State Farm v. Grunewaldt , 2023 S.D. 61 ( 2023 )

#30216-a-PJD
2023 S.D. 61IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
****
STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY, Plaintiff and Appellee,
v.
MIKE GRUNEWALDT, NANCY
GRUNEWALDT, MIKE and NANCY
GRUNEWALDT d/b/a GRUNEWALDT
ANGUS and BERNIE, LLC, Defendants and Appellants,
and
AGTEGRA COOPERATIVE, Defendant.
****
APPEAL FROM THE CIRCUIT COURT OF
THE FIFTH JUDICIAL CIRCUIT
SPINK COUNTY, SOUTH DAKOTA
****
THE HONORABLE TONY L. PORTRA
Judge
****
ZACHARY W. PETERSON of
Richardson, Wyly, Wise,
Sauck & Hieb, LLP
Aberdeen, South Dakota Attorneys for defendants and
appellants.
****
CONSIDERED ON BRIEFS
AUGUST 29, 2023
OPINION FILED 11/29/23
****
HILARY L. WILLIAMSON
TIERNEY C. SCOBLIC of
Fuller, Williamson, Nelson
& Preheim, LLP
Sioux Falls, South Dakota Attorneys for plaintiff and
appellee.
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DEVANEY, Justice
[¶1.] Agtegra Cooperative (Agtegra) brought suit against Mike and Nancy
Grunewaldt, alleging the Grunewaldts delivered wheat contaminated with fertilizer
to its elevator and are therefore liable to Agtegra for associated damages. The
Grunewaldts’ insurance company, State Farm Mutual Automobile Insurance
Company, commenced a separate lawsuit seeking a declaration that it had no duty
to defend or indemnify the Grunewaldts or pay any judgment arising from the
allegations in the underlying suit by Agtegra. State Farm filed a motion for
summary judgment, and after a hearing, the circuit court granted the motion. The
Grunewaldts appeal. We affirm.
Factual and Procedural Background
[¶2.] The following undisputed facts are derived from the pleadings in the
record and the allegations set forth in Agtegra’s complaint against the Grunewaldts.
The Grunewaldts operate a farm near Miranda, South Dakota. On October 15 and
16, 2019, Mike delivered two loads of wheat to Agtegra’s elevator in Redfield, South
Dakota. Agtegra alleges that the wheat delivered was contaminated with fertilizer
and that it was dumped into a bin containing approximately 400,000 bushels of
wheat. According to Agtegra, it “was able to segregate and sell the contaminated
wheat but received considerably less for it than” it “would have received for
uncontaminated wheat.”
[¶3.] Agtegra brought suit against the Grunewaldts for breach of the
implied warranty of merchantability, breach of the implied warranty of fitness for a
particular purpose, breach of contract, breach of the covenant of good faith and fair
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dealing, fraudulent concealment, and negligence. In its complaint, Agtegra alleges
that because Mike had done business with Agtegra for more than twenty years and
was familiar with Agtegra’s delivery terms and conditions and delivery notices, the
Grunewaldts were “aware of [Agtegra’s] inability to accept seed or grain
contaminated with pesticides or other foreign substances, including fertilizer.”
Agtegra sought damages in excess of $325,000 from the Grunewaldts for loss of
income, expenses for increased labor and costs, loss of use of the bin, and other
expenses.
[¶4.] The Grunewaldts are insured by State Farm. Their automobile
insurance policy provides liability coverage up to $100,000, subject to conditions and
exclusions within the policy. In State Farm’s separate suit seeking a declaratory
judgment that it has no duty to defend or indemnify the Grunewaldts in the lawsuit
initiated by Agtegra, it argued that Agtegra’s claims are excluded from the policy’s
coverage terms.
[¶5.] State Farm filed a motion for summary judgment with a supporting
brief and statement of undisputed facts setting forth the terms of the insurance
policy and the allegations in Agtegra’s complaint. The circuit court held a hearing
on November 22, 2022, and at the conclusion of the hearing, granted summary
judgment, determining that State Farm has no duty to defend or indemnify the
Grunewaldts. Relying on this Court’s ruling in South Dakota State Cement Plant
Commission v. Wausau Underwriters Insurance Company (Wausau), 2000 S.D. 116,
616 N.W.2d 397, the court determined that the policy’s pollution exclusion
provisions clearly preclude coverage for Agtegra’s claims against the Grunewaldts.
