___________

No. 94-3777

___________

National Farmers Union Standard *

Insurance Company, *

*

Appellant, *

* Appeals and Cross-Appeal from

v. * the United States District Court

* for the District of 

Souris River Telephone Mutual * North Dakota.

Aid Cooperative and Warren *

Hight, *

*

Appellees. *

___________

No. 95-1087

___________

National Farmers Union Standard *

Insurance Company, *

*

Appellant, *

*

v. *

*

Souris River Telephone Mutual *

Aid Cooperative and Warren *

Hight, *

*

Appellees. *

___________

No. 95-1214

___________

National Farmers Union Standard *

Insurance Company, *

*

Cross-Appellee, *

*

v. *

*

Souris River Telephone Mutual *

Aid Cooperative and Warren *

Hight, *

*

Cross-Appellants. *
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___________

 Submitted: October 18, 1995

 Filed: January 31, 1996

___________

Before BOWMAN, FLOYD R. GIBSON, and WOLLMAN, Circuit Judges.

___________

BOWMAN, Circuit Judge.

This is a complex insurance coverage case. The Souris River

Telephone Mutual Aid Cooperative sought coverage for the death of

one of its employees from its insurer, National Farmers Union

Standard Insurance Company (NFU). After lengthy proceedings in the

District Court, a jury found for the cooperative and its general

manager Warren Hight (collectively, SRT). The District Court

entered judgment on the verdict and awarded SRT damages in the

amount of $371,906.30 plus prejudgment and postjudgment interest.

The court subsequently entered an order granting SRT's motion for

attorney fees in the amount of $105,488.65 but denying SRT's claim

for $10,422.50 in paralegal fees. NFU now timely appeals the

judgment entered against it (No. 94-3777). NFU also appeals the

order awarding attorney fees to SRT (No. 95-1087). SRT crossappeals the order denying its request for paralegal fees (No. 95-

1214). We reverse the judgment entered on the jury's verdict and

remand this case to the District Court for entry of judgment in

favor of NFU. The award of attorney fees to SRT is vacated, and

SRT's cross-appeal from the order denying its request for paralegal

fees is dismissed as moot.

I.

Thomas Schettler, an employee of SRT, died when he fell from

the roof of an office building in Sioux Falls, South Dakota, on
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November 14, 1989, while he was installing a satellite television

dish. SRT is headquartered in Minot, North Dakota, and Schettler

lived and ordinarily worked for SRT in North Dakota. In fact,

Schettler's death in Sioux Falls occurred on the first day in at

least twenty years that SRT had any of its employees perform work

outside of North Dakota. The work in Sioux Falls was being

performed by SRT on behalf of Hughes Network Systems pursuant to a

contract between SRT and Hughes that the parties signed on August 9

and August 14, 1989, respectively.

Schettler's widow filed a claim for death benefits with the

North Dakota Worker's Compensation Bureau (the Bureau). Pursuant

to N.D. Cent. Code § 65-08-01(2) (Supp. 1989), which became

effective July 27, 1989, the Bureau dismissed the claim because

Schettler's death occurred at an identifiable out-of-state job site

and thus was not incidental and referable to Schettler's principal

employment in North Dakota. SRT could have covered its employees

working in South Dakota through the Bureau at no additional cost by

obtaining a certificate of extraterritorial coverage. North Dakota

and South Dakota have reciprocal agreements, and South Dakota

regularly approves requests by the Bureau to cover employees of

North Dakota companies working in South Dakota. SRT, however,

never notified the Bureau that it would have employees working in

South Dakota. The Supreme Court of North Dakota affirmed the

Bureau's decision to deny benefits. SRT v. North Dakota Workers'

Compensation Bureau, 471 N.W.2d 465 (N.D. 1991). 

While SRT was appealing the Bureau's decision, Schettler's

widow filed wrongful death actions against SRT in South Dakota and

North Dakota state courts. SRT turned to its insurer, NFU, to

determine whether SRT's insurance policies with NFU provided

coverage for Schettler's death. NFU then filed this action in the

District Court seeking a declaratory judgment that none of SRT's

policies covered the loss; SRT filed a counterclaim alleging that

the loss was covered or that NFU was negligent in not providing the
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appropriate coverage. Originally, Mrs. Schettler was also named as

a defendant by NFU. NFU and SRT, however, settled Mrs. Schettler's

claims and both companies contributed equally to the settlement.

The declaratory judgment action continued in order to determine

whether either NFU or SRT could recover from the other the amount

it paid to Mrs. Schettler.

