Emp'rs Mut. Cas. Co. v. Brant Lake Sanitary Dist.

446 F.Supp.3d 557

EMPLOYERS MUTUAL CASUALTY COMPANY, Plaintiff,

v.BRANT LAKE SANITARY DISTRICT, a Political Subdivision of the State of South Dakota; and Excel Underground, Inc., Defendants.

4:18-CV-04029-RAL

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

Signed March 17, 2020

Timothy W. Billion, Robins Kaplan LLP, Sioux Falls, SD, Eric J. Magnuson, Pro Hac Vice, Robins Kaplan LLP, Minneapolis, MN, for Plaintiff.

Heather Lammers Bogard, Costello Porter Hill Heisterkamp Bushnell & Carpenter, Rapid City, SD, Jerome B. Lammers, Lammers Kleibacker, LLP, Madison, SD, Daniel K. Brendtro, Hovland, Rasmus, Brendtro & Trzynka, Prof. PLLC, Sioux Falls, SD, for Defendants.

OPINION AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT

ROBERTO A. LANGE, CHIEF JUDGE

Defendant Excel Underground, Inc. (Excel) obtained a $1,569,691.81 jury verdict against Defendant Brant Lake Sanitary District (Brant Lake) in state court. After the jury verdict, Brant Lake's insurer, Plaintiff Employers Mutual Casualty Company (EMCC), filed this case seeking a declaratory judgment that it has no duty to pay for Brant Lake's appeal of the verdict or to indemnify Brant Lake for any damages Brant Lake owed Excel. Doc. 1. Excel and Brant Lake both counterclaimed against EMCC. Docs. 9, 35. EMCC moved for judgment on the pleadings, Doc. 15, which this Court granted in part and denied in part. Doc. 39. EMCC and Brant Lake now have filed cross-motions for summary judgment to submit for decision the lone remaining issue of coverage for the portion of the jury verdict awarding $800,000 for Excel's lost profits. Docs. 42, 46.

I. Facts Not Subject to Genuine Dispute

This case concerns coverage under a Linebacker Public Officials and Employment Practices Liability Policy (the Policy) issued by EMCC to its insured Brant Lake. Brant Lake and Excel contend that the Policy covers at least a portion of a jury award that Excel received against Brant Lake.

On May 30, 2012, Brant Lake contracted with Excel to build a wastewater system for Brant Lake and its residents. The wastewater system project aimed to replace septic tanks of approximately 220 homes around Brant Lake by connecting each home by pipelines and grinder stations to a sewage treatment lagoon. Doc. 44 at ¶ 6; Doc. 55 at ¶ 6. The contract between Brant Lake and Excel incorporated a performance bond issued by Granite Re, Inc. (Granite Re), which the contract required Excel to obtain. Doc. 44 at ¶ 4; Doc. 48 at ¶ 2; Doc. 55 at ¶ 4; Doc. 59 at ¶ 2; Doc. 62 at ¶ 2.

A series of disputes developed between Brant Lake and Excel over work on the wastewater system project. Doc. 44 at ¶¶ 7–18. Brant Lake retained monies from Excel and in January of 2014 terminated the contract while a portion of the wastewater project remained incomplete. Doc. 48 at ¶ 3; Doc. 59 at ¶ 3; Doc. 62 at ¶ 3. Brant Lake's attorney at the direction of Brant Lake sent the January 20, 2014 termination letter not only to Excel, but also to Granite Re. Doc. 44 at ¶ 21; Doc. 55 at ¶ 21. Brant Lake also made a claim on the performance bond issued by Granite Re. Doc. 48 at ¶ 4; Doc. 59 at ¶ 4; Doc. 62 at ¶ 4.

Brant Lake then sued Excel and Granite Re. Doc. 44 at ¶ 1; Doc. 55 at ¶ 1. Excel separately sued Brant Lake alleging two claims, one seeking a declaratory judgment and the other claiming breach of contract against Brant Lake. Doc. 1-1 at 7–8; Doc. 44 at ¶ 2; Doc. 48 at ¶ 5; Doc. 55 at ¶ 2; Doc. 59 at ¶ 5; Doc. 62 at ¶ 5. The cases were consolidated for trial in state court in Lake County, South Dakota. EMCC provided defense counsel for Brant Lake to defend against Excel's claims, and Brant Lake's own counsel pressed Brant Lake's breach of contract claim against Excel.

The jury found in favor of Excel and against Brant Lake, awarding Excel a total of $1,569,691.81 in damages in three categories: $285,921.81 for "retainage;" $483,770 for "other payments under the contract;" and $800,000 for "lost profits." Doc. 44 at ¶ 3; Doc. 55 at ¶ 3. This Court in its Opinion and Order Granting in Part Motion for Judgment on the Pleadings, Doc. 39, ruled that the $285,921.81 awarded for amounts Brant Lake had retained from paying Excel and the $483,770 award for additional monies owed to Excel under the contract were excluded from coverage under Section I.5.d.(1) of the Policy excluding "[a]mounts actually or allegedly due under the terms of a contract." Doc. 1-5 at 2–3; see Doc. 39 at 12–13. This Court chose not to grant EMCC's motion for judgment on the pleadings regarding the $800,000 lost profits award because the "pleadings and the exhibits attached thereto do not provide enough information ... to definitively rule that subsection (2) of the Contractual Liability Exclusion excludes coverage for the lost profits jury award." Doc. 39 at 14. The parties now have filed material from the state court case and trial thereof regarding Excel's claim and jury award for $800,000 of lost profits.

