South Dakota Network, LLC v. Twin City Fire Insurance Company Co.

Filing 40

ORDER granting in part and denying in part 21 Motion for Summary Judgment; denying as moot 31 Motion For Rule 56(d). Signed by U.S. District Judge Karen E. Schreier on 9/22/2017. (JLS)

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
SOUTH DAKOTA NETWORK, LLC,

4:16-CV-04031-KES

Plaintiff,
ORDER DENYING IN PART AND
GRANTING IN PART DEFENDANT’S
MOTION FOR SUMMARY JUDGMENT
AND DENYING PLAINTIFF’S MOTION
TO DEFER CONSIDERATION OF
DEFENDANT’S MOTION

vs.
TWIN CITY FIRE INSURANCE
COMPANY CO.,
Defendant.

Plaintiff, South Dakota Network, LLC (SDN), brought this action against
Twin City Fire Insurance Company Co., seeking a declaration that Twin City
owes a duty to defend SDN in a lawsuit. In addition, SDN seeks damages for
breach of contract, bad faith and vexatious refusal to pay, and violation of
public policy. Twin City moves for summary judgment on all of SDN’s claims.
Docket 21. 1 In response, SDN requests this court to deny Twin City’s motion
for summary judgment or alternatively, under Fed. R. Civ. P. 56(d), defer

Twin City did not expressly move for summary judgment on SDN’s claims for
breach of contract, bad faith and vexatious refusal to pay, and violation of
public policy in its motion for summary judgment. Docket 21. But Twin City
did address the bad faith and vexatious refusal to pay and the violation of
public policy claims in its Memorandum in Support of its Motion for Summary
Judgment. Docket 23. Because these claims are based on the underlying
dispute of whether Twin City has the duty to defend SDN, the court will
address these claims in the interests of justice.
1

1

consideration of Twin City’s motion for summary judgment until SDN receives
additional facts to oppose the motion. Docket 31. For the reasons that follow,
the court denies in part and grants in part Twin City’s motion for summary
judgment and denies SDN’s motion.
FACTS
Construing the facts in a light most favorable to the non-moving party,
SDN, the facts are as follows:
SDN is a limited liability company whose seventeen members are local
exchange carriers (LECs) in South Dakota that provide telecommunication
services to customers in their respective service territories. Docket 8. To assist
its members, SDN operates a tandem switch in Sioux Falls to provide an
efficient method for LECS and long-distance companies, referred to as
interexchange carriers (IXCs), to exchange long distance telecommunication
traffic. When IXCs, like AT&T, transmit calls from one local area to another
local area, they pay for delivering, or “terminating”, the call under a properly
filed and approved tariff or under contractual arrangements.
Twin City is an insurance company that issued insurance policies to
SDN that included Directors, Officers and Entity Liability Coverage, effective
annually from January 9, 2005 through January 9, 2016. Docket 9 at 3. The
first policy at issue in this case was effective from January 9, 2013, through
January 9, 2014 (2013-2014 D&O Policy). Docket 22-1 at 30. The second
policy at issue here was effective from January 9, 2014, through January 9,
2015 (2014-2015 D&O Policy). Docket 22-1 at 81.
2

Twin City’s insurance policies issued to SDN are known as claims made
and reported policies. Docket 22-1 at 30. The 2013-2014 D&O Policy provides
that:
[C]overage applies only to a claim first made against the insureds
during the policy period . . . [and] notice of a claim must be given
to the insurer as soon as practicable after a notice manager
becomes aware of such claim, but in no event later than sixty (60)
calendar days after the termination of the policy period . . . .
Id. The 2014-2015 D&O Policy requires notice no later than ninety (90) days
after termination of the policy period. Docket 22-1 at 106.
Under the definitions section of the 2013-2014 D&O Policy, a “claim”
includes any (i) insured person claim, (ii) entity claim, or (iii) derivative
demand. Docket 22-1 at 45. The sections applicable to this case are the “Entity
Claim” and “Insured Person Claim.” The 2013-2014 D&O Policy defines both
“Entity Claim” and “Insured Person Claim” as any:
(1) written demand for monetary damages or other civil relief
commenced by the receipt of such demand; (2) civil proceeding,
including an arbitration or other alternative dispute proceeding,
commenced by the service of a complaint, filing of a demand for
arbitration, or similar pleading; or (3) criminal proceeding
commenced by the return of an indictment, or formal
administrative or regulatory proceeding commenced by the filing of
a notice of charges, or similar document; against an Insured Entity
[or an Insured Person].
Docket 22-1 at 46. Both parties agree that the only clause at issue here is (1).
See Docket 28 at 13 (stating “[s]ubparts 2 and 3 of the definition of Entity
Claim are easily dismissed as inapplicable.”); Docket 35 at 4 (stating the
question is whether the November 2013 letter and the 2013 complaint fall

