Employers Mutual Casualty Company v. Brant Lake Sanitary District et al

Filing 39

OPINION AND ORDER granting in part and denying in part 15 Motion for Judgment on the Pleadings. Signed by U.S. District Judge Roberto A. Lange on February 12, 2019. (DLC)

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION

EMPLOYERS MUTUAL CASUALTY

4:18-CV-04029-RAL

COMPANY,

Plaintiff,
OPINION AND ORDER GRANTING IN
PART MOTION FOR JUDGMENT
ON THE PLEADINGS

vs.

BRANT LAKE SANITARY DISTRICT, A
POLITICAL SUBDIVISION OF THE STATE

OF SOUTH DAKOTA; and EXCEL
UNDERGROUND,INC.,
Defendants.

Defendant Exeel Underground, Ine.(Exeel) obtained a $1,569,691.81 jury verdict against

Defendant Brant Lake Sanitary District(Brant Lake)in state court. Brant Lake's insurer. Plaintiff

Employers Mutual Casualty Company (EMCC), filed this ease seeking a declaratory judgment
that it has no duty to pay for Brant Lake's appeal ofthe verdict or to indemnify Brant Lake for any

damages Brant Lake may owe Exeel. Doe. 1. Exeel and Brant Lake both eounterelaimed against
EMCC,Docs. 9, 35, and EMCC has now moved forjudgment on the pleadings. Doe. 15. For the

reasons explained below,this Court grants in part and denies in part EMCC's motion forjudgment
on the pleadings.
I.

Facts Established in the Pleadings

Brant Lake contracted with Exeel to build a wastewater treatment system for Brant Lake's

residents. A disagreement arose over construction of the system, so Excel and Brant Lake sued

each other in South Dakota state court. Doc. 1 at

11-12; Doc.9 at ]f 1; Doc. 35 at ]f 4. Excel's

complaint asserted two claims against Brant Lake, one seeking a declaratoryjudgment and one for
breach of contract. Doc. 1-1 at 7-8. EMCC paid for Brant Lake's defense under a reservation of
rights. Doc. 1 at^ 18; Doc. 35 at^ 10.

Brant Lake and Excel tried the case before a jury over nine days in January 2018. Doc. 1

at ^ 13; Doc. 9 at T| 1; Doc. 35 at 6; Doc. 1-4 at 4. The trial judge instructed the jury on breach
of contract but not on any other theories. Doc. 1-2. As relevant here, Instructions 16 and 17

explained the implied covenant ofgood faith and fair dealing contained in all contracts under South
Dakota law. Doc. 1-2 at 17-18. Instruction 19 set forth the parties' positions, stating that "Excel
claims that Brant Lake breached the contract and that Excel sustained damages as a result." Doc.

1-2 at 20. Next,Instruction 20 explained that ifthejury found for Excel,it would need to calculate

damages for "Excel's retainage;" for "other payments for work Excel did under the contract, and
for work which Excel was prevented from doing as a result of Brant Lake Samtary District's

breach(es);" and for "Excel's lost profits." Doc. 1-2 at 21. Instruction 25 then addressed Excel's
request for lost profits:

Loss of profits may be recovered if the evidence shows with reasonable certainty
both their occurrence and the extent thereof. The burden is on Excel to prove it is

reasonably certain that the profits it claims would have been realized except for
Brant Lake's conduct, and that the profits can be ascertained and measured, from
evidence introduced, with reasonable certainty.
Doc. 1-2 at 26.

The jury found in Excel's favor and against Brant Lake. Doc. 1-3. Using a special verdict
form, the jury awarded Excel $285,921.81 for "retainage," $483,770 for "other payments under
the contract," and $800,000 for "its lost profits." Doc. 1-3 at 2. The trial court entered judgment

in Excel's favor on February 20, 2018. Doc. 1-3. Brant Lake filed an appeal, which is currently
pending before the Supreme Court of South Dakota. Doe. 35 at ^ 8.
Brant Lake sought coverage under the Linebacker Public Officials and Employment

Practices Liability Policy (Policy) it has with EMCC, demanding that EMCC provide a

supersedeas bond and legal counsel for its appeal^ and that EMCC indemmfy it for all damages it
may owe Excel. Doc. 1 at ^19-21; Doc. 35 at

11-13. Several sections of the Policy are

relevant to Brant Lake's demands and EMCC's motion for judgment on the pleadings. In hrief,

the Policy covers a pubhc official's "wrongfixl act" but excludes coverage for "contractual
liability." Section 1.1. ofthe Policy describes the coverage provided:
a. Publie Officials Liability

We will pay for "defense expense(s)" and/or those sums that the insured
becomes legally obligated to pay as "damages" because of a "public official's
wrongful act" rendered in discharging duties on behalf of the insured named in
the Declarations.

