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Sapienza v. Liberty Mutual Fire Insurance Co.

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

May 17, 2019




         Plaintiffs, Joseph Sapienza and Dr. Sarah Jones Sapienza, built a house and then had to tear it down to comply with an injunction issued against them in a state court action. The Sapienzas' insurer, Liberty Mutual Fire Insurance Company (Liberty Mutual), defended them in the state court action but refused to indemnify them for the costs of complying with the injunction. The Sapienzas sued Liberty Mutual in this Court, alleging breach of contract and bad faith. Doc. 1. Liberty Mutual moved to dismiss, arguing that the Sapienzas failed to state a claim upon which relief can be granted. Doc. 9. For the reasons stated below, this Court grants in part and denies in part Liberty Mutual's motion to dismiss and certifies a question to the Supreme Court of South Dakota.

         I. Facts

         In 2013, the Sapienzas purchased a home in the McKennan Park Historic District in Sioux Falls, South Dakota. Doc. 1 at ¶¶ 6-7. They decided to raze the existing house and build a new home on the property. Doc. 1 at ¶ 7. They hired an architect to design the home and submitted a proposal to the Sioux Falls Board of Historic Preservation (the Board). Doc. 1 at ¶¶ 8-9. The Board approved the proposal and the Sapienzas hired a contractor to build their home. Doc. 1 at ¶¶ 9-10.

         During construction, the Sapienzas' neighbors, Pierce and Barbara McDowell, became concerned about the size and location of the new home. McDowell v. Sapienza, 906 N.W.2d 399, 403 (S.D. 2018); Doc. 1 at ¶ 11. In early May 2015, the McDowells' lawyer sent the Sapienzas a cease-and-desist letter maintaining that the home violated height and setback regulations. McDowell, 906 N.W.2d at 403. The Sapienzas did not stop construction, so the McDowells sued them in state court in mid-May 2015. Id; Doc. 1 at ¶11.

         The McDowells' complaint alleged that the height and proximity of the Sapienzas' home prevented the McDowells from using their fireplace, blocked the natural light the McDowells previously enjoyed, and decreased the value of their home. Doc. 1 at ¶ 11; Doc. 1-1 at 4-5. Count 1 of the complaint sought a permanent injunction requiring the Sapienzas to modify or relocate their house. Doc. 1-1 at 5-6. Count 2, entitled "Negligence," sought this same injunctive relief and, in the alternative, damages. Doc. 1-1 at 6-7. Count 3 alleged that the Sapienzas' home was a nuisance and requested an injunction and damages. Doc. 1-1 at 7-8.

         The Sapienzas retained a South Dakota attorney (defense counsel) to defend them against the McDowell suit. Doc. 14 at 2; Doc. 11-1. Defense counsel filed an answer for the Sapienzas on June 12, 2015. Doc. 11-1. The Sapienzas notified their insurer Liberty Mutual of the McDowell suit on August 24, 2015. Doc. 1 at ¶ 18; Doc. 14 at 2; Doc. 1-5 at 3. Liberty Mutual insured the Sapienzas under a Homeowner's Policy and an Excess Policy. Doc. 1 at ¶¶ 12-17; Docs. 1-2, 1-3.

         Several sections of these Policies are relevant to the Sapienzas' claims and Liberty Mutual's motion to dismiss. In brief, the Homeowner's Policy required Liberty Mutual to defend and indemnify the Sapienzas against a suit for damages because of "property damage." Section II of the Homeowner's Policy describes the coverage provided:

COVERAGE E - Personal Liability
If a claim is made or a suit is brought against an "insured" for damages because of "bodily injury" or "property damage" caused by an "occurrence" to which this coverage applies, we will:
1. Pay up to our limit of liability for the damages for which the "insured" is legally liable. Damages include prejudgment interest awarded against the "insured"; and
2. Provide a defense at our expense by counsel of our choice, even if the suit is groundless, false or fraudulent. We may investigate and settle any claim or suit that we decide is appropriate. Our duty to settle or defend ends when the amount we pay for damages resulting from the "occurrence" equals our limit of liability.

