Insureds’ counsel may think twice before filing that next appeal in Idaho. In a recent case before the Idaho Supreme Court, an insurer not only prevailed on its denial of the duty to defend, but it also received an award of its attorney’s fees after the insured’s unsuccessful appeal. The case is Linford v. State Farm Fire & Cas. Co., No. 39059-2011, 2012 WL 6620643 (Dec. 20, 2012 Idaho).
The Linfords made a property damage claim on their homeowner’s policy after their home was damaged by fire. State Farm adjusted the loss and paid the Linfords the estimated cost of repairs. The Linfords then entered into a contract with a contractor to repair the home for the amount of the State Farm estimate. They also entered into a separate contract to have the contractor remodel the undamaged part of their house.
Later, a dispute arose between the Linfords and their contractor over the cost of repairs and remodeling. The contractor sued the Linfords for breach of contract, and the Linfords sued State Farm. The Linfords contended the liability coverage provision in their homeowner’s policy required State Farm to defend the lawsuit brought by the contractor and State Farm was required to indemnify against any recovery by the contractor. The Linfords’ lawsuit included claims for breach of the covenant of good faith and fair dealing and the tort of insurance bad faith. The litigation produced three important lessons.
First, a written agreement with the insured to resolve the amount of loss under Coverage A is enforceable and can protect the insurer against subsequent breach of contract claims—even where the insured’s contractor subsequently charges more than the appraised amount for the repairs. State Farm and the Linfords agreed to an appraisal pursuant to the terms of the State Farm policy. Because State Farm paid the amount of the appraisal, there was no breach of contract. The Court then affirmed the grant of summary judgment against the bad faith claims: “Although the tort of bad faith is not a breach of contract claim, to find that the insurer committed bad faith there must also have been a duty under the contract that was breached.” Finding no breach under the contract, the Court upheld the dismissal of the bad faith claims.
Next, the insurer had no duty to defend the insureds in a lawsuit brought by a contractor who claimed it was not paid for all that was owed for repair of covered fire damage and for non-covered remodeling of the undamaged part of the home. The Linfords contended the contractor’s lawsuit for payment of repair and remodeling costs was brought against them “because of…property damage” covered by the insurance. The Linfords’ argument failed to convince the Idaho courts. The duty to defend only arises under the liability coverage section of the policy when a third party alleges it suffered “bodily injury or property damage to which this coverage applies, caused by an occurrence… .” The duty to defend does not arise when the third party files suit against the policyholder for breach of contract.
Finally, insureds’ counsel should be mindful of the potential consequences of pursuing bad faith claims simply because they disagree with the coverage decision. In the Linford case, the Idaho Supreme Court awarded State Farm its attorney’s fees on appeal because it found the case “was brought frivolously and without foundation.”