Doc. 1-5 at 1.^ The Policy's definition of a "public official's wrongful act" reads:
b. "Pubhc official's wrongful act" shall mean any of the following:
(1)Actual or alleged errors;
(2) Misstatement or misleading statement;

(3) Act, omission, neglect, or breach of duty by an insured
in the discharge of"organizational" duties. "Public Officials Wrongfiil Act(s)"
does not include an "employment wrongful act."
Doc. 1-5 at 8.

'During the motion hearing before this Court,the parties advised that EMCC has continued paying
Brant Lake's legal fees on appeal under a reservation of rights. See also Doc. 1 at T|20; Doc. 35
attl2.

^The Policy defines "defense expenses" as "sums payable to others for investigation, litigation,
negotiation, or settlement of any claim which we deem expedient. 'Defense expenses' do not
include our own internal company claim adjustment expenses, or any plaintiff/claimant attorney's
fee/expenses." Doc. 1-5 at 7. The Policy defines "damages" in relevant part as "those amounts
that the insured becomes legally obligated to pay for claims arising out ofa'wrongful act' to which
this insurance applies." Doc. 1-5 at 7.

Section 1.5. of the Policy contains the exclusion for "contractual liability" (Contractual
Liability Exclusion):
5. Exclusions - Coverage A and Coverage B

Each ofthe following exclusions is an absolute exclusion with no duty to defend

or pay "damages" unless otherwise indicated. If both an absolute exclusion and
an exclusion with a duty to defend apply, coverage for "defense expenses" is
excluded and we have no duty to defend.
This insurance does not apply to:

d. Contractual Liability

(1) Amounts actually or allegedly due under the terms of a contract;

(2) Failure, refusal, or inabiUty of the insured to enter into, renew or perform
any contract or agreement. Exclusion S.d.(2) applies to Coverage A only; or
(3) The procurement of goods and/or services, including, but not limited to
construction, architect, or engineering, contracts or agreements.
We will defend a claim under Exclusion S.d., but will have no obligation to pay
"damages".
Doc. 1-5 at 2-3.

The Policy also limits EMCC's obligation to pay "defense expenses":
3. Defense and "Defense Expenses"

a. With regard to any claim we defend:

(4) Our obligation to pay further "defense expenses" ends after the first
judgment has been entered except for appeals of such judgment made by the
claimant.

Doc. 1-5 at 1.

EMCC asked this Court to declare that EMCC's duty to defend Brant Lake ended on

February 20, 2018, when the state court entered judgment against Brant Lake, that EMCC need
not pay for the supersedeas bond, and that the Contractual Liability Exclusion excludes coverage
for Excel's verdict against Brant Lake. Doc. 1. Excel responded with a four-count counterclaim,

alleging that the Policy covers the $800,000 in lost profits (Count 1) as well as the decisions by
Brant Lake's board members allegedly to hire an imderinsured engineer for the sewer project

(Comt 2), overpay the engineer by hundreds of thousands of dollars (Count 3), and enter into an

"illegal... completion contract" with another contractor(Count 4). Doc. 9. Brant Lake also filed
a counterclaim asserting that the Policy covers the $800,000 in lost profits. Doc. 35. EMCC then

moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c).^ Doc. 15.
Among other things, EMCC argued that Excel lacks standing to bring Counts 2, 3, and 4 of its
counterclaim. Both Defendants resisted EMCC's motion. One of Brant Lake's arguments is that

issues ofindemnity are not ripe yet and the only issue properly before this Court is EMCC's duty
to defend through the appeal. All parties participated in a motion hearing this Court held in early
February 2019.

In sum,the parties' pleadings framed the following issues:(1) whether Excel has standing
to bring Counts 2, 3, and 4 of its counterclaim; (2) whether issues of indemnity are ripe for
adjudication;(3) whether the Policy requires EMCC to pay for the supersedeas bond;(4) whether
EMCC's duty to defend Brant Lake ended with the February 20, 2018 judgment;(5) whether the
Contractual Liability Exclusion applies to the award for "retainage" and for "other payments under
the contract"; and (6) whether the Contractual Liability Exclusion applies to the award for lost
profits.

n.

