#27138-a-SLZ

2015 S.D. 55

                          IN THE SUPREME COURT
                                  OF THE
                         STATE OF SOUTH DAKOTA

                                    ****

DAKOTA TRAILER
MANUFACTURING, INC.,                        Appellee,

      v.

UNITED FIRE &
CASUALTY COMPANY,                           Appellant.

                                    ****

                  APPEAL FROM THE CIRCUIT COURT OF
                     THE FIRST JUDICIAL CIRCUIT
                   YANKTON COUNTY, SOUTH DAKOTA

                                    ****

                  THE HONORABLE CHERYLE W. GERING
                               Judge

                                    ****

J. G. SHULTZ
CALEB J. VELDHOUSE of
Woods, Fuller, Shultz & Smith, PC
Sioux Falls, South Dakota                   Attorneys for appellee.


DANIEL K. BRENDTRO
DENNIS L. DUNCAN of
Zimmer, Duncan & Cole, LLP
Sioux Falls, South Dakota                   Attorneys for appellant.


                                    ****

                                            CONSIDERED ON BRIEFS
                                            ON MARCH 24, 2015

                                            OPINION FILED 07/01/15
#27138

ZINTER, Justice

[¶1.]        As a part of Dakota Trailer Manufacturing’s business, it makes

radiator components for an unrelated company. The component work is performed

in one of Dakota Trailer’s locations that the National Council on Compensation

Insurance (NCCI) originally classified as a “machine shop” for workers

compensation insurance rating purposes. After an inspection, NCCI changed the

location’s classification to “welding or cutting.” Dakota Trailer appealed, and both

the Workers’ Compensation Appeals Board (Board) and the South Dakota

Department of Labor (Department) affirmed the new classification. The circuit

court, however, reversed. United Fire & Casualty Company, Dakota Trailer’s

workers’ compensation insurer, appeals. We affirm the circuit court.

                            Facts and Procedural History

[¶2.]        Dakota Trailer manufactures trailers at its plant in Yankton. It also

manufactures component parts (radiator subassemblies) for L&M Radiators at a

separate location. The radiator subassemblies are manufactured in a portion of

L&M Radiators’ shop that Dakota Trailer subleases.

[¶3.]        NCCI is a rating organization that establishes statewide workers’

compensation rates in South Dakota and thirty-seven other states. It gathers

payroll and loss data from insurance companies and uses that information to create

risk classifications (codes) and insurance rates for the codes. NCCI publishes a

guidebook called the “Scopes Manual” that aids in interpretation and selection of

the appropriate codes. NCCI also performs random inspections to make sure

classification codes are properly applied.


                                             -1-
#27138

[¶4.]         NCCI determined that Dakota Trailers had both a primary operation

(trailer manufacturing) and a secondary operation (production welding) that were

conducted at three locations. 1 The issue in this case involves the work performed at

“Location 3,” where employees make the radiator subassemblies. Employees at this

location cut, form, bend, shape, drill, weld, and turn raw materials into the

subassemblies. Upon completion, the subassemblies are taken to L&M Radiators’

adjacent room where its employees finish and incorporate the subassemblies into

radiators.

[¶5.]         After a 2011 inspection, NCCI assigned the classification code 3365,

“Welding or Cutting NOC [(not otherwise classified)] & Drivers,” for Location 3.

Before the inspection, the classification code was 3632, “Machine Shop NOC.” The

actual NCCI codes (the Basic Manual of Workers Compensation Insurance) are not

part of the record. The case was decided on the language of the NCCI Scopes

Manual, which describes and explains the codes.

[¶6.]         The Scopes Manual for Code 3365 provides in relevant part:

              Code 3365 applies to all types of contract welding or cutting
              operations that are not otherwise classified. This classification
              contemplates welding or cutting operations performed by
              specialist contractors doing both shop work or [sic] outside work.
              ...
              Code 3365 is applicable to specialist contractors engaged
              exclusively in all testing or inspection of oil or gas pipes
              provided that the testing or inspection is performed in
              conjunction with the construction of the oil or gas pipeline. . . .

