Interlachen Properties, LLC v. State Auto Insurance Co., 275 F. Supp. 3d 1094

Background

Kuepers Construction built a 24-unit common-interest development; Interlachen (unit owners) sued for construction defects and sought repair/remediation costs (~$5.4M estimates). Kuepers was insured by State Auto under a commercial general liability (CGL) policy (occurrence-based, with a "damage to your work" exclusion).
State Auto provided Kuepers a defense under a Reservation of Rights but refused to procure a supersedeas (appeal) bond or to commit to paying the trial judgment, asserting coverage exclusions.
After trial a jury awarded Interlachen $2,147,000 (statutory-warranty and negligent-repair theories); judgments and costs were later consolidated into Miller‑Shugart settlement agreements: Agreement 1 (Kuepers stipulated to $2,940,875.15) and Agreement 2 (LLC stipulated to $2,059,125), each limiting recovery to insurers.
Kuepers and the LLC sued State Auto in federal court alleging breach of contract (duty to defend and indemnify) and sought enforcement of the Miller‑Shugart agreements; State Auto moved for summary judgment.
The principal coverage dispute centered on whether the CGL policy covered the damages (given the business‑risk "Damage To Your Work" exclusion) and whether the Miller‑Shugart settlements properly allocated covered vs. non‑covered damages.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Did State Auto breach duty to defend Kuepers by refusing to procure a supersedeas bond?	State Auto’s defense obligation implicitly required collateralizing a bond to preserve Kuepers’ assets and appeal rights.	Policy does not obligate State Auto to "furnish" supersedeas bonds; paying bond "costs" ≠ collateralizing bond; furnishing would impose indemnity risk for non‑covered claims.	No breach as a matter of law; policy does not require State Auto to procure/collateralize supersedeas bond.
Did State Auto breach duty to indemnify Kuepers for the judgment?	Judgment from Miller‑Shugart should be collectible from State Auto; refusal to pay breached indemnity duty.	Exclusion for "Damage To Your Work" bars coverage for costs to repair insured's faulty workmanship; reservation of rights preserved coverage defenses.	No breach: evidence shows jury award largely remedial for faulty workmanship (excluded); State Auto validly reserved rights.
Was the LLC an insured entitled to defense under the CGL policy?	LLC was acting as Kuepers’ "real estate manager" (declarant/seller/manager) and thus falls within the policy's definition of insured.	LLC was not listed as a named insured and its activities are not "real estate manager" functions under the policy.	Triable issue: disputed factual record whether LLC acted as Kuepers’ real estate manager; summary judgment denied as to duty to defend LLC.
Are the Miller‑Shugart agreements enforceable against State Auto?	Agreements settle insureds’ liability and limit recovery to insurers; thus enforceable against State Auto.	Agreements fail to allocate covered vs. non‑covered damages and settle amounts that include non‑covered business‑risk losses; therefore unenforceable.	Agreements 1 and 2 unenforceable as matter of law because they include amounts attributable to excluded "your work" damages and do not allocate covered vs. non‑covered portions; summary judgment for State Auto on enforceability.

Key Cases Cited

Auto-Owners Ins. Co. v. Todd, 547 N.W.2d 696 (Minn. 1996) (insurer must defend any claim that is arguably within policy coverage)
Remodeling Dimensions, Inc. v. Integrity Mut. Ins. Co., 819 N.W.2d 602 (Minn. 2012) (reservation of rights required when insurer defends while disputing coverage)
Wanzek Constr., Inc. v. Emp’rs Ins. of Wausau, 679 N.W.2d 322 (Minn. 2004) (business‑risk/"your work" exclusion interpreted under CGL standard form)
Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982) (framework for insurer‑limited Miller‑Shugart settlements and subsequent coverage disputes)
Corn Plus Coop. v. Cont’l Cas. Co., 516 F.3d 674 (8th Cir. 2008) (elements for enforceability of Miller‑Shugart agreements and need to allocate covered vs. noncovered claims)
Nelson v. Am. Home Assurance Co., 702 F.3d 1038 (8th Cir. 2012) (coverage for Miller‑Shugart judgment determined by policy terms)
Alton M. Johnson Co. v. M.A.I. Co., 463 N.W.2d 277 (Minn. 1990) (if settled claims are noncovered, insurer not liable)
Travelers Indem. Co. v. Bloomington Steel & Supply Co., 718 N.W.2d 888 (Minn. 2006) (insurer bears burden to prove applicability of exclusions)