South Dakota Supreme Court Upholds Enforceability of Continuing Injury Exclusion

The South Dakota Supreme Court has upheld the enforceability of an exclusion in a commercial general liability (“CGL”) insurance policy barring coverage for an unknown progressive or continuous injury or damage that occurred before the inception date of a successor insurance policy.

The Case

Steven Thomas & Sons, LLC, was hired in 2002 by Swift Contractors, Inc., to do excavation and soil compaction work for an addition to a school building in South Dakota. The project was completed in 2004 but, at some point in 2005, the building’s floor started to shift and, in 2006, cracks began to appear on certain interior masonry walls.

In 2008, the school district hired a geotechnical investigation company and an engineering firm to investigate the issues with the building. In 2010, the school district received a final report indicating that the settling issue was caused primarily by the use of low-moisture clay, that the bowing of exterior walls was due to improper compaction of the backfill soils, and that the moisture in the clay soils would continue to expand and cause additional distress. The problems were attributed to negligently performed excavation and compaction work by Thomas & Sons.

In March 2010, Thomas & Sons’s CGL insurer, Employers Mutual Casualty Company (“EMC”), received notice from the school district of the potential claims against Thomas & Sons.

In August 2010, the school district sued Thomas & Sons; EMC asserted that it had no duty to defend because the policy excluded coverage for continuous or progressive property damage that occurred before the effective date of the policy. EMC asserted that the damage to the building’s floor was first observed in 2005 and the damage to the foundation and structure were observed in 2006 – before the April 2007 policy inception date.

In 2005 and 2006, Thomas & Sons had been insured by AMCO Insurance Company. After EMC withdrew and refused to share in the cost of defending the claim, AMCO asked EMC to reconsider its decision because the damage was unknown to Thomas & Sons before EMC’s policy took effect. EMC declined. 

Ultimately, AMCO paid defense costs of $124,853 and indemnified Thomas & Sons $342,187.50, plus prejudgment interest, for Thomas & Sons’s share of an arbitration award in favor of the school district.

AMCO then brought a declaratory judgment action against EMC seeking a ruling that EMC had a joint duty to defend Thomas & Sons and, therefore, that EMC was liable for its share of the defense costs, including its share in satisfying the arbitration award against Thomas & Sons.

The trial court ruled in favor of EMC, and the dispute reached the South Dakota Supreme Court. AMCO asked the court to declare that EMC’s exclusion for unknown progressive or continuous injury or damage violated public policy and, therefore, that it was void.

The South Dakota Supreme Court’s Decision

The court affirmed.

In its decision, the court decided that it was not against South Dakota public policy for a CGL insurer to exclude coverage for a continuing or progressive loss that was unknown to the insured at the inception date of the policy.

The court explained that EMC had crafted a specific contract exclusion for “property damage” that “commenced or which is alleged to have occurred, prior to the inception or effective date of this policy,” whether the damage was “known, unknown, or should have been known” by the insured. Because EMC’s policy provision was not “prohibited by statute, condemned by judicial decision, [or] contrary to any identifiable public morals,” the court found no reason to conclude that the exclusion violated public policy. 

The case is AMCO Ins. Co. v. Employers Mutual Cas. Co., No. 26797 (S.D. April 16, 2014).