Interlachen Properties, LLC v. State Auto Insurance Company et al

Filing 80

MEMORANDUM AND ORDER granting in part and denying in part 62 Defendant's Motion for Summary Judgment(Written Opinion) Signed by Chief Judge John R. Tunheim on August 4, 2017. (JMK)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
INTERLACHEN PROPERTIES, LLC,
KUEPERS CONSTRUCTION, INC., and
INTERLACHEN PROPERTYOWNERS
ASSOCIATION, INC.,
Plaintiffs,
v.

Civil No. 14-4380 (JRT/LIB)

MEMORANDUM OPINION
AND ORDER ON DEFENDANT’S
MOTION FOR
SUMMARY JUDGMENT

STATE AUTO INSURANCE COMPANY,
Defendant.
Lauris A. Heyerdahl, LARKIN HOFFMAN DALY & LINDGREN,
LTD., 8300 Norman Center Drive, Suite 1000, Minneapolis, MN 55437,
for plaintiffs.
Cheryl A. Hood Langel and Robert L. McCollum, MCCOLLUM
CROWLEY MOSCHET MILLER & LAAK, LTD, 7900 Xerxes
Avenue South, Suite 700, Minneapolis, MN 55431, for defendant.

Defendant State Auto Insurance Co. (“State Auto”) provided insurance to
construction contractor Kuepers Construction, Inc. (“Kuepers”) under a commercial
general liability (“CGL”) policy. Kuepers designed and constructed homes in a common
interest community in Nisswa, Minnesota (the “Development”), which Interlachen
Properties, LLC (the “LLC”) sold to members of the Interlachen Propertyowners
Association, Inc. (“Interlachen”).

After discovering a number of design and

workmanship defects in the buildings, Interlachen sued Kuepers and the LLC in Crow
Wing County District Court. Kuepers and the LLC eventually executed Miller-Shugart

34

agreements 1 with Interlachen.

Interlachen, Kuepers, and the LLC (collectively,

“Plaintiffs”) now seek enforcement of those agreements against State Auto and also
allege that State Auto breached its contractual duties to defend and indemnify Kuepers
and the LLC. State Auto moves for summary judgment on all of Plaintiffs’ claims. For
the reasons described below, the Court will grant in part and deny in part State Auto’s
motion for summary judgment.
BACKGROUND 2
I.

THE INTERLACHEN DEVELOPMENT
Kuepers designed and constructed the Development – a community of townhomes

resembling log cabins – in Nisswa, Minnesota, between November 1997 and July 2001.
(Aff. of Robert L. McCollum (“McCollum Aff.”), Ex. 1 (“State Court Order”) at 3-4,
Sept. 28, 2016, Docket No. 65.) 3 Kuepers did not use subcontractors. (E.g., id., Ex. 2 at
227:22-228:2, 232:12-14, 239:25-240:25.) The LLC contracted with Kuepers to build the
1

A Miller-Shugart agreement is a settlement between a plaintiff and an insured defendant
when the insurer has either denied coverage for the plaintiff’s claims or the existence of coverage
is in doubt. The insured stipulates to entry of judgment against the insured; in exchange, the
plaintiff agrees to only pursue collection of the judgment from the insurer, with coverage
generally determined in a subsequent proceeding between the plaintiff and the insurer. See
generally Miller v. Shugart, 316 N.W.2d 729, 732-36 (Minn. 1982).
2

Kuepers (a corporation), the LLC (a limited liability company), and Interlachen (a nonprofit corporation) are all Minnesota citizens. State Auto is a corporation with its principal place
of business in Ohio and is not a citizen of Minnesota but does business in Minnesota. The Court
has jurisdiction over this matter pursuant to 28 U.S.C. § 1332(a). The parties agree that
Minnesota law applies.
3

The Development consists of 24 units: 10 duplexes (units 1-20), 1 triplex (units 30-32),
and a lodge (unit 33). (State Auto’s Mem. in Supp. of Summ. J. at 3, Sept. 28, 2016, Docket No.
64.)

-2-

Development, sold the units in the Development between July 1998 and September 2001,
and “issued construction-related warranties regarding the Units to the buyers.” (State
Court Order at 4-6; McCollum Aff., Ex. 3; Decl. of Douglas Kuepers ¶ 5, Nov. 11, 2014,
Docket No. 16.) The Development is a “common interest community” as defined in
Minn. Stat. § 515B.1-103(10); 4 the LLC was the development’s “declarant.” 5
(McCollum Aff., Ex. 5 (“State Court Compl.”) ¶ 3.) Interlachen is the association of
unit-owners in the Development. (State Court Order at 3.)

II.

THE RELEVANT INSURANCE POLICIES
State Auto provided CGL insurance coverage (under the “CGL Policy”) to

Kuepers between December 26, 2001 and December 1, 2011. 6 (Aff. of Steve Kuepers
(“Kuepers Aff.”) ¶¶ 5-8, Oct. 19, 2016, Docket No. 71.) State Auto was Kuepers’s only

4

Section 515B.1-103(10) defines “common interest community” as:

contiguous or noncontiguous real estate within Minnesota that is subject to an
instrument which obligates persons owning a separately described parcel of the
real estate, or occupying a part of the real estate pursuant to a proprietary lease, by
reason of their ownership or occupancy, to pay for (i) real estate taxes levied
against; (ii) insurance premiums payable with respect to; (iii) maintenance of; or
(iv) construction, maintenance, repair or replacement of improvements located on,
one or more parcels or parts of the real estate other than the parcel or part that the
person owns or occupies.
5

The “declarant” of a “common interest community” is the person who has either
“executed a declaration” – the instrument that “creates a common interest community” – and/or
“offered prior to creation of the common interest community to transfer their interest in a unit [of
the community] to be created and not previously transferred.” Minn. Stat. § 515B.1-103(15)(16).
6

The policy number changed over the years, but the details of the applicable policies
remained constant. (See Kuepers Aff. ¶¶ 5-8; McCollum Aff. ¶ 9.)

-3-

CGL insurer during this period.

(Id. ¶ 9.)

The limits for the CGL Policy were

$1,000,000 for each occurrence and $2,000,000 for general aggregate. (Id. ¶¶ 5-8; see
also id., Exs. A-C; McCollum Aff., Ex. 8 (“CGL Policy”).) Subject to a number of
exclusions and limitations, the CGL Policy generally covered “those sums that the
insured becomes legally obligated to pay as damages because of ‘bodily injury’ or
‘property damage,’” as long as the property damage took place during the coverage
period and was caused by an “occurrence” in the “coverage territory.” (CGL Policy at 8.)
The CGL Policy included the following exclusions:
L.

Damage To Your[ 7] Work
“Property damage” to “your work” arising out of it or any part of it
and included in the “products-completed operations hazard.” This
exclusion does not apply if the damaged work or the work out of
which the damage arises was performed on your behalf by a
subcontractor.

m.

Damage To Impaired Property Or Property Not Physically Injured
“Property damage” to “impaired property” or property that has not
been physically injured, arising out of:
(1)

A defect, deficiency, inadequacy or dangerous condition in
“your product” or “your work”; or

(2)

A delay or failure by you or anyone acting on your behalf to
perform a contract or agreement in accordance with its terms.

This exclusion does not apply to the loss of use of other property
arising out of sudden and accidental physical injury to “your
product” or “your work” after it has been put to its intended use.
(Id. at 11.) The CGL Policy also included the following definitions:

7

The CGL Policy defined “you” and “your” to “refer to the Named Insureds.” (CGL
Policy at 8.)

