Emcasco Ins. Co. v. R.S.

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 03-2722
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EMCASCO Insurance Company, *
*
Plaintiff-Appellee, *
* Appeal from the United States
v. * District Court for the
* District of South Dakota
Edith Diedrich, Wayne Diedrich, *
John Diedrich, *
*
Defendants, *
*
R.S. and R.S. as Guardian ad litem for *
M.S., *
*
Defendants-Appellants. *
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Submitted: May 13, 2004
Filed: January 19, 2005
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Before LOKEN, Chief Judge, SMITH, Circuit Judge, and DORR,1 District Judge.
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DORR, District Judge.
1
The Honorable Richard E. Dorr, United States District Judge for the Western
District of Missouri, sitting by designation.
Appellants appeal from the decision of the district court2 granting summary
judgment in favor of EMCASCO and denying summary judgment for appellants on
their cross-motions for summary judgment. For the reasons stated below, we affirm
the district court.
I. Background
A. Factual Background
Edith and Wayne Diedrich (“the Diedrichs”) live in South Dakota, and, at all
times relevant, Edith operated a day care business out of her home. Plaintiff-Appellee
EMCASCO Insurance Company (“EMCASCO”) issued a homeowner’s insurance
policy to the Diedrichs (“Homeowner’s Policy”) that provided coverage for the period
from November 19, 1999, to November 19, 2000. The Diedrichs’ Homeowner’s
Policy included a Home Day Care Endorsement that provided coverage for the
operation of a day care business out of the Diedrichs’ home.
In 1997, Edith Diedrich began providing day care to a minor named M.S.
Between March 2000 and August 2000, the Diedrichs’ teenage son John was present
at the day care. It is undisputed that John sexually molested M.S., who was four years
old at the time, more than forty times in those months. John was prosecuted in the
South Dakota juvenile court system for the offenses.
In February 2002, M.S.’s natural mother (R.S.) filed suit against Edith Diedrich
in South Dakota state court on behalf of herself and as guardian ad litem for M.S.
The suit charges Edith Diedrich with negligent supervision of her son John and seeks
2
The Honorable Karen E. Schreier, United States District Judge for the
Southern District of South Dakota.
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compensatory and punitive damages. In May 2002, EMCASCO brought a diversity
action in federal district court, seeking a declaratory judgment that the Diedrichs’
policy did not cover the acts alleged by R.S. in state court and that, therefore,
EMCASCO had no duty to defend or indemnify Edith Diedrich or any other insured
from the claims made by R.S.
On cross-motions for summary judgment, the district court, analyzing South
Dakota law and the Homeowner’s Policy and Home Day Care Endorsement at issue,
determined that EMCASCO had no duty to defend or indemnify the Diedrichs. The
district court found that the language of the policy was not ambiguous, the
“intentional acts” exclusion in the Homeowner’s Policy precludes coverage for bodily
injury that was intended by one of the insureds, that John Diedrich was an “insured”
for purposes of the policy as a whole, and that John’s intentional acts of criminal
sexual molestation were excluded from coverage under the policy.
B. Relevant Policy Provisions
The Homeowner’s Policy lists Wayne and Edith Diedrich as insureds. It is
undisputed that their minor son John also qualifies as an “insured” within the basic
definition contained in the policy. The section titled “Coverage E” of the policy
provides coverage for an “insured’s” personal liability. This coverage entitles
insureds to both the payment of damages and a defense to the claim by counsel.
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The Section II — Exclusions section of the Homeowner’s Policy states, in
pertinent part as follows:
1. Coverage E – Personal Liability ... do[es] not apply to “bodily
injury” or “property damage”:
a. Which is expected or intended by one or more “insureds”;3
...
k. Arising out of sexual molestation, corporal punishment or
physical or mental abuse....
J.A. at 164-65. Any injury or damage resulting from the home day care
business conducted by Edith Diedrich would also have been excluded from coverage
under the basic Homeowner’s Policy. However, the Diedrichs had purchased a Home
Day Care Coverage Endorsement, which provides in pertinent part as follows:
Coverage E – Personal Liability ... appl[ies] to “bodily injury” and
“property damage” arising out of home day care services regularly
provided by an “insured” and for which an “insured” receives monetary
or other compensation. Section II Exclusion 1.b. [of the original policy,
excluding injury or damage arising out of a “business” engaged in by an
“insured”] does not apply to the coverage provided under this
endorsement.
However, the “bodily injury” and “property damage” coverage provided
under this endorsement does not apply:
a. To “bodily injury” or “property damage” arising out of the
maintenance, use, loading or unloading, or entrustment by the
“insured” to any person, of [animals, aircraft, motor vehicles or
watercraft] owned ... by the “insured” or
b. To “bodily injury” to any employee ....
3
As amended by a rider entitled “Special Provisions – South Dakota.” J.A. at
171, 174.