Legal Standards

A. Judgment on the pleadings standard.

On a motion for judgment on the pleadings under Rule 12(c), courts take the factual

allegations pled by the nonmoving party as true and construe all inferences in the nonmoving

party's favor, but need not accept the nonmoving party's legal conclusions. Official Comm. of

^Brant Lake filed an amended answer and its counterclaim after EMCC moved for judgment on

the pleadings. In an earlier opinion, this Court deemed EMCC's motion for judgment on the
pleadings to apply to Brant Lake's amended answer and coimterclaim. Doc. 34.

Unsecured Creditors v. Archdiocese of St. Paul & Minneapolis (In re Archdiocese of St. Paul &

MinneapnlisV 888 F.3d 944,950(8th Cir. 2018); Schnuck Mkts.. Inc. v. First Data Merch. Servs.
Corp.. 852 F.3d 732,739(8th Cir. 2017). Courts will grantjudgment on the pleadings "only ifthe

moving party clearly establishes that there are no material issues of fact and that it is entitled to
judgment as a matter of law." Porous Media Corp. v. Pall Corp., 186 F.3d 1077, 1079 (8th Cir.
1999).

Although courts generally must ignore matters outside the pleadings when analyzing a Rule

12(e) motion, they "may consider some public records, materials that do not contradict the
complaint, or materials that are necessarily embraced by the pleadings." Saterdalen v. Spencer,
725 F.3d 838, 841 (8th Cir. 2013)(cleaned up). Here, EMCC attached five documents to its

complaint, namely Excel's state-court complaint, the jury instructions, the verdict form, the
judgment, and the Policy. Docs. 1-1 through 1-5. The Policy was attached to the complaint and
is embraced by the pleadings and Excel's complaint, the jury instructions, the verdict form, and
the judgment are matters of public record. See Greenman v. lessen, 787 F.3d 882, 887(8th Cir.

2015)(considering underlying state court decisions because they were matters of public record).
Brant Lake as part ofits opposition to EMCC's motion filed portions ofthe trial transcript. Docs.

26-1 through 26-4. Depending on the circumstances, courts may consider trial transcripts when
ruling on a Rule 12(c) motion. Porous Media Corp.. 186 F.3d at 1079. No party questions the
authenticity of the documents concerning the state case'or the propriety of the Court considering
such materials. This Court may consider the documents the parties submitted without converting
EMCC's motion into one for summaryjudgment.
B. South Dakota law on insurance coverage issues.

The parties agree that South Dakota law governs in this diversity aetion. Seeura Ins, v.
Horizon Plumbing. Inc.. 670 F.3d 857, 861 (8th Cir. 2012). Interpretation of an insurance policy

presents a question oflaw for the court. Swenson v. State Farm Fire & Cas. Co., 891 F. Supp. 2d
1101,1107(D.S.D. 2012). When deterrnining whether a policy provides coverage, courts in South
Dakota read the contract as a whole and give unambiguous language its plain and ordinary

meaning, nnlhane v W.NatT Mut. Ins. Co..704 N.W.2d 287,293(S.D.2005);Pete Lien Sons,
Inc. V. First Am. Title Ins. Co.. 478 N.W.2d 824, 827 (S.D. 1991). If the policy's language is

"fairly susceptible to two constructions," an ambiguity exists, and it will be construed against the
insurer. Am Family Mut. Ins. Co. v. Elliot 523 N.W.2d 100, 102 (S.D. 1994)(cleaned up).

Nevertheless, courts will not create coverage by reading an ambiguity into the plain language of a

policy, riilbatip. 704 N.W.2d at 293. Instead, courts "consider the policy according to the natural
and obvious import of the language, without resorting to subtle and forced construction for the

purpose ofeither limiting or extending its operation." 1^(cleaned up). South Dakota law provides
that exclusions in an insurance policy are strictly construed, and the insurer bears the burden of

showing that the exclusion applies. Owners Ins. Co. v. Tibke Constr.. Inc., 901 N.W.2d 80, 83
(S.D. 2017); Novak v. State Farm Mut. Auto. Ins. Co., 293 N.W.2d 452,455(S.D. 1980). EMCC
can meet that burden by showing that Brant Lake's claim for indemnity ''clearly falls outside of
policy coverage." Owners Ins. Co., 901 N.W.2d at 83(cleaned up),
in.

