Opinion ID: 880087
Heading Depth: 1
Heading Rank: 3

Heading: analysis

Text: A. The district court did not err in determining that EMC had a duty to pay attorney fees and court costs taxed against its insured even though no part of the damages awarded to the policy claimant were subject to policy coverage. In its November 5, 2010 Order re: Motions for Reconsideration, the district court determined that EMC was required to pay the attorney fees and court costs taxed against RCI in the underlying litigation. In its Order, the district court held that the insurance policy: plainly states that with respect to any suit pursued against an insured which it defends, EMC will pay all costs taxed against that insured. The language appears to be unambiguous, and thus, it must be given its plain meaning. EMC has never set forth any specific language in its policy that ties its promise to pay costs on a finding that there is coverage. Because EMC defended its insured, RCI, in the underlying litigation, EMC is responsible to the Donnellys for the $296,933.89 in fees and costs taxed against RCI in that lawsuit, as well as any interest on that judgment which has accrued. Additionally, the district court held that any ambiguity in this provision of the policy contract should be construed strongly against EMC and in favor of the Donnellys. The district court’s conclusions were based on its interpretations of the jury verdict. In its analysis, the district court found that the jury awarded damages to the Donnellys based on several factors including: (1) The basic issue litigated by the parties was whether the construction was completed in a workmanlike manner; (2) The Donnellys proved that RCI failed to adequately perform the work it contracted to perform; (3) The agreement between the Donnellys and RCI was a commercial transaction; (4) Costs and fees were awarded because the gravamen of the action and the resulting verdict was based on a contract based commercial transaction; and 4 (5) The jury did not return a verdict in favor of the Donnellys on a tort based legal theory. On appeal, EMC argues that the plain language of the applicable policy indicates that EMC had no duty to pay costs and fees with respect to non-covered claims. In response, the Donnellys argue that this Court’s opinion in Mutual of Enumclaw v. Harvey, 115 Idaho 1009, 772 P.2d 216 (1989), found that costs can be imposed upon the insurer even if the damages are not covered by an applicable insurance policy. Language in the policy of this case does not indicate that payment of costs is conditioned upon a final determination that the policy covers the insured’s conduct. The language of the policy says that the Company will pay all costs taxed against the insured in any suit defended by the Company. Beyond what appears to be the clear term of the policy, it is arguable that since the Company has the right to control the defense, including the power to refuse settlement, it should also bear the consequences of its case management decisions, including the consequence that the trial court may tax the opponent's costs against the insured. Harvey, 115 Idaho at 1012, 772 P.2d at 219. The policy in Harvey states that the insurer will pay “all expenses incurred by Company and all costs taxed against the insured in any suit defended by Company.” Id. In this case, the insurance policy contains a provision for supplementary payments: 1. We will pay, with respect to any claim we investigate or settle, or any ‘suit’ against an insured we defend: a. All expenses we incur. ... e. All costs taxed against the insured in the ‘suit’. The policy defines “suit” as “a civil proceeding in which damages because of ‘bodily injury’, ‘property damage’ or ‘personal and advertising injury’ to which this insurance applies are alleged.” The question of whether this suit involves applicable injury can be answered by an analysis of a September 7, 2007 reservation of rights letter from EMC to RCI. In the letter EMC states that bodily injury and loss of use were alleged by the Donnellys, “[t]herefore EMC will be providing a defense.” The letter expressly reserves “EMC’s rights to deny or restrict coverage according to the terms of the policy with EMC.” The letter also stated that: There is no coverage for allegation of construction defects and/or contract breach alleged in the complaint because they do not involve property damage. 5 Moreover, Exclusions a. and m. and Endorsement 2280 apply to bar coverage for intentional injury, damage to your work, loss of use expense caused by delay and damage caused by professional engineering or architectural work respectively. However, because there is a potential for coverage of bodily injury caused by carbon monoxide EMC is providing a defense. This Court has previously dealt with the effect of a reservation of rights on an insurer’s obligation to pay costs in Harvey: Mutual of Enumclaw also argues that undertaking Oakes’ defense with a reservation of rights exonerates it from having to pay costs. The court rejects this contention. It is generally recognized that coverage defenses may be properly preserved by a reservation of rights agreement. “Preservation” implies the continuation, the saving of something that existed. It is not a destruction of the insured’s rights nor a creation of new rights for the Company. It preserves that to which the parties had originally agreed. Mutual of Enumclaw, in Section II, Supplementary Coverages 2.a. agreed to pay “all costs taxed against the insured in any suit defended by the Company.” The fact the company reserved its contractual rights before undertaking the defense in no way dissipates its obligation to pay such costs. 