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[¶6.] The Grunewaldts appeal, asserting that the circuit court erred by
ruling that State Farm’s pollution exclusions bar coverage for Agtegra’s property
damage claim against the Grunewaldts and that State Farm thus has no duty to
defend or indemnify.
Standard of Review
[¶7.] This Court’s standard of review on summary judgment is well-settled.
“We affirm the circuit court ‘when there are no genuine issues of material fact and
the legal questions have been correctly decided.’” Culhane v. W. Nat’l Mut. Ins. Co.,
2005 S.D. 97, ¶ 5, 704 N.W.2d 287, 289 (quoting Sanford v. Sanford, 2005 S.D. 34,
¶ 11, 694 N.W.2d 283, 287). The interpretation of an insurance contract is a
question of law reviewed de novo with no deference to the circuit court. N. Star
Mut. Ins. v. Korzan, 2015 S.D. 97, ¶ 13, 873 N.W.2d 57, 61 (citing Ass Kickin Ranch,
LLC v. N. Star Mut. Ins. Co., 2012 S.D. 73, ¶ 7, 822 N.W.2d 724, 726).
Analysis and Decision
[¶8.] “To determine whether the insurer has a duty to defend, we must only
look to the complaint and other record evidence to determine whether the alleged
claim, if true, falls within the policy coverage.” Wausau, 2000 S.D. 116, ¶ 22, 616
N.W.2d at 406; Korzan, 2015 S.D. 97, ¶ 13, 873 N.W.2d at 61 (citing De Smet Farm
Mut. Ins. Co. of S.D. v. Gulbranson Dev. Co., Inc., 2010 S.D. 15, ¶ 19, 779 N.W.2d
148, 155 (considering the pleadings in the underlying action and the language of the
policy when determining whether there is a duty to defend)).
[¶9.] Under the text of the automobile policy at issue here, State Farm
agreed to pay damages an insured becomes legally liable to pay because of: (a)
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“bodily injury to others;” and (b) “damage to property caused by an accident that
involves a vehicle for which that insured is provided Liability Coverage by this
policy.” The policy contains the following relevant coverage exclusions:
(5) There is no coverage for an insured for bodily injury or
property damage caused by pollutants that:
(a) Are transported by;
(b) Are carried in or upon;
(c) Are released, discharged, or removed from; or
(d) Escape or leak from any motor vehicle.
(6) There is no coverage for an insured for any claim made or
lawsuit filed by any person, organization, or governmental body
against that insured for damages, response costs, or similar
costs, or any related remedial action that are:
(a) the real or alleged result of the effects of pollutants; or
(b) in any way associated with the cost of:
(i) cleanup;
(ii) removal;
(iii) containment; or
(iv) neutralization of the effects of pollutants.
Exclusions (5) and (6) above do not apply if the bodily injury or
property damage is the direct, accidental, and instantaneous
result of a collision which arises out of the use of any vehicle as
a motor vehicle for which that insured is provided Liability
Coverage by this policy.
The policy defines “pollutants” as “any solid, liquid or gaseous irritant or
contaminant, toxic substance, hazardous substance, or oil in any form.”
[¶10.] “The burden rests with the insurer ‘to show the claim clearly falls
outside of the policy coverages’ and that ‘there is no duty to defend.’” Korzan, 2015
S.D. 97, ¶ 13, 873 N.W.2d at 61 (quoting De Smet Farm Mut. Ins., 2010 S.D. 15,
¶ 18, 779 N.W.2d at 155); accord Wausau, 2000 S.D. 116, ¶ 15, 616 N.W.2d at 402
(citing N. Star Mut. Ins. Co. v. Kneen, 484 N.W.2d 908, 912 (S.D. 1992)). “[I]f it
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‘arguably appears from the face of the pleadings in the action that the alleged claim,
if true, falls within the policy coverage, the insurer must defend.’” Wausau, 2000
S.D. 116, ¶ 15, 616 N.W.2d at 402 (quoting Hawkeye-Sec. Ins. Co. v. Clifford, 366
N.W.2d 489, 491 (S.D. 1985)). In the event “doubt exists whether the claim against
the insured arguably falls within the policy coverage, such doubts must be resolved
in favor of the insured.” Id. (citation omitted).
[¶11.] Here, the Grunewaldts’ alleged delivery of contaminated wheat to
Agtegra’s elevator forms the basis of all six causes of action in Agtegra’s complaint.