1.      When evaluating an employer’s risk classification, NCCI assigns separate
        codes if a business has a “secondary operation” at a separate location. If
        there are multiple activities in the same physical location, the highest rated
        code is utilized for all employees. Neither Dakota Trailer nor United Fire
        contends that these practices affect this case.

                                            -2-
#27138

            Testing or inspection operations performed by employees of
            insureds also engaged in construction operations shall be
            assigned to the appropriate construction classification.
            ....
            Code 3365 is restricted to insured specialist contractors or
            separate subsidiaries engaged solely in welding or cutting
            operations who do not engage in the operations specified in this
            classification’s footnote. 2
            Code 3365 is a construction classification . . . . It should be
            noted that Code 3365 also includes shop operations. We
            distinguish between Code 8227 operations and Code 3365 shop
            operations in the following manner. Code 8227 operations
            consist of labor that maintains, repairs and stores an insured’s
            materials and equipment. Shop operations assigned to Code
            3365 consist of labor (usually skilled) that engages in operations
            that are specifically related to the work contemplated by the
            construction or erection code applicable to the business. . . .

(Emphasis added.) The Scopes Manual for Code 3632 provides in relevant part:

            Code 3632 applies to the manufacture or repair of machines as
            well as general job machining. It must be emphasized that Code
            3632 is an NOC classification and is applied to operations only
            when such operations are not specifically contemplated by
            another manual classification(s).
            Metal castings, forgings, bars, rods, flats, tubing, angles, pipe
            and pipe fittings, chains, sockets, gears, shafting, pulleys,
            hardware, sheet metal and some lumber and paint may be used.
            A variety of processes may be involved such as boring, turning,
            planing, shaping, milling, drilling, punching, grinding, tapping,
            threading, shearing, bending, forming, riveting, welding,
            painting, inspecting and testing. . . .
            The machining operations are typical machine shop operations
            consisting of sawing, centering, turning, boring, facing, reaming,
            shaping the nose (i.e., “Nosing In” as specified in the class
            phraseology), heattreating, thread milling, application of copper
            bands, washing, painting and packing. . . .

(Emphasis added.)




2.    United Fire conceded that Dakota Trailer did not engage in an activity that
      falls within the footnote.

                                        -3-
#27138

[¶7.]        Dakota Trailer disagreed with the classification change and notified

NCCI. After reviewing the decision internally, NCCI adhered to its code 3365

classification. Dakota Trailer then sought review before the South Dakota Workers

Compensation Appeals Board, which affirmed the change. Dakota Trailer appealed

that decision to the Office of Hearing Examiners. After a contested case hearing, a

hearing examiner issued recommended findings of fact and conclusions of law

supporting the change. The Department accepted the recommendation and

approved the change.

[¶8.]        Dakota Trailer then appealed to the circuit court, which reversed and

reinstated machine shop code 3632. The court, based on the language in the Scopes

Manual, ruled that code 3365 was only intended to apply to “specialist contractors

in the construction industry who are engaged solely in welding or cutting

operations, whether those operations [are] performed in a shop or performed

outside.” Although the court acknowledged witnesses’ testimony indicating that

they understood code 3365 was not restricted to the construction industry, the court

concluded that the witnesses’ interpretation was not supported by the language of

the Scopes Manual.

[¶9.]        United Fire now appeals, arguing that the circuit court did not give

sufficient deference to NCCI’s determination and the hearing examiner’s findings.

In the alternative, United Fire argues that the administrative determination was

correct as a matter of contract interpretation. United Fire finally argues that the

circuit court erred in reversing the administrative determination without entering

an explicit finding that Dakota Trailer’s substantial rights were prejudiced.


