Western National Mutual Insurance Co. v. TSP, Inc.

#27798-r-JMK
2017 S.D. 72

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

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WESTERN NATIONAL MUTUAL
INSURANCE COMPANY, Plaintiff and Appellant,

v.

TSP, INC., Defendant and Appellee.

****

APPEAL FROM THE CIRCUIT COURT OF
THE SECOND JUDICIAL CIRCUIT
LINCOLN COUNTY, SOUTH DAKOTA

****

THE HONORABLE BRADLEY G. ZELL
Judge

****

DOUGLAS M. DEIBERT of
Cadwell, Sanford, Deibert
& Garry, LLP
Sioux Falls, South Dakota

JAMES T. MARTIN of
Gislason, Martin, Varpness
& Janes, PA
Minneapolis, Minnesota Attorneys for plaintiff
and appellant.

MICHAEL L. LUCE
DANA VAN BEEK PALMER of
Lynn, Jackson, Shultz & Lebrun, PC
Sioux Falls, South Dakota Attorneys for defendant and
appellee.

****
CONSIDERED ON BRIEFS
ON NOVEMBER 7, 2016
OPINION FILED 11/08/17
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KERN, Justice

[¶1.] Western National Mutual Insurance Co. (Western National) insured

BHI Inc. under a commercial general liability (CGL) policy. In 2005, Regency

Plymouth Ventures Ltd. (Regency) hired BHI to serve as a general contractor to

build four condominiums near Alexandria, Minnesota. TSP Inc. was the project

architect. BHI hired LandTeam Surveying Co. (LandTeam) to do the project’s land

surveying. LandTeam made a surveying error, and two of the condos were located

too close to the property line and did not comply with county setback requirements.

In order to compensate for the error, BHI and TSP agreed to provide the funds for

Regency to purchase a buffer strip of land to complete the project. Although TSP

and BHI agreed to share the expense, TSP paid Regency the entire amount.

Accordingly, TSP sued BHI for damages arising from LandTeam’s error. BHI

forwarded the suit to Western National for defense, which it refused to provide.

After several years, BHI and TSP settled the case, agreeing that TSP could pursue

any potential remedy against Western National that BHI might have under the

CGL policy. Western National brought a declaratory judgment action against TSP,

seeking a judgment that its CGL policy did not provide coverage for TSP’s claims.

The parties filed cross-motions for summary judgment. The circuit court granted

summary judgment for TSP. Additionally, the court awarded TSP attorneys’ fees

and costs pursuant to SDCL 58-12-13 and SDCL 58-33-46.1. Western National

appeals. We reverse and remand for entry of summary judgment in favor of

Western National and for further hearing on the award of attorneys’ fees.

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Facts and Procedural History

[¶2.] Regency hired BHI to serve as general contractor for a construction

project at Regency’s Arrowwood Resort near Alexandria, Minnesota. The project

involved building four separate condos, each containing four units. TSP was the

project architect. The construction contract required BHI to hire a “legally

qualified” land surveyor experienced in providing land-surveying services and using

accepted surveying practices. BHI hired LandTeam to do the surveying work.

[¶3.] The project proceeded in stages. BHI completed the first two condos

before LandTeam began survey work for the last two. After the last two condos

were finished in the spring of 2006, the parties learned that they were built too

close to the adjoining property because LandTeam committed a surveying error. A

county zoning ordinance required a fifty-foot side-yard setback (setback provision)

with which the two condos did not comply. Accordingly, the county refused to issue

occupancy permits for the condos.

[¶4.] Regency demanded the mistake be corrected as it was losing revenue

because it could not rent the condo units without the occupancy permits. BHI had

three options: it could seek a variance with local zoning authorities, which it did

only to have its request denied; tear down the condos and start construction in a

new location; or purchase a strip of adjoining property from the neighboring

landowner to satisfy the setback provision. Regency’s and BHI’s agreed-upon

remedy was the third: Regency would purchase a strip of land from Blue Lakes

Land Co. for the sum of $302,208.50. BHI and TSP decided to fund Regency’s

purchase with BHI agreeing to pay as its share $96,774.19. However, only TSP or

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its insurer provided the funds for the purchase. Regency bought the necessary

buffer strip in September 2006. BHI never reimbursed TSP for its agreed-upon

portion of the loss.

