City of Fort Pierre v. United Fire & Casualty Co.

463 N.W.2d 845, 21 Envtl. L. Rep. (Envtl. Law Inst.) 20810, 32 ERC (BNA) 1461, 1990 S.D. LEXIS 172

• Court: South Dakota Supreme Court
• Decided: December 5, 1990
• Docket: 16907, 16936
• Status: Published

Opinions

MILLER, Chief Justice (on reassignment).

United Fire & Casualty Company (United) appeals a circuit court judgment holding it liable for the costs and expenses incurred by the City of Ft. Pierre (City) in defending an action brought against City by the federal government.

FACTS

United issued a public officials errors and omissions insurance policy to City. Under this policy United agreed:

To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay on account of any claim made against the Insured except as hereinafter limited and caused by any negligent act, error or omission of the Insured or any other person for whose acts the Insured is legally liable in the conduct of his duties as the public official holding the office shown in the Declarations. (Emphasis added.)

The policy specifically excluded coverage for “injury to or destruction of any tangible property including loss of use thereof;” and “liability for any loss caused intentionally by or at the direction of the Insured.” (Emphasis added.) City was required to give United notice “[a]s soon as practicable” after City became aware of any negligent act, error or omission, and to “immediately forward” every summons or other process if suit was brought against City.

On March 18, 1980, City applied to the United States Army Corps of Engineers (Corps) for a permit under Section 404 of the Clean Water Act of 1977, 33 U.S.C. § 1344 (1988), to construct a roadway across a slough. The land involved, commonly known as the Ft. Pierre slough, lies between U.S. Highway 83 and the Missouri River, within the boundaries of City. The Corps then issued public notice of the application and invited public comments on it. The United States Fish & Wildlife Service (FWS) and the Environmental Protection Agency (EPA) both responded and recommended that the application be denied. City failed to respond to either the FWS or the EPA objections to the issuance of the permit.

On August 4, 1980, City began construction of the roadway in question, without the benefit of a permit. The City used 6,481 cubic yards of fill material to construct the 700 feet by 5 feet deep and 50 feet wide road. Thereafter, the Corps notified City by certified mail that these actions violated the Clean Water Act. The Corps further notified City that it must cease and desist in its actions.

On August 14, 1980, City began construction of a second roadway across the slough. This time, City placed 18,500 cubic yards of shale loam in the slough to construct a 2,000 feet by 5 feet deep and 50 feet wide roadway. City did not apply for nor did it receive a permit for the construction of the second roadway.

On July 29, 1981, the United States Government brought suit against City, alleging that it violated the Clean Water Act by discharging fill material into protected wetland waters without a permit. City had constructed the roadways based upon the advice of its attorney¹ that the slough was not a wetland area within the meaning of the Clean Water Act, thereby making a permit unnecessary. In its lawsuit, the United States sought to (1) permanently enjoin City from conducting any future fill activity without a permit; (2) to require City to perform restoration and erosion control work on that part of the slough already affected; and (3) to impose civil penalties in an amount not to exceed $10,000 for each day of violation.

City did not notify United about the lawsuit or request defense of the action until February 3, 1983. The delay in notification was evidently due to oversight of City or its former attorney regarding the existence of the insurance policy. United responded by informing City it would not defend the action because it believed the lawsuit was not covered by the policy.

Trial of the federal action commenced in the United States district court on August 31, 1983, and a decision was rendered December 30 of that year. The trial court ruled in favor of the United States. United States v. City of Ft. Pierre, South Dakota, 580 F.Supp. 1036 (D.S.D.1983). City appealed to the Eighth Circuit Court of Appeals and, in October of 1984, that court reversed the district court’s decision, concluding that the slough was not a protected wetland under the Clean Water Act. United States v. City of Ft. Pierre, South Dakota, 747 F.2d 464 (8th Cir.1984). City’s legal fees defending the federal lawsuit totaled $28,445.56, $16,618.49 of which was incurred after United was notified of the action.

City ultimately brought this suit against United seeking to recover its legal fees and expenses incurred in defending the federal lawsuit. United answered, asserting that it was not obligated to provide a defense because City’s conduct at issue in the federal lawsuit was outside the coverage of the insurance policy. The circuit court concluded that defense of the federal lawsuit was within the coverage of the policy, thereby entitling City to recover the costs and expenses it incurred after United was notified of the lawsuit. United appeals, claiming that the circuit court erred in concluding that the conduct alleged in the federal lawsuit was within policy coverage and that the delayed notification did not preclude coverage. By notice of review, City claims the circuit court erred in requiring United to pay only the expenses incurred after notification, rather than all legal defense expenses.