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With respect to the coverage provided by this endorsement, Section II
– Conditions Items 1. - Limit of Liability and 2. - Severability of
insurance are deleted and replaced....
...
Severability of Insurance.
This insurance applies separately to each “insured” except with respect
to the Limit of Liability. ...
...
All other provisions of this policy apply.
J.A. at 178. Appellants argue that the state court action is for negligent supervision
by Edith Diedrich, not the intentional acts of her son, and that, therefore, the
exclusions do not apply. Second, appellants claim that since the exclusions stated in
the Home Day Care Endorsement’s exclusions did not include the intentional acts and
sexual molestation exclusions stated in the basic Homeowner’s Policy, the exclusions
of the basic policy were superceded and are no longer in effect. Third, appellants
claim that, pursuant to the policy’s severability clause, Edith Diedrich was the only
insured under the Home Day Care Endorsement and, therefore, her son John was not
an “insured,” and his acts would not trigger any exclusions from the Day Care
coverage. Finally, appellants claim that the policy language is ambiguous when
construing the Homeowner’s Policy in conjunction with the Home Day Care
Endorsement. Such ambiguity, they argue, should therefore be construed in favor of
the insured to include coverage.
EMCASCO argues that the policy and endorsement are not ambiguous, that
they must be read together as a whole, that the severability clause simply means that
the policy provisions apply separately to each insured, and that the exclusion from
coverage for the intentional acts of one or more insureds precludes coverage in this
case. EMCASCO also argues that coverage is precluded because of the sexual
molestation exclusion and case law holding that sexual molestation is not an
“occurrence,” within a similar policy definition.
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II. Analysis
A. Standard of Review and South Dakota Insurance Law
Summary judgment should be granted when there are no genuine issues of
material fact and the moving party is entitled to judgment as a matter of law. Fed. R.
Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). We review de
novo the district court’s interpretation of state law, its interpretation of insurance
contracts, and its ultimate decision to grant summary judgment. Transcon. Ins. Co.
v. W.G. Samuels Co., 370 F.3d 755, 757 (8th Cir. 2004).
Neither party challenges the assertion that South Dakota law applies to this
diversity action. Under South Dakota law, an insurance company’s duty to defend
its insured is “‘much broader’” than its duty to pay a judgment against its insured.
State Farm Mut. Auto. Ins. Co. v. Wertz, 540 N.W.2d 636, 638 (S.D. 1995) (quoting
Hawkeye-Security Ins. Co. v. Clifford, 366 N.W.2d 489, 490 (S.D. 1985)). The
insurer must prove that it has no duty to defend its insured by proving that the claim
“‘clearly falls outside of policy coverage.’” Wertz, 540 N.W.2d at 638 (quoting
North Star Mut. Ins. Co. v. Kneen, 484 N.W.2d 908, 912 (S.D. 1992) (emphasis in
original) (further quotations and citations omitted). If there is ambiguity in the
policy, a court should construe such ambiguities in favor of the insured and require
the insurer to defend. Lakes’ Byron Store, Inc. v. Auto-Owners Ins. Co., 589 N.W.2d
608, 609 (S.D. 1999); Wertz, 540 N.W.2d at 638 (quoting City of Fort Pierre v.
United Fire & Cas. Co., 463 N.W.2d 845, 847 (S.D. 1990)) (further citations
omitted)). However, a court should evaluate the plain language in the policy as a
whole and not attempt to seek a strained or unusual meaning of the language.
Overfield v. Am. Underwriters Life Ins. Co., 614 N.W.2d 814, 817 (S.D. 2000)
(quoting Chord v. Reynolds, 587 N.W.2d 729, 732 (S.D. 1999)) (further quotations
and citations omitted).
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B. Policy Exclusions
Neither party contests that the insurance policy would not cover (and
EMCASCO would not be required to defend) suits against one of the insureds
alleging intentional conduct by that insured, including claims of sexual molestation.
However, appellants argue that because the insured Edith Diedrich was sued in
negligence, and not vicariously for the intentional tort of her son, that the son’s acts
should be considered separate “occurrences” under the insurance policy. Because the
negligence of Edith in supervising her son is independent from John’s intentional
acts, appellants argue, the “intentional acts” and “sexual molestation” exclusions on
the policy do not apply. In other words, EMCASCO has a duty to defend the
Diedrichs because the “occurrence” being alleged in the state court suit is the failure
of the Diedrichs to supervise John, resulting in the “unexpected or unanticipated
occurrence” of John’s molestation. EMCASCO argues that the exclusion does apply.
In South Dakota, the insurer must prove that an exclusion applies. Am. Family
Mut. Ins. Co v. Purdy, 483 N.W.2d 197, 199 (S.D. 1992) (citations omitted). Such
exclusions must be explicitly set forth in the policy, with ambiguities being construed
in favor of the insured. Mid-Century Ins. Co. v. Lyon, 562 N.W.2d 888, 891 n.4 (S.D.
