#26424-a-DG

2013 S.D. 38

IN THE SUPREME COURT

OF THE

STATE OF SOUTH DAKOTA

* * * *

JAMIE SWENSON and RANDY

STEWART, Individually and as

Assignees of Dale Jelen and DJ

Construction, LLC, Plaintiffs and Appellants,

v.

OWNERS INSURANCE COMPANY, Defendant and Appellee.

* * * *

APPEAL FROM THE CIRCUIT COURT OF

THE SECOND JUDICIAL CIRCUIT

LINCOLN COUNTY, SOUTH DAKOTA

* * * *

THE HONORABLE LAWRENCE E. LONG

Judge

* * * *

DANIEL K. BRENDTRO of

Zimmer, Duncan & Cole, LLP

Sioux Falls, South Dakota

and

ANTHONY T. SMITH of

Hellmuth & Johnson, PLLC

Edina, Minnesota Attorneys for plaintiffs

and appellants.

* * * *

CONSIDERED ON BRIEFS ON

MARCH 18, 2013

OPINION FILED 05/15/13
ZACHARY W. PETERSON

JACK H. HIEB of

Richardson, Wyly, Wise, Sauck

 & Hieb, LLP

Aberdeen, South Dakota

and

 

TIMOTHY P. TOBIN of

Gislason & Hunter, LLP

Minneapolis, Minnesota Attorneys for defendant

and appellee.
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GILBERTSON, Chief Justice

[¶1.] Jamie Swenson and Randy Stewart entered into a contract with Dale 

Jelen, d/b/a DJ Construction, LLC (collectively DJ Construction), in 2007 to build a 

home on their property. In 2009, construction on the home was halted after 

Swenson and Stewart discovered the home had sustained significant water damage. 

Swenson and Stewart brought suit against DJ Construction, seeking to recover for 

the damage to their home and DJ Construction’s failure to complete the home. DJ 

Construction contacted its insurer, Auto-Owners Insurance Company (Owners),

seeking defense and indemnity against Swenson and Stewart’s claims. Owners 

denied DJ Construction’s requests after determining there was no coverage under 

the terms of the policy. Subsequently, Swenson and Stewart entered into a 

stipulated judgment and settlement agreement with DJ Construction in which DJ 

Construction confessed judgment and assigned its rights and claims against Owners 

to Swenson and Stewart. Swenson and Stewart then filed suit against Owners 

based upon Owners’ failure to defend and indemnify DJ Construction. Both Owners 

and Swenson and Stewart filed motions for summary judgment, and the circuit 

court granted summary judgment in favor of Owners. Swenson and Stewart appeal. 

FACTS

[¶2.] In this case, the material facts are undisputed. Swenson and Stewart 

own real property located at 47711-273rd Street in Harrisburg, South Dakota. In 

November 2007, Swenson and Stewart entered into a building construction 

agreement with DJ Construction in which DJ Construction agreed to build a home 

on their property. The total contract price was $1,285,952. At the time the parties 
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entered into the contract, DJ Construction was insured by Owners under an 

insurance policy that included a Commercial General Liability Coverage Form (the 

Policy).1 The Policy provided coverage in the amount of $1,000,000 per occurrence. 

[¶3.] Under the terms of the Policy, Owners was responsible for paying 

“those sums that the insured becomes legally obligated to pay as damages because 

of . . . ‘property damage’ to which this insurance applies.” 2 The Policy further 

provided that Owners “will have the right and duty to defend the insured against 

any ‘suit’ seeking those damages.” To be covered under the Policy, the “property 

damage” was required to be caused by an “occurrence.”3 Additionally, the Policy 

contained several coverage exclusions. 

[¶4.] After entering into the contract with Swenson and Stewart, DJ 

Construction began working on the home. However, construction was suspended at 

the end of 2007 because Swenson and Stewart failed to obtain adequate financing

for the project. While the construction was on hold, various building materials 

 

1. DJ Construction initially obtained the Policy for the period of January 1, 

2007, through January 1, 2008, but renewed the Policy to maintain coverage 

through January 1, 2010. 