To support their contention that State Farm has a duty to defend them against
Agtegra’s claims, the Grunewaldts start with several guiding principles this Court
has applied when interpreting insurance contracts.
[¶12.] The Grunewaldts note that under SDCL 58-11-39, “[e]very insurance
contract shall be construed according to the entirety of its terms and conditions as
set forth in the policy and as amplified, extended, or modified by any rider,
endorsement, or application lawfully made a part of the policy.” They further note
that when considering terms designed to limit coverage, this Court applies a strict
interpretation. Novak v. State Farm Mut. Auto. Ins. Co., 293 N.W.2d 452, 455 (S.D.
1980) (providing that “if the clause in question is one of exclusion or exception,
designed to limit the protection, a strict interpretation is applied”). Finally, they
note that if there is a “genuine uncertainty as to which of two or more meanings is
correct, the policy is ambiguous” and any ambiguities in the policy must be resolved
in favor of the insured. Larimer v. Am. Fam. Mut. Ins. Co., 2019 S.D. 21, ¶ 9, 926
N.W.2d 472, 475–76 (citation omitted).
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[¶13.] Relying on these principles, the Grunewaldts present two arguments
that, in their view, establish State Farm has a duty to defend them against
Agtegra’s claims. First, they argue that pollution exclusions are meant to limit an
insurer’s liability for environmental damage and then claim that Agtegra’s
complaint does not allege this type of damage. Second, they argue that if the policy
exclusions “can be read broadly enough to encompass the claims in Agtegra’s
[c]omplaint,” the exclusions are ambiguous because they are susceptible to multiple
meanings and, thus, should be resolved in favor of coverage.
[¶14.] As to their first argument, the Grunewaldts rely on the Court’s
statement in Wausau that the “purpose of a pollution exclusion clause is ‘to limit
liability for environmental damage.’” 2000 S.D. 116, ¶ 17, 616 N.W.2d at 405(referring to the intent of such clauses being the exclusion of coverage for “pollution
and contamination of the environment, be it land, water, or the atmosphere”
(citation omitted)). They then contend that although the Court in Wausau
ultimately determined that a similar pollution exclusion barred coverage in that
case, the facts alleged in Wausau were much different than those alleged by Agtegra
here. In particular, they contend that “[d]elivering wheat that contained foreign
substances and, therefore, did not qualify for ‘food grade use’ is quite a measure
different from spewing cement dust or other recognized pollutants into the
environment.” 1
1. Even if the pollution exclusion clause was interpretated to apply only to
environmental pollution, the Grunewaldts have not offered a definition of
this phrase to support their claim that contaminated wheat would not be
environmental pollution. While not dispositive, the Court in Wausau noted
(continued . . .)
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[¶15.] The Grunewaldts’ reliance on these isolated references to
environmental pollution in the Wausau opinion to support a narrow interpretation
of the pollution exclusions here is misplaced. This Court’s determination that there
was no coverage under the policy in Wausau did not hinge on whether the emission
of cement dust was a form of environmental pollution. In fact, the Court declined to
decide whether cement dust was a pollutant. Id. ¶ 22, 616 N.W.2d at 406. Instead,
the Court determined that because the causes of action in the complaint at issue
were based on alleged “contamination” and the term “pollutants” as used in the
pollution exclusion was defined to include “contaminants,” the claims clearly fell
within the policy exclusion. Id. ¶ 23.
[¶16.] Like the exclusion in Wausau, State Farm’s pollution exclusions and
corresponding definitions do not use the term “environmental.” Therefore, if this
Court interpreted the policy to exclude coverage only for damages related to
environmental pollution, we would be rewriting the terms of the policy. As noted in
Wausau, this Court cannot rewrite an insurance policy or add to its language. Id.
¶ 24, 616 N.W.2d at 407.
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(. . . continued)
that because “cement dust is governmentally regulated” and the cement plant
had received notice of a violation of state environmental statutes and
regulations, “[t]o argue that cement dust is not a pollutant faced with
government regulation on the substance appears to be a specious argument
at best.” 2000 S.D. 116, ¶ 23 n.4, 616 N.W.2d at 406 n.4. Agtegra has
similarly referred to governmental regulations in support of its claim that the
pollution exclusion applies to grain contaminated with pesticide or other
foreign substances that otherwise was intended to be used for food. In
particular, it has alleged that the Grunewaldts had notice that such
contaminated grain would be subject to seizure by the FDA and to citations
pursuant to applicable FDA rules and regulations.
