Sapienza v. Liberty Mut. Fire Ins. Co.

• Decision Date: 18 March 2022
• Docket Number: 3:18-CV-03015-RAL
• Citation: 592 F.Supp.3d 826
• Parties: Joseph SAPIENZA, Sarah Jones Sapienza, M.D., Plaintiffs, v. LIBERTY MUTUAL FIRE INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — District of South Dakota

592 F.Supp.3d 826

Joseph SAPIENZA, Sarah Jones Sapienza, M.D., Plaintiffs,

v.LIBERTY MUTUAL FIRE INSURANCE COMPANY, Defendant.

3:18-CV-03015-RAL

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

Signed March 18, 2022

Angela Beranek Brandt, Caryn A. Boisen, Pro Hac Vice, Larson King, LLP, St. Paul, MN, for Plaintiffs.

Jack H. Hieb, Richardson, Wyly, Wise, Sauck, Hieb LLP, Aberdeen, SD, Christian A. Preus, Pro Hac Vice, Bassford Remele, Minneapolis, MN, for Defendant.

OPINION AND ORDER GRANTING IN PART MOTION FOR PARTIAL SUMMARY JUDGMENT

ROBERTO A. LANGE, CHIEF 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 Supreme Court of South Dakota, answering a certified question from this Court, held that the costs the Sapienzas incurred to comply with the injunction constitute covered "damages" under the Liberty Mutual Policies. Sapienza v. Liberty Mut. Fire Ins. Co. (In re Matter of Certification of Question of Law), 960 N.W.2d 829, 830, 837 (S.D. 2021). Liberty Mutual has now moved for summary judgment on the Sapienzas’ claim for breach of the duty to indemnify, arguing that the Policies cover the costs the Sapienzas incurred to demolish their home but nothing else. The Sapienzas disagree, claiming that the Policies also cover the value of their home or the cost of building their home, expenses they incurred to bring their home into compliance with regulations for historical districts, and the costs of moving, storage, and temporary housing. This Court grants Liberty Mutual's motion on all costs except for the costs the Sapienzas incurred in trying to bring their home into compliance with the applicable regulations.

I. Facts

In 2013, the Sapienzas purchased a home in the McKennan Park Historic District in Sioux Falls, South Dakota. Doc. 27 at ¶¶ 6–7. They decided to raze the existing house and build a much larger new home on the property. Doc. 27 at ¶ 7. The Sioux Falls Board of Historic Preservation (Board) approved the Sapienzas’ proposed design for their new home and the Sapienzas hired a contractor to build it. Doc. 27 at ¶¶ 8–10.

During construction, the Sapienzas’ neighbors, Pierce and Barbara McDowell, became concerned about the new home's size and location. McDowell v. Sapienza, 906 N.W.2d 399, 403 (S.D. 2018) ; Doc. 27 at ¶ 11. 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 for negligence and nuisance. Id.; Doc. 27 at ¶ 11; Doc. 27-1.

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; 27 at ¶ 11; Doc. 27-1 at 4–5. The McDowells sought a permanent injunction requiring the Sapienzas to modify or relocate their house or, alternatively, damages. Doc. 27-1 at 5–8.

The Sapienzas retained a South Dakota attorney (defense counsel) to defend them and notified their insurer Liberty Mutual of the McDowell suit. Doc. 27 at ¶¶ 12, 19. Liberty Mutual insured the Sapienzas under a Homeowner's Policy and an Excess Policy. Doc. 27 at ¶¶ 13–18; Docs. 27-2, 27-3.

Several sections of these Policies are relevant to the Sapienzas’ claims and Liberty Mutual's motion for summary judgment. In brief, the Homeowner's Policy required Liberty Mutual to indemnify the Sapienzas against a claim for damages because of "property damage" for which the Sapienzas were held legally liable. Section II of the Homeowner's Policy describes the personal liability 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. 27-2 at 18. The Homeowner's Policy defines "property damage" as "physical injury to, destruction of, or loss of use of tangible property." Doc. 27-2 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. 27-2 at 20.

The Excess Liability Policy provides additional coverage to the Sapienzas:

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.

Doc. 27-3 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. 27-3 at 7. The Excess Liability Policy "does not apply to: property damage to: (1) property owned by any insured. " Doc. 27-3 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. 27 at ¶ 20; Doc. 27-5.

After a bench trial, a state judge granted the McDowells a mandatory injunction against the Sapienzas. The judge determined that the Sapienzas’ house violated administrative regulations governing the height of new construction in historic districts, that the Sapienzas were liable to the McDowells under negligence and nuisance theories, and that the Sapienzas harmed the McDowells by rendering the McDowells’ chimney unusable, "devast[ing]" the character of their residence, and decreasing their home's value. Doc. 27-4 at 14–21. Finding a monetary award inadequate to remedy these harms, the trial judge issued an injunction requiring the Sapienzas to bring their house into compliance with federal and state regulations for buildings in historic districts or rebuild it. Doc. 27-4 at 2–3, 25, 29.

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 the Policies did not cover the "injunctive relief" ordered by the state trial judge. Doc. 27-5 at 2. According to Liberty Mutual, the injunctive relief and the costs of complying with it did not constitute "damages" under the Policies. Doc. 27-5 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 governing 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’ house 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 ordered the Sapienzas to submit plans to the Board to bring their house into compliance with the regulations for historical districts and with the judge's original decision. Doc. 38-1. If the plans were not approved, the state judge would "exercise all remedies available consistent with" the judgment. Doc. 38-1 at 1. The Sapienzas hired 4D Design and Consulting to plan a remodel of their home that would bring it into compliance with the applicable regulations. Doc. 38-2. The Sapienzas claim that they submitted a new application to the Board based on the plans by 4D Design and Consulting, and that the application process cost them $25,959.94. Doc. 37 at 2–3; Doc. 27-7; Doc. 36-2 at 2, 15–16, 23–25. The Board refused to approve the new application and, according to the Sapienzas, prohibited them from submitting any future plans for approval. Doc. 27 at ¶ 47. In May 2018, the state judge issued a writ of execution ordering the sheriff to tear down the Sapienzas’ home if they did not do so within thirty days. Doc. 38-3; Doc. 27 at ¶ 49. The Sapienzas complied with the writ and spent $61,025.88 to demolish their house.¹ Doc. 27 at ¶ 50; Doc. 36-2 at 2, 38.

The Sapienzas sued Liberty Mutual in this Court in September 2018. Among other claims, the Sapienzas alleged that Liberty Mutual breached the insurance contract by refusing to indemnify them for the costs they incurred to comply with the injunction. Doc. 1. This Court dismissed some of the claims under Federal Rule of Civil Procedure 12(b)(6) but refused to dismiss the Sapienzas’ claim that Liberty Mutual breached the duty to indemnify them. Rather, this Court concluded that there were no controlling decisions from the Supreme Court of South Dakota on whether the costs the Sapienzas incurred to comply with the injunction constituted "damages" under the Policies. Doc. 16 at 14....