In AMCO Ins. Co. v. Employers Mut. Cas. Co., 845 N.W.2d 918 (2014), the South Dakota Supreme Court held that a successor insurance policy’s exclusion precluding coverage for property damage that commenced or occurred prior to the inception of the effective date of the policy, did not violate the public policy of South Dakota.
The facts before the Court were as follows:
Stephen Thomas & Sons, LLC was a South Dakota limited liability company (hereinafter “LLC”). In 2002, Swift Contractors, Inc. hired the LLC to do excavation and soil compaction work on a school building project. That project was completed in 2004. In 2005, the building’s floor started to shift and in 2006 cracks began to appear on some interior masonry walls at the school. Swift Contractors, the School District and the architect became aware of these problems. The architect recommended that the problems be monitored. However, the problems persisted and, in 2008, the School District hired a geotechnical investigation company and an engineering firm to investigate the problem. In 2010, the School District received a final report from its experts indicating that the settling issue was caused by the use of low moisture clay and improper compaction of backfill soils. The problems were attributed to negligence on the part of the LLC.
In 2010, the School District notified the insurer for the LLC, Employers Mutual Casualty Company (“EMC”) of the potential claims against the LLC. EMC advised the LLC that it intended to investigate the loss because EMC believed that several policy exclusions were applicable. When the School District brought suit against the LLC, EMC refused the defense of the LLC relying in part upon its continuous or progressive property damage exclusion because the loss occurred before the effective date of the EMC policy. According to EMC, the damage occurred in 2005 and 2006 when the problems were discovered. In 2005 and 2006, the LLC was insured by a different insurance company, AMCO Insurance Co. AMCO defended and indemnified the LLC for the negligence claim and then brought a declaratory judgment action against EMC arguing that EMC had a joint duty to defend the LLC. AMCO asked the Court to declare that EMC’s continuous and progressive property damage exclusion be held void, as against public policy.
AMCO argued that exclusions pertaining to unknown progressive or continuous injury or damage violated South Dakota’s public policy and were, therefore, void. To bolster its argument, AMCO asserted that the public policy of South Dakota was that CGL coverage “insure against risks outside the insured’s control” and “protect the insured against loss from unknown events.” AMCO asserted that the exclusion was “antithetical to the nature of insurance, exclude[d] coverage for no purpose other than EMC’s profit, and [left] EMC’s insured’s without indemnity coverage in all cases involving continuous injury beginning before EMC’s coverage.”
In response, EMC contended that the exclusion did not conflict with the purposes of insurance generally. The policy language merely identified the risks that EMC had agreed to assume in return for the premiums paid by the insured. It was the position of EMC that if the LLC did not like the policy provision, it could have sought coverage from another insurer or perhaps paid a higher premium to have the exclusion removed by endorsement. Finally, EMC argued that absent a constitutional or statutory provision or judicial decision clearly revealing South Dakota’s existent public policy, the Court’s duty was to maintain and enforce the parties’ contract as written.
The South Dakota Supreme Court began its analysis by acknowledging that the existence of any rights and obligations of the parties to an insurance contract was to be determined by the language of the contract. It was undisputed by the parties that the language of the contract was unambiguous. In that regard, the policy excluded coverage for any unknown loss that was in progress at the inception date of the policy or that occurred before the inception date of the policy. It was also undisputed by the parties that the property damage in question began before EMC’s coverage period started, and that the property damage was unknown to the LLC before the effective date of EMC’s policy.
Addressing the public policy issue, the Court noted that although an insurance contract may be unambiguous, that “the conditions and limitations imposed by the insurance company must be consistent with public policy.” The Court noted: “Long ago, this Court declared that ‘[p]ublic policy is that principle of law which holds that no person can lawfully do that which has a tendency to be injurious to the public or against the public good.’”. According to the Court, determining public policy is a revelation informed by the process of interpretation of statutory and constitutional provisions, judicial actions and administrative actions. The Court elaborated. Public policy safeguarded “that which the community want[ed] and not that which an ideal community ought to want.” Therefore, the Court found that “[u]ntil firmly and solemnly convinced that an existent public policy is clearly revealed, a court is not warranted in applying the principle under consideration.” In light of the Court’s discussion of public policy, the Court then noted that no South Dakota constitutional provision, statute, administrative agency action, or judicial decision addressed EMC’s exclusion, and a review of South Dakota statutes governing liability insurance revealed no provision prohibiting a general liability policy from excluding coverage for an unknown continuous or progressive loss that occurred before the inception date of the policy.
Although the South Dakota Legislature had not examined the efficacy of an exclusion like EMC’s unknown and continuous progressive loss exclusion, the Court did find that a review of relevant treatises revealed a recognized trend in the commercial insurance industry, whereby insurers were narrowing coverage for continuous and progressive injury or damage. In the absence of an express prohibition and the commercial insurance industry’s trend for narrowing coverage in this area, the Court saw no indication that the exclusion violated public policy.
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