Coverage Analysis
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 (8th Circuit)

  An "accident" is an "undesigned, sudden and unexpected event."  Taylor v. Imperial Cas. & Ind. Co., 82 S.D. 298, 144 N.W.2d 856 (1966).   South Dakota courts have ruled that an insured will be deemed to have "expected or intended" harm to occur if the harm was "highly likely" or "substantially probable" to result from the insured's deliberate acts.  Western Cas. & Sur. Co. v. Waisanen, 653 F.Supp. 825, 830 (S. S.D. 1987) and American Universal v. Whitewood Customer Theaters, 707 F.Supp. 1140 (D.S.D. 1989).  However, the insurer must prove that the insured acted for the purpose of causing the loss."  City of Fort Pierre v. United Fire & Cas. Co., 463 N.W.2d 845, 850 (S.D. 1990).

  An intent to injure may be inferred in cases of sexual assaults against minors, where the insured's conduct is deemed inherently injurious as a matter of law.  American Family Mut. Ins. Co. v. Purdy, 483 N.W.2d 197 (S.D. 1992).


  All appeals are heard directly by the South Dakota Supreme Court.

  Unfair or deceptive consumer practices are proscribed by S.D. Codified Laws Ann. § 37-24-1 (1986 & Supp. 1993).

  A duty to act in good faith is an implied term of all insurance policies.  Helmbolt v. LeMars Mut. Ins. Co., 404 N.W.2d 55, 57 (S.D. 1987). Insurer must give its insured's interests at least "equal consideration" in controlling the defense of a case.  Kansas Bankers Surety Co. v. Lynass, 920 F.2d 546 (8th Cir. 1990).  The insured must show, however, that the insurer intentionally denied coverage without any reasonable basis for its position.  Carroll v. Gulf Ins. Co., 886 F.2d 1071, 1073 (8th Cir. 1989).

  Under South Dakota law, an award of punitive damages requires a finding of actual or implied malice.  Dahl v. Sittner, 474 N.W.2d 897, 900 (S.D. 1991).  In Biehrle v. Liberty Mut. Ins. Co., 992 F.2d 873 (8th Cir. 1993), the Circuit Court held that "sloppy business practices" did not rise to the level of implied malice, since there was no evidence that the insurer consciously realized that its conduct would result in injury.

  Under South Dakota law, damages for emotional distress may result from an insurer’s breach of contract.  Athey v. Farmers Insurance Exchange, No. 00-1206 (8th Cir. December 6, 2000) and Kunkel v. United Security Insurance Company of New Jersey, 168 N.W.2d 723, 734 (S.D. 1969).

  Conditioning the settlement of an underinsurance policy on the release of a bad faith claim has been found to be evidence of bad faith and to support an award of punitive damages against an insurer.  Harter v. Plains Insurance Company, 579 N.W.2d 625, 634 (S.D. 1998) and Isaac v. State Farm Mutual Auto Insurance Company, 522 N.W.2d 752, 761 (S.D. 1994).


   Defense of late notice held to require proof of prejudice in Crum & Forster Ins. Co. v. Pacific Employers Ins. Co., 907 F.Supp. 312 (D.S.D. 1995).  Late notice held to defeat coverage in Wolff v. Royal Ins. Co. of America, 472 N.W.2d 233 (S.D. 1991).


  Coverage permitted for trespass and nuisance claims where insured's liability was based on "sudden and accidental" discharges that were outside the scope of the pollution exclusion. American Universal v. Whitewood Customer Theaters, 707 F.Supp. 1140 (D.S.D. 1989).

  However, the U.S. District Court ruled in Crum & Forster Ins. Co. v. Pacific Employers Ins. Co., 907 F.Supp. 312 (D.S.D. 1995) that allegations against an employer for wrongful termination failed to allege a claim within the scope of the policy's "personal injury" coverage. The possibility that a claim for damage to reputation could be made did not give rise to coverage.


  Insured has initial burden of showing that its claim is within the scope of coverage.  City of Fort Pierre v. United Fire & Cas. Co., 463 N.W.2d 845 (S.D. 1990) and  American Family Ins. Group v. Howe, 584 F.Supp. 369 (D.S.D. 1984).  If a prima facie case for coverage can be made, the burden shifts to the insurer to show why coverage should not apply.  General Finance Corp. v. Fid. & Cas. Co. of N.Y., 439 F.2d 981 (8th Cir. 1971).


  South Dakota follows the lex loci rule in multi-state tort actions.  Owen v. Owen, 444 N.W.2d 710 (1989).  In general, it appears that contract actions will be governed by the law of the state in which the last act necessary to make the contract binding upon the parties occurred.  American Serv. Mut. Ins. Co. v. Bottom, 317 F.2d 6 (8th Cir. 1967).


  Demands for injunctive relief held not be covered in Headley v. St. Paul Fire & Marine Ins. Co., 712 F.Supp. 745 (D.S.D. 1989).  Similarly, in City of Fort Pierre v. United Fire & Cas. Co., 463 N.W.2d 845 (S.D. 1990), a claim for civil fines and penalties under the Clean Water Act was held not to seek compensatory "damages."