1997) (citations omitted).
Section II Exclusions in the Homeowner’s Policy denies coverage for bodily
injury or property damage “[w]hich is expected or intended by one or more
‘insureds.’” This provision is contained in a rider to the policy, which modified the
original policy language. The original language denied coverage for bodily injury or
property damage “[w]hich is expected or intended by the ‘insured.’” J.A. 164
(emphasis added). The plain meaning of this modification clearly reflects a change
from an exclusion that only applies to claims against the particular insured who
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committed the intentional act to a broader exclusion that applies to all claims that
arise out of an intentional act committed by any one or more of the insureds.
Courts construing similar [intentional acts exclusionary] policy
language have concluded that, when a provision uses the article “the,”
the [exclusion] applies only to claims brought against the particular
insured named in the claim. Conversely, when the exclusionary
language refers to intentional acts of “an insured,” courts have
uniformly concluded that the exclusion applies to all claims which arise
from the intentional acts of any one insured, even though the claims are
stated against another insured.
N. Sec. Ins. Co. v. Perron, 777 A.2d 151, 163 (Vt. 2001) (citing cases applying
Alaska, California, Florida, Louisiana, Maine, New Hampshire, Tennessee, and
Washington law) (footnote omitted); accord Am. Family Mut. Ins. Co. v. Mission
Med. Group, 72 F.3d 645, 648 (8th Cir. 1995) (citing cases from California, Florida,
and Michigan law “applying the exclusion to a co-insured who has not participated
in the underlying intentional act”).
Appellants cite, as contrary authority, St. Paul Fire & Marine Ins. Co. v.
Schrum, 149 F.3d 878 (8th Cir. 1998). In Schrum, the Zottas, parents of two minor
children, sued the Shrums for negligent supervision after the Shrums’ houseguest,
Richard Lee Backes, sexually molested the Zotta children. Id. at 879. The Shrums’
insurance company then sought a declaration that the Shrums’ liability insurance did
not cover the Zottas’ claim on the basis of a sexual conduct exclusion. Id. at 879-80.
A panel of this Court determined that the sexual conduct exclusion did not apply
because the negligence cause of action contained “‘separate and non-excluded’”
claims from the molestation claim and Backes’s actions were “merely incidental” to
the negligence claim against the Zottas. Id. at 881 (quoting Centermark Props., Inc.
v. Home Indem. Co., 897 S.W.2d 98, 103 (Mo. Ct. App. 1995)) (further citations
omitted). Schrum is distinguishable in a number of ways. First, the Court in Schrum
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was analyzing and interpreting two Missouri state court cases, which are generally
inapplicable to this suit. Second, Schrum’s analysis was based on a sexual act
exclusion, rather than an intentional act exclusion. Third, there was no discussion in
Schrum as to whether Mr. Backes was an “insured” under the policy whose conduct
would have itself come under a policy exclusion. For those reasons Schrum does not
apply.
The injury that gives rise to the state court lawsuit—the sexual molestation of
M.S.—was intended by John Diedrich and clearly constitutes an intentional act within
the policy exclusion. Under the plain language of the Homeowner’s Policy, John
Diedrich was an “insured.” Thus, on its face, we find, as the district court found, that
the intentional act exclusion in the Homeowner’s Policy is applicable to their claim.
Because the intentional act exclusion applies, we need not consider whether the
sexual act exclusion applies.
C. The Home Day Care Endorsement’s Exclusions
Appellants argue, however, that the intentional act exclusion contained in the
basic Homeowner’s Policy was superceded by the Home Day Care Endorsement to
the Policy and, therefore, is no longer applicable. This argument is based on the
theory that since the Endorsement, which authorized the day care coverage, contained
its own stated exclusions and did not restate the exclusions in the basic Homeowner’s
Policy, the Homeowner’s Policy exclusions were, therefore, superceded and are no
longer applicable to coverage under the Home Day Care Endorsement.
This argument by appellants is contrary to the policy language and well-
established South Dakota law.
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Endorsements or riders on a policy become a part of the policy, and
must be construed with it. Such provisions in the body of the policy are
not to be abrogated, waived, limited, or modified by the provisions of an
endorsement or rider unless expressly stated therein that such provisions
are substituted for those in the body of the policy, or unless the
provisions in the policy proper and in the rider or endorsement are
conflicting.
Pete Lien & Sons, Inc. v. First Am. Title Ins. Co., 478 N.W.2d 824, 827 (S.D. 1991)
(quoting 13A J. Appleman, Insurance Law and Practice § 7538 (1976)).