2. The Policy defines “property damage” as:

a. Physical injury to tangible property, including all resulting 

loss of use of that property. All such loss of use shall be 

deemed to occur at the time of the physical injury that 

caused it; or 

b. Loss of use of tangible property that is not physically injured. 

All such loss shall be deemed to occur at the time of the 

“occurrence” that caused it. . . . 

3. For purposes of the Policy, “occurrence” is defined as “an accident, including 

continuous or repeated exposure to substantially the same general harmful 

conditions.”
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(including framing lumber) were left outside at the construction site. These 

materials were not protected from exposure to rain, snow, etc., but DJ Construction

visited the construction site periodically to check on the property and remove snow. 

[¶5.] In July 2008, Swenson, Stewart, and DJ Construction executed a 

second building construction agreement in which the total contract price was 

increased to $1,363,952 to account for additional work. DJ Construction then 

resumed work on the home, which proceeded for approximately one year. The 

building materials that had been exposed to rain, snow, etc. were utilized in 

constructing the home. Further, DJ Construction did not protect the basement of 

the home from exposure to snow and rain during construction. As a result, standing 

water accumulated in the basement at times. 

[¶6.] In August 2009, construction on the home was halted again after 

Swenson and Stewart discovered mold growth, water damage, and other 

construction defects in the home. At the time construction was stopped, work on 

the home was not complete.4 Swenson and Stewart then hired Forensic Building 

Science, Inc. (FBS) to inspect the home. Amongst other things, FBS concluded that 

DJ Construction failed to properly protect the building materials from exposure to 

rain and snow during the time construction was suspended, and that DJ 

Construction failed to protect the basement from rain and snow during 

construction. As a result, FBS concluded the home sustained significant water 

 

4. The home currently remains incomplete.
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damage. FBS recommended that the home be demolished and rebuilt due to the 

extensive damage.5

[¶7.] DJ Construction submitted a claim to Owners for defense and 

indemnity against Swenson and Stewart’s potential claims on August 5, 2009. 

Owners retained Claims Associates Incorporated to “inspect the damages and 

determine the extent of the damages” to the home. The investigator for Claims 

Associates Incorporated issued a report on August 24, 2009. On September 18, 

2009, an Owners claim representative submitted a memorandum to Owners’ legal 

department concluding that DJ Construction was not covered under the Policy. 

[¶8.] Swenson and Stewart formally commenced suit against DJ 

Construction in November 2009, asserting numerous statutory and common-law 

claims. In December 2009, Owners sent DJ Construction correspondence formally

denying DJ Construction’s requests for indemnity and defense after concluding 

there was no coverage for any claims under the terms of the Policy. On June 29, 

2011, Swenson and Stewart entered into a stipulated judgment and settlement 

agreement (the Agreement) with DJ Construction regarding their claims.6 Under 

the terms of the Agreement, DJ Construction agreed to a confession of judgment in 

favor of Swenson and Stewart in the amount of $1,545,121 and agreed to assign

 

5. Swenson and Stewart obtained an estimate indicating that the cost to 

demolish and rebuild the home to its present level of completion would be 

$2,809,312. 

6. On September 29, 2010, Swenson and Stewart notified Owners of its intent to 

enter into the Agreement with DJ Construction. Owners responded that it 

would not be changing its position that the claims asserted by Swenson and 

Stewart were not covered under the terms of the Policy. 
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Swenson and Stewart all of the rights and claims it held against Owners for 

defense, indemnity, and/or bad faith. In exchange, Swenson and Stewart agreed to 

satisfy the judgment solely from Owners. The Agreement was approved by the 

circuit court on July 18, 2011. 

[¶9.] On October 5, 2011, Swenson and Stewart filed suit against Owners

alleging that Owners committed a breach of contract due to its failure to defend and

indemnify DJ Construction, and that Owners acted in bad faith in failing to defend

and indemnify DJ Construction. Swenson and Stewart also sought a declaration as 

to Owners’ obligation to defend and indemnify DJ Construction. Owners submitted 

an answer and counterclaim to the complaint on September 29, 2011. In its

counterclaim, Owners sought a declaration that it had no duty to defend or 

indemnify DJ Construction. 

