Unpublished Disposition, 907 F.2d 155 (9th Cir. 1990)

MEMORANDUM^* 

This is an action by an insured against the insurer for damages arising out of the refusal of the insurer to defend the insured in a significant lawsuit. After an initial partial grant of summary judgment in favor of the insurer, St. Paul, on the issue of punitive damages, this action was tried to a jury which rendered a verdict in favor of the insured, Shunn, awarding it the full amount of attorney's fees ($100,000) it incurred in defending the underlying litigation and awarding extensive consequential damages for a total of $1,145,000 based upon the jury's finding that the refusal to defend was in bad faith. A magistrate, pursuant to the parties' consent, was vested with authority under 28 U.S.C. § 636(c) to order the entry of judgment in the district court. He granted St. Paul's motion for judgment notwithstanding the verdict as to all of the consequential damages and as to a portion of the attorney's fees.

The magistrate set aside the jury's verdict because he held St. Paul's duty to defend Shunn ended at the point in the underlying litigation when the plaintiff ("Central Orchard School District" or "COSD") filed an itemization of damages that failed to include any item representing damages for personal injuries, the only type of damages for which Shunn was insured. The magistrate also held that any consequential damages suffered by Shunn were not causally attributable to the breach by St. Paul of its duty to defend because they occurred after Shunn received the damage itemization. In the event he was reversed on this causation ruling, the magistrate ordered a new trial on the question of whether St. Paul's actions rose to the level of bad faith. Finally, the magistrate denied Shunn pre-judgment interest, and denied joint and several liability against St. Paul and a codefendant, CWA. We affirm in part, reverse in part, and remand.

Duty to Defend

The first issue is whether St. Paul is correct in contending in its cross-appeal that the magistrate erred in denying St. Paul's motion for summary judgment and JNOV based upon St. Paul's contention that it never had a duty to defend.

The relevant portion of the St. Paul insurance policy provided:

I. Coverage A--Bodily Injury Liability for Periods

The Company will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of:

Coverage A.--Bodily Injury.... to which this insurance applies, caused by an occurrence, and the Company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury ..., even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient, but the Company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the Company's liability has been exhausted by payment of judgments or settlements.

The complaint in the underlying litigation read:

P. Installation of pipe ... has been subject to rock protrusions and indentations, [and] has caused pipe breakage, leaks and substantial health hazards or has and will in the future cause the same.

Additionally, section XX of the complaint alleged in part that the defects in the sewer system "constitute general health hazards to COSD and its members."

The jury found that St. Paul had a duty to defend Shunn in the underlying litigation, and its breach of the duty caused St. Paul $100,000 in attorney's fees.

Under Idaho law,

the duty to defend arises upon the filing of a complaint whose allegation in whole or in part, read broadly, reveal a potential liability that would be covered by the insured's policy.

Kootenai County v. Western Casualty and Surety, 750 P.2d 87, 89 (Idaho 1988) (emphasis in original). Read broadly, the "health hazards" alleged in the complaint do reveal a potential for there being an actual occurrence of bodily injury. Thus the magistrate was correct in rejecting St. Paul's motions.

Termination of the Duty to Defend

While the magistrate held that St. Paul had an initial duty to defend Shunn, he held that a damage itemization submitted by the underlying plaintiff (COSD), which failed to reflect a claim for bodily injury damages, was sufficient proof on the part of St. Paul that there was no longer the potential for a claim of bodily injury damages arising from Shunn's construction. This finding limited the amount of attorney's fees recoverable by Shunn to those incurred before its receipt of the damage itemization. It also rejected Shunn's claim for St. Paul's bad faith denial of coverage because the consequential damages resulting from the denial occurred after delivery of the itemization.

Under Idaho law, the insurer must defend if there is even an "arguable potential" for a claim covered by the policy, Kootenai, 750 P.2d at 89-90, and this duty to defend continues "until such time that [the insurer can] prove that the claim against the insured was outside the policy's scope of coverage." Id. (emphasis added). St. Paul does not claim that this pre-trial itemization would have prevented COSD from proving bodily injury damages at trial. The plaintiff's pretrial damages itemization was not proof that no bodily injury damages would be shown at trial, and therefore St. Paul did not prove the duty to defend had ended. The jury in this case was justified in finding St. Paul liable for all of the costs incurred by Shunn in defending the litigation, and in finding sufficient causation to support Shunn's tortious bad faith damages against St. Paul.

Consequential Damages

The jury's award of consequential damages also depends upon its finding that St. Paul's refusal to defend was in bad faith. The evidence of communications between St. Paul and Shunn during the relevant period, as well as an internal memo of St. Paul demonstrating that St. Paul was aware of the possibility of claims being asserted for bodily injury, support this conclusion. The communications also showed that St. Paul was well aware of the broad duty imposed by Idaho law upon insurers to defend claims where the potential for liability exists.