Analysis

A. Excel lacks standing to bring Counts 2,3, and 4 of its counterclaim.

Counts 2, 3, and 4 of Excel's counterclaim allege that Brant Lake's board members hired

an underinsured engineer for the sewer project(Count 2), overpaid the engineer by hundreds of
thousands of dollars(Count 3), and entered into an "illegal... completion contract" with another

contractor (Count 4). Doc. 9 at

20-48. Excel seeks a declaration that the Policy provides

coverage for these acts. EMCC argued forjudgment on the pleadings dismissing Counts 2, 3, and
4 in its initial brief, contending that these counts, which are unrelated to the underlying verdict, do

not present a case or eontroversy and that res judicata bars Exeel from bringing additional claims
against Brant Lake. Doc. 16 at 18-22. Rather than responding to EMCC's case-or-controversy

argument. Excel argued that res judicata did not bar Counts 2, 3, and 4 because the counts "are
claims that[Brant Lake] as an entity holds against its own board members." Doc.27 at 16. EMCC

argued in its reply that Excel does not have standing to assert elaims belonging to Brant Lake.
Doc. 28. Excel filed a surreply, but did not address EMCC's standing argument. Doc. 31.

A party suing in federal court must satisfy both the constitutional and prudential

requirements for standing. Warthv. Seldin. 422 U.S. 490,498-99(1975). One ofthe prudential
standing requirements is that"the plaintiff generally must assert his own legal rights and interests,
and cannot rest his claim to relief on the legal rights or interests of third parties. Ifr at 499. The

purpose of this requirement is to avoid adjudicating rights a third party may not wish to assert
and to ensure effective advocacy. Duke Power Co. v. Carolina Envtl. Studv Grp., Inc,., 438 U.S.

59,80(1978). Litigants have nevertheless been allowed to bring elaims for third parties when the
litigant has suffered "an injury in fact," has a close relationship to the third-^party, and there is
"some hinderance to the third party's ability to protect his or her own interests." Powers v. Ohio,
499 U.S. 400, 410-11 (1991)(cleaned up). As the party asserting that federal jurisdiction exists
over Counts 2, 3, and 4, Excel has the burden of showing that it meets the prudential standing
requirements. Luian v. Defenders of Wildlife, 504 U.S. 555, 561 (1992).

The allegations in Excel's answer and counterclaim do not plausibly suggest that Excel has

standing to bring Counts 2, 3, and 4. Excel admits that the claims in Counts 2, 3, and 4 belong to

Brant Lake rather than to Excel itself and that any money recovered under these claims is "not

owed directly to Excel." Doc. 27 at 16. What Excel is seeking then, is a declaration about what
EMCC must do for Brant Lake, not about what EMCC must do for Excel. Excel has not pleaded

any facts, cited any case, or made any argument suggesting that it has standing to bring claims that
not only belong to Brant Lake, but also that Brant Lake may not wish to bring at all and indeed
has not raised. Instead, Excel simply argues that resolving Counts 2, 3, and 4 "in conjunction

with" the other issues in this case "would be efficient because the discovery"^ and facts will

overlap." Doc. 27 at 16-17. But while one purpose of the Declaratory Judgment Act is "to
facilitate efficient outcomes," Med. Assurance Co. v. Hellman.610 F.3d 371, 381 (7th Cir. 2010),

the Act does not relax the prudential standing rule requiring litigants to assert their own rights,

Edgewood Manor Apartment Homes. LLC, v. RSUI Indem. Co., 733 F.3d 761, 772 n.2(7th Cir.

2013)(rejecting an argument that the Declaratory Judgment Act modified the rule prohibiting
parties from asserting the rights of others). Counts 2, 3, and 4 of Excel's counterclaim are
dismissed for lack of prudential standing.
B. Issues of indemnity are properly before this Court.

Brant Lake argues that the indemnity issues raised in this declaratory judgment case are

not ripe imtil the Supreme Court of South Dakota resolves the appeal of the jury verdict. Citing
two state cases and two district court cases from outside the Eighth Circuit, Brant Lake contends

that"a deelaratoryjudgment action brought to determme an insurer's duty to indemnify an insured

is not ripe for adjudication until an insured becomes legally obligated to pay the damages in the

"^On the one issue that remains following entry ofthis Opinion and Order, discovery appears to be
unnecessary.