[¶10.] Swenson and Stewart filed a motion for partial summary judgment 

with regard to their claims on February 29, 2012. On March 3, 2012, Owners also 

filed a motion for summary judgment. On June 13, 2012, the circuit court entered 

an order granting Owners’ motion for summary judgment and denying Swenson and 

Stewart’s partial motion for summary judgment. The circuit court determined there 

was no coverage under the Policy because multiple Policy exclusions applied. As a 

result, the circuit court concluded Owners had no duty to defend or indemnify DJ 

Construction.7 Swenson and Stewart appeal, arguing the circuit court erred in 

 

7. As an alternative basis for granting summary judgment in favor of Owners, 

the circuit court concluded there was no “occurrence” (meaning there was no 

coverage under the Policy), and thus, Owners had no duty to defend or 

indemnify DJ Construction. 
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granting summary judgment in favor of Owners on Swenson and Stewart’s breach 

of contract and bad faith claims. Swenson and Stewart assert summary judgment 

was improper because the circuit court erred in determining Owners had no duty to 

defend or indemnify DJ Construction under the terms of the Policy. 

ANALYSIS AND DECISON

[¶11.] 1. Whether the circuit court erred in granting summary 

judgment in favor of Owners on Swenson and Stewart’s 

breach of contract and bad faith claims based upon its 

determination that multiple Policy exclusions applied. 

[¶12.] “When reviewing a circuit court’s grant of summary judgment, this 

Court only decides ‘whether genuine issues of material fact exist and whether the 

law was correctly applied.’” Wheeler v. Farmers Mut. Ins. Co. of Neb., 2012 S.D. 83, 

¶ 8, 824 N.W.2d 102, 105 (quoting Zephier v. Catholic Diocese of Sioux Falls, 2008 

S.D. 56, ¶ 6, 752 N.W.2d 658, 662). When the material facts are undisputed, this 

Court’s review “is limited to determining whether the trial court correctly applied 

the law.” Id. (quoting De Smet Ins. Co. of S.D. v. Pourier, 2011 S.D. 47, ¶ 4 n.1, 802 

N.W.2d 447, 448 n.1). “Summary judgment will be affirmed if there exists any basis 

which would support the circuit court’s ruling.” Dakota, Minn. & E. R.R. Corp. v. 

Acuity, 2009 S.D. 69, ¶ 14, 771 N.W.2d 623, 628-29 (quoting Schwaiger v. Avera 

Queen of Peace Health Servs., 2006 S.D. 44, ¶ 7, 714 N.W.2d 874, 877). 

[¶13.] The interpretation of an insurance policy is a question of law, reviewed 

de novo. Demaray v. De Smet Farm Mut. Ins. Co., 2011 S.D. 39, ¶ 8, 801 N.W.2d 

284, 287 (citing Auto-Owners Ins. Co. v. Hansen Hous., Inc., 2000 S.D. 13, ¶ 10, 604 

N.W.2d 504, 509). “The existence of the rights and obligations of parties to an 

insurance contract are determined by the language of the contract, which must be 
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construed according to the plain meaning of its terms.” Biegler v. Am. Family Mut. 

Ins. Co., 2001 S.D. 13, ¶ 20, 621 N.W.2d 592, 598-99 (citing W. Cas. & Sur. Co. v. 

Waisanen, 653 F. Supp. 825, 827 (D.S.D. 1987)). “To ascertain whether a duty to 

defend exists we look to the complaint and ‘other evidence of record.’”8 Demaray, 

2011 S.D. 39, ¶ 8, 801 N.W.2d at 287 (quoting State Farm Fire & Cas. Co. v. 

Harbert, 2007 S.D. 107, ¶ 18, 741 N.W.2d 228, 234). “The insurer ‘bears the burden 

of showing that it has no duty to defend its insured.’” State Farm Mut. Auto. Ins. 

Co. v. Wertz, 540 N.W.2d 636, 638 (S.D. 1995) (quoting N. Star Mut. Ins. Co. v. 

