The Linfords entered into a contract with a contractor to repair the house, and also made a separate contract to remodel the undamaged part of the house. After several months, the contractor filed a lawsuit against the Linfords contending that it substantially completed the construction and that it was owed $91,357.82 for both the fire damage and the remodel. The Linfords filed a lawsuit against State Farm alleging that it had failed to fully pay for the repairs and that State Farm had a duty to defend them against the contractor's action.

The district court ruled in favor of State Farm and this appeal followed.

The Supreme Court of Idaho noted that for there to be a duty to defend, the complaint's allegations must allege a claim to which the duty to defend applies under the terms of the insurance policy. The insureds argued that the homeowners policy dealing with loss settlement for damage to the house provided that "when the repair or replacement is actually completed, we (the insurer) will pay the covered additional amount you (the insured) actually and necessarily spend to repair or replace the damaged part of the property". This clause, said the insured, meant that any expenses they incurred in defending against the contractor's lawsuit obliged State Farm to pay. The Supreme Court dismissed the insureds' contention.

The insureds also claimed that the policy's personal liability insuring agreement included an obligation to provide a defense for a covered claim or lawsuit against the insureds. The Linfords said that the contractor's lawsuit was brought against them because of property damage covered by the insurance. They argued that but for the fire, they would not have engaged the contractor to repair the damage, and but for State Farm failing to pay the sum claimed by the contractor for repairing the fire damage, the contractor would not have sued the Linfords. The Linfords state that the contractor's lawsuit was therefore brought because of physical damage to the house and State Farm thus had a duty to defend. The Supreme Court dismissed this contention also.

The court said that the duty to defend applies to a lawsuit against an insured for damages to which the coverage applied, and there was an exclusion in the liability section of the policy for property damage to property owned by any insured. Therefore, even assuming that the contractor's lawsuit could be construed as having been brought against the Linfords because of property damage to the home, the personal liability section of the policy does not provide coverage for property damage to the insureds' house. The contractor's lawsuit was not one to recover for damages because of property damage, it was filed to recover for the Linfords' alleged breach of the contracts between them and the contractor. There was no claim that the insureds damaged any property of the contractor.

The Linfords also argued that the appraisal called for in the homeowners policy did not cover the entire amount that State Farm was obligated to pay. They argued that the appraisal was to determine the amount of loss only until the repairs were completed and that once they were completed, the insurance policy required State Farm to pay any additional amount that the insureds actually spent to repair the house. The court found no merit in this argument.

The court said that determination of the amount of loss did not have to await the outcome of the contractor's lawsuit. The policy did not provide that State Farm was required to pay according to the terms of the contract negotiated between the Linfords and the contractor, nor did it require State Farm to pay whatever damages the contractor recovered against the Linfords. The total amount that State Farm was required to pay under the insurance policy had been determined between the Linfords and State Farm. If the contractor recovered a greater amount that that from the Linfords, State Farm would not have been required to pay it under the terms of the policy.

The Supreme Court affirmed the judgment of the district court. It held that the insurer did not have to defend the insured against the contractor because the contractor's lawsuit was not due to property damage caused by the insured. The court also held that, after paying the appraised loss amount, the insurer was not required to pay the amount of actual cost to repair.

Editor's Note: The Supreme Court of Idaho clarified at least two items in this ruling.

First, in order for the insurer to have a duty to defend, the insurance policy must provide that the insurer has a duty to defend against the type of claim alleged against the insured. In this instance, the claim against the insureds was not based on bodily injury or property damage caused by the insureds; it was based on the insureds' alleged breach of contract.

Second, the homeowners policy specified the amount that the insurer had to pay for the fire loss; it did not require the insurer to pay according to the terms of the contract between the insureds and the contractor.