United States District Court, D. South Dakota, Central Division
OPINION AND ORDER GRANTING MOTION TO AMEND
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 the duty to defend, breach of the duty to
indemnify, and bad faith. Doc. 1. In an earlier order, this
Court dismissed the Sapienzas' bad faith claims under
Rule 12(b)(6), gave them fourteen days to cure the
deficiencies in their claim for breach of the duty to defend,
and certified a question to the Supreme Court of South Dakota
on whether the costs the Sapienzas incurred to comply with
the injunction constitute covered damages under their
Policies. Doc. 16. The Sapienzas have now filed a motion and
proposed amended complaint alleging more facts to support
their claim for breach of the duty to defend, and making
claims for breach of contract seeking indemnity for the cost
of building their home as well as the cost of demolishing it
and for bad faith based on Liberty Mutual's alleged
mishandling of the Sapienzas' defense. Doc. 19-1. Liberty
Mutual opposes the Sapienzas' motion to amend, arguing
the amendments are futile. Doc. 22.
Facts Relevant to Motion to Amend
2013, the Sapienzas purchased a home in the McKennan Park
Historic District in Sioux Falls, South Dakota. Doc. 19-1 at
¶¶ 6-7. They decided to raze the existing house and
build a new home on the property. Doc. 19-1 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. 19-1 at ¶¶ 8-9. The Board
approved the proposal and the Sapienzas hired a contractor to
build their home. Doc. 19-1 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. 19-1 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.
19-1 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. 19-1 at ¶ 11; Doc. 19-2 at 4-5. Count 1
of the complaint sought a permanent injunction requiring the
Sapienzas to modify or relocate their house. Doc. 19-2 at
5-6. Count 2, entitled "Negligence," sought this
same injunctive relief and, in the alternative, damages. Doc.
19-2 at 6-7. Count 3 alleged that the Sapienzas' home was
a nuisance and requested an injunction and damages. Doc. 19-2
Sapienzas retained a South Dakota attorney (defense counsel)
to defend them against the McDowell suit. Doc. 19-1 at ¶
12; 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. 19-1 at¶ 19; Doc. 19-6 at 3. Liberty
Mutual insured the Sapienzas under a Homeowner's Policy
and an Excess Policy. Doc. 19-1 at ¶¶ 13-18; Docs.
19-3, 19-4. 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. 19-1 at ¶ 20; Doc.
McDowell suit went to trial in June 2016. Doc. 19-5 at 2;
Doc. 19-1 at ¶ 25. 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. 19-5 at 2-3, 25, 29. The state
trial judge did not order the Sapienzas to pay any monetary
damages to the McDowells. Doc. 19-5.
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. 19-6 at 2.
According to Liberty Mutual, the injunctive relief and the
costs of complying with it did not constitute
"damages" under the Policies. Doc. 19-6 at 4.
Defense counsel continued to represent the Sapienzas during
their appeal to the Supreme Court of South Dakota.
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.
the remand, the state judge issued an order giving the
Sapienzas six weeks to submit plans to the Board to bring
their house into compliance with the regulations for
historical districts. Doc. 23-4; Doc. 19-1 at ¶ 37. If
the plans were not approved, the order explained, the state
judge would "exercise all remedies available consistent
with" its judgment. Doc. 23-4. The Sapienzas submitted
new plans for their home, Doc. 19-1 at ¶ 37, after which
the McDowells' attorney sent a letter to the City of
Sioux Falls opposing the plans, Doc. 19-8. The McDowells'
attorney argued that the plans failed to address all of the
ways the Sapienzas' house violated the regulations and
that the Sapienzas should not be allowed to appeal an adverse
decision by the Board. Doc. 19-8 at 4-6. He also noted that
an expert in historic standards was reviewing the
Sapienzas' plans and that he would provide the
expert's opinion to the Board before the scheduled
hearing. Doc. 19-8 at 4-5. An attorney representing the City
of Sioux Falls forwarded the letter to defense counsel, who
in turn forwarded the letter to the Sapienzas. Doc. 19-8 at
2. Defense counsel's email to the Sapienzas remarked that
the letter "confirms that the McDowells intend to pull
out all stops to challenge the proposed renovation of your
home." Doc. 19-8 at 2. Defense counsel did not attend
the hearing before the Board. Doc. 19-1 at ¶¶
46-48. The Board refused to approve the new application and,
based on arguments by the McDowells' lawyer, according to
the Sapienzas, prohibited the Sapienzas from submitting any
future plans for approval. Doc. 19-1 at ¶ 47.
2018, the state judge issued a writ of execution giving the
Sapienzas thirty days to demolish their home. Doc. 19-1 at
¶ 49. The Sapienzas complied with the writ and incurred
in excess of $60, 000 in demolition-related expenses. Doc.
19-1 at ¶ 50.
previous Opinion and Order Granting in Part Defendant's
Motion to Dismiss and Certifying Question to Supreme Court of
South Dakota, Doc. 16, this Court allowed "claims that
Liberty Mutual breached the insurance contract by refusing to
indemnify [the Sapienzas] and providing them with an
inadequate defense" to "survive Liberty
Mutual's motion to dismiss." Doc. 16 at 19. This
Court certified a question to the Supreme Court of South
Dakota of whether "the costs incurred by the Sapienzas
to comply with the injunction constitute covered
'damages' . under the Policies such that Liberty
Mutual must indemnify the Sapienzas for these costs."
Doc. 16 at 20. This Court allowed the Sapienzas fourteen days
to "amend their claim that Liberty Mutual breached the
insurance contract by providing them with an inadequate
defense" so as to avoid dismissal of that claim, and
this Court dismissed the Sapienzas' bad faith claims for
failure to state claims. Doc. 16 at 19-20. The Sapienzas'
motion and proposed amended complaint seek to plead breach of
the duty to defend by bolstering factual allegations, add an
explicit claim for the construction costs of their home as
part of the indemnity claim, and attempt to add back a
first-party bad faith claim for failure to defend. Doc. 19-1.