9

underlying action." Doc. 25 at 2-3 (quoting Gregory v. Farmers Auto. Ins. Ass'n, 910 N.E.2d
763, 765 (111. App. Ct. 2009)).

Courts may not grant relief under the Declaratory Judgment Act unless an "actual
controversy" exists between the parties. 28 U.S.C. § 2201. This "actual controversy" requirement
is identical to the case and controversy requirement embodied in Article 111 of the Constitution.
Ctv. of Mille T

V Reniamin. 361 F.3d 460, 463 (8th Cir. 2004). Article 111, in turn, requires

that there be"a substantial controversy,between parties having adverse legal interests,ofsufficient

immediacy and reality to warrant the issuance of a declaratory judgment." Md. Cas. Co. v. Pae.
Coal & Oil Co.. 312 U.S. 270,273(1941). As with any other action in federal court, an action for

declaratory relief must be ripe for federal jurisdiction to exist. Pub. Serv. Comm'n of Utah v.
Wvcoff Co.. 344 U.S. 237, 242(1952); Gonher Oil Co. v. Bunker. 84 F.3d 1047, 1050 (8th Cir.
1996).

The parties' disagreement over indemnity presents an actual controversy that is ripe for
adjudication. Brant Lake and Excel dispute EMCC's claim that the Policy does not cover any part

of the jury verdict. The parties have adverse legal positions because Brant Lake and Excel want

EMCC to pay for the verdict while EMCC wants to avoid doing so. This dispute is of"sufficient
immediacy" as the jury has found Brant Lake liable for $1,569,691.81 in damages,judgment has
been entered against Brant Lake, and Brant Lake has demanded that EMCC indemmfy it for any
damages owed Excel once final judgment is entered. Contrary to Brant Lake s argument, courts

can decide questions ofindemnity despite the insured's liability for damages being uncertam. In
Scottsdale Insurance Co. v. Universal Crop Protection Alliance. LLC. 620 F.3d 926 (8th Cir.

2010), for instance, the Eighth Circuit resolved a dispute over indemnity even though the statecourt htigation to determine the insured's liability was still pending. Id at 933-35. "In the

10

insurance policy coverage context," the Eighth Circuit explained,"a declaratory judgment action
is ripe irrespective of whether the underlying litigation is ongoing or resolved." Id. at 934; s^
also Md. Cas. Co.. 312 U.S. at 272-74(holding that an actual controversy existed when an insurer

sought a declaratoryjudgment that it had no duty to defend or indemnify its insured in a state court
action that had not yet proeeeded to judgment); lOB Charles Alan Wright, et al.. Federal Practiee
and Procedure § 2757(4th ed.)(explaining that courts have found a "sufficient controversy" when
an insurer seeks a declaration on indemnity even though the insured's liability is uneertain). Under

Scottsdale. then. Brant Lake's appeal of the judgment does not render a decision on indemnity
premature.

C. The supersedeas bond issue is moot.

EMCC initially asked for a declaration that it need not provide a supersedeas bond to
facilitate Brant Lake's appeal. Since EMCC filed this declaratory judgment action, however, the

state trial judge ruled that Brant Lake did not have to post a supersedeas bond in eonnection with

its appeal. Doc. 16 at 4 n.1; Doc. 16-1. All parties agreed at the hearing that the supersedeas bond
issue is now moot.

D. EMCC has no duty to defend Brant Lake beyond the entry ofjudgment.

EMCC requests judgment on the pleadings declaring that its duty to defend Brant Lake
ended on February 20, 2018, when the state eourt entered judgment in favor of Exeel and against
Brant Lake. Brant Lake did not respond to this request in its brief. Again, the Policy sets a limit
on EMCC's duty to pay "defense expenses":

With regard to any claim we defend:

(4) Our obligation to pay further "defense expenses" ends after the first judgment
has been entered except for appeals of such judgment made by the claimant.

11

Doc. 1-5 at 1. Here, the first judgment was entered on February 20, 2018. Although Brant Lake

has appealed thejudgment,the "claimant," Excel, has not. Under the plain language ofthe Pohcy,
EMCC's duty to pay Brant Lake's "defense expenses" ended on February 20, 2018. EMCC is
entitled to judgment on the pleadings on this issue.
E. The policy excludes coverage for "retainage" and "other payments under the contract."