-4-

3.

“Bodily injury” means bodily injury, sickness or disease sustained
by a person, including death resulting from any of these at any time.

....
13.

“Occurrence” means an accident, including continuous or repeated
exposure to substantially the same general harmful conditions.

....
16.

“Products-completed operations hazard”:
a.

Includes all “bodily injury” and “property damage” occurring
away from premises you own or rent and arising out of “your
product” or “your work” except:
(1)

Products that are still in your physical possession; or

(2)

Work that has not yet been completed or abandoned.
However, “your work” will be deemed completed at
the earliest of the following times:
(a) When all of the work called for in your contract has
been completed.
(b) When all of the work to be done at the job site has
been completed if your contract calls for work at more
than one job site.
(c) When that part of the work done at the job site has
been put to its intended use by any person or
organization other than another contractor or
subcontractor working on the same project.

Work that may need service, maintenance, correction, repair or
replacement, but which is otherwise complete, will be treated as
completed.
....
17.

“Property damage” means:
a.

Physical injury to tangible property, including all resulting
loss of use of that property. All such loss of use shall be
deemed to occur at the time of the physical injury that caused
it; or

b.

Loss of use of tangible property that is not physically injured.
All such loss of use shall be deemed to occur at the time of
the “occurrence” that caused it.

....

-5-

22.

“Your work”:
a.

Means:
(1)
(2)

b.

Work or operations performed by you or on your
behalf; and
Materials, parts or equipment furnished in connection
with such work or operations.

Includes
(1)

Warranties or representations made at any time with
respect to the fitness, quality, durability, performance
or use of “your work”, and

(2)

The providing of or failure to provide warnings or
instructions.

(Id. at 17, 19-20.)
The CGL Policy obligated State Auto to defend Kuepers (and any other insured)
against any lawsuit seeking covered damages. (Id. at 8.) But State Auto had “no duty to
defend [Kuepers or any other] insured against any ‘suit’ seeking damages for ‘bodily
injury’ or ‘property damage’ to which [the CGL Policy] d[id] not apply.” (Id.)

III.

THE CONSTRUCTION-DEFECT ACTION
Starting in 2004, Interlachen discovered defects in and damage to the buildings in

the Development, including discolored and peeling wood siding attributable to high
levels of moisture in the logs. (State Court Order at 7-10.) In April 2011, Interlachen
commenced a construction-defect action against Kuepers and the LLC in Crow Wing
County District Court. (Id. at 10; see also McCollum Aff., Ex. 4.) After amending the
complaint, Interlachen’s claims against Kuepers included: breach of contract; breach of
statutory and implied warranties; intentional and/or negligent misrepresentation;

-6-

negligence; breach of the duty of good faith and fair dealing; professional engineering
and design negligence; negligent repair; and equitable estoppel. (State Court Compl.
¶¶ 33-49, 61-116.) 8 Interlachen also alleged breach of express warranties, breach of
implied warranties, and negligence against the LLC.

(Id. ¶¶ 50-60, 79-87.)

In the

amended complaint, Interlachen alleged the following under the heading “DAMAGES”:
The cost to correct the building code violations, remedy the construction
defects and product failures, and repair the damage to the [Development],
including the Townhomes, is believed to exceed $50,000.00. In addition,
as a result of the building code violations, construction defects, product
failures, and related damage, the value of the [Development], including the
Townhomes, is believed to have been impaired and diminished in an
amount greater than $50,000.00.
(Id. ¶ 32.)

In the end, Interlachen produced professional estimates of between

approximately $5.4 million and $5.5 million for the cost of remedying the defective
construction and negligent repairs. (Aff. of Lauris A. Heyerdahl (“Heyerdahl Aff.”),
Ex. G at 73, Oct. 19, 2016, Docket No. 70 (approximately $5.38 million); id., Ex. H at
1682:2-7 (approximately $5.5 million); id., Ex. J at 1280:8-15 (approximately
$5.4 million).)

8

Interlachen alleged that the townhomes in the Development were not constructed in
accordance with industry standards and applicable building codes because of failure to properly
install and seal log siding, install a weather resistant barrier, install windows, insulate around
windows and penetrations, grade the lots, ventilate the ceilings, frame under windows, and
comply with “braced-framing requirements.” (State Court Compl. ¶ 23.)

-7-

Both Kuepers and the LLC notified State Auto about Interlachen’s lawsuit.
Kuepers tendered defense of all but the design-defect claims to State Auto. 9 State Auto
provided a defense to Kuepers subject to a Reservation of Rights dated April 12, 2011.
(McCollum Aff., Ex. 6 at 1.) State Auto hired the law firm Cousineau McGuire to defend
Kuepers at no cost to Kuepers. (Id.) State Auto did not provide any defense to the LLC;
the LLC hired its own counsel.
On January 4, 2013, the state court granted summary judgment to the LLC and
granted partial summary judgment to Kuepers. (State Court Order at 30-31.) The state
court dismissed most claims as barred by the applicable statutes of limitations, including:
breach of contract, breach of implied warranty, breach of express warranty, intentional
and/or negligent misrepresentation, breach of the duty of good faith and fair dealing,
negligence, and professional engineering and design negligence. (Id. at 20-23, 26 (citing
the applicable statutes of limitations at Minn. Stat. §§ 515B.4-115(c), 541.051,
subd. 1(a)).)

The only claims that remained after summary judgment were (1) the

statutory warranty claims against Kuepers based on Minn. Stat. ch. 327A 10 as to
9

Kuepers’s professional-liability carrier defended Kuepers on the design-defect claims.
(Heyerdahl Aff., Ex. E.)
10

Minnesota Statutes section 327A.02 sets forth three statutory warranties (good for one,
two and ten years) that are implied as a matter of law in every sale of a completed dwelling. The
one-year warranty covers “defects caused by faulty workmanship and defective materials due to
noncompliance with building standards.” Minn. Stat. § 327A.02, subd. 1(a). The ten-year
warranty covers “major construction defects due to noncompliance with building standards.” Id.,
subd. 1(c). Under Minn. Stat. § 327A.05, a plaintiff purchasing a new home has a cause of
action for damages arising out of the breach or for specific performance, with damages limited to
either the amount necessary to remedy the defect/breach or the difference between the value of
the dwelling with the defect and the value of the dwelling without the defect.

-8-

seventeen of the twenty-four units – claims that the court held were not time-barred – and
(2) the negligent repairs claim against Kuepers for work performed as late as 2009. (Id.
at 23-24.)
A few weeks before trial, on November 15, 2013, State Auto sent Kuepers an
Updated Reservation of Rights. (McCollum Aff., Ex. 7.) The letter stated that “breach of
warranty claims are not covered” under the CGL Policy and that State Auto would “only
be able to consider indemnification for negligence/negligent repair work causing any
resulting damage.” (Id. at 1 (emphasis added).) The letter reiterated that the CGL
Policy did not cover “[p]roperty damage” to “your work” (referring to Kuepers’s work).
(Id. at 2.) The letter also explained that the CGL Policy was “not intended to be a
warranty or guarantee of your workmanship” and indicated that Kuepers “may wish to
consult its own personal counsel regarding this matter.” (Id. at 4.) Kuepers argues that
this was the first time that State Auto asserted that it would raise a variety of defenses to
coverage of the claims going to trial, but the record shows State Auto’s defense was,
from the beginning, subject to a Reservation of Rights. (See McCollum Aff., Ex. 6 at 1
(“Unfortunately, it appears the policy may not cover you for some or all aspects of this
claim. This is not a coverage denial but, based on the facts as we know them, coverage is
uncertain right now, or may be significantly limited. . . . The company reserves their
right under the policy to deny coverage to you, or anyone claiming coverage under this
policy based on the policy language and facts of the case.”).
The remaining claims went to trial in December 2013; the jury awarded
Interlachen $2,147,000. (Id., Ex. 14 at 1, 3; id., Ex. 15.) The jury found that Kuepers
-9-

