-46.1. Western National appeals. We reverse and remand for entry of summary judgment in favor of Western National and for further hearing on the award of attorneys' fees.

         Facts and Procedural History

         [¶2.] Regency hired BHI to serve as general contractor for a construction project at Regency's Arrowwood Resort near Alexandria, Minnesota. The project involved building four separate condos, each containing four units. TSP was the project architect. The construction contract required BHI to hire a "legally qualified" land surveyor experienced in providing land-surveying services and using accepted surveying practices. BHI hired LandTeam to do the surveying work.

         [¶3.] The project proceeded in stages. BHI completed the first two condos before LandTeam began survey work for the last two. After the last two condos were finished in the spring of 2006, the parties learned that they were built too close to the adjoining property because LandTeam committed a surveying error. A county zoning ordinance required a fifty-foot side-yard setback (setback provision) with which the two condos did not comply. Accordingly, the county refused to issue occupancy permits for the condos.

         [¶4.] Regency demanded the mistake be corrected as it was losing revenue because it could not rent the condo units without the occupancy permits. BHI had three options: it could seek a variance with local zoning authorities, which it did only to have its request denied; tear down the condos and start construction in a new location; or purchase a strip of adjoining property from the neighboring landowner to satisfy the setback provision. Regency's and BHI's agreed-upon remedy was the third: Regency would purchase a strip of land from Blue Lakes Land Co. for the sum of $302, 208.50. BHI and TSP decided to fund Regency's purchase with BHI agreeing to pay as its share $96, 774.19. However, only TSP or its insurer provided the funds for the purchase. Regency bought the necessary buffer strip in September 2006. BHI never reimbursed TSP for its agreed-upon portion of the loss.

         [¶5.] Western National insured BHI for several years under a CGL policy renewable each year beginning on March 31, 2004. In July 2006, BHI filed a Notice of Occurrence/Claim with Western National as a result of the surveying mistake and resulting property purchase to resolve the error. BHI identified the date of the occurrence as September 15, 2005. The parties agree that the CGL policy that commenced on March 31, 2005, is the relevant insurance contract in this dispute. Western National failed to respond to BHI's notice for almost two years.

         [¶6.] On May 1, 2008, TSP sued BHI for contribution, common law indemnity, contractual indemnity, and breach of a settlement agreement and sought to recover the sum paid to Regency. BHI forwarded the complaint to Western National. Within a week, Claims Adjuster Gary Zylstra informed BHI that TSP's claims were outside the scope of coverage. Zylstra explained his decision in a detailed letter, citing the lack of property damage from an occurrence and several policy exclusions. As Western National believed there was no coverage under the policy, it refused to provide BHI with a defense to TSP's suit. On January 14, 2009, BHI's attorney sent a letter to Western National, refuting its denial of coverage and citing two cases as support. Nearly six months later, BHI's attorney still had not heard back from Western National and sent a reminder letter on July 9, 2009. Western National still refused to provide coverage or a defense.

         [¶7.] No pleadings were filed in the suit for several years, and BHI did not answer TSP's complaint. In April 2011, the parties resolved their dispute by entering into a Miller-Shugart settlement agreement.[1] Under the terms of the agreement, BHI accepted full responsibility for LandTeam's surveying error and agreed to entry of judgment against it in the amount of $279, 208.50. BHI agreed to assign its rights against Western National to TSP. On April 12, 2011, Western National received notice of this agreement. On September 28, 2011, Western National sued TSP, seeking a declaratory judgment as to whether its policy provided coverage for TSP's claims against BHI and whether BHI's confession of judgment is valid and binding on Western National. TSP answered and filed a motion for summary judgment asserting BHI's right to coverage under the policy.

         [¶8.] On March 3, 2015, the circuit court held a hearing on cross-motions for summary judgment regarding the coverage dispute. On May 27, 2015, the circuit court issued a memorandum decision granting TSP's motion for summary judgment. The court ruled that the costs arising from the surveying error were covered by the policy, that none of the exclusions barred coverage, and that the Miller-Shugart settlement agreement was valid. On October 19, 2015, the circuit court held a second hearing on the issue of attorneys' fees and awarded TSP $19, 800.18 in attorneys' fees and costs pursuant to SDCL 58-12-3 and SDCL 58-33-46.1. The court found that the delays caused by Western National in handling BHI's claim violated the Unfair Claims Practices Act and were without reasonable cause. On February 12, 2016, the court issued findings of fact and conclusions of law and a final combined judgment against Western National in the sum of $299, 008.68.

         [¶9.] Western National appeals, alleging there is no coverage under the policy for the surveying error because there was no property damage caused by an occurrence. In Western National's view, this is because "[d]efective work which causes damage only to the insured's work product itself is not an 'occurrence.'" Additionally, Western National contends there was no damage to property as a result of the surveying error because the finished structures never impinged upon a third party's property. Even if the policy covers the error, Western National submits that coverage is precluded by the "work-in-progress, " "faulty workmanship, " and "professional services" exclusions. Western National further disputes the validity of the Miller-Shugart agreement and the award of attorneys' fees to TSP. Because we find the "professional services" exclusion applies to defeat coverage, we need not address the threshold question of whether the surveying error resulted in property damage caused by an occurrence or the remaining issues raised by the parties with the exception of the issue of attorneys' fees. See Swenson v. Auto Owners Ins. Co., 2013 S.D. 38, ¶ 32, 831 N.W.2d 402, 412.

         Standard of Review

         [¶10.] "We review a court's denial of a motion for summary judgment under the de novo standard of review." N. Star Mut. Ins. v. Korzan, 2015 S.D. 97, ΒΆ 12, 873 N.W.2d 57, 61. "Summary judgment is appropriate 'if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the ...

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