Swenson v. Auto-Owners Ins. Co.

• Citation: 2013 S.D. 38,831 N.W.2d 402
• Decision Date: 15 May 2013
• Docket Number: No. 26424.,26424.
• Parties: Jamie SWENSON and Randy Stewart, Individually and as Assignees of Dale Jelen and DJ Construction, LLC, Plaintiffs and Appellants, v. AUTO–OWNERS INSURANCE COMPANY, Defendant and Appellee.
• Court: Supreme Court of South Dakota

831 N.W.2d 402

2013 S.D. 38

Jamie SWENSON and Randy Stewart, Individually and as Assignees of Dale Jelen and DJ Construction, LLC, Plaintiffs and Appellants,

v.AUTO–OWNERS INSURANCE COMPANY, Defendant and Appellee.

No. 26424.

Supreme Court of South Dakota.

Considered on Briefs March 18, 2013.

Decided May 15, 2013.

Daniel K. Brendtro of Zimmer, Duncan & Cole, LLP, Sioux Falls, South Dakota and Anthony T. Smith of Hellmuth & Johnson, PLLC, Edina, Minnesota, Attorneys for plaintiffs and appellants.

Zachary W. Peterson, Jack H. Hieb of Richardson, Wyly, Wise, Sauck & Hieb, LLP, Aberdeen, South Dakota and Timothy P. Tobin of Gislason & Hunter, LLP, Minneapolis, Minnesota, Attorneys for defendant and appellee.

GILBERTSON, Chief Justice.

[¶ 1.] Jamie Swenson and Randy Stewart entered into a contract with Dale Jelen, d/b/a DJ Construction, LLC (collectively DJ Construction), in 2007 to build a home on their property. In 2009, construction on the home was halted after Swenson and Stewart discovered the home had sustained significant water damage. Swenson and Stewart brought suit against DJ Construction, seeking to recover for the damage to their home and DJ Construction's failure to complete the home. DJ Construction contacted its insurer, Auto–Owners Insurance Company (Owners), seeking defense and indemnity against Swenson and Stewart's claims. Owners denied DJ Construction's requests after determining there was no coverage under the terms of the policy. Subsequently, Swenson and Stewart entered into a stipulated judgment and settlement agreement with DJ Construction in which DJ Construction confessed judgment and assigned its rights and claims against Owners to Swenson and Stewart. Swenson and Stewart then filed suit against Owners based upon Owners' failure to defend and indemnify DJ Construction. Both Owners and Swenson and Stewart filed motions for summary judgment, and the circuit court granted summary judgment in favor of Owners. Swenson and Stewart appeal.

FACTS

[¶ 2.] In this case, the material facts are undisputed. Swenson and Stewart own real property located at 47711–273rd Street in Harrisburg, South Dakota. In November 2007, Swenson and Stewart entered into a building construction agreement with DJ Construction in which DJ Construction agreed to build a home on their property. The total contract price was $1,285,952. At the time the parties entered into the contract, DJ Construction was insured by Owners under an insurance policy that included a Commercial General Liability Coverage Form (the Policy).¹ The Policy provided coverage in the amount of $1,000,000 per occurrence.

[¶ 3.] Under the terms of the Policy, Owners was responsible for paying “those sums that the insured becomes legally obligated to pay as damages because of ... ‘property damage’ to which this insurance applies.” ² The Policy further provided that Owners “will have the right and duty to defend the insured against any ‘suit’ seeking those damages.” To be covered under the Policy, the “property damage” was required to be caused by an “occurrence.” ³ Additionally, the Policy contained several coverage exclusions.

[¶ 4.] After entering into the contract with Swenson and Stewart, DJ Construction began working on the home. However, construction was suspended at the end of 2007 because Swenson and Stewart failed to obtain adequate financing for the project. While the construction was on hold, various building materials (including framing lumber) were left outside at the construction site. These materials were not protected from exposure to rain, snow, etc., but DJ Construction visited the construction site periodically to check on the property and remove snow.

[¶ 5.] In July 2008, Swenson, Stewart, and DJ Construction executed a second building construction agreement in which the total contract price was increased to $1,363,952 to account for additional work. DJ Construction then resumed work on the home, which proceeded for approximately one year. The building materials that had been exposed to rain, snow, etc. were utilized in constructing the home. Further, DJ Construction did not protect the basement of the home from exposure to snow and rain during construction. As a result, standing water accumulated in the basement at times.

[¶ 6.] In August 2009, construction on the home was halted again after Swenson and Stewart discovered mold growth, water damage, and other construction defects in the home. At the time construction was stopped, work on the home was not complete.⁴ Swenson and Stewart then hired Forensic Building Science, Inc. (FBS) to inspect the home. Amongst other things, FBS concluded that DJ Construction failed to properly protect the building materials from exposure to rain and snow during the time construction was suspended, and that DJ Construction failed to protect the basement from rain and snow during construction. As a result, FBS concluded the home sustained significant water damage. FBS recommended that the home be demolished and rebuilt due to the extensive damage.⁵

[¶ 7.] DJ Construction submitted a claim to Owners for defense and indemnity against Swenson and Stewart's potential claims on August 5, 2009. Owners retained Claims Associates Incorporated to “inspect the damages and determine the extent of the damages” to the home. The investigator for Claims Associates Incorporated issued a report on August 24, 2009. On September 18, 2009, an Owners claim representative submitted a memorandum to Owners' legal department concluding that DJ Construction was not covered under the Policy.

