South Dakota Supreme Court Rules that Covered “Damages” Include Costs Incurred in Complying with Injunction
In a recent decision, the South Dakota Supreme Court in Matter of Certification of Question of L. From United States Dist. Ct., Dist. of S. Dakota, Cent. Div., 2021 S.D. 35 (2021) answered a certified question from the United States District Court for the District of South Dakota about whether costs incurred in complying with a permanent injunction constitute “damages” under an insurer’s policy. The dispute occurred after the Sapienzas were sued for negligence and nuisance by their neighbors after violating local laws regarding height and setback of their newly constructed home. The suit sought general, special, compensatory, consequential and punitive damages against the Sapienzas. The Sapienzas’ insurer agreed to defend the Sapienzas against the suit under their homeowner’s policy. After a three-day trial, the court issued a permanent injunction against the Sapienzas, requiring them to reconstruct or relocate their residence to comply with the applicable regulations.
Although the insurer continued to defend the Sapienzas through the appeal, it sent a letter stating it would not indemnify them for the costs incurred in complying with the injunction as such costs did not constitute covered damages under the applicable policy. The Sapienzas lost their appeal and had their home demolished, incurring $60,000.00 in complying with the order. The Sapienzas subsequently filed suit in the United States District Court for the District of South Dakota against their insurer seeking coverage for the costs incurred in demolishing the property. The court, in turn, certified a question to the South Dakota Supreme Court regarding whether costs incurred in complying with the injunction constituted covered “damages” under the policy.
Before the South Dakota Supreme Court, the Sapienzas argued the term “damages” was unambiguous and included money paid to reimburse for harm as well as costs to remedy a harm. The insurer argued that liability insurance typically includes an obligation to pay a third party for costs for which the insured is liable. It further argued that since the trial court required that the Sapienzas modify or tear down their home, the Sapienzas were not legally liable to their neighbors for costs as a result of property damage.
The South Dakota Supreme Court reasoned that “applying the definition of ‘damages’ that incudes not only a reparation in money as a form of compensation, but also a ‘satisfaction imposed by law for a wrong or injury caused by a violation of a legal right,’ the costs the Sapienzas incurred to comply with the injunction are covered ‘damages…” Since the Sapienzas paid $60,000.00 to satisfy a wrong or injury caused to the neighbor’s property for which they were held liable, such costs were covered by the policy. However, the court did note that preliminary injunctions, orders issued to prevent property damage that has not yet occurred, may not fall within the policy coverage as “damages”. Two justices filed a dissenting opinion, arguing that the decision turned the liability policy into a first-party policy by “requiring ostensible liability coverage for a property owned by the insured.”
Typically, costs incurred in complying with injunctions are not considered “damages”. This decision provides policyholders an opportunity to bring additional litigation on the issue and require insurers to pay additional costs not contemplated by the policy. If you have any questions about this case and its effect on any matters you are reviewing, please do not hesitate to reach out to our talented attorneys. Sodoro Law Group is a full-service law firm answering to the legal needs of Nebraska, Iowa, Kansas, Missouri and South Dakota. For more information, or to contact the team at Sodoro Law Group, go to sodorolaw.com or email Kelsey Sievers at firstname.lastname@example.org