Brant Lake and Excel tried the case before a jury over nine days in January 2018. Doc. 1 at ¶ 13; Doc. 9 at ¶ 1; Doc. 35 at ¶ 6; Doc. 1-4 at 4. Excel sought lost profits from the date Brant Lake terminated the wastewater system contract through the date of trial. Doc. 44 at ¶ 19; Doc. 55 at ¶ 19. Excel presented testimony at trial that Brant Lake's claim on the Granite Re performance bond impaired Excel's ability to secure bonds for other projects, which in turn caused Excel to bid only small projects, to lose out on larger and more profitable projects, and thereby to suffer lost profits. Doc. 26-1 at 4, 7–8, 12–16, 21–25; Doc. 26-2 at 6; Doc. 26-3 at 8; Doc. 26-4 at 2–3. Excel's bonding agent testified that Brant Lake's termination of Excel's contract and claim on the Granite Re performance bond prompted a "push hold" by bonding companies on Excel business pending resolution of the claim. Doc. 44 at ¶ 23; Doc. 55 at ¶ 23. Excel then had to resort to "quick bonds" without underwriting that carried smaller limits, and Excel had to use more than one bonding company at a time to increase its bonding limits. Doc. 44 at ¶ 23; Doc. 55 at ¶ 23. Excel's president testified that Excel consequently could not bid the same number and type of public construction projects in the aftermath of Brant Lake's termination of the contract and claim on the Granite Re bond. Doc. 44 at ¶ 24; Doc. 55 at ¶ 24. Based on testimony from Excel's president about work Excel lost because of the limits on Excel's bonding ability in the aftermath of Brant Lake's bond claim, a certified public accountant hired as Excel's damages expert testified that Excel's lost profits from 2014 to 2018 totaled $800,000. Doc. 44 at ¶¶ 26–27.

The trial judge instructed the jury on breach of contract but not on any other theories. Doc. 1-2. As relevant here, Instructions 16 and 17 explained the implied covenant of good faith and fair dealing contained in all contracts under South Dakota law. Doc. 1-2 at 17–18. Instruction 19 set forth the parties' positions, stating that "Excel claims that Brant Lake breached the contract and that Excel sustained damages as a result." Doc. 1-2 at 20. Next, Instruction 20 explained that if the jury found for Excel, it would need to calculate damages for "Excel's retainage;" for "other payments for work Excel did under the contract, and for work which Excel was prevented from doing as a result of Brant Lake Sanitary District's breach(es);" and for "Excel's lost profits." Doc. 1-2 at 21. Instruction 25 then addressed Excel's request for lost profits:

Loss of profits may be recovered if the evidence shows with reasonable certainty both their occurrence and the extent thereof. The burden is on Excel to prove it is reasonably certain that the profits it claims would have been realized except for Brant Lake's conduct, and that the profits can be ascertained and measured, from evidence introduced, with reasonable certainty.

Doc. 1-2 at 26.

The trial court entered judgment based on the $1,569,691.81 jury verdict in Excel's favor on February 20, 2018. Doc. 1-3. Brant Lake filed an appeal, which is currently pending before the Supreme Court of South Dakota.¹ Doc. 35 at ¶ 8.

Several sections of the Policy are relevant to the remaining coverage issue regarding the $800,000 lost profits award. The Policy in short covers a "Public Official's wrongful act" but excludes coverage for "Contractual Liability." Section I.1. of the Policy describes the coverage provided:

a. Public Officials Liability

We will pay for "defense expense(s)" and/or those sums that the insured becomes legally obligated to pay as "damages" because of a "public official's wrongful act" rendered in discharging duties on behalf of the insured named in the Declarations.

Doc. 1-5 at 1. The Policy defines "damages" in relevant part as "those amounts that the insured becomes legally obligated to pay for claims arising out of a ‘wrongful act’ to which this insurance applies." Doc. 1-5 at 7. The Policy's definition of a "Public official's wrongful act" reads:

b. "Public official's wrongful act" shall mean any of the following:

(1) Actual or alleged errors;

(2) Misstatement or misleading statement;

(3) Act, omission, neglect, or breach of duty by an insured in the discharge of "organizational" duties. "Public Officials Wrongful Act(s)" does not include an "employment wrongful act."

Doc. 1-5 at 8. Thus, there could be coverage for a jury award for Brant Lake's wrongful acts if there is no applicable exclusion.

Section I.5. of the Policy contains the exclusion for "Contractual Liability" (Contractual Liability Exclusion):

5. Exclusions – Coverage A and Coverage B

Each of the following exclusions is an absolute exclusion with no duty to defend or pay "damages" unless otherwise indicated. If both an absolute exclusion and an exclusion with a duty to defend apply, coverage for "defense expenses" is excluded and we have no duty to defend.

This insurance does not apply to:

....

d. Contractual Liability

(1) Amounts actually or allegedly due under the terms of a

...