                                         -4-
#27138

                                       Decision

[¶10.]       The parties disagree on the appropriate standard of review of agency

decisions. United Fire argues that the circuit court erred in failing to give the

Board’s and the Department’s decisions sufficient deferential review; i.e., review for

clear error or an abuse of discretion. Dakota Trailer responds that the circuit court

properly reviewed the administrative decision for clear error as to historical facts

and de novo as to the classification conclusion. Dakota Trailer also contends that

the circuit court reached the correct result.

[¶11.]       Our review in an appeal from the circuit court’s review of a contested

case proceeding is governed by SDCL 1-26-37. Martz v. Hills Materials, 2014 S.D.

83, ¶ 14, 857 N.W.2d 413, 417. “[I]n reviewing the circuit court’s decision under

SDCL 1-26-37, we are actually making ‘the same review of the administrative

tribunal’s action as did the circuit court.’” Peterson v. Evangelical Lutheran Good

Samaritan Soc., 2012 S.D. 52, ¶ 13, 816 N.W.2d 843, 847 (quoting State, Div. of

Human Rights ex rel. Miller v. Miller, 349 N.W.2d 42, 46 (S.D. 1984)). “The

agency’s findings are reviewed for clear error.” Martz, 2014 S.D. 83, ¶ 14, 857

N.W.2d at 417. “However, findings based on documentary evidence . . . are

reviewed de novo.” Id. “Questions of law are also reviewed de novo.” Id. “[W]e

perform that review of the agency’s findings ‘unaided by any presumption that the

circuit court’s decision was correct.’” Peterson, 2012 S.D. 52, ¶ 13, 816 N.W.2d at

847 (quoting Kermmoade v. Quality Inn, 2000 S.D. 81, ¶ 10, 612 N.W.2d 583, 586).

[¶12.]       The Board and the Department (adopting the hearing examiner’s

proposed findings and decision) determined that, under the Scopes Manual, code


                                          -5-
#27138

3365 was the appropriate classification. The historical facts regarding the activities

performed by Dakota Trailer at Location 3 are not in dispute. The question in this

case involves an interpretation of the Scopes Manual, which was incorporated into

the insurance contract. 3 “Insurance contract interpretation is a question of law,

reviewable de novo.” Ass Kickin Ranch, LLC v. N. Star Mut. Ins. Co., 2012 S.D. 73,

¶ 7, 822 N.W.2d 724, 726 (quoting De Smet Ins. Co. of S.D. v. Gibson, 1996 S.D. 102,

¶ 5, 552 N.W.2d 98, 99).

[¶13.]         Both code 3365 and code 3632 mention welding and machining

operations. Both codes are also NOC classifications (“not otherwise classified”).

That means that each applies only if no other classification more specifically

describes the insured’s business. 4

[¶14.]         The Scopes Manual provides that code 3365 “contemplates welding or

cutting operations performed by specialist contractors doing both shop work or [sic]

outside work.” But the manual additionally provides that “Code 3365 is a




3.       United Fire and Dakota Trailer are contractually obligated to use the rate
         codes that NCCI establishes. Dakota Trailer’s insurance policy provides that
         “[t]he premium for this policy will be determined by our manuals of rules,
         classifications, rates, and rating plans,” and code 3365 is specifically
         referenced in the policy. Thus, workers’ compensation classification codes in
         the NCCI Scopes Manual are incorporated into workers’ compensation
         insurance policies. See Travelers Indem. Co. v. Int’l Nutrition, Inc., 734
         N.W.2d 719, 727 (Neb. 2007) (concluding that a reference to “Our manuals” in
         the insurance policy incorporated the NCCI manual into the policy).

4.       The manual provides that code 3365 “applies to all types of contract welding
         or cutting operations that are not otherwise classified.” The manual also
         provides that “Code 3632 is an NOC classification and is applied to
         operations only when such operations are not specifically contemplated by
         another manual classification(s).”

                                           -6-
#27138

construction classification.” And in this case, Dakota Trailer is not involved in the

construction business.

[¶15.]        United Fire, however, argues that code 3365 is not limited to

construction activities because code 3365 covers “both shop [and] outside work.”