3

within the portion of the “claim” definition of “written demand for monetary
damages or other civil relief . . .”).
In the 2014-2015 D&O Policy, “Entity Claim” and “Insured Person Claim”
are defined as “any: (1) written demand for monetary damages or other civil
non-monetary relief commenced by the receipt of such demand . . . .” Docket
22-1 at 99. Sections two and three of “Entity Claim” and “Insured Person
Claim” are the same as the 2013-2014 D&O Policy defined above. Id.
Both policies define a “Wrongful Act” as an actual or alleged “error,
misstatement, misleading statement, act, omission, neglect, or breach of duty
committed by an Insured Person in their capacity as such . . . or matter
claimed against an Insured Person, solely by reason of their serving in such
capacity . . . .” Docket 22-1 at 47-48, 101. The policies also express that
“Interrelated Wrongful Act” means “Wrongful Acts that have as a common
nexus any fact, circumstance, situation, event, transaction, goal, motive,
methodology, or cause or series of causally connected facts, circumstances,
situations, events, transactions, goals, motives, methodologies or causes.”
Docket 22 at 35, 86. Finally, both policies provide that:
All Claims based upon, arising from or in any way related to the
same Wrongful Act or Interrelated Wrongful Acts shall be deemed
to be a single Claim for all purposes under this Policy first made on
the earliest date that . . . any of such Claims was first made,
regardless of whether such date is before or during the Policy
Period . . . .
Docket 22-1 at 39-40, 91.
One of SDN’s members, James Valley Cooperative Telephone Company
(JVCTC), is affiliated with Northern Valley Communications (NVC) (collectively
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the “James Valley Parties”). NVC engages in access stimulation, or traffic
pumping, to leverage its tariffed access services. In this business practice,
NVC—which is located in a rural service area with high access rates—sets up
service agreements with local third parties that have high-volume customers,
such as conference call companies. In the agreements, NVC provides the third
parties with more access minutes, but does not reduce its access rates. This
gives NVC greater access revenues, which it then shares with the local third
parties as compensation. The IXCs, which must pay these tariffed access rates,
end up financing NVC’s access stimulation services. See Docket 28 at 2-3;
Docket 29 at 10.
AT&T has refused to pay NVC’s access charges in relation to NVC’s
access stimulation since March 2013. AT&T has also refused to pay SDN for its
tandem switching charges since April 2013. Docket 30-3 at 5. SDN and the
James Valley Parties then began working together to resolve their billing
disputes with AT&T. When these negotiations stalled, SDN’s Board of Managers
sent a letter to NVC’s General Manager, James Groft, on November 25, 2013.
Docket 22-3 at 21. In this letter, SDN told NVC that SDN planned to prepare a
proposal to settle the dispute with AT&T, and if AT&T agreed to the proposal,
SDN would bring it to NVC to review and possibly accept. SDN also told NVC
that if NVC rejected the proposal, SDN “is authorized by its board to take
whatever legal or other action it deems necessary to require NV[C] to terminate
the traffic.” Docket 22-3 at 21.