breached the one-year statutory warranty pursuant to § 327A.02(a), 11

which was a

“direct cause” of “damages to [all seventeen units].” (Id., Ex. 14 at 1; see also id., Ex. 15
at 1-2.) The jury found that “the amount of money required to fairly and adequately
compensate [Interlachen] for its damages to each particular unit” was $125,000 per unit
for units 1-6 and 12-20 and $94,000 per unit for units 30-31. (Id., Ex. 14 at 2; id., Ex. 15
at 4.) The jury also found that Kuepers was negligent in the performance of repair work
and maintenance at the Development, and that this negligence directly caused
“[Interlachen]’s damages,” for which $120,000 would be to “fair[] and adequate[]”
compensation. 12 (Id., Ex. 14 at 2; id., Ex. 15 at 5.)
The state court entered judgment against Kuepers on February 10, 2014, for the
amount of the jury’s verdict. (Id., Ex. 14 at 3.) After the entry of judgment, Interlachen
sought an award of $757,875.15 in costs and disbursements, including interest.
(Heyerdahl Aff., Ex. O at 119.) On May 15, 2014, the state court awarded $132,487.82
in costs to Interlachen and also ordered that Interlachen was “entitled to interest which
shall be calculated by the Court Administrator.” 13

(McCollum Aff., Ex. 16 at 3;

Heyerdahl Aff., Ex. Q at 141.)

11

The jury found Kuepers did not breach the ten-year statutory warranty in § 327A.02(c).
(McCollum Aff., Ex. 14 at 1; id., Ex. 15 at 2.)
12

However, the jury found that in relation to the negligent repairs claims, Interlachen was
30% contributorily negligent (resulting in an award of $84,000 on those claims). (McCollum
Aff., Ex. 14 at 2-3; id., Ex. 15 at 5.)
13

The Court Administrator never calculated interest because of the subsequent MillerShugart agreement.

- 10 -

The state court initially stayed the February judgment pending appeal conditioned
on Kuepers posting a supersedeas bond in the full amount of the judgment by
February 21, 2014, later extended to February 26, 2014. (McCollum Aff., Ex. 14 at 3;
Heyerdahl Aff., Ex. L.) Kuepers asked State Auto to furnish the bond on its behalf to
stay collection efforts, since Kuepers was on the verge of bankruptcy and could not
qualify for a bond of the required size in its own name. 14 (See McCollum Aff., Ex. 17 at
69; id., Ex. 18 at 1; Kuepers Aff. ¶¶ 13, 15.) By that point, State Auto’s coverage
position was that the CGL Policy did not cover the judgment and that the CGL Policy
also did not obligate State Auto to procure a supersedeas bond for Kuepers. (McCollum
Aff., Ex. 23.)
State Auto refused to procure a supersedeas bond for Kuepers, and Kuepers failed
to post the required bond. In March 2014, Interlachen began the collection process
through post-judgment discovery. (Id., Ex. 52.) On April 1, 2014, Interlachen served
Kuepers with a Demand for Disclosure of assets and finances. (Heyerdahl Aff., Exs. UV.) When Kuepers did not provide the requested information, Interlachen moved the
state court to find Kuepers in contempt and to confine the company’s CEO, Doug
Kuepers, until Kuepers complied with the Demand for Disclosure. (Heyerdahl Aff.,
Ex. W.)
Michael Barrett – the attorney at Cousineau McGuire that State Auto hired to
defend Kuepers – and State Auto proceeded with plans to appeal the judgment, while
14

In other words, Kuepers wanted State Auto to apply for and collateralize a supersedeas
bond in State Auto’s name on Kuepers’s behalf.

- 11 -

Kuepers’s independently-retained attorneys – Mike McGrath and Chris Yetka – focused
on settlement. In March 2014, Barrett filed two post-trial motions on Kuepers’s behalf.
(See id., Ex. 22.)

But Interlachen and Kuepers (represented by McGrath) were

negotiating a possible Miller-Shugart agreement at the time. (Id., Ex. 27.) Because a
state court ruling on the post-trial motions could have damaged the negotiations, in late
June 27, 2014, Interlachen and Kuepers submitted a joint letter to the state court asking it
to delay ruling on the post-trial motions. (See id., Exs. 28, 31.) Plaintiffs allege that
despite repeated requests that they engage in settlement discussions, Barrett and State
Auto “never made a realistic settlement offer to [Interlachen] following the entry of
judgment,” (Kuepers Aff. ¶ 16), and instead were determined to appeal the verdict even
though execution of judgment could force Kuepers into bankruptcy. On the other hand,
State Auto contends that it made genuine efforts to settle on Kuepers’s behalf. (See, e.g.,
McCollum Aff., Exs. 23, 25.)
On July 28, 2014, Kuepers and Interlachen executed a Miller-Shugart agreement
(“Agreement 1”) that included stipulation to a judgment of $2,940,875.15 that Interlachen
could collect exclusively from “State Auto, CNA and the Liability Insurers.” (McCollum
Aff., Ex. 32 at 5-6.) Agreement 1 expressly excluded the design-defect claims (which
were covered under Kuepers’s separate policy with its professional-liability carrier), as
well as the claims against the LLC. (Id. at 5-6.)
On August 5, 2014, Interlachen and Kuepers submitted Agreement 1 to the state
court for approval. (McCollum Aff., Ex. 38.) Over State Auto’s objections, on August 7,
2014, the state court issued an order approving of Agreement 1; the state court
- 12 -

subsequently entered judgment for the stipulated amount of $2,940,875.15 against
Kuepers. (Id., Exs. 30, 38.)
On August 22, 2014, Interlachen filed a notice of appeal of the state court’s
dismissal of the design-defect claims and the claims against the LLC. (Id., Ex. 44;
Heyerdahl Aff., Ex. Z.) Facing the prospect of liability as a result of the appeal, on
August 28, 2014, the LLC entered into a Miller-Shugart agreement with Interlachen
(“Agreement 2”), in which the LLC stipulated to a judgment of $2,059,125 against the
LLC, to be collected only from State Auto or “any other insurer from whom [the LLC] is
entitled to indemnification.” (McCollum Aff., Ex. 40 at 3-4.) On September 24, 2014,
over State Auto’s objections, the state court approved of Agreement 2 and entered
judgment of $2,059,125 against the LLC. (McCollum Aff, Exs. 34-35, 41).
Kuepers and Interlachen also executed a third Miller-Shugart agreement,
pertaining to the professional negligence claims only, which is not a subject of this
action. The three Miller-Shugart agreements put an end to the state-court litigation.

IV.

