Dakota Trailer Mfg., Inc. v. United Fire & Cas. Co.

Decision Date01 July 2015
Docket NumberNo. 27138.,27138.
Citation866 N.W.2d 545
PartiesDAKOTA TRAILER MANUFACTURING, INC., Appellee, v. UNITED FIRE & CASUALTY COMPANY, Appellant.
CourtSouth Dakota Supreme Court

J.G. Shultz, Caleb J. Veldhouse of Woods, Fuller, Shultz & Smith, PC Sioux Falls, South Dakota, Attorneys for appellee.

Daniel K. Brendtro, Dennis L. Duncan of Zimmer, Duncan & Cole, LLP Sioux Falls, South Dakota, Attorneys for appellant.

Opinion

ZINTER, Justice.

[¶ 1.] As a part of Dakota Trailer Manufacturing's business, it makes radiator components for an unrelated company. The component work is performed in one of Dakota Trailer's locations that the National Council on Compensation Insurance (NCCI) originally classified as a “machine shop” for workers compensation insurance rating purposes. After an inspection, NCCI changed the location's classification to “welding or cutting.” Dakota Trailer appealed, and both the Workers' Compensation Appeals Board (Board) and the South Dakota Department of Labor (Department) affirmed the new classification. The circuit court, however, reversed. United Fire & Casualty Company, Dakota Trailer's workers' compensation insurer, appeals. We affirm the circuit court.

Facts and Procedural History

[¶ 2.] Dakota Trailer manufactures trailers at its plant in Yankton. It also manufactures component parts (radiator subassemblies) for L & M Radiators at a separate location. The radiator subassemblies are manufactured in a portion of L & M Radiators' shop that Dakota Trailer subleases.

[¶ 3.] NCCI is a rating organization that establishes statewide workers' compensation rates in South Dakota and thirty-seven other states. It gathers payroll and loss data from insurance companies and uses that information to create risk classifications (codes) and insurance rates for the codes. NCCI publishes a guidebook called the “Scopes Manual” that aids in interpretation and selection of the appropriate codes. NCCI also performs random inspections to make sure classification codes are properly applied.

[¶ 4.] NCCI determined that Dakota Trailers had both a primary operation (trailer manufacturing) and a secondary operation (production welding) that were conducted at three locations.1 The issue in this case involves the work performed at “Location 3,” where employees make the radiator subassemblies. Employees at this location cut, form, bend, shape, drill, weld, and turn raw materials into the subassemblies. Upon completion, the subassemblies are taken to L & M Radiators' adjacent room where its employees finish and incorporate the subassemblies into radiators.

[¶ 5.] After a 2011 inspection, NCCI assigned the classification code 3365, “Welding or Cutting NOC [ (not otherwise classified) ] & Drivers,” for Location 3. Before the inspection, the classification code was 3632, “Machine Shop NOC.” The actual NCCI codes (the Basic Manual of

Workers Compensation Insurance

) are not part of the record. The case was decided on the language of the NCCI Scopes Manual, which describes and explains the codes.

[¶ 6.] The Scopes Manual for Code 3365 provides in relevant part:

Code 3365 applies to all types of contract welding or cutting operations that are not otherwise classified. This classification contemplates welding or cutting operations performed by specialist contractors doing both shop work or [sic] outside work.
...
Code 3365 is applicable to specialist contractors engaged exclusively in all testing or inspection of oil or gas pipes provided that the testing or inspection is performed in conjunction with the construction of the oil or gas pipeline....
Testing or inspection operations performed by employees of insureds also engaged in construction operations shall be assigned to the appropriate construction classification.
....
Code 3365 is restricted to insured specialist contractors or separate subsidiaries engaged solely in welding or cutting operations who do not engage in the operations specified in this classification's footnote.2
Code 3365 is a construction classification .... It should be noted that Code 3365 also includes shop operations. We distinguish between Code 8227 operations and Code 3365 shop operations in the following manner. Code 8227 operations consist of labor that maintains, repairs and stores an insured's materials and equipment. Shop operations assigned to Code 3365 consist of labor (usually skilled) that engages in operations that are specifically related to the work contemplated by the construction or erection code applicable to the business ....
(Emphasis added.) The Scopes Manual for Code 3632 provides in relevant part:
Code 3632 applies to the manufacture or repair of machines as well as general job machining. It must be emphasized that Code 3632 is an NOC classification and is applied to operations only when such operations are not specifically contemplated by another manual classification(s).
Metal castings, forgings, bars, rods, flats, tubing, angles, pipe and pipe fittings, chains, sockets, gears, shafting, pulleys, hardware, sheet metal and some lumber and paint may be used. A variety of processes may be involved such as boring, turning, planning, shaping, milling, drilling, punching, grinding, tapping, threading, shearing, bending, forming, riveting, welding, painting, inspecting and testing ....
The machining operations are typical machine shop operations consisting of sawing, centering, turning, boring, facing, reaming, shaping the nose (i.e., “Nosing In” as specified in the class phraseology), heat treating, thread milling, application of copper

bands, washing, painting and packing....

