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In a very strange (and I believe wrongly decided case), the Supreme Court of Idaho held that where a contractor was defended by its commercial general liability (CGL) carrier, and was found liable for breach of an implied warranty of workmanship in performing the work promised under its contract, the carrier was required to cover the attorney’s fees awarded to the homeowner against the contractor despite the fact that none of the underlying compensable damages were themselves covered by the policy.  The reason there was no coverage for the defective workmanship, according to the court, was that no tort allegations were made, and there was no bodily injury or property damage.  But how the court concluded that the plaintiff’s attorney’s fees that were awarded against the contractor are covered by insurance is worth reading.

Plaintiff’s attorney’s fees were treated by the court as if they were costs incurred to defend the contractor against the suit. After explaining the difference in a duty to defend the insured and a duty to indemnify for damages awarded against an insured, the court concluded that the attorney’s fees were covered under the supplementary payments provision of the policy which provide:

“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.’”

Having reached the correct result on the question of whether there was coverage under the policy for the damages awarded to the homeowner for defective workmanship because there was no accident resulting in bodily injury or property damage, the court proceeded to misinterpret the contractual liability exclusion in the policy as being the basis for its decision.    The court concluded that, under a CGL policy, BI and PD damages are “generally covered under the insurance policy unless the injury is expected, intended, or unless liability results from contract”Employers Mutual Casualty Company v. Donnelly and Rimar Construction, 300 P.3d 31 (Idaho 2013).

In explaining its reasoning with regard to the attorneys fees, the court stated:

Under the plain language of the contract, [contractor’s] policy states that damages only need to be ‘alleged’ to trigger coverage, they do not need to be proven.  Since [the homeowners] clearly alleged damages that implicate the applicable provisions of the policy [carrier] is obligated to pay ‘[a]ll costs taxed against the insured in the ‘suit.’ ”

As applied by the court, the policy wording that reads “all costs taxed against the insured” means a carrier must pay not only the attorneys fees incurred in defending the insured contractor, but also the attorneys fees that a jury awards to the plaintiff against the contractor.  The key is what is the meaning of “taxed against?”

 

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 15, No. 8 (Aug 2013).

Copyright 2013, ConstructionRisk, LLC