                    IN THE SUPREME COURT OF THE STATE OF IDAHO
                                   Docket No. 38623

EMPLOYERS MUTUAL CASUALTY                             )
COMPANY,                                              )
                                                      )
      Plaintiff-Appellant,                            )
                                                      )
v.                                                    )        Boise, December 2012 Term
                                                      )
DAVID DONNELLY and KATHY                              )        2013 Opinion No. 51
DONNELLY, husband and wife,                           )
                                                      )        Filed: April 19, 2013
      Defendants-Respondents,                         )
                                                      )        Stephen W. Kenyon, Clerk
and                                                   )
                                                      )
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.

         District court decision in declaratory judgment action, affirmed.

         Ringert Law, Chtd., Boise, for appellant. James G. Reid argued.

         Ellis, Brown & Sheils, Boise, for respondents. Allen B. Ellis argued.

                                    _______________________


BURDICK, Chief Justice
         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




                                                  1
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



                                                 2
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


                                                  3
       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


                                                  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. § 12-
   120(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. § 41-
   1839.
       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.
                                        IV. CONCLUSION
          We hold that the district court did not err when it determined that EMC is required to pay
costs and attorney fees taxed against RCI in the underlying action. We also hold that the district
court did not err when it determined that the awarded damages are excluded from coverage under
the applicable insurance policy. Further, we hold that the district court did not err when it
declined to award attorney fees to the Donnellys under I.C. § 12-120(3). Attorney fees are also
unavailable under I.C. § 41-1839 since the Donnellys are not entitled to any sums under the
policy.


          Justices J. JONES and HORTON CONCUR.


Justice EISMANN, specially concurring.
          I concur in the majority opinion, but write only to address arguments made by the dissent.


                                                  12
        “A contract must be interpreted according to the plain meaning of the words used if the
language is clear and unambiguous.” Hill v. American Family Mut. Ins. Co., 150 Idaho 619, 622,
249 P.3d 812, 815 (2011). “ ‘Unless contrary intent is shown, common, non-technical words are
given the meaning applied by laymen in daily usage—as opposed to the meaning derived from
legal usage—in order to effectuate the intent of the parties.’ ” Armstrong v. Farmers Ins. Co. of
Idaho, 147 Idaho 67, 69, 205 P.3d 1203, 1205 (2009). “[B]ecause insurance contracts are
adhesion contracts, typically not subject to negotiation between the parties, any ambiguity that
exists in the contract must be construed most strongly against the insurer.” Id. at 70, 205 P.3d at
1206.
        The insurance policy at issue states, “We will pay, with respect to any claim we
investigate or settle, or any ‘suit’ against an insured we defend: . . . [a]ll costs taxed against the
insured in the ‘suit’.” The plain language of the policy states that Employers Mutual Casualty
Company (EMC) will pay all costs taxed against its insured with respect to any suit against the
insured that EMC defends.
        The policy defines the word “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 dissent focuses on the words “to which this insurance applies” in
arguing that EMC was not contractually obligated to pay the costs assessed against Rimar
Construction, Inc. (RCI). According to the dissent, because the Donnellys did not recover any
damages covered by the policy, the underlying lawsuit was not a “suit” under the policy, and
therefore there were no costs taxed against RCI in a “suit.” In making that argument, the dissent
ignores the last two words of the sentence upon which it relies.
        As stated above, the entire sentence defines a “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.” (Emphasis added.) In its argument, the dissent
ignores the words “are alleged.” It is undisputed that covered damages were alleged in the
underlying lawsuit. As the dissent concedes, “Since damages for personal injury and injury to
the property surrounding the addition were clearly alleged in the complaint, there is no question
that EMC had a duty to defend this action.” Thus, under the clear, unambiguous wording of the
insurance policy, the underlying lawsuit was a “suit” under the policy definition, and because