The jury awarded Exeel $285,921.81 for "retainage" and $483,770 for "other payments
under the eontraet." Doc. 1-3 at 2. EMCC argues that subsection(1)of the Contraetual Liability

Exelusion exeludes coverage for these damages. That subsection provides that the Policy does not

cover "[ajmounts actually or allegedly due under the terms of a contract." Doc. 1-5 at 3. Brant
Lake's briefdid not address EMCC's argument, and its onlyresponse at the hearing was that issues

of indemnity are not yet ripe. Exeel at the hearing argued only that the separate "lost profits"
award was covered by the Policy.

The Poliey does not define the phrase "due under the terms of a contract," so this Court
looks to the dictionary to determine the "plain and ordinary meaning" of these words. W. Nat'l
Mut. Ins. Co. V. TSP. Ine.. 904 N.W.2d 52, 57(S.D. 2017)(eleaned up). The word "due" means

"[ojwing or payable," while the word "owing" simply means "yet to be paid." Blaek's Law
Dictionarv(10th ed. 2014). In this context, the word "under" means "[i]n accordanee with," The
New Shorter Oxford English Dietionarv 3470 (3d ed. 1993), and the word "terms" means

"conditions" or the "provisions that determine the nature and scope of an agreement," MerriamWebster's Collegiate Dictionarv 1289(11th ed. 2014).

Subsection(1)ofthe Contractual Liability Exclusion clearly applies to the jury's award of
$483,770. After all, the verdict form stated that these damages were for "other payments under
the contract," Doc. 1-3 at 2, and the jury instructions described this aspect of Excel's damages as

being "[f]or other payments for work Excel did imder the contract, and for work which Excel was
12

prevented from doing as a result of[Brant Lake's] breach(es)." Doc. 1-2 at 21. Although the
contract between Excel and Brant Lake is not in the record, the verdict form and jury instructions

establish that the $483,770 in damages was for money Brant Lake owed "in accordance with" the
terms of that contract.

The jury instructions do not define "retainage," but under the general understanding ofthis
word, the $285,921.81 awarded for "retainage" was also an amount Brant Lake owed under the
contract. Courts have defined "retainage" as "a percentage of what one party to a construction

contract owes the other, which is withheld to assure that all ofthe work under the contract has been

satisfactorily completed and that all mechanic's liens have been released or expired." Herling v.
Wvo. Mach. Co.. 304 P.3d 951, 955 n.l (Wyo. 2013). A treatise on construction law provides a
similar definition:

A common contract approach to reducing a contractee's risk that its contractor will
fail to fully perform its contractual obligations is to withhold a percentage of the
sums due until the work is substantially complete. This percentage is known as

"retainage." Typical retainage amounts are 5 to 10% ofthe contract price.

3 Philip L. Bruner & Patrick J. O'Connor Jr., Bruner & O'Connor on Construction Law § 8:18

(2016 ed.)(footnotes omitted). These definitions are consistent with ExeeTs statement during trial
that retainage means "work [Excel has] already done, but not yet been compensated for." Doc.

26-1 at 4. No party at the hearing offered any different explanation of the "retainage" award.
EMCC has met its burden of showing that subsection (1) of the Contractual Liability Exclusion

clearly applies to the jury's verdict for "retainage" and "other payments under the contract."
F. The contractual liability exclusion and the $800,000 in "lost profits."

EMCC argues that subsection(2)ofthe Contractual Liability Exclusion excludes coverage

for the jury award to Excel of $800,000 in lost profits. Brant Lake disagrees, arguing that the
Contractual Liability Exclusion is inapplicable both because of the language of the Policy and
13

because the $800,000 in lost profits could only have been awarded under a tort theory, "perhaps
as an action for interference with contractual relations." Doc.25 at 16. Excel contends that EMCC

has failed to show that the Contractual Liability Exclusion clearly applies and that a reasonable

interpretation ofthe exclusion, considering the nature ofthe risks insured, would afiford coverage
for the $800,000 in lost profits.

