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Sapienza v. Liberty Mutual Fire Insurance Co.

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

October 16, 2019

JOSEPH SAPIENZA, and SARAH JONES SAPIENZA, M.D, Plaintiffs,
v.
LIBERTY MUTUAL FIRE INSURANCE COMPANY, Defendant.

          OPINION AND ORDER GRANTING MOTION TO AMEND

          ROBERTO A. LANGE, UNITED STATES DISTRICT JUDGE

         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 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.

         I. Facts Relevant to Motion to Amend

         In 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.

         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. 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.

         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. 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 at 7-8.

         The 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. 19-6.

         The 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.

         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. 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.

         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.

         After 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.

         In May 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.

         In a 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.

         II. ...


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