Court Opinion

ID: 9737492
Source: CourtListenerOpinion
Date Created: 2023-08-26 19:26:51.26765+00
Date Added: 2024-06-11T07:23:59.294418
License: Public Domain

SABERS, Justice
(dissenting).
I dissent.
1. United had a duty to defend.
The scope of insurance policy coverage is determined from the contractual intent and objectives of the parties as expressed by the policy language. See Black Hills Kennel Club, Inc. v. Fireman’s Fund Indem. Co., 77 S.D. 503, 94 N.W.2d 90 (1959). An insurance contract’s language is to be construed according to its plain and ordinary meaning. Grandpre v. Northwestern Nat’l Life Ins. Co., 261 N.W.2d 804 (S.D.1977).
The City’s policy from United covers “any claim made against the Insured ... caused by any . •.. error ... of the Insured,” and United is obligated to defend “any suit against the Insured alleging such ... error ... and seeking damages on account thereof[.]” The plain and ordinary meaning of error is: “A mistaken judgment or incorrect belief as to the existence or effect of matters of fact, or a false or mistaken conception or application of the law.” Black’s Law Dictionary 487 (5th ed. 1979). Accordingly, the policy covers any claims against the City that are the result of the City’s mistaken judgment as to a matter of fact.
An insurer must defend its insured in an action brought against the insured if the pleadings in the action allege facts that, if true, fall within the policy’s coverage. Bayer v. Employers Reinsurance Corp., 383 N.W.2d 858 (S.D.1986). The insurer bears the burden of showing that it has no duty to defend the action because it clearly falls outside the policy coverage. Hawkeye-Security Ins. Co. v. Clifford, 366 N.W.2d 489 (S.D.1985). Therefore, United has a duty to defend any claim against the City that alleges facts that are the result of the City’s mistaken judgment as to a matter of fact.
The United States action against the City alleged the City discharged fill into a protected wetland without a permit. If those facts were true, the claim by the United States against the City would be caused by the City’s mistaken judgment as to a matter of fact, i.e., the slough’s status as a protected wetland. The mistaken judgment would have been the City’s belief that the slough was not a protected wetland, making a permit unnecessary. Indeed, in its brief, United acknowledged that the City proceeded without a permit because *850“the City felt that the United States government’s classification of the slough as a ‘wetland’ was incorrect.” Consequently, contrary to the majority’s conclusion, the federal lawsuit fell within the policy’s general coverage, or, at a minimum, does not clearly fall outside the policy coverage.
2. Exclusion for intentional loss does not apply.
An insurance policy exclusion for a loss caused intentionally by an insured applies only when the insurance company is able to show that the insured acted for the purpose of causing the loss. See Rajspic v. Nationwide Mut. Ins. Co., 110 Idaho 729, 718 P.2d 1167 (1986); Horace Mann Ins. Co. v. Independent School Dist. No. 656, 355 N.W.2d 413 (Minn.1984). That is, the loss itself must be intended before the exclusion will apply. As explained by the court in Allstate Ins. Co. v. Steinemer, 723 F.2d 873 (11th Cir.1984):
Under the majority rule the exclusion applies if the insured intended to do a particular act, and intended to do some harm, even if the harm actually done was radically different from that intend-ed_ On the other hand, an “intentional injury” exclusion will not apply if the insured intentionally does an act, but has no intent to commit harm, even if the act involves the foreseeable consequences of great harm or even amounts to gross or culpable negligence.
Id. at 875 (citation omitted); see also Farmers Ins. Group v. Sessions, 100 Idaho 914, 918, 607 P.2d 422, 426 (1980) (“We follow the great weight of authority and hold that for this ‘intentional tort’ exclusion to operate the insurance company must be able to show that its insured acted ... for the purpose of causing injury in the person or property in which it resulted.”). This rule was applied by the Oklahoma Supreme Court in a case involving policy language almost identical to that at issue here. In Lumbermens Mut. Ins. Co., Mansfield, Ohio v. Blackburn, 477 P.2d 62, 64 (Okl.1970), the court considered an exclusion for “bodily injury or property damage caused intentionally by or at the direction of the Insured” (emphasis omitted), and concluded:
[T]he majority of the better-reasoned opinions in cases involving insurance policy exclusion provisions with language like the one involved here, or wording of similar import, require that the intention of the person, whose act caused the injury, ‘must be to inflict the injury actually inflicted....’
■Id. at 65. In short, the intention must be to cause the loss as well as to do the act.
The trial court found that the City’s actions were not undertaken with any intent to cause a loss. As the trial court explained: “The City was only doing that which it believed it had a right to do within the law.” Although the City acted intentionally to discharge the fill material into the Ft. Pierre slough, it did not intend to cause any harm by that conduct. The City did not intend to wrongfully discharge the fill without a necessary permit, because it believed a permit was not necessary. In fact, the City was correct in so thinking and the 8th Circuit Court of Appeals so held. Contrary to the majority’s conclusion, the exclusion for intentional loss does not apply to this case.
3. The civil penalty is not punitive in nature.
The majority holds that a civil penalty is not covered by the policy because a civil penalty is punitive in nature and public policy prevents insurance coverage for punitive damages.
Before punitive damages may be awarded, malice on the part of the party from whom the punitive damages are sought must be shown. Yankton Prod. Credit Ass’n v. Jensen, 416 N.W.2d 860 (S.D.1987). No similar requirement exists for the imposition of the civil penalty. Therefore, the civil penalty the United States sought to have imposed upon the City of Ft. Pierre cannot be equated to punitive damages.