We reverse, holding that United had no duty to defend under the policy.

ISSUE I

WHETHER UNITED HAD A DUTY TO DEFEND WHEN THE ERRORS AND OMISSIONS POLICY SPECIFICALLY EXCLUDED INTENTIONAL CONDUCT.

Insurance may protect the insured from the consequence of his negligent acts, errors and omissions. 13A G. Couch, Couch on Insurance § 48:166 (2nd ed. 1982). Errors and omissions policies are a hybrid form of insurance coverage. It guards against loses arising to the insured, as well as liabilities arising on the part of the insured, by reason of errors or omissions. 9 J. Appleman, Insurance Law & Practice § 5256 (1981). An errors and omissions policy provides a specialized and limited type of insurance coverage. Grieb v. Citizens Cas. Co. of N.Y., 33 Wis.2d 552, 148 N.W.2d 103 (1967).

Here, the coverage included in the policy was for “any negligent act, error or omission” of City. The policy further excluded “injury to or destruction of any tangible property” or “liability for any loss caused intentionally or at the direction of the insured.” (Emphasis added.) The duty of an insurance company to defend its insured is determined by the allegations of the complaint and the action brought against the insured. Bayer v. Employers Reinsurance Corp., 383 N.W.2d 858, 860 (S.D.1986); U.S. Fidelity & Guaranty Co. v. Louis A. Roser Co., 585 F.2d 932, 936 (8th Cir.1978).

The complaint brought by the United States alleged that the City intentionally violated the Clean Water Act. The prayer for relief sought injunction and civil penalties. In a letter to City’s Mayor from the Corps of Engineers, City’s continued construction of a road in the absence of a permit was characterized as a “willful and flagrant violation of federal statutes.” The federal government never alleged that City’s conduct was negligent or the result of some error or omission. (Obviously, City believed that the federal government’s classification of this “wetland” was incorrect and so it continued to build a roadway without a federal permit. City’s belief was later determined to be legally correct since the United States Court of Appeals, Eighth Circuit, held that the slough was not a wetland.)

The burden of showing no duty to defend rests on the insurer. Hawkeye-Security Ins. Co. v. Clifford, 366 N.W.2d 489, 492 (S.D.1985). The insurer must show the claim clearly falls outside of policy coverage. Id. If, after considering the complaint, and when appropriate, other 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. Id.

In Black Hills Kennel Club v. Firemens’ Fund Indemnity Co., 77 S.D. 503, 506-507, 94 N.W.2d 90, 92 (1959), we noted that:

The scope of liability insurance is determined from the contractual intent and objectives of the parties as expressed in the policy. We are mindful of the rule of construction that where the provisions of an insurance contract are not clear and are fairly susceptible of different interpretation that one most favorable to the insured should be adopted. This rule does not mean, however, that the court may seek out a strained or unusual meaning for the benefit of the insured. Insurers may assume some risks and exempt themselves from liability for others.

(Citations omitted.) The federal government’s lawsuit arose exclusively because City decided to intentionally ignore the government’s permit requirements. City made a knowing, conscious decision to construct the roadway, being fully aware that the federal government would require an application for a permit (in fact, City ultimately applied for such a permit). This is not conduct which is negligent or an error or omission. Thus, United had no duty to defend under the policy. See Continental Casualty Co. v. Richmond, 763 F.2d 1076 (9th Cir.1985). Black Hills Kennel Club, supra.

ISSUE II

WHETHER THE FEDERAL LITIGATION WHICH SOUGHT CIVIL PENALTIES CONSTITUTED A SUIT FOR “DAMAGES” UNDER THE INSURANCE POLICY, REQUIRING UNITED TO DEFEND CITY.

United contends that the circuit court erred in concluding that the civil penalties requested by the United States in the federal lawsuit were not excluded from coverage under the policy. United asserts that a civil penalty is not covered by the policy because such penalties are punitive in nature and public policy prevents insurance coverage for punitive damages.

The terms of the insurance contract required United “[t]o pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay on account of any claim made against the Insured -” However, this language is limited by the exclusions in the policy.