5

In response to SDN’s letter, counsel for the James Valley Parties wrote a
letter to SDN on November 27, 2013 (November 2013 letter). Docket 22-1 at 21.
Accompanying the letter was an unsigned, unfiled, draft Complaint (2013 draft
Complaint) that the James Valley Parties asserted they were prepared to file
against SDN if SDN did not change its planned course of action. Docket 22-1 at
7. The November 2013 letter provides, in relevant part:
The purpose of this letter is to demand that SDN cease and
desist with the course of action set forth in your letter and to
provide further assurances that it will not engage in the unlawful
conduct described therein.
Given the long history of a mutually-beneficial relationship
between my clients and SDN, my clients were both surprised and
disappointed at the Board’s decision to try to impose such a
mandate on NVC and on its stated intent to actively work in a
manner that is adversarial to NVC’s interest in obtaining payment
for its tariffed services. Thus, for purposes of ensuring that the
Board is aware of the basis for our response, and the cease and
desist demand contained herein, I summarize a few of the most
pertinent facts:
....
(5) In furtherance of its repeatedly-stated position that
members and affiliates must use SDN for exchange of access
traffic, SDN’s Board of Directors approved, and the members
ratified in May of this year, an amendment to the Operating
Agreement that expressly requires members and affiliates to utilize
SDN for their access traffic, and SDN does not have a unilateral
right to modify that requirement;
....
(8) SDN CEO Mark Shlanta stated his intent to reverse or
deviate from SDN’s policy for the first time only a few weeks ago,
essentially demanding that NVC subjugate its rights to provide
transport at its tariffed rates in order to reach an agreement with
AT&T;
....
(11) Following Mr. Shlanta’s recently stated intent to change
SDN’s position on direct connection and his demand that NVC find
a solution to the dispute with AT&T, Mr. Groft agreed to provide
further proposals for discussion and to continue efforts to work
towards a resolution, a promise that Mr. Groft has fulfilled; and
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(12) In an apparent effort to force NVC’s hand, rather than
allowing those settlement discussions to continue, the actions set
forth in your letter were taken by the Board.
Docket 22-1 at 21-22. The November 2013 letter then stated:
[T]he series of actions outlined in [SDN’s] letter constitute an
anticipatory breach of the SDN operating agreement and express
and implied contracts with NVC. These actions entitle us to
proceed directly to court to stop the unlawful conduct. However,
because we believe that the Board’s actions were made without full
consideration of the ramifications of its actions, we are allowing
[SDN] until Monday, December 2, 2013, at 5:00 CT to retract the
letter and provide written assurance that SDN will not enter into
negotiations with AT&T regarding transport for AT&T traffic to
NVC, will not terminate circuit agreements between NVC and SDN,
and will not falsely accuse NVC of blocking traffic when such
actions would be directly caused by the wrongful and unlawful
conduct of SDN, not NVC.
Id. at 23. The November 2013 letter then listed several causes of action that
SDN’s “proposed course of action may also give rise to . . .” in addition to
constituting a breach of the operating agreement and contracts. Id.
Upon receipt of the November 2013 letter, SDN rescinded its November
25, 2013, letter by a board vote. Docket 30-1 at 2. On December 6, 2013, SDN
and the James Valley Parties met and agreed to a resolution of their dispute
with AT&T. SDN did not report anything about the November 2013 letter or the
2013 draft Complaint to Twin City within 60 days of the 2013-2014 D&O Policy
termination date. Docket 29 at 10.
SDN, the James Valley Parties, and AT&T spent the next several months
trying to resolve the parties’ past billing disputes and AT&T’s prospective
concerns about the billing rate for the stimulated traffic. In the spring of 2014,
the James Valley Parties indicated to SDN its intention to bring a lawsuit
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against AT&T to resolve its historical billing disputes. SDN declined the James
Valley Parties’ invitation to join in this litigation. Docket 29 at 12. In July 2014,
NVC filed a complaint against AT&T in federal court related to its past billing
dispute, and AT&T counterclaimed. SDN and the James Valley Parties
continued negotiating with AT&T as to the future billing rate during June and
July 2014. In early September 2014, SDN told NVC that it was finalizing its
agreement with AT&T. NVC did not tell SDN to hold off on signing the
agreement. On September 18, 2014, SDN and AT&T executed an agreement
establishing the rate for prospective transport costs associated with stimulated
traffic.
Then, on November 17, 2014, counsel for NVC sent a cease and desist
letter to SDN requesting a copy of the September 2014 agreement between SDN
and AT&T. See Docket 22-1 at 26. On March 26, 2015, SDN received a letter
from counsel for NVC, stating NVC had filed a Complaint against SDN, SDN’s
CEO, Mark Shlanta, and certain SDN Board members. See id. at 4. On April 8,
2015, SDN provided written notice of a Claim to its Insurer, Twin City. Docket
22 at 9.
Twin City denied coverage for SDN and stated it would neither defend nor
indemnify SDN for the lawsuit NVC filed against SDN. Docket 30-11 at 2, 3013 at 2. In its July 1, 2015, letter denying coverage, Twin City confirmed SDN,
CEO Shlanta, and the other Members of SDN’s Board of Managers named in
the NVC lawsuit would qualify as an “Insured” under the policies, and thus
each would have the potential for coverage. Docket 30-11 at 6. But Twin City
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maintained that the November 2013 letter and 2013 draft Complaint that were
sent to SDN constituted a “claim” under the 2013-2014 D&O Policy, this
“claim” from November 2013 was an “interrelated wrongful act” with a common
nexus to the NVC lawsuit filed against SDN on March 26, 2015, 2 and Twin City
did not receive notice from SDN of this “claim” until April 8, 2015. Id. Thus,
Twin City stated such notice was received well beyond the 60 days after the
termination of the 2013-2014 D&O Policy, as allowed by the 2013-2014 D&O
Policy. Id. In other words, Twin City denied coverage because SDN did not
provide notice of its “claim” to Twin City by March 10, 2014, which SDN admits
it did not do. Id.; Docket 29 at 10.
Twin City has continued to deny coverage for SDN under any of the D&O
policies. On March 4, 2016, SDN brought this action against Twin City for a
declaratory judgment that SDN made a timely and valid demand on Twin City
for coverage under its 2014-2015 D&O Policy, and Twin City has a duty to
defend and indemnify SDN in its lawsuit with the James Valley Parties. Docket
8 at 9. SDN has also included claims for breach of contract, bad faith and
vexatious refusal to pay, and violation of public policy. Id. Twin City maintains
its position that it does not have a duty to defend or indemnify SDN because