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[¶17.] The Grunewaldts nevertheless assert that coverage exists because, as
stated in their second argument, the terms used in State Farm’s policy exclusions
should be deemed ambiguous as applied to Agtegra’s claims. They contend that
although State Farm argues for a broad interpretation of the exclusion provisions,
the provisions are equally as susceptible to a narrow interpretation because State
Farm’s use of “terms of art” typically associated with environmental pollution (for
example, references to pollutants being “released” or “discharged” or those that
“escape” or “leak from” a vehicle) could lead a reasonable insured to believe that the
policy only excludes coverage for damages associated with environmental pollution. 2
[¶18.] However, rather than interpreting the terms of an insurance policy as
“terms of art,” our rules of insurance contract interpretation require us to interpret
the language of the policy according to its plain and ordinary meaning. W. Agric.
Ins. Co. v. Arbab-Azzein, 2020 S.D. 12, ¶ 11, 940 N.W.2d 865, 868. Moreover, this
Court has declined to apply a narrow, technical definition to a term when there is
nothing in the insurance contract supporting such a limited interpretation. In re
Certification of a Question of L. from U.S. Dist. Ct., D.S.D., Cent. Div., 2021 S.D. 35,
¶¶ 17, 19, 960 N.W.2d 829, 835.
[¶19.] Further, even if an insured could interpret some of the terms in State
Farm’s policy differently, the mere “fact that the parties differ as to the contract’s
2. The Grunewaldts also argue that the reference in exclusion (6) to lawsuits
filed by organizations and governmental bodies suggests or implies that only
coverage for environmental pollution was intended to be excluded. But this
ignores other language in this provision stating that “there is no coverage for
an insured for any claim made or lawsuit filed by any person, organization, or
governmental body . . . .” (Emphasis added.)
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interpretation does not create an ambiguity.” See Ass Kickin Ranch, 2012 S.D. 73,
¶ 9, 833 N.W.2d at 727 (citation omitted). “[W]hen the terms of an insurance policy
are unambiguous, these terms ‘cannot be enlarged or diminished by judicial
construction.’” Id. ¶ 10 (citation omitted).
[¶20.] Relevant to Agtegra’s claims here, State Farm’s policy states, in
exclusion (5), that there is no coverage for property damage caused by “pollutants”
that are “transported by,” “carried in,” or “removed from” any vehicle. Exclusion (6)
states that there is no coverage for damages that result from “the effects of
pollutants” or costs associated with the “cleanup,” “removal,” or “containment . . . of
pollutants.” The policy’s definition of “pollutants” includes “any solid, liquid or
gaseous irritant or contaminant, toxic substance, hazardous substance, or oil in any
form.” (Emphasis added.)
[¶21.] Agtegra’s underlying complaint alleges the Grunewaldts transported
and delivered wheat contaminated with fertilizer, causing the value of the wheat in
the bin in which it was placed to be “adversely impacted” and requiring increased
labor and costs to segregate and separately sell the contaminated wheat. When
applying the plain and ordinary meaning of State Farm’s policy terms here, the
exclusions unambiguously bar coverage.
[¶22.] When addressing a similarly worded definition of “pollutant” as used
in the insurance policy’s exclusions in Wausau, this Court concluded: “Because the
causes of action in the complaint are based upon alleged ‘contamination,’ assuming
that the allegations that [the insured] caused contamination are true, no coverage
would apply and Wausau would not have a duty to defend because the causes of
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action in the complaint all clearly fall within the definition of pollution in the
pollution exclusion clause.” 2000 S.D. 116, ¶ 24, 616 N.W.2d at 407. For the same
reasons, State Farm’s pollution exclusions clearly bar coverage here.
[¶23.] The Grunewaldts urge this Court to take a different approach. They
ask that we refrain from focusing solely on the use of the term “contaminant” in
Agtegra’s complaint “without regard to all the facts alleged” and the other language
in the exclusions. They argue that applying “a purely literal interpretation” of the
term contaminant “would stretch the limited meaning of the pollutant exclusions to
things having nothing to do with environmental pollution.” They further note that
other courts interpreting similar exclusions have interpreted them more narrowly
because of this concern. See, e.g., Nautilus Ins. Co. v. Jabar, 188 F.3d 27, 31 (1st
Cir. 1999) (determining pollution exclusion did not apply to claims alleging
exposure to hazardous fumes discharged by products used to repair a roof because
“[w]ithout some limiting principle [applied to the term ‘contaminant’], the pollution
exclusion clause would extend far beyond its intended scope, and lead to some
absurd results” (first alteration in original) (citation omitted)); Ins. Co. of Ill. v.