115 Idaho 1009, 1013, 772 P.2d 216, 220 (1989) (internal citations and quotations omitted). Also, this Court held in Harvey that attorney fees are an element of costs in this context. “The plain, ordinary and popular meaning of ‘costs’ is the expense of litigation which includes attorney fees.” Id. Here, there is a key distinction from the Harvey case. In Harvey, the duty to pay emanated from the supplemental coverages. In this case, EMC’s obligations emanate from the duty to defend as provided in the supplementary payments section of the policy. Although EMC’s obligation arises from a different source, the outcome is the same as in Harvey. Under the plain language of the contract, RCI’s policy states that damages only need to be “alleged” to trigger coverage, they do not need to be proven. Since the Donnellys clearly alleged damages that implicate the applicable provisions of the policy, EMC is obligated to pay “[a]ll costs taxed against the insured in the ‘suit.’” Therefore, we hold that the district court correctly concluded that EMC is obligated to pay the $296,933.89 in costs and attorney fees awarded against RCI in the underlying action. B. The district court did not err in determining that EMC had no duty under the policy contract to indemnify RCI with respect to the damages awarded to the Donnellys. In the Amended Judgment, the district court interpreted the special jury verdict to conclude that RCI breached its implied warranty of workmanship with the Donnellys, but that 6 there were no damages for negligence. In its Order regarding the motions for reconsideration, the district court held that the damages awarded for breach of an implied warranty sounded in contract, meaning that EMC has no obligation to pay the award under its policy with RCI. In so holding, the district court determined that: EMC’s Commercial General Liability insurance policy does not act as a performance bond; and it does not provide for payment of damages resulting from a breach of contract. In fact, such damages are excluded from coverage. Because no award was made by the jury for any tort cause of action that was pled and submitted, and because the breach of implied warranty of workmanship as presented in the underlying case was a contract related breach, EMC has no obligation to pay the compensatory damages in the amount of $126,611.55 previously awarded to the Donnellys. The district court also held that the $2,000 award for violation of the Idaho Consumer Protection Act, I.C. § 48-603, was not covered for two reasons. First, the damages are statutory in nature and not associated with the loss of use of property or with physical injury to tangible property. And second, to prevail under the act, the Donnellys had to establish that RCI knowingly engaged in conduct prohibited by the act. For RCI to knowingly engage in prohibited conduct RCI would have to reasonably expect damages to occur from the conduct, so the district court found the policy contract’s Expected or Intended Injury Exclusion to bar coverage. On cross-appeal, the Donnellys argue on appeal that the jury award should be covered under the policy contract because EMC breached its duty to RCI to implement an allocated verdict and because the jury found that there were no contract damages; leaving only tort as the nature of the damages. In response, EMC argues that the district court correctly determined that the policy contract does not cover the damages the jury awarded. 1. RCI’s policy with EMC with regard to damages. On September 14, 2004, EMC and RCI entered into an agreement of insurance known as a Commercial General Liability Policy. The policy provides coverage for property damage and bodily injury: “We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” The policy only applies to bodily injury or property damage if: (1) The ‘bodily injury’ or ‘property damage’ is caused by an ‘occurrence’ that takes place in the ‘coverage territory’; (2) The ‘bodily injury’ or ‘property damage’ occurs during the policy period. The policy defines bodily injury as “bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.” Property damage is defined as: 7 a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the ‘occurrence’ that caused it. The insurance policy also contains several pertinent exclusions. The expected or intended injury exclusion of the policy states: This insurance does not apply to: ... ‘Bodily injury’ or ‘property damage’ expected or intended from the standpoint of the insured. This exclusion does not apply to ‘bodily injury’ resulting from the use of reasonable force to protect persons or property. The policy also contains an exclusion for contractual liability: This insurance does not apply to: ... ‘Bodily injury’ or ‘property damage’ for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages: (1) That the insured would have in the absence of the contract or agreement . . . . For purposes of this action, a plain reading of the policy shows that “bodily injury” or “property damage” are generally covered under the insurance policy unless the injury is expected, intended, or unless liability results from contract. 