[¶5.] Western National insured BHI for several years under a CGL policy

renewable each year beginning on March 31, 2004. In July 2006, BHI filed a Notice

of Occurrence/Claim with Western National as a result of the surveying mistake

and resulting property purchase to resolve the error. BHI identified the date of the

occurrence as September 15, 2005. The parties agree that the CGL policy that

commenced on March 31, 2005, is the relevant insurance contract in this dispute.

Western National failed to respond to BHI’s notice for almost two years.

[¶6.] On May 1, 2008, TSP sued BHI for contribution, common law

indemnity, contractual indemnity, and breach of a settlement agreement and

sought to recover the sum paid to Regency. BHI forwarded the complaint to

Western National. Within a week, Claims Adjuster Gary Zylstra informed BHI that

TSP’s claims were outside the scope of coverage. Zylstra explained his decision in a

detailed letter, citing the lack of property damage from an occurrence and several

policy exclusions. As Western National believed there was no coverage under the

policy, it refused to provide BHI with a defense to TSP’s suit. On January 14, 2009,

BHI’s attorney sent a letter to Western National, refuting its denial of coverage and

citing two cases as support. Nearly six months later, BHI’s attorney still had not

heard back from Western National and sent a reminder letter on July 9, 2009.

Western National still refused to provide coverage or a defense.

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[¶7.] No pleadings were filed in the suit for several years, and BHI did not

answer TSP’s complaint. In April 2011, the parties resolved their dispute by

entering into a Miller–Shugart settlement agreement.1 Under the terms of the

agreement, BHI accepted full responsibility for LandTeam’s surveying error and

agreed to entry of judgment against it in the amount of $279,208.50. BHI agreed to

assign its rights against Western National to TSP. On April 12, 2011, Western

National received notice of this agreement. On September 28, 2011, Western

National sued TSP, seeking a declaratory judgment as to whether its policy

provided coverage for TSP’s claims against BHI and whether BHI’s confession of

judgment is valid and binding on Western National. TSP answered and filed a

motion for summary judgment asserting BHI’s right to coverage under the policy.

[¶8.] On March 3, 2015, the circuit court held a hearing on cross-motions for

summary judgment regarding the coverage dispute. On May 27, 2015, the circuit

court issued a memorandum decision granting TSP’s motion for summary

judgment. The court ruled that the costs arising from the surveying error were

covered by the policy, that none of the exclusions barred coverage, and that the

Miller–Shugart settlement agreement was valid. On October 19, 2015, the circuit

court held a second hearing on the issue of attorneys’ fees and awarded TSP

1. A Miller–Shugart settlement permits an insured to settle a claim against it
by admitting to a judgment and then assigning its rights under its insurance
policy to its judgment creditor. The settlement, however, is not binding on
the insurer unless the claim was actually covered and the amount of the
settlement is reasonable and not the product of fraud or collusion. See Miller
v. Shugart, 316 N.W.2d 729, 734-35 (Minn. 1982); Jerome Abrams, Failure to
Allocate? Nobody Pays: Using Miller Shugart Settlements in Cases of
Questionable Insurance Coverage, 4 Wm. Mitchell J.L. & Prac. 2, 5-6 (2010).

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$19,800.18 in attorneys’ fees and costs pursuant to SDCL 58-12-3 and SDCL

58-33-46.1. The court found that the delays caused by Western National in

handling BHI’s claim violated the Unfair Claims Practices Act and were without

reasonable cause. On February 12, 2016, the court issued findings of fact and

conclusions of law and a final combined judgment against Western National in the

sum of $299,008.68.