PROCEDURAL HISTORY
The LLC commenced this action in Crow Wing County on October 8, 2014,

naming State Auto, Kuepers, and Interlachen as defendants. (Notice of Removal, Ex. 1
(“Compl.”) at 1, Oct. 17, 2014, Docket No. 1.) State Auto removed the action to federal
court. (Notice of Removal at 1.)
The LLC and Kuepers allege State Auto breached its obligations under the CGL
Policy to defend and indemnify them in the state-court action and, among other claims,

- 13 -

that State Auto also breached its fiduciary duty and the implied covenant of good faith
and fair dealing. 15 (Compl. at 13-17; Kuepers’s Answer & Cross-cl. Against State Auto
(“Kuepers Answer”) at 11-13, Nov. 14, 2014, Docket No. 28.) The LLC and Kuepers
seek damages, costs, and fees. (Compl. at 17-18; Kuepers Answer at 13-14). Plaintiffs
seek enforcement of both Agreements.

(Compl. at 14, 18; Kuepers Answer at 14;

Interlachen’s Answer, Cross-cl. & Countercl. (“Interlachen Answer”) at 13, Nov. 14,
2014, Docket No. 27.) Interlachen seeks orders of garnishment allowing it to collect
these judgments from State Auto as well as to garnish any award that Kuepers or the LLC
wins in this litigation. (Interlachen Answer at 13.)
State Auto seeks a declaratory judgment that both Agreements are unenforceable.
(State Auto’s Answer & Countercl. to the LLC’s Compl. at 18-21, Oct. 28, 2014, Docket
No. 10.) State Auto also seeks fees and costs from the LLC, alleging that the LLC
“brought this claim with full knowledge that it never purchased insurance coverage from
State Auto, that it never paid a premium for insurance coverage to State Auto, that it is
not a named insured or other insured under any policies of insurance provided by State
Auto, and because it has no liability to [Interlachen].” (Id. at 21.)
State Auto moved for realignment of the parties on October 28, 2014, arguing that
Interlachen’s and Kuepers’s interests are aligned with the LLC’s. (State Auto’s Mem. in
Supp. of Mot. for Realignment at 1, Oct. 28, 2014, Docket No. 6). On November 11,
15

Plaintiffs have not briefed a response to State Auto’s motion to dismiss the claims for
breach of fiduciary duty and breach of the implied covenant of good faith and fair dealing.
Therefore, the Court considers these claims abandoned. See Luckey v. Alside, Inc., No. 15-2512,
2017 WL 1183974, at *4 (D. Minn. Mar. 29, 2017).

- 14 -

2014, the LLC moved for remand based on lack of diversity. (The LLC’s Mot. to
Remand, Nov. 11, 2014, Docket No. 12.) On September 30, 2015, the Court affirmed the
Magistrate Judge’s order granting State Auto’s motion to realign the parties and denying
the LLC’s motion to remand. (Mem. Op. & Order, Sept. 30, 2015, Docket No. 43.)
State Auto filed the instant motion for summary judgment on September 28, 2016,
seeking dismissal with prejudice of all claims against it.

ANALYSIS
I.

STANDARD OF REVIEW
Summary judgment is appropriate where there are no genuine issues of material

fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P.
56(a). A fact is material if it might affect the outcome of the lawsuit, and a dispute is
genuine if the evidence is such that it could lead a reasonable jury to return a verdict for
either party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A court
considering a motion for summary judgment must view the facts in the light most
favorable to the non-moving party and give that party the benefit of all reasonable
inferences to be drawn from those facts. Matsushita Elec. Indus. Co. v. Zenith Radio
Corp., 475 U.S. 574, 587 (1986). Summary judgment is appropriate if the nonmoving
party “fails to make a showing sufficient to establish the existence of an element essential
to that party’s case, and on which that party will bear the burden of proof at trial.”
Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). “To defeat a motion for summary
judgment, a party may not rest upon allegations, but must produce probative evidence

- 15 -

sufficient to demonstrate a genuine issue [of material fact] for trial.” Davenport v. Univ.
of Ark. Bd. of Trs., 553 F.3d 1110, 1113 (8th Cir. 2009).

II.

BREACH OF CONTRACT
Kuepers and the LLC claim that State Auto breached a contractual duty to defend

and indemnify them in the underlying construction defect action. “An insurer’s duty to
defend its insured arises when any part of the claim against the insured is arguably within
the scope afforded by the policy.” Auto-Owners Ins. Co. v. Todd, 547 N.W.2d 696, 698
(Minn. 1996). “An insurer seeking to escape its duty to defend has the burden of
establishing that all parts of the cause of action fall clearly outside the scope of
coverage.” Id. “To determine whether a duty [to defend] exists, the allegations in the
underlying complaint and the surrounding facts will be compared with the relevant
language in the insurance policy.” Gen. Cas. Co. of Wis. v. Wozniak Travel, Inc., 762
N.W.2d 572, 576 (Minn. 2009). An insurer has “a duty to defend if any part of the
claims asserted against [the insured] in the underlying case ‘arguably’ falls within the
scope of coverage.” Ross v. Briggs & Morgan, 540 N.W.2d 843, 847 (Minn. 1995).
“When an insurer has a duty to defend a liability claim for which it questions coverage,
the insurer must expressly inform its insured that it accepts defense of the claim subject
to its right to later contest coverage of the claim based on facts developed at trial.”
Remodeling Dimensions, Inc. v. Integrity Mut. Ins. Co., 819 N.W.2d 602, 616 (Minn.
2012). “An insurer that fails to make such a reservation of rights is estopped from later
denying coverage of the claim, up to the policy limits.” Id.

- 16 -

“An insurer’s duty to defend is distinct from . . . the duty to indemnify.” Franklin
v. W. Nat’l Mut. Ins. Co., 574 N.W.2d 405, 406 (Minn. 1998).
The duty to defend is broader than the duty to indemnify in three ways:
(1) the duty to defend extends to every claim that “arguably” falls within
the scope of coverage; (2) the duty to defend one claim creates a duty to
defend all claims; and (3) the duty to defend exists regardless of the merits
of the underlying claims.
Wooddale Builders, Inc. v. Md. Cas. Co., 722 N.W.2d 283, 302 (Minn. 2006). “[A]n
insurer has a duty to indemnify when its insured is found liable for a third-party claim
within the terms of the liability insurance policy, but an insurer has no duty to indemnify
when its insured is found liable for a third-party claim that is outside the policy’s scope.”
Remodeling Dimensions, Inc., 819 N.W.2d at 616.

A.

Kuepers
1.

Duty to Defend Kuepers

There is no question that State Auto was obligated to defend Kuepers in the statecourt action. State Auto provided Kuepers with a defense, at no cost to Kuepers, until
Kuepers settled with Interlachen after trial. But Plaintiffs argue that State Auto breached
the duty to defend Kuepers when it refused to procure a supersedeas bond on Kuepers’s
behalf in order to stay the judgment against Kuepers. Plaintiffs argue that both the CGL
Policy and Minnesota law 16 obligated State Auto to procure the bond on Kuepers’s
behalf.

16

The one Minnesota case Plaintiffs cite, Powers v. Wilson, 166 N.W. 401 (Minn. 1918),
is not on-point.