(Emphasis added.)

[¶ 7.] Dakota Trailer disagreed with the classification change and notified NCCI. After reviewing the decision internally, NCCI adhered to its code 3365 classification. Dakota Trailer then sought review before the South Dakota Workers Compensation Appeals Board, which affirmed the change. Dakota Trailer appealed that decision to the Office of Hearing Examiners. After a contested case hearing, a hearing examiner issued recommended findings of fact and conclusions of law supporting the change. The Department accepted the recommendation and approved the change.

[¶ 8.] Dakota Trailer then appealed to the circuit court, which reversed and reinstated machine shop code 3632. The court, based on the language in the Scopes Manual, ruled that code 3365 was only intended to apply to “specialist contractors in the construction industry who are engaged solely in welding or cutting operations, whether those operations [are] performed in a shop or performed outside.” Although the court acknowledged witnesses' testimony indicating that they understood code 3365 was not restricted to the construction industry, the court concluded that the witnesses' interpretation was not supported by the language of the Scopes Manual.

[¶ 9.] United Fire now appeals, arguing that the circuit court did not give sufficient deference to NCCI's determination and the hearing examiner's findings. In the alternative, United Fire argues that the administrative determination was correct as a matter of contract interpretation. United Fire finally argues that the circuit court erred in reversing the administrative determination without entering an explicit finding that Dakota Trailer's substantial rights were prejudiced.

Decision

[¶ 10.] The parties disagree on the appropriate standard of review of agency decisions. United Fire argues that the circuit court erred in failing to give the Board's and the Department's decisions sufficient deferential review; i.e., review for clear error or an abuse of discretion. Dakota Trailer responds that the circuit court properly reviewed the administrative decision for clear error as to historical facts and de novo as to the classification conclusion. Dakota Trailer also contends that the circuit court reached the correct result.

[¶ 11.] Our review in an appeal from the circuit court's review of a contested case proceeding is governed by SDCL 1–26–37. Martz v. Hills Materials, 2014 S.D. 83, ¶ 14, 857 N.W.2d 413, 417. [I]n reviewing the circuit court's decision under SDCL 1–26–37, we are actually making ‘the same review of the administrative tribunal's action as did the circuit court.’ Peterson v. Evangelical Lutheran Good Samaritan Soc., 2012 S.D. 52, ¶ 13, 816 N.W.2d 843, 847 (quoting State, Div. of Human Rights ex rel. Miller v. Miller, 349 N.W.2d 42, 46 (S.D.1984) ). “The agency's findings are reviewed for clear error.” Martz, 2014 S.D. 83, ¶ 14, 857 N.W.2d at 417. “However, findings based on documentary evidence ... are reviewed de novo.” Id. “Questions of law are also reviewed de novo.” Id. [W]e perform that review of the agency's findings ‘unaided by any presumption that the circuit court's decision was correct.’ Peterson, 2012 S.D. 52, ¶ 13, 816 N.W.2d at 847 (quoting Kermmoade v. Quality Inn, 2000 S.D. 81, ¶ 10, 612 N.W.2d 583, 586).

[¶ 12.] The Board and the Department (adopting the hearing examiner's proposed findings and decision) determined that, under the Scopes Manual, code 3365 was the appropriate classification. The historical facts regarding the activities performed by Dakota Trailer at Location 3 are not in dispute. The question in this case involves an interpretation of the Scopes Manual, which was incorporated into the insurance contract.3 “Insurance contract interpretation is a question of law, reviewable de novo.” Ass Kickin Ranch, LLC v. N. Star Mut. Ins. Co., 2012 S.D. 73, ¶ 7, 822 N.W.2d 724, 726 (quoting De Smet Ins. Co. of S.D. v. Gibson, 1996 S.D. 102, ¶ 5, 552 N.W.2d 98, 99).

[¶ 13.] Both code 3365 and code 3632 mention welding and machining operations. Both codes are also NOC classifications (“not otherwise classified”). That means that each applies only if no other classification more specifically describes the insured's business.4

[¶ 14.] The Scopes Manual provides that code 3365 “contemplates welding or cutting operations performed by specialist contractors...

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