Specifically, Twin City’s letter stated the underlying lawsuit against SDN “is
based upon the Insureds [sic] alleged conduct regarding its agreement with
AT&T and such agreement’s attendant effect on the Plaintiffs. Accordingly, [this
action against SDN] is deemed a single Claim first made on November 27,
2013, the date the Insured received the 2013 Draft Complaint, as the Claims
are based upon, arise from and are related to the same Wrongful Act or
Interrelated Wrongful Acts. Therefore, the Insuring Agreement of the 20132014 Policy is implicated.” Docket 30-11 at 6.
2

9

the applicable policies do not provide coverage to SDN because SDN failed to
give timely notice of the claims against it. Docket 21 at 2.
LEGAL STANDARD
Summary judgment is proper “if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment
as a matter of law.” Fed. R. Civ. P. 56(a). “[A] party seeking summary judgment
always bears the initial responsibility of . . . demonstrat[ing] the absence of a
genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323
(1986). The moving party must inform the court of the basis for its motion and
also identify the portion of the record that shows there is no genuine issue in
dispute. Hartnagel v. Norman, 953 F.2d 394, 395 (8th Cir. 1992) (citation
omitted).
To avoid summary judgment, “[t]he nonmoving party may not ‘rest on
mere allegations or denials, but must demonstrate on the record the existence
of specific facts which create a genuine issue for trial.’ ” Mosley v. City of
Northwoods, 415 F.3d 908, 910 (8th Cir. 2005) (quoting Krenik v. County of Le
Sueur, 47 F.3d 953, 957 (8th Cir. 1995)). “[T]he mere existence of some alleged
factual dispute between the parties is not sufficient by itself to deny summary
judgment . . . . Instead, ‘the dispute must be outcome determinative under
prevailing law.’ ” Get Away Club, Inc. v. Coleman, 969 F.2d 664, 666 (8th Cir.
1992) (quoting Holloway v. Pigman, 884 F.2d 365, 366 (8th Cir. 1989)). On a
motion for summary judgment, the facts and inferences drawn from those facts
are “viewed in the light most favorable to the party opposing the motion.”
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Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587-88
(1986) (quoting United States v. Diebold, Inc., 369 U.S. 654, 655 (1962)).
Under Fed. R. Civ. P. 56(d), the nonmoving party may also request a
continuance until the nonmovant has had adequate time for discovery to
justify his opposition to the other party’s motion for summary judgment. Toben
v. Bridgestone Retail Operations, LLC, 751 F.3d 888, 894 (8th Cir. 2014)
(citations omitted). A party moving for a Rule 56(d) continuance must file an
affidavit showing how postponement of ruling on the motion for summary
judgment will allow him to elicit more facts in discovery that are “essential” to
rebut the summary judgment motion. Id. A district court has “wide discretion”
in ruling on a Rule 56(d) motion. Id. at 895.
DISCUSSION
I.

Breach of Contract
When interpreting an insurance policy, the rights and obligations of the

parties “are determined by the language of the contract, which must be
construed according to the plain meaning of its terms.” W. Nat’l Mut. Ins. Co.,
887 N.W.2d at 890 (citing Swenson v. Auto Owners Ins. Co., 831 N.W.2d 402,
407 (S.D. 2013)). South Dakota law 3 provides that a liability insurer’s duty to
defend encompasses “any third party claim asserted against an insured that
arguably falls within the policy’s coverages.” State Farm Fire & Cas. v. Harbert,
In an action based on diversity of citizenship, a federal court must apply the
choice of law principles of the state in which the district court is located.
Allianz Ins. Co. of Can. V. Sanftleben, 454 F.3d 853, 855 (8th Cir. 2006). After
applying South Dakota’s choice of law rules, it appears that South Dakota law
governs and neither party argues otherwise.
3