As stated earlier, the federal government’s complaint alleged nothing which could be characterized as a negligent act, nor as an error or omission.² It brought an injunction action with possible civil penalties as a consequence. The civil penalties prayed for by the federal government were punitive in nature and not a request for compensatory damages. United States v. Edwards, 667 F.Supp. 1204, 1213-15 (W.D.Tenn.1987). The civil penalty, in connection with the injunctive relief, is often included to motivate the alleged wrongdoer to quick action, as well as for punishment, or a combination thereof. Punitive damages are not compensatory but are in addition to compensatory damages.

Although there is a split in authority, as a general rule, it is against public policy to allow the insured wrongdoer to shift the burden of payment of punitive damages to its insurer.³ Two interests implicated by an award of punitive damages are punishment to the wrongdoer and deterrence of the wrongdoer’s conduct. Here, City committed the “wrong” and is attempting to shift responsibility for its actions to its insurer. To allow City to do so would allow it to act with impunity. City would not be punished, nor would it be deterred from similar actions. “Were a person able to insure himself against economic consequences of his intentional wrongdoing, the deterrence attributable to financial responsibility would be missing.” Ambassador Ins. Co. v. Montes, 76 N.J. 477, 483, 388 A.2d 603, 606 (1978).

Thus, because we have determined that the civil penalties prayed for by the federal government were punitive in nature and that in this instance the award of punitive damages would violate public policy, we hold that United had no duty to defend City under the policy.

We have considered the other issues raised and find them to be without merit or moot.

The judgment of the trial court is reversed.

WUEST and MORGAN, JJ., concur. HENDERSON and SABERS, JJ., dissent.

1 . City's attorney at that time is not involved in this litigation.

2 . Note that this is distinguishable from the situation wherein the language of the insurance policy covers the underlying liability, as was presented in Providence Washington Ins. Co. of Alaska v. City of Valdez, 684 P.2d 861 (Alaska 1984). Here, the language of the insurance policy specifically excludes coverage of the underlying liability, thus Valdez is distinguishable.

3 . Rossman v. State Farm Mut. Auto. Ins. Co., 832 F.2d 282 (4th Cir.1987); Northwestern Nat'l. Cas. Co. v. McNulty, 307 F.2d 432 (5th Cir.1962); City Prod. Corp. v. Globe Indem. Co., 88 Cal.App.3d 31, 151 Cal.Rptr. 494 (1979); U.S. Concrete Pipe Co. v. Bould, 437 So.2d 1061 (Fla.1983); Beaver v. Country Mut. Ins. Co., 95 Ill.App.3d 1122, 1125, 51 Ill.Dec. 500, 420 N.E.2d 1058 (1981); Crull v. Gleb, 382 S.W.2d 17 (Mo.Ct.App.1964); LoRocco v. N.J. Mfr. Indem. Ins. Co., 82 N.J.Supr. 323, 197 A.2d 591 (1964); Hartford Acc. & Indem. Co. v. Village of Hemstead, 48 N.Y.2d 218, 422 N.Y.S.2d 47, 397 N.E.2d 737 (1979); Casey v. Calhoun, 40 Ohio App.3d 83, 531 N.E.2d 1348 (1987); Dayton Hudson Corp. v. American Mut. Liab. Ins. Co., 621 P.2d 1155 (Okla.1980); Esmond v. Liscio, 209 Pa.Super. 200, 224 A.2d 793 (1966); 15A G. Couch, Couch on Insurance § 56.9. See also Union L.P. Gas Sy., Inc. v. International Surplus Lines Ins. Co., 869 F.2d 1109 (8th Cir.1989); Creed v. Allstate Ins. Co., 365 Pa.Supr. 136, 529 A.2d 10 (1987); Contra Skyline Harvestore Sys. Inc. v. Centennial Ins. Co., 331 N.W.2d 106 (Iowa 1983); Creech v. Aetna Cas. & Sur. Co., 516 So.2d 1168 (La.App.1987) writ denied 519 So.2d 128 (La.1988); Harrell v. Travelers Indem. Co., 279 Or. 199, 567 P.2d 1013 (1977); First Bank (NA)-Billings v. TransAmerica Ins. Co., 209 Mont. 93, 679 P.2d 1217 (1984); Mazza v. Medical Mut. Ins. Co., 311 N.C. 621, 319 S.E.2d 217 (1984); American Home Assur. Co. v. Safway Steel Prods. Co., Div. of Figgie Int’l Inc., 743 S.W.2d 693 (Tex.App.1987); United Serv. Auto. Ass’n. v. Webb, 235 Va. 655, 369 S.E.2d 196 (1988); Sinclair Oil Co. v. Columbia Casualty Co., 682 P.2d 975 (Wyo.1984).