                                                 13
EMC defended that suit, it is contractually obligated to pay all costs assessed against RCI, its
insured, in that suit.
        The dissent contends that the clear wording of the policy should not apply because “an
insured could not reasonably expect the insurer to pay costs awarded against the insured in a suit
in which there was no coverage for any of the claims.” According to the dissent, the insured
could not reasonably expect that the policy means exactly what it says. We long ago rejected the
doctrine of reasonable expectations. Casey v. Highlands Ins. Co., 100 Idaho 505, 509, 600 P.2d
1387, 1391 (1979). In doing so, we stated, “Intent is to be determined from the language of the
contract itself and ‘in the absence of ambiguity, contracts for insurance must be construed as any
other and understood in their plain, ordinary and proper sense, according to the meaning derived
from the plain wording of the contract.’ ” Id. (footnotes omitted). Whatever the insured could or
could not reasonably have expected cannot alter the clear wording of the policy.
        The dissent also argues that when covered and uncovered claims are alleged in the civil
proceeding, the insurer is “squarely between a rock and a hard place.” According to the dissent,
        On the one hand, if it denied coverage while the complaint continued to allege
        potentially covered damages, if it were eventually determined there were such
        damages, EMC would subject itself to claims of breach of contract, bad faith, and
        punitive damages. By continuing with the defense, however, it ended up
        subjecting itself to claims for costs and attorney’s fees by reason of the
        supplemental payments provision of its insurance policy, or so at least the
        majority holds. [Citation omitted.]

If EMC does not want to be obligated to pay all costs assessed against its insured in lawsuits that
EMC defends, then it simply has to change the wording of its policy. It is certainly free to draft a
policy that provides it will pay all costs taxed against the insured in a suit that EMC defends only
if the insured is found legally obligated to pay damages to which the insurance applies. It could
also have limited its obligation to the payment of costs assessed against its insured on causes of
action or theories of liability upon which its insured is found legally obligated to pay damages to
which the insurance applies. It is not up to us to rewrite EMC’s policy to say what it now wishes
it would have said.




                                                14
W. JONES, dissenting:

       I respectfully dissent from the majority Opinion. It is my opinion that there is no
coverage under the commercial general liability policy issued by Employers Mutual Casualty
Company (“EMC”) to Rimar Construction, Inc. (“RCI”) for the costs and attorney’s fees
awarded to the Donnellys against RCI in the underlying action, David and Kathy Donnelly v
Rimar Construction, Inc., case number CV 2006-0445.
       With respect to the coverage issue regarding costs and attorney’s fees in the underlying
action, the case is complicated by the fact that this was a “mixed action.” See Prichard v.
Liberty Mut. Ins. Co., 101 Cal. Rptr. 2d 298, 300 (Cal. Ct. App. 2000) (Defining a “mixed
action” as one where “the suit against the policyholder includes at least one claim that was
potentially covered and therefore triggered the duty to defend.”). There is no dispute between
the parties that there is no coverage for damages arising from contract claims. The complaint in
the underlying action also alleged negligence, seeking damages for personal injury and injury to
property not the subject of the contract for remodel of portions of the Donnellys’ home. There is
no dispute that damages resulting from personal injury or property damage to property outside
the area of construction would be covered under the policy issued by EMC. Because the
underlying suit included two claims that were potentially covered as well as some that were not,
it was a “mixed action.”
       “An insurer’s ‘duty to defend arises upon the filing of a complaint whose allegations, in
whole or in part, read broadly, reveal a potential for liability that would be covered by the
insured’s policy.’ ” Cnty. of Boise v. Idaho Counties Risk Mgmt. Program, Underwriters, 151
Idaho 901, 904, 265 P.3d 514, 517 (2011) (quoting Hoyle v. Utica Mut. Ins. Co., 137 Idaho 367,
371–72, 48 P.3d 1256, 1260–61 (2002)). It is well-settled law that the duty to defend under a
CGL policy is broader than the duty to indemnify.         Idaho Counties Risk Mgmt. Program
Underwriters v. Northland Ins. Cos., 147 Idaho 84, 88, 205 P.3d 1220, 1224 (2009). In a mixed
action, an insurer has no contractual duty to defend those specific claims that are not even
potentially covered. See Aerojet-Gen. Corp. v. Transp. Indem. Co., 948 P.2d 909, 921 (Cal.
1997). However, the insurer does have a duty imposed by law to defend the entire action, so as
not to interfere with its defense of claims that may be covered. See id.; Tibert v. Nodak Mut. Ins.
Co., 816 N.W.2d 31, 42 (N.D. 2012); Evanston Ins. Co. v. Legacy of Life, Inc., 370 S.W.3d 377,
380 (Tex. 2012); Maxwell v. Hartford Union High Sch. Dist., 262, 814 N.W.2d 484, 496 (Wis.