  Under South Dakota law, “typically and most appropriately, the issue regarding an insurer’s duty to defend arises in a separate declaratory judgment action, preceding a trial on the underlying damage action.”  Stoebner v. South Dakota Farm Bureau Mutual Insurance Company, 598 N.W. 2d 557, 561 (1999).  


   --Claims Manuals

   --Drafting History

   --Other Policyholder Claims

   --Reinsurance Information



  The insurer’s duty to defend “is much broader than the duty to pay a judgment rendered against the insured” and will be found to exist unless the insurer can establish that the insured’s claim clearly falls outside of policy coverage. State Cement Plant Commission v. Wausau Underwriting Insurance Company, 616 N.W.2d 397 (S.D. 2000).  If, after reviewing the complaint and other appropriate record evidence “doubt exists whether the claim against the insured arguably falls within the policy coverage, such doubts must be resolved in favor of the insured.”  State Farm Mutual Auto Insurance Company v. Wertz, 540 N.W. 2d 636, 638 (S.D. 1995).  Although the Supreme Court has ruled that the duty to defend must be evaluated based on comparing the allegations in the complaint to the coverage provided under the policy, it ruled in Wertz that “when appropriate, other record evidence” should also be considered.  540 N.W. 2d at 638.

  The burden of proving that claim is outside the scope of coverage is on insurer.  An insurer that reserves its rights loses the right to unilaterally appoint defense counsel or otherwise control the defense of its insured.  Kansas Bankers Sur. Co. v. Lynass, 920 F.2d 546 (8th Cir. 1990).


  South Dakota has rejected the majority rule that an insured may not use estoppel as a basis for broadening coverage beyond what is actually provided under the written terms of the contract.  


  An excess insurer has been held entitled to recover defense costs that it incurred protecting its insured's interests after the primary insurer wrongfully refused to defend.  In Church Mut. Ins. Co. v. Smith, 509 S.W.2d 274 (S.D. 1994), the South Dakota Supreme Court held that the excess insurer could recover on a theory of unjust enrichment, even though it was not in contractual privity with the primary insurer.


  Federal court ruled in Headley, supra that discharges continuing after insured was first made aware of contamination were not "sudden and accidental."


  On-going pollution held to involve a single "occurrence" in Headley v. St. Paul Fire & Marine Ins. Co., 712 F.Supp. 745 (D. S.D. 1989).  

   In Benedictine Sisters v. St. Paul Fire & Marine, 815 F.2d 1209 (8th Cir. 1987), a divided 8th Circuit panel ruled that deliberate discharges of soot that occurred in the course of the insured's good faith efforts to clean out its emissions system were "accidental" since they were not "expected or intended."  Subsequent lower district court rulings in Headley and Whitewood Custom Theaters have found that the exclusion bars coverage for gradual contamination, particularly where the cause is within the insured's control. 

  The South Dakota Supreme Court has ruled that a trial court erred in holding that claims for trespass and nuisance arising out of a concrete plant’s emissions of cement dust are not subject to the absolute pollution exclusion.  In State Cement Plant Commission v. Wausau Underwriters Ins. Co., 616 N.W.2d 397 (S.D.  2000), the court ruled that whether or not cement dust is a “contaminant” or “pollutant,” the exclusion plainly applies as  the neighboring property owners were all claiming that they had suffered “contamination” because of discharges from the insured’s facility.   Two dissenting justices argued that Wausau had failed to show that cement dust is a “pollutant.”


  Supreme Court ruled in City of Fort Pierre v. United Fire & Cas. Co., 463 N.W.2d 845 (S.D. 1990) that it is against public policy to permit an insured wrongdoer to shift the financial burden of a punitive damage award to its insurer.  See also Dairyland Ins. Co. v. Wyatt, 474 N.W.2d 514 (S.D. 1991).


  Where the terms of a policy are fairly susceptible of different interpretations, the one most favorable to the insured will be adopted.  Kremer v. American Family Mut. Ins. Co., 501 N.W.2d 765, 767 (S.D. 1993).  However, this rule only applies if the term in question is ambiguous and the proposed interpretations are both reasonable.  Klatt v. Continental Ins. Co., 409 N.W.2d 366, 369 (S.D. 1987), cited in Rogers v. Allied Mut. Ins. Co.,  520 S.W.2d 614 (S.D. 1994).


  Federal court ruled in McElhaney v. Eli Lilly & Co., 564 F.Supp. 265 (D.S.D. 1983) that DES defendants had the burden of showing that their drug did not injure the plaintiff.  However, multi-piece tire rim claims under market share theories or enterprise liability were rejected in Bradley v. Firestone Tire & Rubber Co., 590 F.Supp. 1177 (D.S.D. 1984).

  U.S. District Court has ruled in a pollution case that once a discharge causes property damage to the plaintiff "all subsequent flows causing damage are but varying degrees of the original discharge."  Headley v. St. Paul Fire & Marine Ins. Co., 712 F.Supp. 745, 748 (D.S.D. 1989).

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