[¶9.] Western National appeals, alleging there is no coverage under the

policy for the surveying error because there was no property damage caused by an

occurrence. In Western National’s view, this is because “[d]efective work which

causes damage only to the insured’s work product itself is not an ‘occurrence.’”

Additionally, Western National contends there was no damage to property as a

result of the surveying error because the finished structures never impinged upon a

third party’s property. Even if the policy covers the error, Western National

submits that coverage is precluded by the “work-in-progress,” “faulty

workmanship,” and “professional services” exclusions. Western National further

disputes the validity of the Miller–Shugart agreement and the award of attorneys’

fees to TSP. Because we find the “professional services” exclusion applies to defeat

coverage, we need not address the threshold question of whether the surveying

error resulted in property damage caused by an occurrence or the remaining issues

raised by the parties with the exception of the issue of attorneys’ fees. See Swenson

v. Auto Owners Ins. Co., 2013 S.D. 38, ¶ 32, 831 N.W.2d 402, 412.

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Standard of Review

[¶10.] “We review a court’s denial of a motion for summary judgment under

the de novo standard of review.” N. Star Mut. Ins. v. Korzan, 2015 S.D. 97, ¶ 12,

873 N.W.2d 57, 61. “Summary judgment is appropriate ‘if the pleadings,

depositions, answers to interrogatories, and admissions on file, together with the

affidavits, if any, show that there is no genuine issue as to any material fact and

that the moving party is entitled to a judgment as a matter of law.’” Id. (quoting

SDCL 15-6-56(c)).

[¶11.] “The interpretation of an insurance policy is a question of law,

reviewed de novo.” Swenson, 2013 S.D. 38, ¶ 13, 831 N.W.2d at 407. “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.” Id. “When an insurer seeks to invoke a policy exclusion as a

means of avoiding coverage, the insurer has the burden of proving that the

exclusion applies.” Ass Kickin Ranch, LLC v. N. Star Mut. Ins. Co., 2012 S.D. 73, ¶

9, 822 N.W.2d 724, 727.

Analysis

1. Whether the Designated Professional Services endorsement
excludes coverage for property damage caused by
LandTeam’s land-surveying error.

[¶12.] Western National argues the circuit court erred by holding the

Designated Professional Services endorsement to the CGL policy did not exclude

coverage for the alleged property damage caused by LandTeam’s land-surveying

error. The circuit court stated in its May 28, 2015 decision that the endorsement

did not bar coverage because “[t]he professional services were performed by a non-
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employee subcontractor. The policy does not exclude coverage for work performed

on behalf of the insured by a professional subcontractor.”

[¶13.] The one-page endorsement is captioned “Exclusion—Designated

Professional Services” and states:

This insurance does not apply to “bodily injury”, “property
damage” or “personal advertising injury” due to the rendering of
or failure to render any professional service.

The endorsement also provides a schedule to list specific professional services. It

also notes that if left blank, the information required to complete the endorsement

will be shown in the declarations. No entry appears on the schedule, but the

declarations page lists “all services” under the exclusion. Western National

contends that land surveying is a professional service and the use of any includes

professional services rendered by LandTeam. In response, TSP claims that Western

National’s interpretation of the endorsement is so broad that it “would seem to

cover virtually everyone working for BHI.” Further, TSP asserts that the

endorsement is inapplicable to work done by subcontractors, relying on State Farm

& Casualty Company v. Lorrick Pacific, LLC, an opinion from the United States

District Court for the District of Oregon. No. 03:110-CV-834-HZ, 2012 WL 1432603

at *5-6 (D. Or. Apr. 24, 2012).

[¶14.] This issue requires us to interpret the meanings of professional service

and any in the endorsement. The CGL policy does not define professional service,

but we have previously defined the term in CGL policies to mean those acts or

services “entailing the performance of a vocation, calling, or occupation requiring

learning and intellectual skill.” St. Paul Fire & Marine Ins. Co. v. Engelmann,

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2002 S.D. 8, ¶ 8, 639 N.W.2d 192, 197. Further, “[w]e may use statutes and

dictionary definitions to determine the plain and ordinary meaning of undefined

words” in a contract. Jackson v. Canyon Place Homeowner’s Ass’n, Inc., 2007 S.D.