SRT claimed coverage under three insurance policies it had in

force through NFU at the time of Schettler's death: (1) a Rural

Utilities Insurance Plan (RUIP), which is a general commercial

liability policy; (2) a Commercial Umbrella Liability Policy

(CULP); and (3) a Directors, Officers, and Managers Liability

Insurance Policy (DOM). NFU sought a judgment declaring that

Schettler's death was not covered by any of these policies. In its

counterclaim, SRT alleged that Schettler's death was covered and

requested a declaratory judgment to that effect. Additionally, SRT

alleged that, even if there was no coverage under the three NFU

policies, NFU or its agents were negligent when they failed to

provide a stop-gap endorsement to SRT's RUIP and that such an

endorsement would have covered Schettler's death. SRT also

contended that NFU was negligent in other, unspecified ways by

failing to provide SRT with appropriate insurance coverage.

The District Court granted partial summary judgment to NFU,

holding that the RUIP and the CULP issued by NFU to SRT do not

provide coverage for the loss here at issue. SRT has not appealed

the court's grant of partial summary judgment, and thus no issues

concerning the RUIP and the CULP are before us. In the same order,

the court refused to grant summary judgment with respect to the DOM

policy, holding that as a matter of law the DOM policy covered SRT

for any losses SRT incurred as a result of the negligent acts or

omissions of its general manager Warren Hight. The case proceeded

to trial, and the court submitted the question of Hight's

negligence to the jury. The court also submitted to the jury SRT's

negligence counter-claims against NFU. The jury returned a special
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verdict in which it found that (1) Hight was "negligent in failing

to ensure that SRT had secured extraterritorial workers

compensation coverage"; (2) "NFU or one of its agents [was]

negligent in failing to provide the Stop Gap endorsement on the

1989 RUIP"; and (3) "NFU or one of its agents [was] negligent in

[some] other way in failing to provide proper insurance coverage

for SRT." Verdict Form at 1, 2, 3, NFU v. SRT, No. A1-92-055

(D.N.D. Sept. 20, 1994). Based on the jury's verdict, the court

entered judgment for SRT in the amount of $371,906.30 plus

prejudgment and postjudgment interest. The court later entered an

order awarding attorney fees in the amount of $105,488.65 but

denying SRT's claim for $10,422.50 in paralegal fees. NFU appeals

the court's ruling on the coverage afforded by the DOM policy, the

judgment entered on the jury's verdict, and the attorney fees

award. SRT cross-appeals the denial of its claim for paralegal

fees.

II.

NFU argues that the District Court erred when it held that the

DOM policy covered SRT for losses it incurred as a result of the

negligence of its general manager Warren Hight. The

interpretation of an insurance policy is a matter of state law.

Bell Lumber & Pole Co. v. United States Fire Ins. Co., 60 F.3d 437,

441 (8th Cir. 1995). "We review questions of state law de novo,"

without giving any deference to the District Court's decision. Id.

The DOM policy at issue in this case provides that NFU will

pay on behalf of SRT any "loss" that results from "any . . . claims

made during the policy period . . . against each and every

Director, Officer or Manager by reason of any Wrongful Act for

which the Insured may be required or permitted by law to indemnify

such Director, Officer or Manager." DOM Policy at 1, reprinted in

Appellant's Appendix vol. I at A53. SRT's theory of the case is

that SRT itself has a claim against Hight for his negligent failure
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to ensure that extraterritorial workers' compensation coverage was

obtained for SRT's employees working in South Dakota. SRT contends

that its claim against Hight would be successful and that this loss

to Hight as a result of SRT's claim is a loss for which SRT could

indemnify Hight. Because the DOM policy does not specifically

exclude coverage for claims made by SRT against its own directors,

officers, or managers, SRT contends that the DOM policy covers its

claim against Hight.

We conclude that SRT's theory of the case is fatally flawed.

A condition precedent of coverage under the DOM policy is a "loss"

to a director, officer, or manager. While we agree with SRT that

SRT need not actually bring a lawsuit against Hight to trigger the

coverage of the policy, the plain language of the policy at least

requires SRT to show that Hight would incur a loss if SRT pursued

its negligence claim against him. In the circumstances of this

case, SRT cannot show that Hight would suffer a loss if SRT pursued

its claim because state law provides Hight with immunity against

such a claim. Hight thus being insulated from loss, he would have

no need for indemnification, and SRT thus could have no basis in

fact for a claim under the DOM policy.