The magistrate denied the motion for JNOV on this point, correctly noting that on the basis of the internal memo alone, the jury could have reached its conclusion that there was bad faith. The magistrate, nevertheless, ordered a new trial in the event this appeal reversed his ruling of JNOV on causation because the magistrate felt that it was "fairly debatable" whether St. Paul had a duty to defend Shunn, and a reasonable insurer would have been justified in not immediately defending Shunn. The magistrate noted in particular that " [t]he fact that Judge Legge found no bodily injury in the [underlying] litigation speaks loudly in defense of St. Paul's refusal to defend Shunn. It demonstrates that St. Paul's understanding of COSD's claims were correct. Thus, it was fairly debatable whether St. Paul had a duty to defend Shunn."

A stringent standard applies when a motion for new trial is based on insufficiency of the evidence. See Venegas v. Wagner, 831 F.2d 1514, 1519 (9th Cir. 1987). In order to uphold the magistrate's order of a new trial, the jury's finding of bad faith on the part of St. Paul must have been against the "great weight" of the evidence. Id. The fact that no bodily injury was actually found in the underlying action does not answer the question of the broader scope of St. Paul's duty to defend. There was no question that the insurer refused to defend a claim for damages arising out of claimed deficiencies including leaks in a sewer system necessary to maintain the health of a community. The claim was clearly broad enough to cover damages within the scope of coverage and St. Paul had little basis for its initial refusal to defend. We reverse the magistrate's order of a new trial.

Punitive Damages

The magistrate did not err in granting partial summary judgment in favor of St. Paul on the issue of punitive damages. Under Idaho law, punitive damages are awarded "only in the most unusual and compelling circumstances, ... [and] will be sustained on appeal only when it is shown that the defendant acted in a manner that was an extreme deviation from reasonable standards of conduct, and that the act was performed by the defendant with an understanding of or disregard for its likely consequences." Cheney v. Palos Verdos Inv. Corp., 104 Idaho 897, 665 P.2d 661, 668-669 (Idaho 1983). No such showing was made.

Prejudgment Interest

Idaho law allows prejudgment interest where an amount is capable of ascertainment by mere mathematical process. See Farm Dev. Corp. v. Hernandez, 93 Idaho 918, 478 P.2d 298 (1970). Because attorney's fees are capable of determination by mathematical processes, see id. ("The sum due is sufficiently definite if it ... can be determined from established market prices."), and because the fact that the amount was disputed or unlitigated is irrelevant, Ace Realty, Inc. v. Anderson, 106 Idaho 742, 682 P.2d 1289, 1298 (1984), the magistrate erred in denying Shunn's motion for prejudgment interest on the stipulated amount of its attorney's fees.

Joint and Several Liability

The magistrate denied Shunn's motion to alter or amend judgment so as to render both St. Paul and CNA, another of Shunn's insurers, jointly and severally liable. Both St. Paul and CNA were tried in the same action under theories of contract and tort liability and the jury found against St. Paul in the amount of $1,145,000 and against CNA in the amount of $1,145,000. Shunn failed to request joint and several liability from the defendants until post-trial, and has failed to demonstrate that the two defendants concurrently caused it an indivisible injury. See Tucker v. Union Oil Co. of California, 603 P.2d 156, 166 (1979) (acts of defendants must concurrently cause an indivisible injury). For this reason, the magistrate did not err in denying Shunn its request for joint and several liability against St. Paul.

We have reviewed the other allegations of discovery and evidentiary errors and find them to be without merit. Shunn seeks attorney's fees for this appeal pursuant to section 41-1839 of the Idaho Code. This section does not apply where all that is proved is a breach of a duty to defend. Hirst v. St. Paul Fire & Marine Ins. Co., 106 Idaho 792, 683 P.2d 440 (Idaho App.1984), Shunn's application for attorney's fees on appeal is denied.

CONCLUSION

We affirm the magistrate's denial of St. Paul's motions for summary judgment and JNOV, his grant of partial summary judgment to St. Paul on the issue of punitive damages, his denial of joint and several liability and his evidentiary and discovery rulings. We reverse the ruling that St. Paul's duty to defend ended when Shunn received a damage itemization from COSD and order the jury's award of damages against St. Paul reinstated. We also reverse the magistrate's order of a new trial on the issue of bad faith, and his denial of Shunn's motion for pre-judgment interest. The effect of these rulings is to reinstate the jury verdict in full--both the consequential damages and all the attorney's fees. We deny Sunn's application for attorney's fees on appeal.

AFFIRMED in part, REVERSED in part, and REMANDED.