- 17 -

Plaintiffs acknowledge that the CGL Policy does not contain language explicitly
obligating State Auto to furnish a supersedeas bond. The CGL Policy does obligate State
Auto to pay “[t]he cost of bonds to release attachments,” but it also clarifies that State
Auto “do[es] not have to furnish these bonds.” (CGL Policy at 21.) The thrust of
Plaintiffs’ argument is that an obligation to furnish the bond is encompassed within the
broader duty of the insurer to adequately defend the insured.
Inferring an obligation to furnish a supersedeas bond on behalf of an insured
conflicts with the CGL Policy’s statement that “[n]o other obligation or liability to pay
sums or perform acts or services is covered unless explicitly provided for.” (Id. at 8.)
Additionally, a deep tension with the overarching principle that an insurer is only
required to provide indemnification for claims for which there is insurance coverage
would result if, as Plaintiffs argue, State Auto’s contractual duty to defend implied a duty
to collateralize a supersedeas bond.
If [State Auto] were to post the bond, in the event of an unsuccessful
appeal, [State Auto] would be “required to functionally indemnify
[Kuepers] by forfeiting the bond for the trial judgment. Requiring insurers
to assume a broader duty to defend on this topic, then, may result in an
insurer having to indemnify an insured for a claim that the policy does not
cover.”
See James River Ins. Co. v. Interlachen Propertyowners Ass’n, No. 14-3434, 2016 WL
3093383, at *6 (D. Minn. June 1, 2016) (third alteration in original) (quoting Charter
Oak Ins. Co. v. Maglio Fresh Food, 45 F. Supp. 3d 461, 476 (E.D. Pa. 2014)).
Furthermore, even if the policy language requiring State Auto to pay the “costs” of
bonds to release attachments somehow implied State Auto must also pay the “costs” of

- 18 -

supersedeas bonds, State Auto still had no obligation to furnish bonds of either type,
under the plain terms of the CGL Policy. (CGL Policy at 21); see also James River Ins.
Co., 2016 WL 3093383, at *5-6 (explaining the distinction between a contract requiring
payment of the “cost” of a bond, which specifies the costs of funding a bond’s premium,
and “furnishing,” or collateralizing, a bond).

Because State Auto did not have a

contractual duty to furnish a supersedeas bond on Kuepers’s behalf, State Auto’s refusal
to furnish such a bond did not amount to a breach of contract.

2.

Duty to Indemnify Kuepers

Plaintiffs also argue that State Auto’s refusal to pay the state-court judgment
against Kuepers, or to indemnify Kuepers for that judgment when it was entered, was a
breach of State Auto’s duty to indemnify Kuepers. Again, the Court notes that State
Auto was not obligated to provide indemnification for claims with no underlying
coverage.

See Travelers Prop. Cas. Co. of Am. v. Klick, No. 15-2403, 2016 WL

5349430, at *5 (D. Minn. Sept. 23, 2016) (“The duty to indemnify requires an insurer to
pay damages that the insured is legally obligated to pay for covered claims, and it ‘arises
only if the insured ultimately proves up facts showing coverage.’” (quoting Nelson v. Am.
Home Assurance Co., 842 F. Supp. 2d 909, 915 (D. Minn. 2011))), appeal filed, No. 164000 (8th Cir. Oct. 21, 2016). State Auto validly provided Kuepers with a defense subject
to a Reservation of Rights which, from the beginning, made clear that the “your work”
exclusion might apply to some or all of Interlachen’s claims. (McCollum Aff., Ex. 6 at 34.) At trial, Interlachen provided evidence of damages equal the amount it would cost to

- 19 -

remedy Kuepers’s faulty workmanship.

Plaintiffs have not explained or provided

evidence of any resulting damages that would not be subject to the “Damage to Your
Work” exclusion.

Therefore, State Auto’s good-faith coverage position – that the

statutory warranty and negligent repairs claims were not covered claims – did not amount
to a breach of State Auto’s duty to indemnify Kuepers for covered claims.

B.

The LLC
1.

Duty to Defend the LLC

Turning to the LLC’s breach of contract claims, State Auto would have had a duty
to defend the LLC in the state-court action if the LLC was an “insured” and one or more
claims against the LLC were “arguably” covered claims. Ross, 540 N.W.2d at 847.
First, the Court considers whether the LLC was an “insured.” The CGL Policy
defines “insured” as follows:
SECTION II – WHO IS AN INSURED
1.

If you are designated in the Declarations as:
....
c. A limited liability company, you are an insured. Your members
are also insureds, but only with respect to the conduct of your
business. Your managers are insureds, but only with respect to their
duties as your managers.
...

2.

Each of the following is also an insured:
....
b. Any person . . . or any organization while acting as your real
estate manager.

(CGL Policy at 14-15.)

- 20 -

Plaintiffs argue the LLC was an “insured” under Kuepers’s CGL Policy because
Interlachen sued the LLC for actions taken while the LLC was acting in its capacity as
Kuepers’s “real estate manager.” State Auto argues that the LLC was not an insured
because it was not listed in the Declarations page of the policy and also because the LLC
was not acting as Kuepers’s “real estate manager.” State Auto does not consider the
LLC’s involvement in project management during the building of the Development or its
sale of the units in the Development to be activities carried out by a “real estate
manager.” (State Auto’s Mem. in Supp. of Summ. J. at 27-28, Sept. 28, 2016, Docket
No. 64.)
Addressing State Auto’s argument that the LLC is not an “insured” because it is
not listed on the CGL Policy’s Declarations, the Court finds that a plain reading of the
CGL Policy shows that “insured” includes “any organization” acting as Kuepers’s “real
estate manager,” even if the “real estate manager” is not listed in the Declarations.
Section 1 of the definition of “insured” refers to those listed on the Declarations page,
while Section 2 defines those that are “insureds” in addition to those listed in the
Declarations.

(See CGL Policy at 14 (“Each of the following is also an insured”

(emphasis added)).) Therefore, the LLC was an “insured” if it was acting as Kuepers’s
“real estate manager.”
The activities over which Interlachen originally sued the LLC were:
(1) “statements or representations [to buyers] regarding the quality of the construction
and design of [the Development]” made by the LLC in its capacity as “declarant,”
allegedly constituting express warranties under Minn. Stat. § 515B.4-112; (2) warranties
- 21 -

the LLC made in its capacity as “declarant,” by virtue of selling units to buyers, as
implied by statute, see Minn. Stat. § 515B.4-113; and (3) negligence in the building of
the Development, to the extent the LLC was involved in building. (State Court Compl.
¶¶ 50-60, 79-87.) The question for the Court is whether the evidence viewed in the light
most favorable to Plaintiffs could demonstrate that the LLC acted as Kuepers’s “real
estate manager” in carrying out those activities.
“Summary judgment is inappropriate where terms of a contract are at issue and
those terms are ambiguous or uncertain. If, however, terms of the contract may be given
their plain and ordinary meaning, construction of the contract is a matter for the court and
summary judgment may be appropriate.” Bank Midwest, Minn., Iowa, N.A. v. Lipetzky,
674 N.W.2d 176, 179 (Minn. 2004) (citation omitted).
The CGL Policy does not define the term “real estate manager.” But the provision
including “real estate managers” in the definition of “insured” is standard CGL-policy
language, and a number of courts have interpreted the term “real estate manager” in this
context to be unambiguous.

See Ins. Co. of N. Am. v. Hilton Hotels U.S.A., Inc.,

908 F. Supp. 809, 815 (D. Nev. 1995) (collecting cases). In QBE Ins. Corp. v. Creston
Court Condominium, Inc., the district court determined the “plain and ordinary meaning”
of the term “real estate manager” is “one who conducts, directs or supervises another’s
real estate.” 58 F. Supp. 3d 1137, 1150 (D. Or. 2014).
Turning to the question of whether the LLC falls within the definition of a “real
estate manager,” the Court finds that viewing the evidence in the light most favorable to
Plaintiffs, there is a question of fact as to whether Interlachen’s claims against the LLC
- 22 -

were based on actions the LLC undertook in its capacity as Kuepers’s real estate
manager. For example, Interlachen’s original state-court complaint alleges that the LLC
was involved in the process of managing the building process of the Development. (State
Court Compl. ¶¶ 79-87.) The record is not particularly well-developed regarding the
LLC’s role in the Development because the LLC was dismissed from the state case at a
relatively early stage. But there is at least a plausible argument, based on the record
before the Court, that the LLC was acting as Kuepers’s real estate manager with respect
to the Development when the LLC was involved in managing activities related to the
Development before the units were sold.