11

741 N.W.2d 228, 234 (S.D. 2007). The insurer has the burden of
demonstrating it has no duty to defend the insured. Id. (citing North Star Mut.
Ins. Co. v. Kneen, 484 N.W.2d 908, 912 (S.D. 1992)). To satisfy this burden, the
insurer must show the claim “clearly falls outside of policy coverage.” Id. (citing
State Farm Mut. Auto. Ins. Co. v. Wertz, 540 N.W.2d 636, 638 (S.D. 1995)). Any
doubt about whether an insured’s claim falls within a policy’s coverage “must
be resolved in favor of the insured.” Id. (citing City of Fort Pierre v. United Fire &
Cas. Co., 463 N.W.2d 845, 847 (S.D. 1990)).
A.

Whether a Claim Existed under the 2013-2014 D&O Policy

Twin City argues that the notice it received on April 8, 2015, of the
underlying lawsuit against SDN is an Interrelated Wrongful Act for claims first
made in November 2013, and should be treated as a single claim 4 first made on
November 27, 2013, under the 2013-2014 D&O Policy language. Docket 23 at
4. As such, Twin City asserts that SDN was required to provide notice of its
claim to Twin City no later than March 10, 2014, which it did not do.

In its Memorandum in Support of its Motion for Summary Judgment, Twin
City analyzes the November 2013 disagreement as a “claim” under the 20142015 D&O Policy language. Docket 23 at 7. Because the 2014-2015 D&O
Policy language states a “claim” is deemed to be “made on the earliest date
that . . . any of such ‘claims’ was first made[,]” the court is of the opinion that
the November 2013 disagreement must first be analyzed under the 2013-2014
D&O Policy’s definition of a “claim.” Notably, the only difference between the
two policies’ definitions of “claim” is the addition of “other civil non-monetary
relief” in the 2014-2015 D&O Policy (emphasis added). See also Docket 35 at 4
(Twin City stating in its reply brief the “question is whether the November 2013
Letter and 2013 Complaint fall within” the definition of a claim as defined in
the 2013-2014 D&O Policy).
4

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In response, SDN argues that the 2013-2014 D&O Policy is not
applicable to this case because no claim was made against SDN in November
2013. See Docket 28 at 10-11. SDN also alludes to the definition of a “claim” in
the 2013-2014 D&O Policy as possibly ambiguous. See Docket 28 at 13
(stating “it is unclear what the phrase ‘or other civil relief commenced by the
receipt of such demand’ means.”).
The November 2013 letter sent to SDN by counsel for the James Valley
Parties demanded that SDN “cease and desist with the course of action set
forth in [its] letter and to provide further assurances that it will not engage in
the unlawful conduct described therein.” Docket 22-1 at 21. Accompanying the
letter was an unsigned, unfiled, draft Complaint. Id. at 7. In its letter, the
James Valley Parties gave SDN until December 2, 2013, to retract its November
25, 2013 letter, and stop its “stated intent” of negotiating directly with AT&T.
Id. at 23.
On December 2, 2013, SDN’s Board of Managers held a special board
meeting where the Board voted to retract its letter dated November 25, 2013.
Docket 30-1 at 2. And SDN rescinded its “stated intent” of negotiating directly
with AT&T. On December 6, 2013, SDN and the James Valley Parties met and
resolved their dispute as to how to jointly work with AT&T moving forward.
Docket 29 at 2; 30-3 at 42. The 2013 draft Complaint was never filed or served.
As noted by the Eighth Circuit, determining whether a “claim” has been
made under a claims-made policy involves “differences of degree.” Berry v. St.
Paul Fire & Marine Ins. Co., 70 F.3d 981, 983 (8th Cir. 1995). This court finds
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that a stated intention to act in a certain way, when that stated intention is
quickly, formally rescinded, is a relevant difference of degree. And just as it is
important for a court to look at “the full text” of a document when determining
if that document is a claim under a claims-made insurance policy, see id., it is
important for a court to look at the full picture of a situation when determining
if a claim was made during a policy period.
Because SDN rescinded its stated intent and SDN was, or at least
believed it was, on good terms with the James Valley Parties moving forward,
there was no claim to report to Twin City by March 10, 2014, the final date that
SDN could notify Twin City of a claim under the 2013-2014 D&O Policy. At
most, the November 2013 documents revealed a disagreement among business
associates and a warning about how to move forward in the future, and that
disagreement was resolved in a matter of weeks. See Docket 23 at 4 (Twin City
stating in its memorandum that the James Valley Parties “warned SDN not to
interfere with their rights . . . .”). In fact, the November 2013 letter demanded
that SDN retract its letter, and this is exactly what SDN subsequently did. So
the disagreement was resolved just as the James Valley Parties wanted it to be
resolved. Thus, there was no pending “written demand for monetary damages
or other civil relief” for Twin City to defend on or by March 10, 2014, the last
day a claim could be reported to Twin City under the 2013-2014 D&O Policy.
B.