Hight's immunity is derived from the chapter of the North

Dakota Century Code that relates to cooperative associations such

as SRT. The code provides as follows:

Directors, trustees, and officers, and the manager who is

the person most responsible for carrying out the policies

and directives of the trustees, officers, or board of

directors, are immune from civil liability for any act or

omission relating to their service or function as a

director, trustee, officer, or manager, unless the act or

omission constitutes gross or willful negligence or gross

or willful misconduct.

N.D. Cent. Code § 10-15-31(1) (1995). Hight, as general manager,

is "the person most responsible for carrying out" SRT's policies.

He is thus immune from civil liability for his negligent acts and
 1

We note that this statement tends to show that the District

Court misunderstood the duty imposed on NFU by the DOM Policy. NFU

is not required to indemnify SRT against any loss it suffers as a

result of a manager's wrongful act. NFU is required to pay SRT

under the relevant terms of the DOM Policy only when a director,

officer, or manager suffers a loss as a result of a claim based on

"any Wrongful Act of a director, officer, or manager]" when NFU

"may be required or permitted by law to indemnify such Director,

Officer or Manager" against such a loss. DOM Policy at 1,

reprinted in Appellant's Appendix vol. I at A53. This

misunderstanding may be at the root of the District Court's

erroneous refusal to grant NFU summary judgment on the issue of the

scope of coverage afforded SRT by the DOM Policy.

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omissions. Correspondingly, he is not immune if his acts or

omissions constitute "gross or willful negligence or gross or

willful misconduct." We note that SRT has not alleged that Hight

was grossly or willfully negligent or that he engaged in gross or

willful misconduct. Thus Hight is entitled to immunity from civil

liability for any negligent failure to ensure that SRT obtained

extraterritorial workers' compensation coverage.

Apparently, both SRT and the court below thought that NFU was

attempting to amend the DOM Policy's definition of a "Wrongful Act"

by referring to the statutory immunity provided by N.D. Cent. Code

§ 10-15-31(1) (1995). The court stated that 

SRT further argues that the civil liability standard

articulated in N.D.C.C. § 10-15-31(1) was not

incorporated, by reference or otherwise, into the DOM

policy. SRT's argument on this point is sound. The

agreement between NFU and SRT--the DOM policy--creates a

duty to indemnify for losses sustained as a result of any

`wrongful act' committed by a director, officer, or

manager of SRT,[1] as defined by the DOM policy itself.

Given that the policy's definition of a `wrongful act'

does not make reference to gross or willful negligence or

misconduct, this court cannot disregard the clear intent

of the contracting parties by appending the standard of

care articulated in the [statute].

Mem. & Order at 23, National Farmers Union Std. Ins. Co. v. Souris

River Tel. Mut. Aid Coop., No. A1-92-055 (D.N.D. Nov. 3, 1993).
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The District Court misunderstood NFU's argument on this issue. NFU

does not argue that the statute's standard of civil liability

should be imported into the DOM policy. NFU merely points out,

correctly in our opinion, that the express language of the policy

requires Hight, the manager in question, to suffer some sort of

loss. Under North Dakota law, however, Hight cannot suffer a loss

as a result of a claim based on his negligent acts or omissions

while serving as SRT's general manager. See N.D. Cent. Code § 10-

15-31(1). Hight is immune from civil liability for such negligent

acts or omissions. In the circumstances of this case, the putative

claim of SRT does not expose Hight to any liability. Hight cannot

suffer a loss, and thus there is no coverage for SRT under the DOM

Policy. The District Court erred when it reached the opposite

conclusion, and its judgment to that effect is reversed.

Necessarily, the court also erred when it submitted to the jury the

question of whether Hight was negligent in failing to ensure that

SRT had secured extraterritorial workers' compensation coverage.

As a matter of law, NFU is entitled to prevail on the issue of

liability under the DOM policy.

III.

We turn now to NFU's arguments regarding SRT's negligence

counterclaims. NFU contends that the District Court should have

granted NFU's motion for judgment as a matter of law because the

evidence is insufficient to support the jury's findings that NFU or

one of its agents was negligent. Specifically, NFU argues that

there is insufficient evidence to prove that it was negligent (1)

when it did not add an Employer's Liability/Stop-Gap Coverage

Endorsement to SRT's 1989 RUIP or (2) when it failed otherwise to

provide insurance that would have covered Schettler's death. We

review de novo the denial of a motion for judgment as a matter of

law, applying the same standards as the District Court. Nicks v.