[¶ 8.] Swenson and Stewart formally commenced suit against DJ Construction in November 2009, asserting numerous statutory and common-law claims. In December 2009, Owners sent DJ Construction correspondence formally denying DJ Construction's requests for indemnity and defense after concluding there was no coverage for any claims under the terms of the Policy. On June 29, 2011, Swenson and Stewart entered into a stipulated judgment and settlement agreement (the Agreement) with DJ Construction regarding their claims. ⁶ Under the terms of the Agreement, DJ Construction agreed to a confession of judgment in favor of Swenson and Stewart in the amount of $1,545,121 and agreed to assign Swenson and Stewart all of the rights and claims it held against Owners for defense, indemnity, and/or bad faith. In exchange, Swenson and Stewart agreed to satisfy the judgment solely from Owners. The Agreement was approved by the circuit court on July 18, 2011.

[¶ 9.] On October 5, 2011, Swenson and Stewart filed suit against Owners alleging that Owners committed a breach of contract due to its failure to defend and indemnify DJ Construction, and that Owners acted in bad faith in failing to defend and indemnify DJ Construction. Swenson and Stewart also sought a declaration as to Owners' obligation to defend and indemnify DJ Construction. Owners submitted an answer and counterclaim to the complaint on September 29, 2011. In its counterclaim, Owners sought a declaration that it had no duty to defend or indemnify DJ Construction.

[¶ 10.] Swenson and Stewart filed a motion for partial summary judgment with regard to their claims on February 29, 2012. On March 3, 2012, Owners also filed a motion for summary judgment. On June 13, 2012, the circuit court entered an order granting Owners' motion for summary judgment and denying Swenson and Stewart's partial motion for summary judgment. The circuit court determined there was no coverage under the Policy because multiple Policy exclusions applied. As a result, the circuit court concluded Owners had no duty to defend or indemnify DJ Construction.⁷ Swenson and Stewart appeal, arguing the circuit court erred in granting summary judgment in favor of Owners on Swenson and Stewart's breach of contract and bad faith claims. Swenson and Stewart assert summary judgment was improper because the circuit court erred in determining Owners had no duty to defend or indemnify DJ Construction under the terms of the Policy.

ANALYSIS AND DECISION

[¶ 11.] 1. Whether the circuit court erred in granting summary judgment in favor of Owners on Swenson and Stewart's breach of contract and bad faith claims based upon its determination that multiple Policy exclusions applied.

[¶ 12.] “When reviewing a circuit court's grant of summary judgment, this Court only decides ‘whether genuine issues of material fact exist and whether the law was correctly applied.’ ” Wheeler v. Farmers Mut. Ins. Co. of Neb., 2012 S.D. 83, ¶ 8, 824 N.W.2d 102, 105 (quoting Zephier v. Catholic Diocese of Sioux Falls, 2008 S.D. 56, ¶ 6, 752 N.W.2d 658, 662). When the material facts are undisputed, this Court's review “is limited to determining whether the trial court correctly applied the law.” Id. (quoting De Smet Ins. Co. of S.D. v. Pourier, 2011 S.D. 47, ¶ 4 n. 1, 802 N.W.2d 447, 448 n. 1). “Summary judgment will be affirmed if there exists any basis which would support the circuit court's ruling.” Dakota, Minn. & E. R.R. Corp. v. Acuity, 2009 S.D. 69, ¶ 14, 771 N.W.2d 623, 628–29 (quoting Schwaiger v. Avera Queen of Peace Health Servs., 2006 S.D. 44, ¶ 7, 714 N.W.2d 874, 877).

[¶ 13.] The interpretation of an insurance policy is a question of law, reviewed de novo. Demaray v. De Smet Farm Mut. Ins. Co., 2011 S.D. 39, ¶ 8, 801 N.W.2d 284, 287 (citing Auto–Owners Ins. Co. v. Hansen Hous., Inc., 2000 S.D. 13, ¶ 10, 604 N.W.2d 504, 509). “The existence of the rights and obligations of parties to an insurance contract are determined by the language of the contract, which must be construed according to the plain meaning of its terms.” Biegler v. Am. Family Mut. Ins. Co., 2001 S.D. 13, ¶ 20, 621 N.W.2d 592, 598–99 (citing W. Cas. & Sur. Co. v. Waisanen, 653 F.Supp. 825, 827 (D.S.D.1987)). “To ascertain whether a duty to defend exists we look to the complaint and ‘other evidence of record.’ ” ⁸Demaray, 2011 S.D. 39, ¶ 8, 801 N.W.2d at 287 (quoting State Farm Fire &...