Moreover, the civil penalty falls within the policy coverage as set forth by the plain and ordinary meaning of the policy’s language. The policy requires United to pay “all sums which the insured shall be*851come legally obligated to pay on account of any claim made against the insured.” If a civil penalty had been assessed against the City as a result of the federal lawsuit, the penalty would constitute a “sum” the City would be legally obligated to pay on account of a claim made against the City.*
4. Other Issues.
Although the majority does not reach these issues, United also claims coverage should be denied because the policy expressly excludes coverage for injury to tangible property, and because the City failed to promptly notify United of the federal lawsuit.
It is not necessary to address the tangible property damage exclusion because if any claim of a cause of action against an insured falls within policy coverage, then the insurer must defend all claims. See First Newton Nat’l Bk. v. General Casualty Co. of Wisconsin, 426 N.W.2d 618 (Iowa 1988); Reurink Bros. Star Silo, Inc. v. Maryland Casualty Co., 131 Mich.App. 139, 345 N.W.2d 659 (1983); Senger v. Minnesota Lawyers Mut. Ins. Co., 415 N.W.2d 364 (Minn.App.1987). Since United was obligated to defend the City based upon the civil penalty, it was obligated to defend the other claims as well.
As to the delayed notification issue, this court has not previously ruled on the effect of an insured’s failure to promptly advise an insurer of a covered liability. However, the better and more modern view among the states which have addressed the issue is:
An unexcused delay by the insured in giving notice to the insurer of [a loss] does not relieve the insurer of its obligation to defend and indemnify unless the delay operates materially to prejudice the insurer’s ability to investigate and defend.
Great American Ins. Co. v. C.G. Tate Constr. Co., 303 N.C. 387, 390, 279 S.E.2d 769, 771 (1981); accord Johnson Controls, Inc. v. Bowes, 381 Mass. 278, 409 N.E.2d 185 (1980); Brakeman v. Potomac Ins. Co., 472 Pa. 66, 371 A.2d 193 (1977); A & W Artesian Well Co. v. Aetna Cas. & Sur. Co., 463 A.2d 1381 (R.I.1983); Reliance Ins. Co. v. St. Paul Ins. Companies, 307 Minn. 338, 239 N.W.2d 922 (1976).
The traditional position, that the failure to strictly comply with notice requirements releases an insurer from its obligation to defend and indemnify an insured, is based on the inaccurate and outdated view that insurance policies are private contracts in the traditional sense. As the Pennsylvania Supreme Court has explained:
Such a position fails to recognize the true nature of the relationship between insurance companies and their insureds. An insurance contract is not a negotiated agreement; rather its conditions are by and large dictated by the insurance company to the insured.
Brakeman 371 A.2d at 196. The North Carolina Supreme Court echoed this sentiment when it stated:
The terms of an insurance contract are not bargained for in the traditional sense. Insurance policies are offered on a take-it-or-leave-it basis and, frequently, the only term over which the insured has any say is the amount of coverage.
Great American, 279 S.E.2d at 774.
The modern view of notice requirements focuses on the purpose for the requirement and realizes that it is not to provide a technical escape hatch to allow the insurance company to deny coverage. The modern view does not belittle the need for notice to the insurer, but instead puts the notice requirement in its proper perspective. “The clear purpose of the notice provision is to protect the ability of the insurer to prepare a viable defense by preserving its ability fully to investigate the accident.” Great American, 279 S.E.2d at 775. In other words, notice requirements are included in insurance contracts to protect the insurance company’s interest from being prejudiced. If delayed notification has not prejudiced the insurer’s ability to defend a claim, then there is no reason to strictly *852enforce the notice requirement. As the court explained in Brakeman, 371 A.2d at 197:
Where the insurance company’s interests have not been harmed by a late notice, even in the absence of extenuating circumstances to excuse the tardiness, the reason behind the notice condition in the policy is lacking, and it follows neither logic nor fairness to relieve the insurance company of its obligation under the policy in such a situation.
Under the facts of this case, United has not been prejudiced. The City’s defense of the federal lawsuit was effective, so United is not obligated to pay any judgment. Instead, the City is simply requesting its legal defense costs which United would have incurred even if the notification had been prompt. Therefore, since the delayed notification had no adverse effect upon United’s ultimate liability, they cannot claim to have been prejudiced by the delayed notification.
Finally, by notice of review, the City claims the trial court erred in failing to order United to pay all defense costs incurred by the City, rather than the costs incurred after United was notified of the federal lawsuit. When an insurer breaches its obligation to defend an insured, the insured is entitled to recover his legal defense expenses. Wilson v. Allstate Ins. Co., 85 S.D. 553, 186 N.W.2d 879 (1971). Accordingly, if there has been no breach of the obligation to defend, then no expenses may be recovered. Thus, any expenses incurred by the insured before the insurer has .breached its duty to defend are not recoverable. In this case, United did not breach its duty to defend until after it had been notified of the claim because it could not conduct a defense without knowing about the claim against the City.
Therefore, I would hold that the City may recover from United the expenses it incurred defending against the federal lawsuit, but only those expenses incurred after the City’s notification to United.
HENDERSON, J., joins this dissent.

 We also note that the Alaska Supreme Court concluded that punitive damages are covered under a policy using the same language as that used by United. Providence Washington Ins. Co. of Alaska v. City of Valdez, 684 P.2d 861 (Alaska 1984).