                                                15
2012); Shoshone First Bank v. Pac. Emp’rs Ins. Co., 2 P.3d 510, 514 (Wyo. 2000). In the
present case, therefore, if damages were recovered by the Donnellys for personal injury or
property damage that was not merely economic loss, EMC had a duty to defend RCI from all
causes of action raised in the complaint. Since damages for personal injury and injury to the
property surrounding the addition were clearly alleged in the complaint, there is no question that
EMC had a duty to defend this action.
       An insurer’s duty to defend a mixed action ceases at the point where all of the potentially
covered claims have been dismissed from the case. See Aetna Cas. & Sur. Co. v. Mut. of
Enumclaw Ins. Co., 121 Idaho 603, 607, 826 P.2d 1315, 1319 (1992) (Defense duty “continues
until such time as the insurer can show that the claim against the insured cannot be said to fall
within the policy’s scope of coverage.”); Baron Oil Co. v. Nationwide Mut. Fire Ins. Co., 470
So. 2d 810, 815 (Fla. Dist. Ct. App. 1985); Soc’y Ins. v. Bodart, 819 N.W.2d 298, 302 (Wis. Ct.
App. 2012). Until such time, however, EMC had a duty to defend this case. EMC not only
discharged this duty, but also prudently filed a declaratory judgment action to resolve its
coverage dispute with RCI. See Hoyle v. Utica Mut. Ins. Co., 137 Idaho 367, 371, 48 P.3d 1256,
1260 (2002). This action was assigned its own number and is completely independent from the
underlying action, case number CV 2006-0445. This declaratory action, however, was assigned
to the same judge, the Honorable Steve Verby, as the underlying action. Judge Verby stayed
further proceedings in this action over the objection of EMC pending the resolution of the
underlying construction-defect dispute, likely because it was not known at that point whether the
Donnellys would be able to prove their allegations of personal injury or damage to property
surrounding the addition.    EMC was trying to seek an early determination regarding the
uncovered claims so that it could cease any further defense in the underling action. Having been
denied that opportunity, EMC was thus placed between a rock and a hard place. On the one
hand, if it denied coverage while the complaint continued to allege potentially covered damages,
if it were eventually determined there were such damages, EMC would subject itself to claims of
breach of contract, bad faith, and punitive damages. See generally Myers v. Workmen's Auto Ins.
Co., 140 Idaho 495, 511, 95 P.3d 977, 993 (2004). By continuing with the defense, however, it
ended up subjecting itself to claims for costs and attorney’s fees by reason of the supplemental
payments provision of its insurance policy, or so at least the majority holds.         Under the



                                               16
circumstances of this particular case, including the insurance policy itself, I disagree with the
conclusion of the majority.
         I think the proper analysis in this case is to determine whether EMC’s defense of the case
was pursuant to its “duty” under the policy and the law and whether any “covered claims” were
determined in favor of the Donnellys. Once there was a final determination that Donnellys failed
to recover on any “covered claims,” the duty to defend ceased, as did any claim by RCI for
indemnity, either for damages or for costs and fees awarded against RCI.                              The eventual
determination that there were no covered damages necessarily means that there never were any
covered claims. This fact was merely not determined until the end of the underlying action.
That the district court was not able to make a ruling in this action until the jury in the underlying
action determined that there were no covered claims should not create coverage that would not
otherwise exist for attorney’s fees and costs.
         Most importantly, the policy itself establishes that there is no coverage for costs and
attorney’s fees in cases in which no covered damages are awarded against the insured. The
policy provides three coverages: Coverage A for bodily injury and property damage, Coverage B
for personal and advertising injury, and Coverage C for medical payments. Those are the only
“coverages” provided by the policy.                There is, however, a provision for “supplementary
payments” to Coverages A and B. That provision states:
         we will pay, with respect to any clam we investigate 1 or settle, or any ‘suit’
         against an insured we defend;
         (a)     All expenses we incur [and]
         ....
         (e)     All costs taxed against the insured in the “suit.”