Missouri, No. 94-3752, slip op. at 8 (8th Cir. Oct. 12, 1995).
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Under North Dakota law, the plaintiff in a negligence action

has the burden to prove the four basic elements of a tort: duty,

breach, injury, and proximate cause. Knorr v. K-Mart Corporation,

300 N.W.2d 47, 50 (N.D. 1980). In this case, SRT's burden, as the

counter-claimant, is to prove (1) that NFU or one of its agents

owed a duty to SRT, (2) that NFU or one of its agents breached its

duty, (3) that SRT suffered an injury, and (4) that NFU's breach

was the proximate cause of SRT's injury. We conclude that SRT did

not produce sufficient evidence to prove that NFU breached its duty

to SRT. 

The starting point for a proper analysis of SRT's evidence

regarding NFU's alleged breach is a consideration of the nature of

NFU's duty to SRT. The North Dakota Supreme Court has adopted

Minnesota's statement of the standard of care for insurance agents.

Rawlings v. Fruhwirth, 455 N.W.2d 574, 577 (N.D. 1990). Under that

standard of care, insurance agents must 

exercise the skill and care which a reasonably prudent

person engaged in the insurance business would use under

similar circumstances. This duty is ordinarily limited

to the duties imposed in any agency relationship to act

in good faith and follow instructions.

Id. (citing Gabrielson v. Warnemunde, 443 N.W.2d 540, 543 (Minn.

1989)). The Rawlings court also noted, however, that Minnesota

recognizes "an expanded duty or standard of care may arise on the

part of an insurance agent on the basis of a `special relationship'

between the insurance agent and the insured." Id. In Born v.

Medico Life Ins. Co., the Minnesota Court of Appeals held that

whether an agent has a duty to inform an insured about "possible

gaps in coverage depends on the relationship of the parties,

specific requests of the insured, and the professional judgment of

the agent." 428 N.W.2d 585, 589 (Minn. Ct. App. 1988). The

District Court instructed the jury in a manner consistent with

Rawlings and Born, and NFU does not challenge the instructions.

Rather, NFU argues that SRT's evidence is insufficient to establish
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a breach of duty by NFU and, therefore, that the District Court

erred in denying its motion for judgment as a matter of law.

Considering first the general standard of care for insurance

agents, we conclude that SRT produced insufficient evidence to show

a breach of the standard of care by NFU. We note that if SRT's

evidence is sufficient evidence of a breach, North Dakota law would

require an insurance agent to advise an insured of a need for

additional coverage when (1) the need arises as a result of the

insured's entry into a new business activity in a state in which it

has never done business before, (2) the agent is unaware of the new

business activity in the new state, and (3) the venture into the

new state occurs after the insurance policy has been purchased. No

North Dakota cases are in point on this issue, but "[w]hen a

state's highest court has not addressed the precise question of

state law that is at issue, a federal court must decide `what the

highest state court would probably hold were it called upon to

decide the issue.'" Lenhardt v. Zoeller, 55 F.3d 377, 379 (8th

Cir. 1995) (quoting Hazen v. Pasley, 768 F.2d 226, 228 (8th Cir.

1985)). In light of the fact that the North Dakota Supreme Court

has adopted the Minnesota Supreme Court's statement of the duty an

insurance agent owes to an insured, we look, as we believe the

North Dakota Supreme Court would, to Minnesota precedents. 

In Gabrielson v. Warnemunde the Minnesota Supreme Court

reinstated a summary judgment in favor of an insurance agent. The

court held that the agent breached no duty by failing to provide

coverage for an insured's new boat when the insurance agent did not

know the insured had purchased a new boat. The insured's old boat

had been covered under his homeowner's insurance policy but the new

boat was not covered because its engine exceeded the horsepower

limitations of the policy. The court stated that insurance agents

generally have "no `ongoing duty of surveillance' or `obligation to

ferret out at regular intervals information which brings

policyholders within the provisions of an exclusion.'" 443 N.W.2d
 2

It does not appear that any additional insurance would have

been needed if SRT had applied to the North Dakota Workers'

Compensation Bureau for an extension of SRT's workers' compensation

coverage to employees working in South Dakota. Such an extension

would have been routinely granted at no cost to SRT.

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at 544 (quoting Kashmark v. Western Ins. Cos., 344 N.W.2d 844, 847

(Minn. 1984), and Tollefson v. American Family Ins., 226 N.W.2d

280, 283 (Minn. 1974), respectively). The court reached its

decision in part because

[t]he insured bears the responsibility to inform the

agent of changed circumstances which might affect the

coverage of the insurance policy, because the insured is

in a better position to communicate those changes than

the agent could be expected to discover on his or her own

initiative. 