(Emphasis added.) But the Scopes Manual provides that “[s]hop operations

assigned to Code 3365 consist of labor (usually skilled) that engages in operations

that are specifically related to the work contemplated by the construction or erection

code applicable to the business.” (Emphasis added.) And as previously indicated,

Dakota Trailer is not involved in the construction business.

[¶16.]        However, United Fire also points out that an NCCI representative

testified that they applied code 3365 because it is “not limited to just construction.

. . . [I]t is broader than that. . . . [I]t is under [NCCI’s] construction umbrella[,] . . .

[b]ut it’s also used for shop operations that are performed by a specialty contractor,

which is what [NCCI] understood Dakota Trailer to be doing at” Location 3. The

NCCI representative also pointed out that Dakota Trailer’s insurance agent

testified that code 3365 had been assigned to a client with welding shops even

though that client was not in the construction business.

[¶17.]        Although there is no dispute about the witnesses’ testimony, the

testimony is not consistent with the language of the Scopes Manual. The manual

provides that code 3365 is intended to apply to specialist contractors in the

construction industry. Indeed, as previously noted, the manual specifically provides

that code 3365 “is a construction classification[.]” Additionally, when referring to

other applications of code 3365, such as testing and inspection of oil or gas


                                             -7-
#27138

pipelines, the manual provides that the activity must be “in conjunction with the

construction of the” pipelines. (Emphasis added.) Finally, the manual provides:

“Shop operations assigned to Code 3365 consist of labor (usually skilled) that

engages in operations that are specifically related to the work contemplated by the

construction or erection code applicable to the business.” (Emphasis added.)

Therefore, we agree that the relevant language in the Scopes Manual contemplates

“shop operations,” but the language also limits those operations to work performed

in a shop for a business classified in a construction or erection code. And there is no

evidence that Dakota Trailer’s business is so classified. Because these witnesses’

use and application of code 3365 is not consistent with the plain language of the

manual, United Fire’s reliance on witness testimony is misplaced.

[¶18.]       The inapplicability of code 3365 is supported by the administrative

findings below. The Scopes Manual provides that code 3365 “is restricted to insured

specialist contractors or separate subsidiaries engaged solely in welding or cutting

operations[.]” (Emphasis added.) However, the hearing examiner found that

Dakota Trailer engaged in more than welding and cutting operations at Location 3.

He found that Dakota Trailer “would take raw materials and cut, form, bend, shape,

drill, and make them into parts for the radiators.” He further found that “33% of

the radiator work was cutting and bending and 33% was welding. The remaining

33% was machining and quality control.” Therefore, Dakota Trailer’s activities at

Location 3 were not restricted “solely” to welding or cutting, a requirement for

inclusion in code 3365.




                                          -8-
#27138

[¶19.]          The findings of fact also indicate that Dakota Trailer’s activities at

Location 3 fit within code 3632, the classification for general machining processes—

Dakota Trailer’s previous classification. The Scopes Manual provides: “Code 3632

applies to the manufacture or repair of machines as well as general job machining.”

General machining activities specifically include “shaping, . . . drilling, . . . bending,

forming, . . . [and] welding[.]” Considering the hearing examiner’s findings set forth

in ¶ 18, supra, code 3632 specifically covers Dakota Trailer’s activities at Location 3.

[¶20.]          Dakota Trailer was not engaged in the construction business.

Additionally, the administrative findings of fact reflect that Dakota Trailer’s

activities at Location 3 were not limited solely to cutting and welding. The findings

further reflect that Dakota Trailer engaged in general job machining processes that

are described in code 3632 and not listed in any other more specific classification.

We affirm the circuit court’s decision. We find no merit in United Fire’s remaining

arguments.

[¶21.]          GILBERTSON, Chief Justice, and SEVERSON and KERN, Justices,

and PALMER PERCY, Circuit Court Judge, concur.

[¶22.]          PALMER PERCY, Circuit Court Judge, sitting for WILBUR, Justice,

disqualified.




                                             -9-
