Title: Berneta DeLuna v. State Farm Fire & Casualty Co. Duty to defend/indemnify

State: idaho

Issuer: Idaho Supreme Court (civil)

Document:

IN THE SUPREME COURT OF THE STATE OF IDAHO 
 
Docket No. 34202 
 
  
BERNETA DELUNA,                           
                                          
          Plaintiff-Appellant,            
                                          
v.                                        
                                          
STATE FARM FIRE AND CASUALTY 
COMPANY,     
                                          
          Defendant-Respondent.           
                                          
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Boise, June 2008 Term 
 
2008 Opinion No. 91 
 
Filed:  July 1, 2008 
 
Stephen W. Kenyon, Clerk 
 
Appeal from the District Court of the First Judicial District of the State of Idaho, 
Kootenai County.  Hon. Lansing L. Haynes, District Judge. 
 
The decision of the district court is affirmed. 
 
Paine Hamblen LLP, Coeur d’Alene, for appellant.  Michael B. Hague argued. 
 
Elam & Burke, P.A., Boise, for respondent.  Jeffrey A. Thomson argued.  
 
_____________________ 
 
J. JONES, Justice 
 
Berneta Deluna brought this action against State Farm Fire and Casualty Company 
(“State Farm”) to collect the amount of a judgment she obtained against Stuart Kramsky, a State 
Farm insured.  On cross-motions for summary judgment, the district court held State Farm 
breached its duty to defend Kramsky, who had assigned his rights to Deluna, but determined that 
Deluna had established no compensable damages resulting from the breach.  The court found 
State Farm had no duty to indemnify under Kramsky’s policy.  Deluna appealed to this Court, 
and we affirm. 
I. 
Stuart Kramsky operated an insurance agency in Post Falls, Idaho, selling Allstate 
Insurance.  Kramsky owned a business policy issued by State Farm that provided liability 
coverage for injuries resulting from his business operations.   
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In January 2000, Kramsky engaged Berneta Deluna as an independent contractor to act as 
a general office assistant in his agency.  Shortly after she started work, the relationship between 
the two took on sexual overtones.  Kramsky apparently made the first overtures while the two 
were at work.  Not long after, Kramsky invited Deluna to dinner.  After another dinner at his 
home, the two engaged in sexual intercourse, but not before Deluna inquired whether Kramsky 
needed to wear protection.  He told her he did not, and so the two had unprotected sex. 
Kramsky failed to inform Deluna that he had tested positive for the herpes simplex virus 
many years before, around 1978 or 1979.  Because many years had passed without Kramsky 
experiencing any symptoms of the disease and because, in fifteen years of marriage, he had 
never transmitted the incurable disease to his then-wife, Kramsky believed he was not at risk for 
transmitting the disease.  Deluna and Kramsky had sex several more times, and at some point, 
she contracted herpes.  Deluna worked for Kramsky for around ten weeks.  At some point, 
Deluna began feeling soreness and pain in her genital region.  She resisted Kramsky’s advances 
one day, and three days later he fired her.  The two continued to have sex, however, even after 
Deluna discovered she was infected with herpes.   
The relationship later ended, and Deluna decided to sue Kramsky.  In early 2001, she sent 
an unfiled complaint to Kramsky.  Kramsky notified his two insurance carriers, State Farm and 
Allstate Insurance, of the potential suit and both initially provided him with counsel.  State Farm 
sent Kramsky three “reservation of rights” letters regarding the unfiled complaint.  The third 
letter informed Kramsky that it would withdraw its representation in the event a scheduled 
mediation did not resolve the claim.  The mediation was unsuccessful, and State Farm withdrew 
shortly thereafter.   
In 2002, Deluna filed a complaint that substantially differed from the original unfiled 
complaint.  Kramsky tendered the defense of the filed complaint (Deluna v. Kramsky) to State 
Farm.  State Farm formally rejected the defense.  State Farm sent another reservation of rights 
letter, stating in part,  
State Farm Fire and Casualty Company has no duty to defend or indemnify you 
under this policy.  It is our opinion that there is no coverage for the alleged bodily 