Id. The court concluded that the agent "received no information to

put him on notice that [the insured] had acquired a high powered

boat, and therefore [the agent] cannot be liable for failing to

discover that fact." Id. In Tollefson the court held that an

insurance agent had not breached any duty by failing to provide

additional automobile insurance coverage for an insured's daughter,

who was no longer a student but was still of college age. The

court stated that the agent could not have breached any duty "until

and unless he had information which would alert him to the fact

that she was no longer a student" and thus no longer a member of

the insured's household. Tollefson, 226 N.W.2d at 283. 

We are persuaded by the logic in the Gabrielson and Tollefson

opinions, and we believe the North Dakota Supreme Court would be as

well. We thus conclude that for SRT to prevail on its negligence

counterclaims, SRT must produce sufficient evidence to prove that

NFU had notice of the change of circumstances that resulted in a

possible need for additional insurance coverage, i.e., that SRT

would be sending employees to perform work at out-of-state sites.2

SRT failed to provide any such evidence. 
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 It is undisputed that SRT failed to apprise NFU of the change

of circumstances in any explicit way. It is also undisputed that

NFU's agents could not have discovered the change of circumstances

in an annual policy review because SRT entered into the Hughes

contract, which resulted in SRT's performing work outside of North

Dakota, only after SRT had purchased its insurance policies for the

relevant policy year. SRT argues only that NFU should have known

of the change of circumstances because NFU had made Hughes, at

SRT's request, an additional insured under SRT's policies with NFU.

SRT argues that NFU should have reviewed the Hughes contract to

determine if any additional insurance was required. We do not find

this argument persuasive. Even if NFU or its agents were under an

obligation to review the Hughes contract, a question which we need

not and do not decide, we conclude that a review of the contract

would not have put NFU on notice that SRT would be sending its

employees to work in other states. We have conducted the review of

the contract that NFU allegedly should have undertaken, and we note

that the contract does not, by its terms, obligate SRT to send its

employees into South Dakota or any other state. Thus even if NFU

had reviewed the contract in August 1989, NFU would not have known

of the change of circumstances or the need for additional

insurance.

In these circumstances, NFU or its agents did not breach a

duty to SRT. To prove that NFU breached a duty to SRT, SRT was

required to show that NFU or its agents knew of the change of

circumstances that resulted in a need for additional insurance.

The record is devoid of any evidence of such knowledge. We thus

conclude that the North Dakota Supreme Court would find SRT's

evidence of a breach insufficient as a matter of law. A contrary

conclusion effectively would impose an unprecedented duty on

insurers such as NFU to monitor the business operations of their

insureds on a daily basis. Insureds are in a better position to

know of changes in their operations that may affect insurance
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coverage requirements; thus the law places the onus on insureds to

inform their insurers of such changes. 

Similarly, we conclude as a matter of law that SRT did not

produce sufficient evidence of a special relationship to create a

submissible case against NFU under the expanded duty of care

included in the District Court's instructions. North Dakota has

not defined what special circumstances would impose an expanded

duty on an insurance agent, but Minnesota has imposed an expanded

duty only in exceptional cases. See, e.g., Osendorf v. American

Family Ins. Co., 318 N.W.2d 237 (Minn. 1982) (holding that agent

owed affirmative duties because insured was farmer with limited

education and reading skills, insured relied upon agent's

expertise, and agent had visited farm regularly and should have

been aware of need for additional insurance). Here, there is no

evidence that any special relationship existed between SRT and NFU.

To the contrary, the relationship was a rather ordinary, longstanding business relationship in which a telephone company

purchased insurance from an insurance company through an insurance

agent. Both parties are sophisticated and possess substantial

business experience. Thus insofar as SRT based its claim on the

expanded duty of care, NFU was entitled to judgment as a matter of

law.

We hold that, as a matter of law, SRT has failed to show that

NFU breached a duty to SRT. The District Court thus erred when it

denied NFU's motion for judgment as a matter of law. 

IV.

The judgment of the District Court in favor of SRT is reversed

and the case is remanded for entry of judgment in favor of NFU on

both its declaratory judgment action and SRT's counterclaims. The

court's order awarding attorney fees to SRT is vacated. SRT's
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cross-appeal of the order denying its request for paralegal fees is

dismissed as moot.

A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.