37, ¶ 11, 731 N.W.2d 210, 213. SDCL chapter 36-18A includes land surveying

amongst its listing of technical professions, and SDCL 36-18A-4 defines the practice

of land surveying as the:

practice or offering to practice professional services such as
consultation, investigation, testimony evaluation, land-use
studies, planning, mapping, assembling, interpreting reliable
scientific measurements and information relative to the location,
size, shape, or physical features of the earth, improvements on
the earth, the space above the earth, or any part of the earth,
and utilization and development of these facts and interpretation
into an orderly survey map, plan, report, description, or project.

The practice of land surveying includes any of the following:
(1) Locates, relocates, establishes, reestablishes, lays out, or
retraces any property line or boundary of any tract of land or any
road, right-of-way, easement, alignment, or elevation of any of
the fixed works embraced within the practice of land
surveying[.]

(Emphasis added). The Legislature has clearly identified land surveying as a

professional service. Further, the nature of land surveying as a vocation requiring

specialized knowledge and the application of intellectual skill support the inclusion

of land surveying as a professional service under the endorsement. See also Minn.

Stat. § 326.02 (imposing licensing requirements on persons engaged in a variety of

professions including land surveying).

[¶15.] TSP’s argument that including land surveying as a professional service

gives an overbroad meaning to the endorsement is unpersuasive. It may be true

that the professional services endorsement “should not apply to construction work

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performed by contractors[.]” Scott C. Turner, Insurance Coverage of Construction

Disputes § 39:3 (2d ed.), Westlaw (database updated June 2017). However, “[t]his

distinction for contractors is part of the larger distinction between professional

services which require specialized knowledge or training and involve the exercise of

judgment and those services involved in the execution of a decision based on non-

professional judgment.” Id. Land surveying requires intellectual assessments and

the use of professional judgment in comparison to a general construction task like

putting up a wall, which involves manually implementing an existing plan.

Including land surveying as a professional service will not give this endorsement

improper breadth. See Maine Mut. Fire Ins. Co. v. Tinker, 872 A.2d 360, 362 (Vt.

2005) (holding the phrase “rendering or failing to render any professional service”

unambiguously includes land surveying in a CGL policy exclusion).

[¶16.] We next address the scope of the word any in the endorsement. “In

construing the provisions of an insurance contract, we do not seek strained

interpretations.” W. Nat’l Mut. Ins. Co. v. Decker, 2010 S.D. 93, ¶ 11, 791 N.W.2d

799, 802. The endorsement provides that “[t]his insurance does not apply to . . .

‘property damage’ . . . due to the rendering of or failure to render any professional

service.” (Emphasis added). Importantly, the endorsement does not limit its scope

to the professional services of the insured. The property damage at issue was

caused by LandTeam’s rendering of a professional service. The fact that LandTeam

was a subcontractor is immaterial to the endorsement. Further, the case TSP cites

in support of its argument—holding that the endorsement does not apply to services

provided by subcontractors—is inapposite. See Lorrick Pac., 2012 WL 1432603, at

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*5-6. In Lorrick Pacific, the court held that the term professional services was

ambiguous and “construe[d] the term as not including managing, coordinating, and

overseeing the work of subcontractors.” Id. at *6. The Lorrick Pacific court did not

find the word any to be ambiguous. Nor do we. The endorsement is broadly

written, and we will give effect to its plain meaning. Swenson, 2013 S.D. 38, ¶ 13,

831 N.W.2d at 407.

[¶17.] Because any alleged property damage in this case was caused by a

professional service, the Designated Professional Services endorsement excludes

coverage. Western National has met its burden to show TSP’s claims arising from

LandTeam’s land-surveying error are excluded by the endorsement.