Stringfield, 685 N.E.2d 980, 982 (Ill. App. Ct. 1997) (declining to view the term
“contaminant” in isolation and holding that pollution exclusion did not bar coverage
for a child’s injuries from ingesting lead-based paint). 3
3. State Farm, on the other hand, asserts that “a majority of courts have
expressly denounced the theory that pollution exclusions only apply to
‘environmental pollution’” and cites several cases declining to narrowly
interpret the term “pollutant.” See, e.g., Auto-Owners Ins. Co. v. Hanson, 588
N.W.2d 777, 780–81 (Minn. Ct. App. 1999) (holding that the chipping and
flaking of lead paint on the windowpane of apartment was a “discharge,
(continued . . .)
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[¶24.] Notably, however, in Wausau, this Court considered, and rejected, the
same concern raised by the Grunewaldts, namely that if the term “contaminant”
was interpreted broadly, “any substance would meet the exclusion.” See 2000 S.D.
116, ¶ 20, 616 N.W.2d at 405 (quoting Guilford Indus., Inc. v. Liberty Mut. Ins. Co.,
688 F. Supp. 792, 794 (D. Me. 1988)). The Court noted that in Guilford, the district
court ultimately determined that the exclusion was not overly broad because “to fall
within the exclusion, the substance must meet a ‘certain very precisely drawn
circumstance[ ]: if it is an irritant or contaminant.’” Id. ¶ 20 (alteration in original)
(quoting Guilford, 688 F. Supp. at 794). The Court then noted that Wausau’s
exclusion was likewise “intended not to cover any substance, but only those
substances which irritate or contaminate.” 4 Id. ¶ 21.
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(. . . continued)
dispersal or release” under the exclusion barring coverage); Cincinnati Ins.
Co. v. Becker Warehouse, Inc., 635 N.W.2d 112, 119–20 (Neb. 2001) (holding
that a pollution exclusion barred coverage where fumes from floor sealant
applied by a construction contractor were “discharged, dispersed, migrated or
released”); Wilson Mut. Ins. Co. v. Falk, 857 N.W.2d 156, 171 (Wis. 2014)
(concluding that manure seeping into a well is unambiguously within the
definition of a pollutant); Bituminous Cas. Corp. v. Sand Livestock Sys., Inc.,
728 N.W.2d 216, 221 (Iowa 2007) (finding carbon monoxide to be a “gaseous
irritant or contaminant” and thus within the “extremely broad” definition of
“pollutants”).
4. The dissent in Wausau espoused the same view advanced by the
Grunewaldts, that a broad construction of the terms “irritant” and
“contaminant” would render the pollution exclusion meaningless. 2000 S.D.
116, ¶ 35, 616 N.W.2d at 409 (Gilbertson, J., dissenting). The dissent
distinguished the holding in Guilford by noting that the contaminant or
irritant in the case was oil, a clearly recognized pollutant, as opposed to the
cement dust at issue in Wausau. Id. ¶ 37. Notably, the dissent suggested
that to be considered a “pollutant,” a substance “must generally ‘occur in a
setting such that [it] would be recognized as a toxic or particularly harmful
substance in industry or by governmental regulators.’” Id. ¶ 38, 616 N.W.2d
(continued . . .)
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[¶25.] In light of this Court’s decision in Wausau and the plain language of
State Farm’s pollution exclusion provisions, the circuit court correctly applied this
precedent when determining that the allegations in Agtegra’s complaint clearly fell
within State Farm’s policy exclusions. The court thus properly held that State
Farm has no duty to defend or indemnify the Grunewaldts in the lawsuit initiated
by Agtegra.
[¶26.] Affirmed.
[¶27.] JENSEN, Chief Justice, and KERN, SALTER, and MYREN, Justices,
concur.
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(. . . continued)
at 409–10 (citation omitted). Here, assuming the truth of the allegation in
Agtegra’s complaint that wheat contaminated with pesticide or other foreign
substances, including fertilizer, is subject to seizure and citation per FDA
regulations, it appears that State Farm’s exclusion would bar coverage even
under the Wausau dissent’s analysis.
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