injury to the plaintiff for the reason that the alleged conduct did not arise out of 
the course of your business and was not ‘with respect to the conduct of a 
business.’ 
Thereafter, Kramsky proceeded to defend the action pro se.   
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Deluna and Kramsky eventually executed an assignment of rights agreement 
(“Agreement”).  The Agreement detailed Kramsky’s attempts to get State Farm to both defend 
and indemnify him in Deluna v. Kramsky.  The Agreement recited Kramsky’s inability to afford 
private counsel and the likelihood that he would be unable to satisfy a judgment obtained against 
him by Deluna.  The parties agreed Deluna could proceed to trial without Kramsky’s appearance 
or defense.  Kramsky assigned to Deluna his rights to indemnity under the State Farm policy.  
Deluna, in turn, agreed that she would not seek satisfaction against Kramsky’s personal assets or 
property.   
Deluna v. Kramsky went to trial.  Kramsky did not appear.  The judge issued an opinion 
dismissing four of the six causes of action, while granting a $1,282,596.32 judgment to Deluna 
on the two remaining claims (negligent transmission of the herpes virus and negligent infliction 
of emotional distress).  Deluna then filed a complaint against State Farm in order to recover the 
amount of the judgment, thus beginning the present case.  Both Deluna and State Farm moved 
for summary judgment.  The district court found that Deluna possessed Kramsky’s rights against 
State Farm by virtue of the Agreement.  The judge determined State Farm had a duty to defend 
Kramsky in Deluna v. Kramsky, which it failed to do, but that Deluna had shown no 
compensable damages.  The judge ruled that State Farm was not required to pay the damages 
Deluna obtained in Deluna v. Kramsky because her injury was not covered under Kramsky’s 
insurance policy.  Deluna appealed to this Court.   
II. 
We are asked to decide the measure of damages where an insurer breaches its duty to 
defend.  Deluna contends that the district court erred in concluding that an insured may only 
recover the costs and attorney fees incurred in defending an action where the insurer improperly 
fails to provide a defense.  State Farm contends the district court correctly decided the issue.  
Both parties seek attorney fees on appeal.   
A. 
When reviewing an order for summary judgment, the standard of review for this Court is 
the same standard used by the district court in ruling on the motion.  Watson v. Weick, 141 Idaho 
500, 504, 112 P.3d 788, 792 (2005).  Summary judgment is proper when “the pleadings, 
depositions, and admissions on file, together with the affidavits, if any, show that there is no 
genuine issue as to any material fact and that the moving party is entitled to judgment as a matter 
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of law.”  Idaho R. Civ. P. 56(c).  If there is no genuine issue of material fact, “only a question of 
law remains, over which this Court exercises free review.”  Watson, 141 Idaho at 504, 112 P.3d 
at 792.   
B. 
State Farm asserted in the action below that it had no duty to defend Kramsky.  The 
district court found otherwise and State Farm has not appealed that decision.   We nevertheless 
set out the legal posture of the case to highlight the manner in which a legitimate dispute 
regarding the duty to defend ought to be resolved.   
An insurance company’s duty to defend arises “where a complaint, read broadly, reveals 
‘a potential for liability that would be covered by the insured’s policy.’”  City of Idaho Falls v. 
Home Indem. Co., 126 Idaho 604, 608, 888 P.2d 383, 387 (1995) (quoting Kootenai County v. 
Western Cas. & Sur., 113 Idaho 908, 910, 750 P.2d 87, 89 (1988)).  “[T]he duty to defend clearly 
exists so long as there is a genuine dispute over facts bearing on coverage under the policy or 
over the application of the policy’s language to the facts.”  Black v. Fireman’s Fund Am. Ins. 
Co., 115 Idaho 449, 455, 767 P.2d 824, 830 (Ct. App. 1989).   
In this case, Deluna’s complaint triggered State Farm’s duty to defend.  Deluna alleged 
several causes of action: negligent transmission of herpes, negligent infliction of emotional 
distress, intentional infliction of emotional distress, fraud, and battery.  The complaint alleged 
Kramsky manipulated his position as Deluna’s boss to have sex with her and that he failed to 