2. The nature of the damages awarded to the Donnellys. On the nature of the damages, the district court concluded that “the jury found there was a breach of contract, but awarded no damages for that specific cause of action. The jury verdict of $126,611.55 was based solely on the legal theory of breach of the implied warranty of workmanship.” EMC argues that the damages awarded to the Donnellys are excluded from coverage because the damages were the result of a contract, not tortious conduct. EMC argues that the instructions provided to the jury help demonstrate that the implied breach of workmanship is contract-based. In particular, Jury Instruction No. 47, which states that “[t]he Donnellys’ allege that [RCI] breached implied warranties by failing to perform the agreed upon construction in a workmanlike manner,” and instruction No. 50 which states that “[i]n a construction contract, there is an implied warranty that the work is to be completed in a workmanlike manner.” 8 The Donnellys argue that the jury found no contract damages, leaving only tort as the basis for liability. Further, the Donnellys argue that EMC breached its duty to RCI by not requesting an allocated verdict. Additionally, the Donnellys argue in their reply brief that the award for breach of implied warranty of workmanship is covered under the policy contract since the policy covers “physical injury to tangible property” and their amended complaint alleged damage to the integrity of their original home. In its analysis, the district court held that a breach of the implied warranty of workmanship sounds in contract, not tort. In so concluding, the district court relied upon this Court’s holding in Sumpter v. Holland Realty, Inc. 140 Idaho 349, 93 P.3d 680 (2004). In Sumpter, this Court in turn examined its holding in Taylor v. Herbold, which stated: The law governing the ability to obtain remedies for breach of contract, as well as tortious behavior, is confusing, with few, if any, court decisions on the subject. Ordinarily, a breach of contract is not a tort. A contract may, however, create a state of things that furnishes the occasion for a tort. 38 Am.Jur. 662, Negligence § 20. If the relation of the plaintiff and the defendants is such that a duty to take due care arises therefrom irrespective of contract and the defendant is negligent, then the action is one of tort. To found an action in tort, there must be a breach of duty apart from the nonperformance of a contract. 52 Am.Jur. 379, Torts, § 26. 140 Idaho at 353, 93 P.3d at 684 (quoting Taylor v. Herbold, 94 Idaho 133, 138, 483 P.2d 664, 669 (1971)). Expanding on this point, Sumpter stated that: It can also be said that if a cause of action for breach of a duty based on a contractual promise could also be maintained without the contract by virtue of a statutory or common law duty, then the action is founded upon tort, not contract. Id. at 354, 93 P.3d at 684. The key determination for whether an implied warranty of workmanship––and therefore the insurance policy—covers the damages is whether the duty is based upon a contractual promise or if the duty can be maintained without the contract. In the special verdict, the jury found: there was a contract involving the remodeling project between RCI and the Donnellys; RCI did not substantially perform under the contract; a breach of contract caused damage to the Donnellys; and that RCI breached “the implied warranty of workmanship with regard to the manner in which it constructed the Donnelly remodel project.” Based on the jury’s verdict, the breach of implied warranty of workmanship occurred with regard to RCI’s performance under the remodeling contract with the Donnellys. There is no duty beyond the contractual promise between RCI and the Donnellys. Since the insurance policy contains an express exclusion for 9 contractual damages, we hold that the district court correctly found the awarded damages to be outside the scope of the insurance policy. 3. Whether the absence of an allocated verdict obligates EMC to pay the awarded damages. Alternatively, the Donnellys allege that there is a duty imposed upon EMC to request an allocated verdict. By failing to allocate a verdict, the Donnellys argue that EMC breached its duty to the insured, and that this Court should direct the district court to enter a judgment of coverage. In response, EMC argues that the special verdict rendered by the jury, as opposed to a general verdict, constitutes an allocated verdict. a. Whether the underlying verdict was an allocated verdict. Here, the Donnellys argue that the special verdict could not be an allocated verdict because it did not address, among other things, tort damages against RCI. More specifically, the Donnellys argue that by failing to request an allocated verdict, EMC imposed an impossible burden on the Donnellys to determine the proportion of damages that are covered under the insurance policy. Black’s Law Dictionary defines “special verdict” as one in which “the jury makes findings only on factual issues submitted to them by the judge, who then decides the legal effect of the verdict.” Black’s Law Dictionary 1697 (9th ed. 2009). In contrast, an unallocated verdict is one that fails to pinpoint or delineate the extent of each party’s