Whether the Interrelated Wrongful Act Provision Bars
Coverage

Twin City also argues that the 2013 disagreement between SDN and the
James Valley Parties and the NVC lawsuit filed against SDN on March 26,
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2015, are an interrelated wrongful act under the policy language. Docket 23 at
8. Specifically, Twin City maintains that the 2015 lawsuit and the November
2013 documents, which it argues are both “claims,” “all concern a continuing
dispute involving SDN allowing AT&T direct access . . . .” Id.
Twin City cites to several cases where courts have found that claims
arising out of common facts or situations are interrelated claims. See Docket
23 at 8-9. But the court agrees with SDN that in each of these cases, two
“claims” were made against the insureds. See Docket 28 at 14-15. In fact,
many of the cases involved two separate lawsuits. Thus, the cases Twin City
relies on are distinguishable from the facts here, where there was no pending
claim under the 2013-2014 D&O policy as established above.
Even if this court were to construe the 2013 disagreement broadly as a
“claim,” it would not constitute an “interrelated wrongful act” under the policy
language with the 2015 lawsuit. The policies exclude coverage for “[a]ll Claims
based upon, arising from or in any way related to the same Wrongful Act or
Interrelated Wrongful Acts . . . .” Docket 22-1 at 39, 91. The policies define an
“Interrelated Wrongful Act” as wrongful acts “that have as a common nexus
any fact, circumstance, situation, event, transaction, goal, motive,
methodology, or cause or series of causally connected facts, circumstances,
situations, events, transactions, goals, motives methodologies or causes.”
Docket 22-1 at 35, 86. And the policies define “Wrongful Act” as any actual or
alleged “error, misstatement, misleading statement, act, omission, neglect, or
breach of duty” committed by an Insured Person. Docket 22-1 at 47-48, 101.
15

The court must interpret these policy definitions. The “Wrongful Act”
policy provision requires some sort of actual or alleged action on behalf of the
insured, whether that means an insured’s improper action or failure to act. The
“Interrelated Wrongful Act” provision is a policy exclusion because the policies
state that any interrelated wrongful acts are deemed to be a single claim that
relates back to the first date the claim was made. Docket 22-1 at 39-40, 91.
See also Connect Am. Holdings, LLC v. Arch Ins. Co., 174 F. Supp. 3d 894, 90102 (E.D. Penn. 2016) (framing a similar interrelated wrongful act insurance
policy provision that relates back as a policy exclusion). Under South Dakota
law, policy exclusions in insurance contracts are strictly construed against the
insurer. Alverson v. Nw. Nat’l Cas. Co., 559 N.W.2d 234, 238 (S.D. 1997). Thus,
this policy exclusion will be strictly construed against Twin City as the insurer.
In this case, the focal point of the policies’ definition of an “Interrelated
Wrongful Act” is “common nexus.” The policies, however, do not define the
meaning of “common nexus.” Black’s Law Dictionary defines nexus as “[a]
connection or link, often a causal one.” Nexus, Black’s Law Dictionary (10th ed.
2014).
Based on this definition, the court finds that a common nexus requires a
causal connection or a link between the two “wrongful acts.” In other words,
there must be two separate actions by the insured that are linked together. It is
not enough for the actions to be similar in nature or to have parallel facts.
Rather, the two actions must have linked or causally connected facts. See also