timely pay her, due to their sexual relationship.   Read broadly, Deluna’s complaint reveals a 
potential for liability under the business liability policy.  Her claims are premised on the notion 
that Kramsky used his position as her boss to coerce her into having sex with him, resulting in 
her damages.  Kramsky’s policy provided coverage for “[b]odily injury or property damage 
caused by an occurrence which takes place in the coverage territory during the policy period.”  
The transmission of herpes can properly be characterized as a bodily injury and, since Deluna’s 
complaint alleged that Kramsky used his position as her boss to seduce her, a broad reading of 
the complaint reveals a potential for coverage.  
The district court found State Farm breached its duty to defend Kramsky when it 
withdrew its representation.  State Farm failed to follow the prudent and generally-accepted 
practice when it withdrew from representation.   
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The proper procedure for the insurer to take is to evaluate the claims and 
determine whether an arguable potential exists for a claim covered by the policy; 
if so, then the insurer must immediately step in and defend the suit.  At the same 
time, if the insurer believes that the policy itself provides a basis, i.e., an 
exclusion, for noncoverage, it may seek declaratory relief.   
Kootenai County, 113 Idaho 911, 750 P.2d at 90.  State Farm failed to seek declaratory relief 
when Kramsky demanded a defense of Deluna’s claim against him.  Its failure in this regard is 
highlighted by Allstate’s withdrawal from representing Kramsky only after it sought and 
obtained a declaratory ruling that its policy did not cover Deluna’s injuries.  State Farm would 
have been well advised to have done the same.    
C. 
This Court has held an insurer is not allowed to “guess wrong” when it determines the 
potential for coverage under a policy.  Id.  We are asked to state the repercussions that flow from 
a wrong guess.  Deluna contends State Farm’s failure to defend Kramsky automatically triggered 
its duty to indemnify him.  State Farm acknowledges it had a duty to indemnify for any sums 
Kramsky was legally obligated to pay as damages for bodily injury to Deluna, but only with 
respect to injuries she sustained within the “conduct of his business.”   
The duty to defend and duty to indemnify are separate, independent duties.  As the Court 
of Appeals stated in Hirst v. St. Paul Fire & Marine Ins. Co., 106 Idaho 792, 683 P.2d 440 (Ct. 
App. 1984), “It is . . . well established that the duty of an insurer to defend, for the protection of 
the insured, is a separate, unrelated and broader obligation than a duty to pay for damages under 
the insurance policy.”  Id. at 798, 683 P.2d at 946.  Hirst concluded the duty to indemnify is 
triggered only where an insurance company would be obligated to pay the underlying action 
regardless of how it fulfilled its duty to defend.  We agree.   
Deluna argues that an insurer, having breached its duty to defend, is not entitled to 
relitigate an underlying action following a settlement or judgment, citing the City of Idaho Falls 
case.  126 Idaho at 610, 888 P.2d at 389.  However, in Hirst, the Court of Appeals correctly 
stated:  “[W]here an insurance company has wrongfully refused to defend, it may nevertheless in 
a subsequent action on the policy attempt to show that the liability is not covered by the policy.”  
106 Idaho at 799, 683 P.2d at 447 (quoting Afcan v. Mutual Fire, Marine and Inland Ins. Co., 
595 P.2d 638, 647 (1979)).  In Afcan, the Alaska Supreme Court was considering a situation 
where liability was imposed by a settlement agreement involving claims that fell both within and 
outside of the policy.  The Court explained that an insurer would be liable up to policy limits if 
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the claims fell within policy coverage, but would not be liable if the claims were outside policy 
coverage.  Afcan, 895 P.2d at 647.  In this case, State Farm is not attempting to relitigate the 
judgment in Deluna v. Kramsky.  Instead, it attempts only to show that Deluna’s claims fell 
outside Kramsky’s business insurance policy and it is entitled to do so. 
In Deluna v. Kramsky, the district court found Kramsky liable for negligent transmission 
of herpes and negligent infliction of emotional distress.  The court found no credible evidence to 