Kneen, 484 N.W.2d 908, 912 (S.D. 1992)). “This burden is satisfied when the 

insurer shows the claim ‘clearly falls outside of policy coverage.’” Harbert, 2007 

S.D. 107, ¶ 18, 741 N.W.2d at 234 (quoting Wertz, 540 N.W.2d at 638). “If, after 

considering the complaint, and when appropriate, other record evidence, doubt 

exists whether the claim against the insured arguably falls within the policy 

coverage, such doubts must be resolved in favor of the insured.” Biegler, 2001 S.D. 

13, ¶ 20, 621 N.W.2d at 599 (quoting City of Fort Pierre v. United Fire & Cas. Co., 

463 N.W.2d 845, 847 (S.D. 1990)). 

[¶14.] In granting summary judgment in favor of Owners on Swenson and 

Stewart’s breach of contract and bad faith claims, the circuit court determined that 

several Policy exclusions for “property damage” applied so as to clearly exclude 

Swenson and Stewart’s claims from coverage. Specifically, the circuit court 

 

8. Thus, contrary to Swenson and Stewart’s contention, the source of an 

insurer’s duty to defend is not confined to the complaint alone. 
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determined that Exclusions j(5), j(6), and j(7) applied. With regard to these 

exclusions, the Policy provides in relevant part that the insurance does not apply to:

j. Damage to Property

“Property damage” to: 

. . .

(5) Personal property in the care, custody or control of, or 

 over which physical control is being exercised for any 

 purpose by any insured;

(6) That particular part of real property on which any 

 insured or any contractors or subcontractors working 

 directly or indirectly on your behalf are performing 

 operations, if the “property damage” arises out of those 

 operations; or

(7) That particular part of any property that must be 

 restored, repaired or replaced because “your work”9

 was incorrectly performed on it;

. . .

Paragraph (7) of this exclusion does not apply to “property 

damage” included in the “products-completed operations 

hazard[.]”10

 

9. “Your work” is defined in relevant part as: “(1) Work or operations performed 

by you or on your behalf; and (2) Materials, parts or equipment furnished in 

connection with such work or operations.”

10. In relevant part, “products-completed operations hazard” is defined to 

include: 

[A]ll “bodily injury” and “property damage” occurring away from 

premises you own or rent and arising out of “your product” or 

“your work” except: 

. . . 

(2) Work that has not yet been completed or abandoned. 

 However, “your work” will be deemed completed at the 

 earliest of the following times: 

(a) When all of the work called for in your contract has 

 been completed.

(b) When all of the work to be done at the job site has 

 been completed if your contract calls for work at more 

 than one job site.

(continued . . .)
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We address each exclusion in turn. 

[¶15.] a. Whether the circuit court erred in determining 

Exclusion j(5) applied.

[¶16.] On appeal, Swenson and Stewart argue Exclusion j(5) does not apply 

for multiple reasons. First, Swenson and Stewart argue that because Owners did 

not plead Exclusion j(5) as an affirmative defense in its answer to Swenson and 

Stewart’s complaint, Owners waived this defense. However, we disagree that 

Exclusion j(5) even qualifies as an affirmative defense. In its answer, Owners 

asserted as an affirmative defense that Swenson and Stewart’s complaint “failed to 

state a cause of action against [Owners].” Owners then set forth some of the terms 

of the Policy, including the language of various Policy exclusions. Although Owners 

did not specifically note Exclusion j(5) in its answer, after addressing various Policy 

provisions Owners broadly asserted that “[t]he claims at issue . . . are not covered 

under the Owners policy and/or are excluded.” Swenson and Stewart cite to no 

authority indicating that an insurance company is required to identify specific 

policy provisions in these circumstances. Therefore, we reject this argument. 