For this reason, the Court cannot grant

summary judgment in favor of State Auto based on a conclusion as a matter of law that
the LLC is not an insured because it was not acting as Kuepers’s “real estate manager.”
Instead, the Court assumes at summary judgment that the LLC is an “insured” under the
CGL Policy in relation to all of Interlachen’s claims against the LLC.
State Auto argues that even if the LLC is an insured, the “Damage To Your Work”
exclusion applies to all claims against the LLC. (See CGL Policy at 11.) But the
question for the Court is not whether, with the benefit of hindsight, it is clear that the only
damages Interlachen actually sought were subject to the “Damage To Your Work”
exclusion. Instead, the question is whether State Auto has met its burden to establish that
all of the claims against the LLC, as articulated in the State Court Complaint, were not
“arguably within the scope afforded by the policy.” Auto-Owners Ins. Co., 547 N.W.2d
at 698.

- 23 -

In the state-court action, Interlachen alleged the LLC was involved in the process
of building the Development, including management of the building process, and that the
LLC acted negligently. (State Court Compl. ¶¶ 79-87.) Interlachen generally alleged
damages including “resulting physical damage.” (Id. ¶ 87.) Assuming the LLC was an
insured, the Court finds State Auto has not met its burden of establishing that the
negligence claim against the LLC was not “arguably” within the scope of the CGL
Policy, since it was possible at the outset of the litigation that Interlachen might produce
evidence of resulting damages not subject to the “Damage To Your Work” exclusion.
Additionally, State Auto acknowledged in its April 2011 Reservation of Rights
letter that it was unable to determine at that time if the allegations in Interlachen’s lawsuit
fall under the definition of an “occurrence.” (McCollum Aff., Ex. 6 at 3.) Presumably,
the same logic could apply to the claims against the LLC, and therefore, though State
Auto now argues there was no “occurrence” giving rise to property damage, that issue
was not clear at the time State Auto refused to recognize a duty to defend the LLC.
Thus, there is evidence in the record that could give rise to a finding that there was
arguably coverage for the negligence claim against the LLC.

Therefore, the Court

declines to hold as a matter of law that State Auto had no duty to defend the LLC.

2.

Duty to Indemnify the LLC

Although State Auto may have had a duty to defend the LLC and may have
breached that duty, this does not resolve whether State Auto breached the separate,
narrower duty to indemnify the LLC. The CGL Policy obligates State Auto to indemnify

- 24 -

insureds only for “those sums that the insured becomes legally obligated to pay as
damages because of ‘bodily injury’ or ‘property damage.’” (CGL Policy at 8.) Here, the
LLC won at summary judgment in state court. Other than as stipulated in Agreement 2,
there was no judgment entered against the LLC and the LLC made no payments to
Interlachen in relation to any settlement.

And while Agreement 2 did result in a

judgment entered against the LLC, under the terms of the settlement, the LLC was at no
time “legally obligated to pay” the judgment. (Id.; see McCollum Aff., Ex. 40 at 4
(explaining, in Agreement 2, that Interlachen agreed not to seek to collect from the LLC
the stipulated judgment entered against the LLC). Under the plain terms of the CGL
Policy there was nothing for State Auto to indemnify, and thus, Plaintiffs have failed to
show that State Auto breached a contractual duty to indemnify the LLC. 17

III.

ENFORCEABILITY OF THE MILLER-SHUGART AGREEMENTS
Next the Court considers the enforceability of the Agreements – Plaintiffs argue

both Agreements are enforceable against State Auto, while State Auto takes the opposite
position.
17

The LLC alleges that “[o]nce judgment had been entered [against Kuepers], and after
settlement discussions had failed, State Auto denied all coverage to Kuepers for the verdict
amount, thereby breaching its obligation to indemnify both Kuepers and [the] LLC for covered
property damage under the [CGL Policy].” (Compl. at 10 (emphasis added).) But the fact that
State Auto denied coverage for the verdict against Kuepers does not amount to a refusal to
indemnify the LLC – a legally distinct entity. The LLC further alleges that the fact that State
Auto “refused to purchase or obtain an appeal bond on behalf of either [the] LLC or Kuepers”
amounted to a breach of “State Auto’s defense obligations to both [the] LLC and Kuepers.” (Id.)
But State Auto only refused to obtain an appeal bond on behalf of Kuepers. Because the state
court granted summary judgment in favor of the LLC, there was never any requirement that the
LLC post a supersedeas bond, as the LLC had nothing to appeal.

- 25 -

When an insurer denies an insured coverage for claims made against the insured,
the insured and the claimant may execute a Miller-Shugart agreement by settling “on a
judgment for an amount collectible from the insurance policy. The claimant releases the
insured from personal liability and the claimant’s recovery is limited to the amount
obtained from the insurers.” Corn Plus Coop. v. Cont’l Cas. Co., 516 F.3d 674, 677 n.2
(8th Cir. 2008).
“While a Miller-Shugart judgment settles the issue of the underlying defendant’s
liability to the plaintiff, it does not resolve the question of whether the insurance policy
provides coverage for that liability.” Nelson v. Am. Home Assurance Co., 702 F.3d 1038,
1041 (8th Cir. 2012) (applying Minnesota law). “[I]f there is found to be no coverage for
the Miller-Shugart judgment, that ends the matter.” Alton M. Johnson Co. v. M.A.I. Co.,
463 N.W.2d 277, 279 (Minn. 1990); see also Miller v. Shugart, 316 N.W.2d 729, 734
(Minn. 1982) (explaining that if the insurer who contests coverage takes the risk of
declining to participate in settlement negotiations that ultimately result in a MillerShugart agreement, the insurer “escapes the risk if it should be successful on the
coverage issue, and, in that event, it is plaintiff who loses”).
Coverage is determined by the terms of the insurance policy. Nelson, 702 F.3d at
1041. “While the insured bears the initial burden of demonstrating coverage, the insurer
carries the burden of establishing the applicability of exclusions.” Travelers Indem. Co.
v. Bloomington Steel & Supply Co., 718 N.W.2d 888, 894 (Minn. 2006). “To establish or
trigger coverage under an occurrence-based policy, ‘an insured must demonstrate that
damage “occurred” while the policy was in effect.’” Parr v. Gonzalez, 669 N.W.2d 401,
- 26 -

406 (Minn. Ct. App. 2003) (quoting N. States Power Co. v. Fid. & Cas. Co., 523 N.W.2d
657, 659-60 n.3 (Minn. 1994)).
“When insurance policy language is clear and unambiguous, ‘the language used
must be given its usual and accepted meaning.’” Wanzek Constr., Inc. v. Emp’rs Ins. of
Wausau, 679 N.W.2d 322, 324-25 (Minn. 2004) (quoting Lobeck v. State Farm Mut. Auto
Ins. Co., 582 N.W.2d 246, 249 (Minn. 1998)). If policy language is ambiguous, it must
be interpreted in favor of coverage. Exclusions are read narrowly against the insurer.” Id.
at 325 (quoting Nordby v. Atl. Mut. Ins. Co., 329 N.W.2d 820, 822 (Minn. 1983)).
If an insurance policy does provide coverage for some or all of the settled claims,
then the next question is whether the agreement is enforceable against the insurer. “A
Miller-Shugart agreement is enforceable against an insurer if it meets three conditions:
the insured provided notice to its insurer of its intent to enter into such agreement; the
settlement is not the product of fraud or collusion; and the settlement is reasonable and
prudent.” Corn Plus, 516 F.3d at 680; see also Brownsdale Coop. Ass’n v. Home Ins.
Co., 473 N.W.2d 339, 341 (Minn. Ct. App. 1991) (same).

