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Employers Mutual Casualty Company v. David Donnelly and Kathy Donnelly

April 19, 2013

EMPLOYERS MUTUAL CASUALTY COMPANY, PLAINTIFF-APPELLANT,
v.
DAVID DONNELLY AND KATHY DONNELLY, HUSBAND AND WIFE,
DEFENDANTS-RESPONDENTS,
RIMAR CONSTRUCTION, INC., AN IDAHO CORPORATION; IVAN RIMAR, AN INDIVIDUAL
DEFENDANTS.



Appeal from the District Court of the First Judicial District, State of Idaho, Bonner County. Hon. Steven C. Verby, District Judge.

The opinion of the court was delivered by: Burdick, Chief Justice

2013 Opinion No. 51

Stephen W. Kenyon, Clerk and

District court decision in declaratory judgment action, affirmed.

This case arises out of a decision from the Bonner County district court in a case between Employers Mutual Casualty Company (EMC), David and Kathy Donnelly (Donnellys), and Rimar Construction, Inc. (RCI). In 2007, EMC brought a declaratory judgment action against the Donnellys and RCI to establish that under its policy of insurance with RCI, EMC had no duty or responsibility to pay damages claimed by the Donnellys in litigation between the Donnellys and RCI. The declaratory judgment action was stayed until a verdict was reached in the underlying action. In the underlying action, the Donnellys were awarded $128,611.55 in damages and $296,933.89 in costs and attorney fees against RCI.

Subsequently the district court entered summary judgment in the declaratory action, finding that there was no insurance coverage for the damages the Donnellys incurred, but that there was coverage for costs and attorney fees awarded in the underlying action. On appeal, EMC argues that the district court erred in its determination that it had a duty to pay attorney fees and costs when there were no damages awarded to the plaintiff subject to the policy coverage. The Donnellys cross appeal, arguing the district court erred in its conclusion that EMC did not have a duty to cover the damages in this case, and that the Donnellys are entitled to attorney fees under I.C. § 41-1839. We affirm the decision of the district court.

I. FACTUAL AND PROCEDURAL BACKGROUND

This case arises out of a dispute between the Donnellys and RCI regarding a construction contract. After a fire, David and Kathy Donnelly engaged RCI to do repairs and further remodeling on the Donnellys' family home in May of 2005. On March 7, 2006, the Donnellys brought an action (Underlying Action) against RCI alleging, among other things, negligent and intentionally faulty workmanship, breach of contract, and breach of warranties. An Amended Verified Complaint was filed on July 31, 2007. The Donnellys alleged substantial damages to property, physical injury, and loss of use. At all applicable times, RCI was covered under a Commercial General Liability Policy (Insurance Policy) issued by EMC on September 14, 2004.

On May 24, 2007, EMC filed a declaratory judgment action against the Donnellys and RCI to establish that under the Insurance Policy, EMC had no duty or responsibility to pay any damages claimed or awarded to Donnelly in the underlying action. RCI made a counterclaim against EMC alleging bad faith and a breach of contract, and the Donnellys initially made a simple denial of EMC's claim. On December 12, 2007, the district court entered an order staying the Declaratory Action until the Underlying Action between the Donnellys and RCI was concluded.

A jury trial on the Underlying Action commenced on June 23, 2008. In a special verdict rendered on July 9, 2008, the jury found that RCI breached the implied warranty of workmanship with the Donnellys resulting in $126,611.55 in damages. The jury also found that RCI violated two provisions of the Idaho Consumer Protection Act (ICPA) entitling the Donnellys to $2,000 in damages under I.C. § 48-603. An amended judgment was entered on March 20, 2009, consistent with the special jury verdict.

After the Underlying Action concluded, a settlement agreement was reached between EMC and RCI regarding the declaratory action and the underlying litigation on August 17, 2009. Under the settlement agreement, RCI dropped its counterclaims in the Declaratory Action and agreed not to contest EMC in the Declaratory Action.

EMC and the Donnellys filed for summary judgment in the Declaratory Action. The district court initially denied the cross-motions for summary judgment in an order issued on April 7, 2010. In its denial, the district court held that both parties failed to meet their burden of persuasion when all inferences were resolved in favor of the adverse party. The district court also believed there to be a question of fact as to whether the damages awarded to the Donnellys in the Underlying Action were property damage or contract-based claims. EMC and the Donnellys then filed cross-motions for reconsideration of the summary judgment decision.

In its November 5, 2010 Order re: Motions for Reconsideration (Order), the district court ruled that as contract-based damages there was no insurance coverage for the underlying $128,611.55 in compensatory damages the Donnellys incurred, but there was coverage for the award of $296,933.89 in costs and attorney fees. A Judgment was filed pursuant to the Order on February 23, 2011.

Subsequent to the Judgment, the Donnellys moved for attorney fees in the Declaratory Action. EMC filed its own Motion to Disallow Costs and Fees on March 17, 2011. On May 20, 2011, the district court granted EMC's motion and denied the Donnellys' request for attorney fees incurred in the Declaratory Action. In the order, the district court held that the Donnellys are not entitled to attorney fees under I.C. § 41-1839 because the Donnellys are not an insured of EMC, nor are they entitled to fees under I.C. § 12-120(3) because the Donnellys have no commercial relationship with EMC.

On March 2, 2011, EMC timely appealed the district court's decision regarding the award of attorney fees from the underlying litigation. The Donnellys timely filed a cross-appeal regarding EMC's liability for the damages award and attorney fees in this matter.

II. ISSUES ON APPEAL

1. Whether the district court erred in determining that EMC had a duty to pay attorney fees and court costs taxed against its insured in a suit brought by the policy claimant for which defense was provided by the insurer, but where no part of the damages awarded to the policy claimant were subject to policy coverage?

2. Whether the district court erred in determining that EMC had no duty to indemnify with respect to the damages awarded to the Donnellys.

3. Whether the district court erred in not awarding attorney fees to the Donnellys under I.C. § 12-120(3).

4. Whether the district court erred in not awarding attorney fees to the Donnellys under I.C. § 41-1839.

5. Whether the Donnellys are entitled to attorney fees on appeal pursuant to I.C. § 41-1839.

III. ANALYSIS

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

(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 ...


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