         The term “suit” is a defined term. It is defined as “a civil proceeding in which damages
because of ‘bodily injury,’ ‘property damage’ or ‘personal advertising injury’ to which this
insurance applies are alleged.” (Emphasis added.) It is important to note it does not say a suit is
a civil proceeding in which damage from bodily injury or property damage is alleged, but only
damages from bodily injury or property damage to which this insurance applies is alleged. It is
beyond question that the insurance did not apply to this suit because there were no damages
awarded that were covered under Coverages A, B, or C to which the insurance applied. It is


1
 Apparently the majority would hold that if an insurer merely “investigates” a case, and then decides correctly to
deny any defense or coverage, it would still have to pay costs and fees taxed against its insured in any later suit.

                                                          17
incomprehensible how “supplementary payments” to Coverages A and B could apply when there
is no coverage under Coverages A or B. Black’s Law Dictionary defines “supplemental” as “that
which is added to a thing . . . to complete it.” What can be “added” to a coverage that does not
exist?
         The district court and the majority rely on Mutual of Enumclaw v. Harvey, 115 Idaho
1009, 772 P.2d 216 (1989), which is readily distinguishable. The Harvey policy did not contain
language in a “supplementary payments” section providing the company would pay “all costs
taxed against the insured in any suit defended by the company.”              Instead, it provided
“supplementary coverage” for costs taxed against the insured. Id. at 1012, 772 P.2d at 219
(emphasis added). Here, there was no “coverage,” supplemental or otherwise, for costs taxed
against the insured, but only a supplementary payment in the event that there was coverage under
Coverages A or B, which there was not. Additionally, the policy in Harvey did not contain the
language contained in the EMC policy defining a “suit” as a civil proceeding “in which damages
to which this insurance applies are alleged.” Both of those distinguishing factors make Harvey
irrelevant to the decision in the present case.
         This case would be more properly decided under State Farm General Insurance Co. v.
Mintarsih, 95 Cal. Rptr. 3d 845 (Cal. Ct. App. 2009). That case was also a mixed-coverage case
in which State Farm defended, as EMC did here, under a Reservation of Rights. In the present
case, EMC clearly issued a Reservation of Rights letter to its insured, RCI, stating that although
it would defend the case under its duty-to-defend obligation, it reserved all claims for indemnity,
which obviously would also include indemnity for any costs and attorney’s fees, until the
coverage issues were sorted out. RCI never objected to that Reservation of Rights and indeed
hired its own counsel to appear on its own behalf and in its own defense of the Donnellys’
lawsuit. There is no evidence that EMC even controlled the defense in the underlying action
because RCI’s independent counsel fully participated.         Such joint defense is clearly an
acquiescence to the Reservation of Rights letter issued by EMC. Like the EMC policy in the
present case, the State Farm policy in Mintarsih provided that it would pay costs on suits in
which the company defended the insured. Id. at 849. The court, however, concluded that the
obligation to pay a cost award could arise only if the insurer had a “duty” to defend the insured.
See id. at 854. The court held that an insured could not reasonably expect the insurer to pay
costs awarded against the insured in a suit in which there was no coverage for any of the claims.

                                                  18
See id. at 854–56. This conclusion makes good sense. If, every time an insurer defended under a
reservation of rights and was later found not to have a duty to defend, the insurer was
nonetheless obliged to pay costs taxed against the insured, then insurers would be skittish in
providing a defense whenever coverage was in doubt.
       It 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. To
hold otherwise unjustifiably places EMC squarely between a rock and a hard place. Under the
majority’s opinion, an insurer is forced either to refuse to defend its insured, even when the duty
to defend is obvious (thereby subjecting itself to potential bad faith claims for punitive damages
and breach of contract) or to surrender its rights under its policy by agreeing to defend a claim
ultimately determined not to be covered by the policy (which, under the majority’s reasoning,
would subject it to costs and fees taxed against the insured). This whole problem relates back to
the inability to resolve the declaratory action early on, because the question of coverage rested on
disputed factual issues that were determined only upon the conclusion of the trial in the
underlying action. EMC’s only reasonable alternative was to issue its Reservation of Rights
letter, thereby preserving the issue of coverage until it could be determined, which it later was,
that there was no coverage since the Donnellys failed to prevail on a covered claim.




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