Furthermore, when the

agreement purports to cover multiple defendants or a mix of covered and non-covered
claims, the agreement must explicitly allocate damages to each claim and/or each
defendant. Corn Plus, 516 F.3d at 681. When a settlement fails to allocate as required,
the settlement is unreasonable as a matter of law and unenforceable. Id.

- 27 -

A.

Agreement 1

First, the Court considers whether there is coverage for the underlying claims
settled in Agreement 1. Agreement 1 states: “Kuepers stipulates to the judgment in favor
of [Interlachen] and against Kuepers in the amount of the jury award plus the requested
costs and disbursements in the total amount of $2,940,875.15.” (McCollum Aff., Ex. 32
at 5.) The jury award was based on two claims: breach of statutory warranty and
negligent repairs. State Auto argues the jury award is based on damages that are not
covered under the CGL Policy because of the CGL Policy’s exclusion from coverage of
“Damage To Your Work.”
The CGL Policy excludes “Damage To Your Work,” as follows: “‘Property
damage’ to ‘your work’ arising out of it or any part of it and included in the ‘productscompleted operations hazard.’ This exclusion does not apply if the damaged work or the
work out of which the damage arises was performed on your behalf by a subcontractor.”
(CGL Policy at 11.) And “[y]our work” is defined to include “[w]ork or operations
performed by you or on your behalf”; “[m]aterials, parts or equipment furnished in
connection with such work or operations”; and “[w]arranties or representations made at
any time with respect to the fitness, quality, durability, performance or use of ‘your
work.’” (Id. at 20.)
The “Damage To Your Work” exclusion amounts to a contractual adoption of the
business-risk doctrine. See, e.g., Wanzek Constr., 679 N.W.2d at 326 (examining the
CGL standard-coverage form provision excluding “your work” – an exact match to the
exclusion language in the CGL Policy); O’Shaughnessy v. Smuckler Corp., 543 N.W.2d
- 28 -

99, 103-04 & n.1 (Minn. Ct. App. 1996) (interpreting a CGL policy with an exclusion for
“[p]roperty damage” to “your work” with a near-identical definition of “your work”),
abrogated on other grounds, Gordon v. Microsoft Corp., 645 N.W.2d 393 (Minn. 2002).
The business-risk doctrine “excludes coverage for property damage caused by the
insured’s ‘faulty workmanship’ where the damages claimed are the cost of correcting the
work itself.” Remodeling Dimensions, Inc., 819 N.W.2d at 611 (quoting Wanzek Constr.,
679 N.W.2d at 325-26). The business-risk doctrine is a complement to the basic purpose
of CGL policies – to cover “tort liability for physical damages to others and not for
contractual liability of the insured for economic loss because the product or completed
work is not that for which the damaged person bargained.” Wanzek Constr., 679 N.W.2d
at 325 (quoting Roger C. Henderson, Insurance Protection for Products Liability and
Completed Operations: What Every Lawyer Should Know, 50 Neb. L. Rev. 415, 441
(1971)); see also Knutson Constr. Co. v. St. Paul Fire & Marine Ins. Co., 396 N.W.2d
229, 232-37 (Minn. 1986) (discussing the policy rationale for the business-risk doctrine);
Bor-Son Bldg. Corp. v. Emp’rs Commercial Union Ins. Co. of Am., 323 N.W.2d 58, 64
(Minn. 1982) (“We are convinced that the standard comprehensive general liability
policy does not provide coverage to an insured-contractor for a breach of contract action
grounded upon faulty workmanship or materials, where the damages claimed are the cost
of correcting the work itself.” (quoting Vernon Williams & Son Constr., Inc. v. Cont’l Ins.
Co., 591 S.W.2d 760, 765 (Tenn. 1979))). 18
18

Plaintiffs argue that Minnesota’s interpretation of the “Your Work” exclusion makes
(Footnote continued on next page.)

- 29 -

At trial, Interlachen sought damages related to breach of statutory warranty for the
amount of money it would take to remedy faulty construction by Kuepers’s employees,
including improper installation of windows, siding, and other materials; improper roof
and building framing; failure to seal truss bypasses; and failure to maintain proper
spacing between logs, shakes and shingles. See § 327A.02, subd. 1(a) (explaining that
the one-year statutory warranty covers “defects caused by faulty workmanship and
defective materials due to noncompliance with building standards”); § 327A.05, subd. 1
(limiting damages for a breach of statutory warranty claim to either the amount necessary
to remedy the defect or the difference between the value of the dwelling with the defect
and the value of the dwelling without the defect). The damages estimates Interlachen
presented at trial were estimates of the cost to repair the faulty workmanship as well as,
arguably, to replace other parts of the buildings damaged because of the faulty
workmanship.

(McCollum Aff., Ex. 2 at 482:15-23, 2553:9-2556:23, id., Ex. 11;

Heyerdahl Aff., Ex. G; id., Ex. H at 1668:10-21, 1669:13-1682:13; id., Ex. I; id., Ex. J at
1267:13-1268:8, 1269:9-1280:15). While there may have been some “resulting damage”
included in the professional estimates, the only reasonable conclusion is that the jury
verdict was based, at least in large part, on the cost of correcting Kuepers’s faulty
workmanship. Thus, under the CGL Policy’s “Damage To Your Work” exclusion, there

____________________________________
(Footnote continued.)

the CGL Policy illusory. Given the wide acceptance of the business-risk doctrine, see Wanzek
Constr., 679 N.W.2d at 325-26, the Court rejects this argument.

- 30 -

is no coverage for at least some portion of the damages the jury awarded based on breach
of statutory warranty.
Even if the Court assumes that there was coverage for some claims settled in
Agreement 1, a portion of the jury verdict represented the costs to remedy Kuepers’s
faulty workmanship. As a result, Agreement 1 encompassed settlement of claims for
some damages for which there was no coverage and, looking at the language in
Agreement 1, failed to allocate the settlement amount among covered and non-covered
claims. Therefore, Agreement 1 is unenforceable as a matter of law. 19&20 Corn Plus, 516
F.3d at 681 (“[F]ailure to allocate the settlement amount by damage item precludes
enforcement of a Miller-Shugart agreement consisting of covered and noncovered
claims.”).

B.

Agreement 2

Similarly, Agreement 2 is enforceable only if the claims it settles are of the type
covered by the CGL Policy. 21 On its face, Agreement 2 is ambiguous as to what claims it
was intended to settle; there are two possibilities. First, Agreement 2 states that “the
parties agree to allocate the [$2,059,125] Settlement Amount as follows: $2,000,000 to
Kuepers’ legal obligation to pay damages because of property damage caused by an
19

When a Miller-Shugart agreement is deemed unreasonable, a court may not substitute
its own estimate of reasonable damages. Corn Plus, 516 F.3d at 681-82.
20

Because Agreement 1 is unenforceable as a matter of law, the Court does not consider
State Auto’s additional arguments regarding the viability of Agreement 1.
21

As noted above, the Court assumes at summary judgment that the LLC is an “insured.”