2. Whether the circuit court erred in awarding attorneys’ fees
to TSP.

[¶18.] The circuit court held a hearing on attorneys’ fees on October 19, 2015,

and awarded TSP $19,800.18 as detailed in its findings of fact and conclusions of

law, pursuant to SDCL 58-12-32 and SDCL 58-33-46.1.3 The court awarded

2. SDCL 58-12-3 provides:
In all actions or proceedings hereafter commenced against any
employer who is self-insured, or insurance company, including
any reciprocal or interinsurance exchange, on any policy or
certificate of any type or kind of insurance, if it appears from the
evidence that such company or exchange has refused to pay the
full amount of such loss, and that such refusal is vexatious or
without reasonable cause, the Department of Labor and
Regulation, the trial court and the appellate court, shall, if
judgment or an award is rendered for plaintiff, allow the
plaintiff a reasonable sum as an attorney’s fee to be recovered
and collected as a part of the costs, provided, however, that
when a tender is made by such insurance company, exchange or
self-insurer before the commencement of the action or
proceeding in which judgment or an award is rendered and the
(. . . continued)
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attorneys’ fees under SDCL 58-12-3 because it found that “[t]he denial of coverage

. . . by [Western National] . . . [was] without reasonable cause.” The court also

awarded attorneys’ fees under SDCL 58-33-46.1, finding that Western National

violated the Unfair Claims Practices Act, specifically SDCL 58-33-67(1),4 on two

occasions by not responding to BHI’s communications within thirty days as

required. The first violation occurred after Western National ignored BHI’s July 13,

2006 notice of claim for “some 22 months.”

(continued . . .)
amount recovered is not in excess of such tender, no such costs
shall be allowed. The allowance of attorney fees hereunder shall
not be construed to bar any other remedy, whether in tort or
contract, that an insured may have against the same insurance
company or self-insurer arising out of its refusal to pay such
loss.

3. SDCL 58-33-46.1 provides:
Any person who claims to have been damaged by any act or
practice declared to be unlawful by this chapter shall be
permitted to bring a civil action for the recovery of all actual and
consequential damages suffered as a result of such act or
practice including reasonable attorneys’ fees to be set by the
court.

4. SDCL 58-33-67(1) provides:
In dealing with the insured or representative of the insured,
unfair or deceptive acts or practices in the business of insurance
include, but are not limited to, the following:
(1) Failing to acknowledge and act within thirty days
upon communications with respect to claims
arising under insurance policies and to adopt and
adhere to reasonable standards for the prompt
investigation of such claims[.]

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[¶19.] In its brief to this Court, Western National admits this violation of

SDCL 58-33-67(1).5 The second violation occurred after Western National failed to

respond to BHI’s claim for insurance coverage after TSP initiated its suit against

BHI. BHI’s attorney sent a letter to Western National dated January 14, 2009,

seeking insurance coverage. Approximately six months later, BHI’s attorney still

had not heard back from Western National, and BHI sent a reminder on July 9,

2009.

[¶20.] Western National, however, argues that the circuit court erred in

awarding attorneys’ fees under either statute. Initially, Western National claims

that SDCL 58-12-3 cannot be a basis for an award because the attorneys’ fees were

granted as part of a ruling on cross-motions for summary judgment and before a

hearing on whether attorneys’ fees were warranted. Further, Western National

argues someone other than the insured cannot be awarded fees under the statute.

TSP disputes Western National’s contentions, claiming that the court held a later

hearing on attorneys’ fees after it decided the motions for summary judgment.

Further, TSP argues the circuit court was correct to determine that TSP was a

proper assignee of BHI’s insurance contract rights against Western National. As

such, it could collect under any statute authorizing attorneys’ fees.

5. Western National conceded:
There is no doubt that Western National violated its own claims handling
procedures and requirements under South Dakota law that an insurer
respond to a claim within 30 days. SDCL 58-33-67(1). There is no excuse for
the fact that there was no follow-up after the July 13, 2006 Notice of Claim
for some 20 months.

