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Employers Mutual Casualty Co. v. Brant Lake Sanitary District

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

February 12, 2019

EMPLOYERS MUTUAL CASUALTY COMPANY, Plaintiff,
v.
BRANT LAKE SANITARY DISTRICT, A POLITICAL SUBDIVISION OF THE STATE OF SOUTH DAKOTA; and EXCEL UNDERGROUND, INC., Defendants.

          OPINION AND ORDER GRANTING IN PART MOTION FOR JUDGMENT ON THE PLEADINGS

          ROBERTO A. LANGE UNITED STATES DISTRICT JUDGE

         Defendant Excel Underground, Inc. (Excel) obtained a $1, 569, 691.81 jury verdict against Defendant Brant Lake Sanitary District (Brant Lake) in state court. Brant Lake's insurer, Plaintiff Employers Mutual Casualty Company (EMCC), filed this case seeking a declaratory judgment that it has no duty to pay for Brant Lake's appeal of the verdict or to indemnify Brant Lake for any damages Brant Lake may owe Excel. Doc. 1. Excel and Brant Lake both counterclaimed against EMCC, Docs. 9, 35, and EMCC has now moved for judgment on the pleadings, Doc. 15. For the reasons explained below, this Court grants in part and denies in part EMCC's motion for judgment on the pleadings.

         I. Facts Established in the Pleadings

         Brant Lake contracted with Excel to build a wastewater treatment system for Brant Lake's residents. A disagreement arose over construction of the system, so Excel and Brant Lake sued each other in South Dakota state court. Doc. 1 at ¶¶ 11-12; Doc. 9 at ¶ 1; Doc. 35 at ¶ 4. Excel's complaint asserted two claims against Brant Lake, one seeking a declaratory judgment and one for breach of contract. Doc. 1-1 at 7-8. EMCC paid for Brant Lake's defense under a reservation of rights. Doc. 1 at¶ 18; Doc. 35 at¶ 10.

         Brant Lake and Excel tried the case before a jury over nine days in January 2018. Doc. 1 at ¶ 13; Doc. 9 at ¶ 1; Doc. 35 at ¶ 6; Doc. 1-4 at 4. The trial judge instructed the jury on breach of contract but not on any other theories. Doc. 1-2. As relevant here, Instructions 16 and 17 explained the implied covenant of good faith and fair dealing contained in all contracts under South Dakota law. Doc. 1-2 at 17-18. Instruction 19 set forth the parties' positions, stating that "Excel claims that Brant Lake breached the contract and that Excel sustained damages as a result." Doc. 1-2 at 20. Next, Instruction 20 explained that if the jury found for Excel, it would need to calculate damages for "Excel's retainage;" for "other payments for work Excel did under the contract, and for work which Excel was prevented from doing as a result of Brant Lake Sanitary District's breach(es);" and for "Excel's lost profits." Doc. 1-2 at 21. Instruction 25 then addressed Excel's request for lost profits:

Loss of profits may be recovered if the evidence shows with reasonable certainty both their occurrence and the extent thereof. The burden is on Excel to prove it is reasonably certain that the profits it claims would have been realized except for Brant Lake's conduct, and that the profits can be ascertained and measured, from evidence introduced, with reasonable certainty.

Doc. 1-2 at 26.

         The jury found in Excel's favor and against Brant Lake. Doc. 1-3. Using a special verdict form, the jury awarded Excel $285, 921.81 for "retainage," $483, 770 for "other payments under the contract," and $800, 000 for "its lost profits." Doc. 1-3 at 2. The trial court entered judgment in Excel's favor on February 20, 2018. Doc. 1-3. Brant Lake filed an appeal, which is currently pending before the Supreme Court of South Dakota. Doc. 35 at ¶ 8.

         Brant Lake sought coverage under the Linebacker Public Officials and Employment Practices Liability Policy (Policy) it has with EMCC, demanding that EMCC provide a, supersedeas bond and legal counsel for its appeal[1] and that EMCC indemnify it for all damages it may owe Excel. Doc. 1 at ¶¶ 19-21; Doc. 35 at ¶¶ 11-13. Several sections of the Policy are relevant to Brant Lake's demands and EMCC's motion for judgment on the pleadings. In brief, the Policy covers a public official's "wrongful act" but excludes coverage for "contractual liability." Section 1.1. of the Policy describes the coverage provided:

a. Public Officials Liability We will pay for "defense expense(s)" and/or those sums that the insured becomes legally obligated to pay as "damages" because of a "public official's wrongful act" rendered in discharging duties on behalf of the insured named in the Declarations.

Doc. 1-5 at l.[2] The Policy's definition of a "public official's wrongful act" reads:

b. "Public official's wrongful act" shall mean any of the following:
(1) Actual or alleged errors;
(2) Misstatement or misleading statement;
(3) Act, omission, neglect, or breach of duty by an insured in the discharge of "organizational" duties. "Public Officials Wrongful Act(s)" does not include an "employment wrongful act."

Doc. 1-5 at 8.

         Section 1.5. of the Policy contains the exclusion for "contractual liability" (Contractual Liability Exclusion):

5. Exclusions - Coverage A and Coverage B
Each of the following exclusions is an absolute exclusion with no duty to defend or pay "damages" unless otherwise indicated. If both an absolute exclusion and an exclusion with a duty to defend apply, coverage for "defense expenses" is excluded and we have no duty to defend. This insurance does not apply to:
d. Contractual Liability
(1) Amounts actually or allegedly due under the terms of a contract;
(2) Failure, refusal, or inability of the insured to enter into, renew or perform any contract or agreement. Exclusion 5.d. ...

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