support a finding of liability for intentional infliction of emotional distress, fraud, battery, or 
punitive damages.  The court acknowledged that the relationship between Deluna and Kramsky 
began at work, but concluded that Deluna’s injuries arose from the transmission of herpes—
which was not business-related.  Even if the sexual relationship was not entirely consensual on 
Deluna’s part, the transmission of herpes has no relation to the conduct of Kramsky’s insurance 
business.   
Hirst is instructive because the factual posture there was similar to the situation here.  In 
Hirst, parents executed a settlement in a suit against a doctor who sexually molested their son 
while treating him.  106 Idaho at 794, 683 P.2d at 442.  The parents then sued the doctor’s 
business insurance provider, who had refused to defend the doctor, in order to recover the 
amount of the settlement.  Id.  On summary judgment, the district court determined the insurance 
company had breached its duty to defend the suit against the doctor, but that it was not liable for 
the settlement because the actions alleged in the complaint were not covered by the terms of the 
policy.  Id.  On appeal, the Court of Appeals affirmed.  The court adopted the “Alaska Rule,” 
holding that an insurer is liable for the reasonable costs and attorney fees incurred by the insured 
in the defense and settlement of a claim that revealed “potential” liability.  Id. at 799, 683 P.2d at 
447 (quoting Afcan, 595 P.2d at 646).  The Court of Appeals declined to adopt the “Illinois 
Rule,” which holds that an insurer is estopped from denying coverage if it fails to defend a suit.  
Id.  The Illinois Rule results in an insurer garnering liability for the costs of defending a suit, the 
amount recovered from the insured by way of judgment or settlement, and any additional 
damages caused by the breach of duty to defend.  Id. (citing Solo Cup Co. v. Federal Ins. Co., 
619 F.2d 1178, 1184 (7th Cir. 1980)).  The Court of Appeals rejected the Illinois Rule because it 
viewed it as a punitive measure for breach of a contractual duty.  Hirst, 106 Idaho at 799, 683 
P.2d at 447.  The court indicated contractual remedies were more apposite for a breach of the 
duty to defend, holding the non-breaching party should be fully recompensed for the breach, but 
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the insurance company should not be punished.  Id.  We agree with the Court of Appeals’ 
holding.  The proper measure of damages for breach of a contractual duty, including an insurer’s 
duty to defend, is contract damages.  In a situation such as this, damages would include attorney 
fees and costs for defending the claim, together with any other damages shown to be a result of 
the breach.   
In this case, State Farm breached its duty to defend, entitling Deluna to recover 
Kramsky’s defense costs by virtue of the Agreement.  However, since Kramsky defended pro se, 
no attorney fees were recoverable. Curtis v. Campbell, 105 Idaho 705, 707, 672 P.2d 1035, 1037 
(1983).  Deluna did not plead or prove any other damages resulting from the breach.  We find no 
error in the ruling of the district court and we therefore affirm. 
D. 
Both parties requested attorney fees on appeal.  Deluna cites I.C. § 41-1839 and I.C. § 
12-120 as the bases for her request.  However, since she did not prevail on appeal she has no 
claim to fees.    
State Farm requested attorney fees under Idaho App. R. 41 and I.C. § 41-1839(4).  I.C. § 
41-1839(4) is the “exclusive remedy for the award of statutory attorney’s fees in all actions 
between insureds and insurers involving disputes arising under policies of insurance.”  The 
section also allows the Court to award attorney fees when it finds that a case was brought, 
pursued, or defended frivolously, unreasonably or without foundation.  Id.  However, this Court 
will not award attorney fees on appeal unless “all claims brought or all defenses asserted” meet 
the above criteria.  Slaathaug v. Allstate Ins. Co., 132 Idaho 705, 711, 979 P.2d 107, 113 (1999). 
This case presented a legitimate issue – the measure of damages available for a breach of the 
duty of an insurer to provide a defense to an insured – upon which this Court has not previously 
issued a definitive ruling.  Thus, State Farm is not entitled to attorney fees.   
III. 
We affirm the district court.  Costs are awarded to State Farm. 
 
 
Chief Justice EISMANN, and Justices BURDICK, W. JONES, Pro Tem KIDWELL 
CONCUR.