16

Connect Am. Holdings, 174 F. Supp. 3d at 903 (“The focus of the
interrelatedness inquiry is on the acts, not on the parties or the goals.”).
Applying this interpretation, the court concludes that the November 2013
disagreement between SDN and the James Valley Parties, which was resolved
within weeks, is not an Interrelated Wrongful Act to the 2015 lawsuit filed
against SDN. In 2013, SDN and the James Valley Parties worked together to
convince AT&T to pay SDN and the James Valley Parties for past charges that
AT&T was withholding. They disputed their historical billing charges with
AT&T, but these joint negotiations stalled. See generally Docket 30-3 at 22-23.
The James Valley Parties were then upset with SDN because SDN stated it
intended to negotiate directly with AT&T and it would bring a proposal back to
the James Valley Parties. After the James Valley Parties objected, SDN formally
retracted its stated intent and held a meeting with the James Valley Parties on
December 6, 2013. At the meeting, they reached a resolution on how to jointly
negotiate with AT&T regarding the historical billing dispute. As a result, the
2013 disagreement was resolved. SDN and the James Valley Parties then spent
the next several months in early 2014 jointly negotiating with AT&T.
Ultimately, the James Valley Parties filed a federal complaint against AT&T
related to its historical billing dispute, which SDN declined to join.
On September 18, 2014, SDN and AT&T executed an agreement about
future billing costs. This was the basis of the James Valley Parties’ lawsuit filed
in state court against SDN on March 26, 2015.

17

Thus, the 2013 disagreement and the 2015 lawsuit involved two different
actions by SDN. The 2013 disagreement stemmed from the historical billing
dispute with AT&T, while the 2015 lawsuit related to prospective transport
costs. The 2013 disagreement occurred because SDN stated its intention to
negotiate with AT&T directly, but then retracted its intention in less than 30
days and before the deadline set by the James Valley Parties. The retraction
fully resolved the issues identified in the November 2013 letter. The 2015
lawsuit, on the other hand, arose because of an agreement that SDN and AT&T
formally executed after the federal lawsuit between the James Valley Parties
and AT&T commenced. While the 2013 disagreement and the 2015 lawsuit
involved the same parties, they were not causally linked actions by SDN. And
unlike the 2013 disagreement, the James Valley Parties never told SDN to
discontinue its negotiations about a future billings rate with AT&T before the
SDN-AT&T settlement was reached in September 2014. There is no indication
in the record that the 2013 disagreement about past billings caused SDN to
execute its agreement with AT&T in September 2014 regarding future billing
rates. Thus, Twin City’s argument that the 2013 disagreement and the 2015
lawsuit “all concern a continuing dispute involving SDN allowing AT&T direct
access . . .” (Docket 23 at 8) is too broad. Twin City has not met its burden of
proving that the “Interrelated Wrongful Act” policy exclusion bars coverage. See
N. Star Mut. Ins. v. Korzan, 873 N.W.2d 57, 65 (S.D. 2015) (stating that the
insurer has the burden to prove a policy exclusion applies).

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II.

SDN’s Bad Faith Claim
Twin City also argues that because there is no duty to defend or

indemnify, SDN’s bad faith claim fails as a matter of law. Docket 23 at 12. To
establish a claim for bad faith, a plaintiff must prove there is “an absence of a
reasonable basis for denial of policy benefits . . . and the knowledge or reckless
disregard [of the lack] of a reasonable basis for denial.” Swenson v. Auto
Owners Ins. Co., 831 N.W.2d 402, 412 (S.D. 2013) (alteration in original) (citing
Dakota, Minn. & E. R.R. Corp. v. Acuity, 771 N.W.2d 623, 629 (S.D. 2009)). In
the first-party context, where the insurer has accepted a premium from the
insured to provide coverage, bad faith typically occurs when the insurance
company “ ‘consciously engages in wrongdoing during its processing or paying
of policy benefits to its insured.’ ” Dakota, Minn. & E. R.R. Corp., 771 N.W.2d at
629 (quoting Hein v. Acuity, 731 N.W.2d 231, 235 (S.D. 2007)). Bad faith can
include an insurer’s failure to conduct a reasonable investigation of the
insured’s claim. Id. (internal citation omitted). Whether an insurer has acted in
bad faith in its decision to deny coverage is generally a question of fact. Id. at
629-30. But if an insured’s claim is “fairly debatable” in fact or law, then the
insurer has a reasonable basis to deny the claim without acting in bad faith.
Id. at 630. The insurer’s decision to deny coverage “must be reviewed ‘at the
time it made the decision . . . .’ ” Id. (citing Walz v. Fireman’s Fund. Ins. Co.,
556 N.W.2d 68, 70 (S.D. 1996)).
SDN ultimately provided written notice of a Claim to Twin City on April 8,
2015. Twin City denied coverage on July 1, 2015, stating it would neither
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defend nor indemnify SDN for the lawsuit filed against SDN. Docket 30-11 at 2.
SDN then submitted many letters and emails to Twin City, seeking to clarify
Twin City’s understanding of the facts in the underlying dispute with the
James Valley Parties. Because there is evidence that SDN provided Twin City
with additional information, there is a question of fact as to whether Twin City
conducted a reasonable investigation to reconsider its decision to deny
coverage. Twin City is correct in that even an incorrect denial of coverage is
insufficient to support a claim for bad faith. See Mudlin v. Hills Materials Co.,
742 N.W.2d 49, 54 (S.D. 2007). But whether Twin City had a reasonable basis
to deny SDN’s claim must be reviewed by the finder of fact based on evidence
existing at the time it denied coverage to SDN.
In its bad faith claim, SDN also alleges Twin City’s refusal to provide
coverage was vexatious, entitling SDN to recover attorney’s fees and other
costs. Docket 8 at 11. Twin City briefly addressed this claim in its
Memorandum in Support of its Motion for Summary Judgment. Docket 23 at
14. Ruling on this issue is premature at this time. See Bjornestad v. Progressive
N. Ins. Co., 664 F.3d 1195, 1198-1200 (8th Cir. 2011) (reviewing the
application of South Dakota law to a district court’s award of attorney’s fees for
vexatious and unreasonable conduct, a fact-driven question, after a jury
verdict was rendered in the case).
III.

