National Farmers Union Standard Insurance v. Souris River Telephone Mutual Aid Cooperative , 75 F.3d 1268 ( 1996 )

___________
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. *
___________
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 cross-
appeals 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
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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).
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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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
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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.
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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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, long-
standing 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.
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