         Doc. 1-2 at 18. The Homeowner's Policy defines "property damage" as "physical injury to, destruction of, or loss of use of tangible property." Doc. 1-2 at 8. The Homeowner's Policy in its exclusions states that "Coverage E - Personal Liability, does not apply to: ... b. 'Property damage' to property owned by the 'insured.'" Doc. 1-2 at 20.

         The Excess Liability Policy provides additional coverage to the Sapienzas:

We will pay all sums in excess of the retained limit and up to our limit of liability for damages because of personal injury or property damage to which this policy applies and for which the insured is legally liable.

         Doc. 1-3 at 7. The Excess Liability Policy defines "property damage" as "(a) injury to or destruction of tangible property; (b) injury to intangible property sustained by an organization as the result of false eviction, malicious prosecution, libel, slander or defamation." Doc. 1-3 at 7. The Excess Liability Policy "does not apply to: property damage to: (1) property owned by any insured." Doc. 1-3 at 8.

         Liberty Mutual agreed to defend the Sapienzas from the McDowell suit under a reservation of rights, and defense counsel previously retained by the Sapienzas continued defending the Sapienzas with Liberty Mutual then paying the attorney's fees. Doc. 1 at ¶ 18; Doc. 1-5. Nevertheless, the Sapienzas allege that Liberty Mutual "controlled the defense by, among other things, implementing a Comprehensive Litigation Program, issuing instructions to defense counsel concerning actions to be taken (or not taken), failing to retain an independent expert architect or contractor to offer opinions regarding the home, and refusing to pay for certain activities." Doc. 1 at ¶ 18; Doc. 1-4 at 2.

         The McDowell suit went to trial in June 2016. Doc. 1-4 at 2. The state trial judge issued a decision and order in December 2016 granting the McDowells a mandatory injunction against the Sapienzas. The injunction required the Sapienzas to bring their house into compliance with federal and state regulations for buildings in historic districts or rebuild it. Doc. 1-4 at 2-3, 25, 29. The state trial judge did not order the Sapienzas to pay any monetary damages to the McDowells. Doc. 1-4.

         Liberty Mutual sent the Sapienzas a letter in early March 2017 stating that it would "continue to provide a defense to you for the Lawsuit, including any appeal," but that it would not provide any coverage for the "injunctive relief ordered by the state trial judge. Doc. 1-5 at 2. According to Liberty Mutual, the injunctive relief and the costs of complying with it did not constitute "damages" under the Policies. Doc. 1-5 at 4.

         The Supreme Court of South Dakota affirmed the state trial court's order of injunctive relief in early 2018. McDowell. 906 N.W.2d 399. The Court affirmed that regulations concerning construction in historic districts applied to the Sapienzas' house and that the house violated these regulations because it was more than eight feet taller than the permitted height. Id. at 405-06. As to the injunction, the Court held that "[p]ecuniary compensation would not provide adequate relief for the harm the Sapienzas' home caused to the McDowells and the McKennan Park District. Id. at 407. The Court remanded the case "for further proceedings consistent with" its opinion. Id. at 411.

         The Sapienzas allege that after the remand, the state judge ordered them to submit a new application to the Board. Doc. 1 at ¶ 26. The new application included structural changes to the Sapienzas' home to bring it into compliance with the regulations for historical districts." Doc. 1 at ¶ 26. Defense counsel, who had continued to represent the Sapienzas during their appeal to the Supreme Court of South Dakota, did not attend the hearing before the Board. Doc. 1 at ¶ 27. According to the Sapienzas, the Board refused to approve the new application and, based on arguments by the McDowells' lawyer, prohibited the Sapienzas from submitting any future plans for approval. Doc. 1 at ¶ 28.

         In May 2018 the state judge issued a writ of execution giving the Sapienzas thirty days to demolish their home. Doc. 1 at ¶ 29. The Sapienzas complied with the writ and incurred in excess of ...

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