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[¶21.] “Attorney fees may only be awarded by contract or when specifically

authorized by statute.” Biegler v. Am. Family Mut. Ins. Co., 2001 S.D. 13, ¶ 56,

621 N.W.2d 592, 606. “The party requesting an award of attorneys’ fees has the

burden to show its basis by a preponderance of the evidence.” Arrowhead Ridge I,

LLC v. Cold Stone Creamery Inc., 2011 S.D. 38, ¶ 25, 800 N.W.2d 730, 737.

[¶22.] Regardless of the parties’ various arguments, SDCL 58-12-3 cannot be

the basis for an award of attorneys’ fees to TSP. SDCL 58-12-3 permits a court to

award attorneys’ fees in an action against an insurance company for the denial of

coverage without reasonable cause but only “if judgment or an award is rendered for

plaintiff.” TSP is not entitled to judgment or an award against Western National

for the denial of coverage and is therefore not entitled to an award of fees under this

provision. Because we reverse the grant of summary judgment in favor of TSP, we

vacate any fees awarded under SDCL 58-12-3.

[¶23.] Regarding the second statutory ground for attorneys’ fees, Western

National argues that although it violated SDCL 58-33-67(1), “the South Dakota

statute, on its face, indicates that its violation does not supply a private cause of

action to anyone . . . and certainly not TSP.” Western National relies upon

SDCL 58-33-69, which states that “[n]othing in §§ 58-33-66 to 58-33-69, inclusive,

grants a private right of action.” But SDCL 58-33-46.1 allows “[a]ny person who

claims to have been damaged by any act or practice declared to be unlawful by

[chapter 58-33] . . . to bring a civil action for the recovery of all actual and

consequential damages suffered as a result of such act or practice including

reasonable attorneys’ fees to be set by the court.” In other words, while SDCL 58-

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33-67(1) does not by its own terms grant a private right of action according to SDCL

58-33-69, a violation thereof provides a cause of action under SDCL 58-33-46.1.

[¶24.] In its answer to the amended complaint, TSP asserted that it “is

entitled to an award of attorneys’ fees pursuant to SDCL 58-33-46.1” for Western

National’s violations of SDCL 58-33-67. The circuit court’s factual findings that

Western National violated SDCL 58-33-67(1) twice by failing to respond to BHI’s

communications within thirty days are not clearly erroneous. See Brooks v.

Milbank Ins. Co., 2000 S.D. 16, ¶ 16, 605 N.W.2d 173, 178. Further, under SDCL

58-33-46.1, TSP was a “person . . . damaged by” Western National’s violation of

SDCL 58-33-67(1).6 Thus, regardless of whether there was coverage, TSP was

entitled to bring a claim for reasonable attorneys’ fees.

[¶25.] Although the circuit court held a hearing on attorneys’ fees and

awarded TSP $19,800.18, it is unclear what portion of the fees were properly

assessed because the court did not delineate between fees awarded under

SDCL 58-33-46.1 and SDCL 58-12-3. Further complicating the matter, the parties

have not included the transcript of the October 19, 2015 attorneys’ fees hearing in

the record. Thus, we remand for the court to hold a hearing to determine what

portion, if any, of the fees awarded to TSP occurred as a result of Western

National’s violations of SDCL 58-33-67(1) and to award the same.

Conclusion

[¶26.] The Designated Professional Services endorsement excludes all

potential coverage for any property damage caused by the land-surveying error.

6. The definition of person under SDCL 2-14-2 includes a corporation.

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Accordingly, the circuit court erred by granting TSP’s motion for summary

judgment. We remand for entry of summary judgment in favor of Western

National. Further, the circuit court erred in awarding attorneys’ fees pursuant to

SDCL 58-12-3. We vacate the award of attorneys’ fees and remand to the circuit

court for further hearing on this issue consistent with this opinion.

[¶27.] GILBERTSON, Chief Justice, and ZINTER and SEVERSON, Justices,

and WILBUR, Retired Justice, concur.

[¶28.] JENSEN, Justice, not having been a member of the Court at the time

this action was submitted to the Court, did not participate.

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