Section II of the Home Day Care Endorsement reflects that there was no intent
to supercede all of the exclusions in the Homeowner’s Policy by specifically stating
that “Section II Exclusion 1.b. does not apply to the coverage provided under this
Endorsement.” The clear inference from this provision that singled out only one of
the several exclusions in the basic Homeowner’s Policy is that the remaining
exclusions do apply. Any doubt about this inference is resolved by the final sentence
of Section II in the Endorsement, which states: “All other provisions of this policy
apply.” Therefore we find, as did the district court, that the exclusions listed in the
Home Day Care Endorsement are in addition to and supplement the exclusions listed
in the basic Homeowner’s Policy.
D. Severability Clause
Appellants’ next argument is that the “Severability of Insurance” provision in
the Endorsement requires that each insured’s acts be viewed separately and, therefore,
John’s intentional acts should not be taken into account when considering a claim for
Edith’s negligence. In addition, appellants argue that Edith is the only insured under
the Home Day Care Endorsement because she was the only insured operating the
home day care business.
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Again, the established law and a plain reading of the Endorsement language do
not support appellants’ contentions. The pertinent provision in the Endorsement
provides as follows:
For an additional premium, we cover the home day care “business”
described below, conducted by an “insured.”
...
2. Severability of Insurance. This insurance applies separately to
each “insured” except with respect to the limit of liability. All other
provisions of this policy apply.
J.A. at 178. The South Dakota Supreme Court has previously considered a similar
argument for interpretation of a severability clause to preclude the act of one insured
from being used to support the application of an exclusion against another insured.
In Great Cent. Ins. Co. v. Roemmich, 291 N.W.2d 772 (S.D. 1980), the court
considered an exclusion in a homeowner’s policy for liability arising out of the use
of a vehicle by “any insured.” Id. at 773-74. As in the instant case, the underlying
event was against the parents for negligent supervision of their son. The insured in
Roemmich claimed that the severability clause should have been interpreted to limit
the vehicle exclusion only to the particular insured who was driving the vehicle. The
South Dakota Supreme Court stated
the definition of “insured” is readily understandable and the severability
clause does not create any ambiguity. The use of the words “any
insured” makes it clear that the policy does not cover liability arising
from motor vehicle use by any insured. The policy language is clear and
unambiguous.
Id. at 774. In the same way, the definition of an “insured” and the intentional acts
exclusion in the Diedrichs’ Homeowner’s Policy are unambiguous. The severability
clause does not create any ambiguity. Thus, we hold that the severability clause does
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not separate Edith’s claimed negligence from the exclusion for John’s intentional
acts.
We are likewise not persuaded by appellant’s contention that Edith is the only
insured under the Day Care Endorsement. It is undisputed that Edith and Wayne
Diedrich and their son John are “insureds” as defined in the Homeowner’s Policy.
Nowhere is the definition of “insured” redefined in the Home Day Care Endorsement
to exclude “insureds” as defined in the body of the Homeowner’s Policy. In general,
when a term used in the body of the policy is not redefined in an endorsement, it
retains the definition set forth in the body of the policy. 4 Eric Mills Holmes,
Appleman on Insurance § 20.1(2d ed. Supp. 2004). The policy language supports this
conclusion. In the provision that excludes home day care coverage from the
Diedrichs’ general Homeowner’s Policy, it provides “[i]f an ‘insured’ regularly
provides home day care services,” the policy does not provide liability coverage. J.A.
at 177 (emphasis added). Similarly, the Home Day Care Endorsement states that “we
cover the home day care ‘business’ described below conducted by an ‘insured’ ....”
J.A. at 178 (emphasis added). As discussed above, the use of the article “an” clearly
indicates inclusion of all those defined as “insured,” not just the particular “insured”
person conducting the business.
E. Ambiguity
Appellants have made a general argument that the pertinent policy provisions
are ambiguous. “When the Homeowner’s Policy and Home Day Care Endorsement
are placed side-by-side and analyzed together, they simply cannot be reconciled.”
Appellant’s Br. at 35. In essence, appellants repeat their argument that because the
Home Day Care Endorsement listed separate exclusions, an ambiguity was created
between the Home Day Care Endorsement exclusions and the Homeowners Policy
exclusions. We find no merit in this argument for the reasons discussed above.
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III. Conclusion
In summary, we find that the language in the intentional acts exclusion of the
policy is unambiguous and excludes claims based on the underlying intentional
conduct of any one of the “insureds.” The policy unambiguously defines John
Diedrich as an “insured.” M.S. and R.S.’s claim filed in state court directly spawns
from John’s intentional acts of sexual molestation. None of the provisions in the
Home Day Care Endorsement changes this analysis. Therefore, the plain language
of the policy relieves EMCASCO from the duty to defend Edith Diedrich in the state
court action and from any obligation to indemnify the Diedrichs as a result of that
claim. Accordingly, we affirm the well-reasoned opinion of the district court.
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