[¶17.] Next, Swenson and Stewart claim Owners is estopped from relying on 

Exclusion j(5) because it failed to assert Exclusion j(5) as a basis for denying 

coverage when it formally denied DJ Construction’s request for defense and 

indemnity. However, as noted by Owners, this Court’s prior case law requires 

Swenson and Stewart to prove DJ Construction was prejudiced by Owners’ failure 

________________________

(. . . continued)

(c) When that part of the work done at a job site has been 

put to its intended use by any person or organization 

other than another contractor or subcontractor working 

on the same project. 
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to identify Exclusion j(5) as a basis for denying coverage in order for estoppel to 

apply. See Nat’l Sun Indus., Inc. v. S.D. Farm Bureau Ins. Co., 1999 S.D. 63, ¶ 12,

596 N.W.2d 45, 47 (stating that “[t]he crucial elements of estoppel . . . are the 

insurer’s stated reliance upon one ground for denying liability without stating 

additional known grounds, and resulting prejudice to the claimant”). In this case, 

Swenson and Stewart have not established that DJ Construction suffered prejudice 

due to Owners’ initial failure to identify Exclusion j(5) as a basis for denying

coverage. Swenson and Stewart’s unsupported assertion that DJ Construction was 

prejudiced is simply not enough to estop Owners from asserting Exclusion j(5) as a 

basis for denying coverage. See id. ¶ 13, 596 N.W.2d at 47-48 (holding that insurer 

was not estopped from asserting exclusion because plaintiff “failed to point to any 

specific evidence in the record that would support its prejudice claim[,]” and 

plaintiff’s general assertion of prejudice was insufficient). Therefore, this argument 

is also without merit. 

[¶18.] Third, Swenson and Stewart argue Exclusion j(5) does not apply 

because Owners failed to establish DJ Construction had exclusive care, custody, or 

control over the personal property (the building materials left at the construction 

site during the winter of 2007 to 2008). In support of this argument, Swenson and 

Stewart cite to case law from other jurisdictions in which exclusivity of control was 

required for the “care, custody, or control” exclusion to apply. However, South 

Dakota has not adopted a requirement that the “care, custody, or control” be 

exclusive. Further, Exclusion j(5) does not contain language requiring care, 

custody, or control to be exclusive. See Culhane v. W. Nat’l Mut. Ins. Co., 2005 S.D. 
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97, ¶ 27, 704 N.W.2d 287, 297 (recognizing that the function of courts is “neither 

[to] rewrite the parties’ contract nor add to its language”). Therefore, proof of 

exclusivity of care, custody, or control is not required in this case. 

[¶19.] Overall, under the circumstances of this case, Exclusion j(5) applies so 

as to exclude coverage for Swenson and Stewart’s claims regarding the damage to 

the framing lumber and other building materials DJ Construction left outside 

during the winter of 2007 to 2008. The building materials were personal property. 

Additionally, they were in the care, custody, and control of DJ Construction when 

they were damaged because DJ Construction was the general contractor for the 

construction site, DJ Construction maintained the construction site during the 

winter, and the damage to the building materials occurred due to DJ Construction’s 

failure to adequately protect the building materials from the rain, snow, etc. while 

construction was suspended. As a result, the circuit court did not err in 

determining Exclusion j(5) applied. 

[¶20.] b. Whether the circuit court erred in determining 

Exclusion j(6) applied.

[¶21.] As previously indicated, Exclusion j(6) excludes coverage for property 

damage to “[t]hat particular part of real property on which any insured or any 

contractors or subcontractors working directly or indirectly on your behalf are 

performing operations, if the ‘property damage’ arises out of those operations[.]” 

Swenson and Stewart argue Exclusion j(6) is not applicable to “at least some of the 

damage to the Home.” Specifically, Swenson and Stewart argue Exclusion j(6) does 

not apply to their claims regarding the damage to the framing lumber and building 

materials that were exposed to rain, snow, etc. during the winter of 2007 to 2008. 
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However, the plain language of Exclusion j(6) establishes that Exclusion j(6) applies 

to property damage to “that particular part of real property . . . .” Thus, Exclusion 

j(6) expressly limits its application to damage to real property, rather than personal 

property. At the time the building materials sustained damage as a result of being 

exposed to rain and other elements, the building materials were personal property. 

Therefore, by its own terms, Exclusion j(6) is not applicable to Swenson and 

Stewart’s claims regarding the damage to the building materials. 