- 31 -

occurrence and $59,125 for damages caused by Kuepers’ misrepresentation in
connection with the repairs undertaken in 2001.” (McCollum Aff., Ex. 40 at 3 (emphasis
added).) Thus, Agreement 2 could be interpreted as a settlement of claims against
Kuepers, under a theory that the LLC could have been jointly and severally liable with
Kuepers for those damages.
Second, Agreement 2 acknowledges that in the state-court action, Interlachen
asserted negligence claims against Kuepers and the LLC for which Interlachen “sought
an amount in excess of Five Million Dollars,” and the $2,940,875.15 stipulated settlement
in Agreement 1 covered a portion of the alleged $5 million in damages. (Id. at 1-2.)
Agreement 2 states that the stipulated judgment against the LLC, for $2,059,125, settles
“the portion of the initial Negligence Claims which is in excess of the [$2,940,875.15]
Judgment Amount.” (Id. at 3-4.) Thus, Agreement 2 could be interpreted as a settlement
of Interlachen’s negligence claims against the LLC, which was the subject of an appeal
by Interlachen at the time of settlement.
As an initial matter, the Court determines that if the parties intended Agreement 2
to settle claims against Kuepers, then Agreement 2 is unreasonable as a matter of law.
The LLC is a legally separate entity from Kuepers. Agreement 1 – between Interlachen
and Kuepers – settled all claims against Kuepers other than those related to design,
architectural, and/or engineering negligence (which were covered, if at all, by Kuepers’s
professional-liability insurance policy with an insurer other than State Auto). (McCollum
Aff., Ex. 32 at 6.) As part of Agreement 1, Interlachen explicitly agreed it would seek to
satisfy the $2,940,875.15 stipulated judgment against Kuepers “solely from Kuepers’
- 32 -

insurers . . . and/or by use of a loan receipt that is subject to a separate agreement
between the parties.” (Id.) Additionally, the state court order approving of Agreement 1
includes entry of judgment against Kuepers only and does not order that Kuepers and the
LLC are jointly and severally liable. (McCollum Aff., Ex. 33.) In this context, the Court
finds it is impossible to infer that a reasonable insured in the LLC’s position would have
settled claims against Kuepers when the action against Kuepers was already settled and
Interlachen agreed, as part of that settlement, to seek collection of the judgment from
entities other than the LLC. 22
The Court next considers the second possible interpretation of Agreement 2 – that
it settles Interlachen’s negligence claim against the LLC. Interlachen’s negligence claim
alleged that Kuepers and the LLC “negligently and carelessly construct[ed] the
[Development],” and “negligently fail[ed] to properly and competently supervise, direct,
monitor, and manage their work and the work of their subcontractors, and to properly
coordinate their work with [each other].” (State Court Compl. ¶ 81.) Interlachen further
alleged Kuepers and the LLC failed to construct the Development in compliance with
applicable building codes, “industry and manufacturers’ requirements, free from defects,
and in a manner that would make the [t]ownhomes fit for their intended purpose.” (Id.
¶¶ 83-84.) As for damages caused by the negligence, Interlachen alleged:
22

The Court also notes that Agreement 2 states, in relation to the statement settling
claims against Kuepers, that it is meant to settle “Kuepers’ misrepresentation in connection with
repairs undertaken in 2001.” (McCollum Aff., Ex. 40 at 3.) This is not a covered claim because
Interlachen never asserted a misrepresentation claim based on conduct in 2001. Instead,
Interlachen asserted a negligent misrepresentation claim related to repairs Kuepers undertook
between 2006 and 2010. (State Court Compl. ¶¶ 61-73.)

- 33 -

As a direct result of these breaches of duties owed by [Kuepers and the
LLC], [Interlachen] ha[d] been damaged . . . for, among other things, the
cost to remedy and correct construction defects and bring the [t]ownhomes
into compliance with the applicable building codes and industry standards
and repair the resulting physical damage, for the diminished value of the
[t]ownhomes and the [Development], and for the loss of income resulting
from the inability to rent the [Units] while repairs [were] being made.
(Id. ¶ 87.) The negligence claim clearly related to Kuepers’s and the LLC’s faulty
construction falling under the contractual definition of “your work.” Therefore, at least
some, if not all, of the $2,059,125 settlement in Agreement 2 is subject to the “Damage
To Your Work” exclusion.
This interpretation of Agreement 2 is bolstered by language in the Agreement
itself stating that the $2,059,125 settlement is meant to cover “the portion of the initial
Negligence Claims which is in excess of the [$2,940,875.15 judgment resulting from
Agreement 1].” (McCollum Aff., Ex. 40 at 3-4.) Agreement 2 recites that the starting
dollar amount for this calculation is the amount “in excess of [$5 million]” that
Interlachen initially sought in the state-court action. And based on the record before the
Court, the source of the $5 million figure appears to be Interlachen’s professional repairs
estimates for $5.4 million and $5.5 million. (Heyerdahl Aff., Exs. G-J.) As noted above,
these estimates included the costs to remedy Kuepers’s faulty workmanship, and
therefore at least a portion of the damages based on the estimates is subject to the
“Damage To Your Work” exclusion. The only reasonable conclusion is that at least part,
if not all, of the settlement in Agreement 2 represents non-covered damages
corresponding to the costs to remedy Kuepers’s and the LLC’s faulty workmanship.

- 34 -

As with Agreement 1, if the negligence claim against the LLC is not a covered
claim in its entirety, “that ends the matter.” Alton M. Johnson Co., 463 N.W.2d at 279.
And if there is coverage for some portion of the damages corresponding with the
settlement amount, Agreement 2 is unenforceable as a matter of law for failure to allocate
between covered and non-covered claims. See Corn Plus, 516 F.3d at 681. 23 Thus,
Agreement 2 is unenforceable against State Auto.
In conclusion, the Court holds that as a matter of law, Agreements 1 and 2 are
unenforceable against State Auto, State Auto did not breach a contractual duty to defend
or indemnify Kuepers, and State Auto did not breach a contractual duty to indemnify the
LLC. The Court will grant State Auto’s motion for summary judgment on those claims.
Because there is a disputed question of material fact as to whether the LLC acted as
Kuepers’s real estate manager, and because Interlachen’s state-court claims against the
LLC “arguably” fell within the CGL Policy, the Court will deny State Auto’s motion for
summary judgment as to Plaintiffs’ claim that State Auto breached a duty to defend the
LLC.
This case will be placed on the Court’s next available trial calendar.

23

Because the Court finds that Agreement 2 is unenforceable as a matter of law, the
Court declines to consider State Auto’s additional arguments regarding the existence of coverage
and the reasonableness of the settlement amount in Agreement 2.

- 35 -

ORDER
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED that Defendant State Auto Insurance Company’s Motion for
Summary Judgment [Docket No. 62] is GRANTED in part and DENIED in part, as
follows:
1.

State Auto’s motion is DENIED with respect to the claim that State Auto

breached a contractual duty to defend Plaintiff Interlachen Properties, LLC.
2.

State Auto’s motion is GRANTED in all other respects. All of Plaintiffs’

claims against State Auto, other than the claimed breach of duty to defend the LLC, are
DISMISSED WITH PREJUDICE.

DATED: August 4, 2017
at Minneapolis, Minnesota.

______s/John R. Tunheim__________
JOHN R. TUNHEIM
Chief Judge
United States District Court

- 36 -