EMCC's pleadings and the exhibits attached thereto do not provide enough information for
this Court to defmitively rule that subsection (2) of the Contractual Liability Exclusion excludes

coverage for the lost profits jury award. Subsection (2) states that the Policy "does not apply to
...(2) Failure, refiisal, or inability of the insured to enter into, renew or perform any contract or

agreement." Doc. 1-5 at 2-3. Although EMCC argues that the lost profits clearly fall within
subsection (2), its pleadings did not explain what the lost profits were for or how Excel was able
to recover them. Indeed, the nature ofthe $800,000 in lost profits would have remained a mystery

to this Court had Brant Lake not filed a portion ofthe trial transcript.^ The trial transcript indicates
that Brant Lake not only terminated Excel firom the wastewater treatment system project, but also

made a claim on Excel's performance bond. Doc. 26-1 at 2-3.^ Excel's theory at trial appears to
have been that Brant Lake's claim on its hond impaired Excel's ability to secure bonds for other

projects, which in turn caused Excel to hid only small projects, to lose out on large and more
profitable projects, and to thereby suffer lost profits. Doc. 26-1 at 4, 7-8,12-16,21-25; Doc. 262 at 6; Doc. 26-3 at 8; Doc. 26-4.at 2-3. In its briefto this Court, Excel asserts that it pursued the

lost profits under a contract theory because the performance bond was incorporated into the

^Brant Lake briefly mentioned the basis of the jury's $800,000 lost profits award in its
Counterclaim,Doc.35 at^22-23,but the submission ofthe trial excerpts first informed the Court
ofthe evidence and the calculation ofthe amount.

^This Court is not making any factual findings about Excel's claim for lost profits.
14

construction contract between Excel and Brant Lake. Doc.27 at 8. According to Excel, it alleged

that Brant Lake "breached the duty of good faith and fair dealing implied within the bond and
within its contract, generally, by using it wrongfully and for an improper purpose, beyond the
seope oftheir agreement." Doc. 27 at 8. The construction contract and performance bond are not
part of this Court's reeord at this time, and Brant Lake has filed only a small portion of the
transcript firom the nine-day jury trial. Based on the limited record at this time, this Court cannot

determine on a motion for judgment on the pleadings whether the jury awarded the lost profits
because of Brant Lake's "[f]allure, refusal, or inability ... to enter into, renew or perform any
contract or agreement."

EMCC maintains that this Court need only look to the jury instruetions, the verdict form,

and Excel's complaint to resolve the issue ofcoverage for the lost profits award. To be sure, these
documents show that it is at least fairly debatable whether EMCC must indemnify Brant Lake for
the lost profits. Yet these documents do not show that EMCC is entitled to judgment on the
pleadings. After all, courts grant motions forjudgment on the pleadings only when "it is elear that
the merits ofthe eontroversy ean be fairly and fully deeided in this summary manner." 5C Charles
Alan Wright et al.. Federal Practice and Proeedure § 1369(3d ed.). Here, it is not elear that this
Court can decide whether the exclusion applies to this lost profits award on the current record. Cf.
St. Paul Fire & Marine Ins. Co. v. Engehnann.639 N.W.2d 192,198-99(S.D. 2002)(considering

testimony from the underlying trial when deciding whether the insurer had a duty to indemnify);
Klatt V. Cont'l Ins. Co.. 409 N.W.2d 366, 370 (S.D. 1987) (considering complaint, jury
instructions, verdict, trial testimony, and the trial eourt's findings of faet when deeiding whether
an insuranee poliey covered damages).

15

To recap, EMCC is entitled to judgment on the pleadings on Counts 2, 3,and4 of Excel's
counterclaim, a declaration that it has no duty to defend Brant Lake beyond the February 20,2018
judgment, and a declaration that the Policy does not cover the jury's award of damages for

"retainage" and "other payments under the contract." This Court denies EMCC's motion for
judgment on the pleadings as to the lost profits because that issue, though likely a question oflaw,
ought to be decided on a more developed record, perhaps through cross motions for summary
judgment.
IV.

Conclusion

For the reasons stated above, it is hereby
ORDERED that EMCC's Motion for Judgment on the Pleadings, Doc. 15, is granted in

part and denied in part. EMCC's motion is granted on Counts 2,3, and 4 of Excel's counterclaim,
for a declaratory judgment that EMCC's duty to defend Brant Lake ended on February 20,2018,
and for a declaratoryjudgment that EMCC has no obligation to indemnify Brant Lake for thejury's
award of damages for "retainage" and "other payments under the contract." EMCC's motion is

denied as to its request for a declaratory judgment on the lost profits award not being covered.
EMCC's motion for a declaratory judgment on not having to post a supersedeas bond is denied as
moot.

DATED this

day of February ,2018.
BY THE COURT:

ROBERTO A. LANG!

UNITED STATES DISTRICT JUDGE

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