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Vol. 2, Iss. 23
December 18, 2013


Idaho Supreme Court: No Covered Damages – But Coverage Still Owed For Plaintiffs’ Attorney Fees
Employers Mutual Casualty Co. v. Donnelly, No. 38623 (Idaho April 19, 2013)


Employers Mutual Casualty Co. v. Donnelly is a paradigm top 10 coverage case. It involves an issue that comes up with some regularity, there is a dearth of case law nationally addressing it and the decision shedding light on it is from a state supreme court.

Donnelly is on the lengthy side and involves several issues, but the one subject of discussion here is this. In almost all litigation here, Alaska aside, the losing party is not obligated to pay the prevailing party’s attorney’s fees. This is often referred to as the “American Rule.” But there are some common exceptions, most notably when a contract or statute allows the prevailing party to recover its attorney’s fees.

Consider this situation. An insured is found obligated to pay compensatory damages to a plaintiff and it is also determined that the insured violated a consumer protection statute that allows for the prevailing party to recover its costs and attorney’s fees. Or there is some other mechanism that allows for the prevailing party to recover its attorney’s fees. Now assume that the damages awarded are themselves not covered. This is not a far-fetched situation. After all, for there to have been a determination that a consumer protection statute was violated, the insured’s actions may have been of a nature that are uninsurable. Likewise, prevailing party attorney’s fees may be recoverable in a breach of contract action, but damages of such nature may not be covered.

Query: If the compensatory damages awarded against the insured are not covered, are the associated attorney’s fees, incurred by the plaintiff, to recover such damages, also not covered? This was the question before the Idaho Supreme Court in Donnelly. The Idaho high court concluded that, even if the damages were not covered, the corresponding prevailing party attorney’s fees were.

[The case does not involve a different issue concerning prevailing party attorney’s fees – whether they are covered in the first place, and, if so, whether such coverage is found in the supplementary payments section (and excess of limits) or insuring agreement (and within limits). This is a whole other issue involving prevailing party attorney’s fees.]

At issue was coverage for a construction defect suit (what else). A jury concluded that a construction company breached its implied warranty of workmanship to a homeowner and awarded $126,000. The jury also concluded that the construction company violated two provisions of the Idaho Consumer Protection Act and awarded $2,000. The homeowners were also entitled to recover their costs and attorney’s fees of $297,000.

For various reasons, no coverage was owed for the damages awarded to the homeowners for breach of warranty. Nonetheless, the Idaho Supreme Court held that coverage was owed for the costs and attorney’s fees award of nearly $300,000.

The commercial general liability policy at issue contained a “Supplementary Payments” provision that provided, in pertinent part, as follows: “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 defined “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 trial court held that the insurer was obligated to provide coverage for the attorney’s fees, despite the absence of coverage for the construction defect damages: “[T]he 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.”

The Idaho Supreme Court affirmed, focusing on the fact that the policy defined “suit” as needing to only allege “property damage.” The court stated: “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.’” Of note, ISO’s CG 00 01 form (including the 2013 version) likewise defines “suit” as a civil proceeding in which damages to which the insurance applies are “alleged.”

A dissenting opinion was filed. While more complex than just this, the dissenting justice focused on a different aspect of the definition of “suit.” While “suit” is a civil proceeding in which damages are alleged, such damages must also be ones “to which the insurance applies.”

The dissenting justice’s conclusion was that “[i]t has clearly been determined that Donnellys recovered no damages covered by any provision of the EMC policy. Since it is clear under the policy that there is no ‘coverage’ for any damages awarded against the insured, there can clearly be no ‘supplementary payments’ for costs and fees when it is established there is no coverage for damages awarded in the lawsuit.”

 
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