United States District Court, D. South Dakota, Central Division
OPINION AND ORDER GRANTING IN PART DEFENDANT'S
MOTION TO DISMISS AND CERTIFYING QUESTION TO SUPREME COURT OF
ROBERTO A. LANGE, UNITED STATES DISTRICT JUDGE
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.
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.
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.
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
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.
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
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";
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.
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.
Excess Liability Policy provides additional coverage to the
COVERAGE - PERSONAL EXCESS LIABILITY
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.
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.
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.
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.
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.
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.
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.
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 ...