SDN’s Public Policy Claim
Finally, Twin City argues that SDN’s public policy claim must fail as a

matter of law because SDN “cannot meet its high burden to establish that any
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Twin City policy provision violates public policy.” Docket 23 at 14. In its
Amended Complaint, SDN states that Twin City’s “broad interpretation” of the
“interrelated acts” policy provision in the claims-made insurance policies is
inconsistent with South Dakota public policy. Docket 8 at 11-12. In other
words, SDN claims it violates public policy to treat the events of November
2013 and the subsequent lawsuit filed in 2015 as an “interrelated claim” as
defined in the policies. Twin City argues that there is no statute or court
decision that prohibits such interrelated claim provisions as a matter of South
Dakota public policy. Docket 23 at 14. In response, SDN argues it is premature
to dismiss its public policy count. Docket 28 at 30.
Conditions and limitations imposed by insurance policies must be
consistent with public policy. AMCO Ins. Co. v. Emp’rs Mut. Cas. Co., 845
N.W.2d 918, 921 (S.D. 2014). An insurance policy provision that is “prohibited
by statute, condemned by judicial decision, [or] contrary to any identifiable
public morals” violates public policy. Id. at 923 (quotation omitted).
South Dakota law does not prohibit “a commercial general liability
insurer from excluding coverage for an unknown continuous or progressive
loss that occurs before the inception date of the policy.” AMCO, 845 N.W.2d at
922. And “[c]ommercial general liability insurance contracts commonly limit
the risks the insurer intends to indemnify.” Id. at 923. Thus, South Dakota
public policy generally accepts the use of insurance policy exclusions.
The “Interrelated Wrongful Act” provision here is a policy exclusion in
this claims-made insurance policy. SDN has not directed the court to any
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South Dakota statute, judicial decision, or public moral prohibiting the use of
an “Interrelated Wrongful Act” policy provision, and the court has not found
one. While the court has not accepted Twin City’s interpretation of the
“Interrelated Wrongful Act” provision based on the facts of this case, the use of
an interrelated claim insurance policy provision does not violate South Dakota
public policy. Thus, Twin City is entitled to summary judgment on SDN’s claim
for a violation of public policy.
CONCLUSION
The court finds that, as a matter of law, there was no pending “claim”
during the 2013-2014 D&O Policy and further finds that the 2013
disagreement and the 2015 lawsuit are not an “Interrelated Wrongful Act”
under the policies’ definition so as to bar coverage to SDN. On SDN’s bad faith
claim, the court finds that whether Twin City denied coverage to SDN on a
reasonable basis presents a question of fact for the jury. Finally, the court
concludes that the use of an “Interrelated Wrongful Act” policy provision does
not violate South Dakota public policy. Thus, it is
ORDERED that Twin City’s Motion for Summary Judgment (Docket 21)
is denied on the issue of SDN’s claim for a declaratory judgment and breach of
contract, denied on the issue of SDN’s claim for bad faith, and granted on the
issue of SDN’s claim for a violation of public policy.

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IT IS FURTHER ORDERED that SDN’s motion to delay ruling on Twin
City’s Motion for Summary Judgment under Fed. R. Civ. P. 56(d) (Docket 31) is
denied as moot.
DATED this 22nd day of September, 2017.
BY THE COURT:
/s/ Karen E. Schreier
KAREN E. SCHREIER
UNITED STATES DISTRICT JUDGE

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