[¶22.] Nevertheless, Exclusion j(6) remains applicable to Swenson and 

Stewart’s claims regarding the damage to the home that occurred during 

construction.11 In particular, Exclusion j(6) excludes coverage for Swenson and 

Stewart’s claims concerning the damage the home sustained as a result of DJ 

Construction’s failure to protect the basement of the home from exposure to rain 

and snow (leading to significant water damage), DJ Construction’s use of the 

damaged materials in constructing the home, etc. Exclusion j(6) applies because 

the damage to the home occurred under the supervision and direction of DJ 

Construction, the damage occurred while DJ Construction and its subcontractors 

were actively performing the construction work (and prior to DJ Construction’s 

completion of its contractual duties), and the damage resulted from the negligent 

work of DJ Construction and its subcontractors. Therefore, the circuit court did not 

err in concluding that Exclusion j(6) applied. 

 

11. By only arguing Exclusion j(6) is not applicable to their claims regarding the 

damage to the building materials, Swenson and Stewart apparently do not 

contest the fact that Exclusion j(6) does apply to their claims concerning the 

damage to their home. 
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[¶23.] c. Whether the circuit court erred in determining 

 Exclusion j(7) applied.

[¶24.] As discussed above, Exclusion j(7) excludes coverage for property 

damage to “[t]hat particular part of any property that must be restored, repaired or 

replaced because ‘your work’ was incorrectly performed on it[.]” Further, the Policy 

indicates that “[p]aragraph (7) of this exclusion does not apply to ‘property damage’ 

included in the ‘products-completed operations hazard[.]” On appeal, Swenson and 

Stewart argue Exclusion j(7) does not apply because Exclusion j(7) is ambiguous 

and general rules of contract construction require any ambiguities to be construed 

in favor of the insured. See Am. Family Mut. Ins. Co. v. Elliot, 523 N.W.2d 100, 102 

(S.D. 1994) (stating that “[i]f the language of the policy is ambiguous, the policy 

should be construed liberally in favor of the insured and strictly against the 

insurer”). In support of their claim that Exclusion j(7) is ambiguous, Swenson and 

Stewart cite the Ninth Circuit’s decision in Allstate Ins. Co. v. Smith, 929 F.2d 447

(9th Cir. 1991). 

[¶25.] In Smith, the insured purchased an “all risk” insurance policy to cover 

the portion of an office building he rented in which he conducted his medical 

practice. Id. at 448. While working on the building, a roofing contractor removed 

most of the roof, but did not put a temporary cover over the exposed portion of the 

building. Id. at 448-49. It rained, and the insured’s office suffered damages. Id. at 

449. The insured then filed a claim with his insurer. Id. The insurer responded by 

filing a declaratory judgment action, requesting that the court rule the insured’s 

losses were not covered under the policy. Id. The court ruled the policy exclusion 
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for “faulty workmanship”12 applied, thus excusing the insurer from reimbursing the 

insured. Id.

[¶26.] On appeal, the Ninth Circuit determined the phrase “faulty 

workmanship” was subject to two interpretations: (1) the flawed quality of a 

finished product; or (2) a flawed process. Id. Thus, the court concluded the “faulty 

workmanship” exclusion was ambiguous. Id. at 450. As a result, the court applied 

the “flawed quality of a finished product” interpretation, because it was the most 

favorable to the insured. Id. Using this interpretation, the court concluded “the 

exclusion does not apply because [the insured]’s losses were not caused by a flawed 

product, but by failure to protect the premises during the roof repair process.” Id. 

[¶27.] Swenson and Stewart compare this case to Smith, arguing that 

Exclusion j(7) is ambiguous because it is unclear whether it applies to: (1) the 

flawed quality of the finished product; or (2) a flawed process. Further, they argue 

that the “flawed quality of the finished product” interpretation should also be 

applied in this case as it is most favorable to DJ Construction. However, Smith is 

readily distinguishable from this case. First, the language used in the exclusion in 

Smith is different than the language of Exclusion j(7). While the policy in Smith

excluded coverage for loss or damage caused by “faulty workmanship,” the phrase 

“faulty workmanship” is not found within Exclusion j(7). Instead, Exclusion j(7) 

provides that the Policy excludes coverage for property damage to “[t]hat particular 

 