liability for every claim. See Duke v. Hoch, 468 F.2d 973, 975–76 (5th Cir. 1972). Although the verdict was not allocated, the district court was able to determine from the special verdict the allocation of damages or responsibility for the payment of the damages awarded by the jury. As noted above, the district court correctly—and with no apparent difficulty—identified the jury-awarded damages of $126,611.55 as contractual in nature and the two $1,000 awards for violations of the Idaho consumer protection statutes. Additionally, to the extent that EMC has any duty to ensure an allocated verdict, that duty is to the insured, and not the injured party. See id. at 979. C. The district court did not err in denying attorney fees to the Donnellys under I.C. § 12120(3). In its Order disallowing costs and fees, the district court held that the Donnellys were not entitled to attorney fees under I.C. § 12-120(3) in the declaratory action. In so holding, the district court concluded that there was no commercial relationship directly between the Donnellys and EMC. 10 Idaho Code section 12-120(3) states that: In any civil action to recover on an open account, account stated, note, bill, negotiable instrument, guaranty, or contract relating to the purchase or sale of goods, wares, merchandise, or services and in any commercial transaction unless otherwise provided by law, the prevailing party shall be allowed a reasonable attorney’s fee to be set by the court, to be taxed and collected as costs. It is clear from the facts that there is no direct commercial relationship between EMC and the Donnellys. Therefore, we hold that the Donnellys are not entitled to attorney fees under I.C. § 12-120(3). D. The district court did not err in denying attorney fees to the Donnellys under I.C. § 411839. In its Order disallowing costs and fees, the district court held that I.C. § 41-1839 is not applicable to this case. According to the district court, the statute is inapplicable because the Donnellys are not an insured under EMC’s insurance policy with RCI. Additionally, the district court held that even if the statute was applicable, the requirements of the statute were not met because the Donnellys provided no evidence that proof of loss has been furnished as provided in the policy. On appeal, the Donnellys argue that the district court erred in holding that they are not entitled to attorney fees under I.C. § 41-1839. More specifically, the Donnellys argue that they “were the ‘person[s] entitled to the amount justly due’ under the policy and EMC denied liability, thereby waiving the requirement of proof of loss.” In response, EMC argues that the Donnellys are not entitled to attorney fees because they were not an insured of EMC. Additionally, EMC argues in the alternative that the Donnellys failed to show evidence for a submission of a proof of loss as required under I.C. § 41-1839. Idaho Code section 41-1839 states in pertinent part: (1) Any insurer issuing any policy, certificate or contract of insurance, surety, guaranty or indemnity of any kind or nature whatsoever, which shall fail for a period of thirty (30) days after proof of loss has been furnished as provided in such policy, certificate or contract, to pay to the person entitled thereto the amount justly due under such policy, certificate or contract, shall in any action thereafter brought against the insurer in any court in this state or in any arbitration for recovery under the terms of the policy, certificate or contract, pay such further amount as the court shall adjudge reasonable as attorney’s fees in such action or arbitration. ... (4) Notwithstanding any other provision of statute to the contrary, this section and section 12-123, Idaho Code, shall provide the exclusive remedy for the award 11 of statutory attorney’s fees in all actions or arbitrations between insureds and insurers involving disputes arising under policies of insurance. Provided, attorney’s fees may be awarded by the court when it finds, from the facts presented to it that a case was brought, pursued or defended frivolously, unreasonably or without foundation. Section 12-120, Idaho Code, shall not apply to any actions or arbitrations between insureds and insurers involving disputes arising under any policy of insurance. (emphasis added). The dispositive issue on the availability of I.C. § 41-1839 to the Donnellys is whether they are the party entitled to an amount justly due under the policy. It is made clear in Part III.A above that EMC’s duty to defend RCI obligates it to pay for the attorney fees taxed against RCI in the Underlying Action. “[T]he defense duty is a covenant in the policy that runs only to the insured.” San Diego Hous. Comm’n v. Indus. Indem. Co., 116 Cal. Rptr. 2d 103, 120 (2002). In this case, the policy language “[w]e will pay, with respect to . . . any ‘suit’ against an insured we defend . . . all costs taxed against the insured in the ‘suit’” applies to EMC’s obligation to RCI, not to the Donnellys in their capacity as a judgment creditor. So, although the Donnellys are owed attorney fees, they are not—in the absence of an assignment from RCI—owed attorney fees directly from EMC. Therefore, they are not the party entitled to an amount justly due in the context of I.C. § 41-1839. We hold that the Donnellys are not entitled to attorney fees under I.C. § 41-1839.