12. The exclusion provided that the policy: “d[id] not cover any loss or damage 

caused by . . . c. [f]aulty, inadequate or defective: . . . ii. design, specifications, 

workmanship, repair, construction, renovation, remodeling, grading, 

compaction; . . . .” 
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part of any property that must be restored, repaired or replaced because ‘your work’ 

was incorrectly performed on it.” Thus, simply because the phrase “faulty 

workmanship” was found to be ambiguous in Smith does not make Exclusion j(7)

ambiguous. The second notable difference between this case and Smith is that 

Smith involved an insurance policy for first-party property coverage (obtained to 

protect the insured from loss due to damage to the insured’s own property), whereas 

in this case, DJ Construction obtained third-party liability insurance to protect it 

from liability claims. Therefore, because the facts of Smith are materially 

distinguishable, the Ninth Circuit’s rationale in Smith is not applicable in this case. 

[¶28.] Instead, we conclude that the language of Exclusion j(7) is 

unambiguous and that it applies so as to exclude Swenson and Stewart’s claims 

from coverage. See Alverson v. Nw. Nat’l Cas. Co., 1997 S.D. 9, 559 N.W.2d 234; 

Haugan v. Home Indem. Co., 86 S.D. 406, 197 N.W.2d 18 (1972). First, the record

establishes the home sustained significant damage that needs to be restored, 

repaired, or replaced (although the FBS report recommended demolition and

replacement due to the substantial repair costs). Second, the record indicates DJ 

Construction performed the work incorrectly by using the damaged building 

materials in constructing the home, failing to protect the home from rain, snow, and 

other weather during construction, etc. Third, the record establishes the damage to 

the building materials and the home was caused by DJ Construction’s improper

work. Accordingly, the initial requirements for applying Exclusion j(7) are satisfied. 

[¶29.] As an additional requirement for Exclusion j(7)’s application, the 

Policy provides that Exclusion j(7) does not apply to property damage included in 
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the “products-completed operations hazard.” However, the Policy also provides that

work that has not been completed is not included as a “products-completed 

operations hazard.” In this case, DJ Construction entered into a contract with 

Swenson and Stewart to build the home, and DJ Construction’s work on the home

was not completed at the time the property damage occurred. Therefore, Exclusion 

j(7) remains applicable. As a result, the circuit court did not err in concluding 

Exclusion j(7) applied.

[¶30.] Because we conclude that Exclusions j(5), j(6), and j(7) apply, and that 

the circuit court did not err in reaching this conclusion, there was no coverage for 

Swenson and Stewart’s claims under the terms of the Policy. As a result, Owners 

had no duty to defend or indemnify DJ Construction. Therefore, the circuit court 

did not err in granting summary judgment in favor of Owners on Swenson and 

Stewart’s breach of contract claims. 

[¶31.] Further, as to Swenson and Stewart’s bad faith claim, this Court has 

indicated that “for proof of bad faith, there must be 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[.]” See Dakota, Minn. & E. R.R. Corp., 2009 S.D. 69,

¶ 17, 771 N.W.2d at 629 (alteration in original). In this case, Owners had a 

reasonable basis for denying coverage because multiple Policy exclusions applied. 

Thus, Owners did not act in bad faith in rejecting DJ Construction’s requests for 

defense and indemnity. Accordingly, the circuit court did not err in granting 

summary judgment in favor of Owners on Swenson and Stewart’s bad faith claim. 
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[¶32.] In reaching these conclusions, we acknowledge that the issues 

regarding the existence of “property damage” caused by an “occurrence” are 

threshold issues. However, even if the record contained sufficient allegations of 

“property damage” caused by an “occurrence,” DJ Construction was not entitled to 

defense or indemnity from Owners if the Policy exclusions applied. Consequently, 

because we conclude that the circuit court correctly determined the Policy 

exclusions were applicable, we need not address the parties’ disputes regarding

whether Swenson and Stewart’s claimed damages to their home constitute 

“property damage,” and if so, whether the “property damage” was caused by an 

“occurrence.” Further, we conclude that the additional issues Swenson and Stewart

raise on appeal are without merit due to the dispositive nature of our 

determinations regarding the Policy exclusions. Therefore, we affirm.

[¶33.] KONENKAMP, ZINTER, SEVERSON, and WILBUR, Justices, concur.