MEMORANDUM OF DECISION AND ORDER
STEPHEN M. McNAMEE, Senior District Judge.
In this insurance coverage dispute, Plaintiff Chartis Property Casualty Co. ("Chartis") alleges that Defendants Robert and Hillary Alpert ("the Alperts") are not entitled to coverage under two insurance policies that Chartis issued to the Alperts. Chartis initiated this declaratory judgment action asking that the Court resolve the coverage dispute. (Doc. 1.) In response, the Alperts counterclaimed, alleging breach of contract and insurance bad faith, and requesting attorney's fees and other damages. (Doc. 12.) Pending before the Court is Chartis' motion for summary judgment and the Alperts' cross-motion for partial summary judgment. (Docs. 36, 45.) The matters are fully briefed-the parties having responded, replied and filed supporting and controverting statement of facts. (Docs. 37, 45, 46, 58, 59, 60, 69.) Also pending is Chartis' motion to strike the declaration of an undisclosed witness (Doc. 61), which is also fully briefed. (Docs. 68, 70.) As set forth below, the Court will grant Chartis' motion for summary judgment and deny the Alperts' motion for partial summary judgment. The Court will deny Chartis' motion to strike the declaration of an undisclosed witness.
The Alperts are the insureds on a homeowner's policy (Doc. 37-2 at 2-46) and a personal excess liability policy (Doc. 37-3 at 2-31) (referred to as the "Policies"). In 2008-09, Defendant Robert Alpert worked as a consultant for Eye Level Holdings, LLC ("ELH") f/k/a Cylon through his company Danro Corporation. (Doc. 37-6 at 2-3; Docs. 35, 64.) ELH provides (among other things) premium text messaging services for wireless phones. (Doc. 37-4 at 7.) ELH assigned Alpert to work with other companies related to ELH's business, including Verizon Wireless. (Doc. 64.)
After Alpert had ceased his consulting work for ELH, Verizon Wireless sued ELH based, in part, on allegedly disparaging statements about ELH made by Alpert to Verizon Wireless and others. See Cellco Partnership d/b/a Verizon Wireless v. Jason Hope, et al., No. CV 11-432-PHX-DGC. In the Cellco case, Alpert was deposed and questioned about information he provided to Verizon about ELH, and his deposition transcript was treated as confidential. In this case, the Court granted Defendants' motion to seal Alpert's deposition due to the presence of confidential business information. (Doc. 64.) The parties in the Cellco litigation settled their dispute. (Cellco, No. CV 11-432-PHX-DGC, Doc. 294.)
Subsequently, on March 30, 2011, ELH sued the Alperts, two other individuals, and two companies owned by Robert Alpert. (Doc. 37-4; Doc. 46 at 3.) On April 7, 2011, the Alperts tendered the ELH lawsuit to Chartis and requested that Chartis defend and indemnify them. (Doc. 46-2 at 2.) Chartis then began their investigation regarding whether the Alperts were entitled to coverage under the policies. (Doc. 46-30.) The Alperts also tendered the ELH Complaint to their business insurance carrier based on policies that were issued to the two companies owned by the Alperts that were named in the lawsuit, Copia Mobile and AZ Digital Farm. (Doc. 37-5 at 7-11.) On May 16, 2011, the Alperts settled the claims for all defendants with ELH for $900, 000, and subsequently requested that the insurers reimburse the settlement amount the Alperts agreed to pay ELH. (Doc. 37-5 at 17-46.) The business carrier settled and paid $300, 000 to the Alperts. (Doc. 37-5 at 7-11.) Based on the homeowners policies in effect, Chartis refused to defend or indemnify the Alperts. (Doc. 46-30.)
The ELH Complaint/Alpert's Tender
The underlying lawsuit against the Alperts, Eye Level Holdings, LLC d/b/a Jawa, f/k/a Cylon v. Copia Mobile, LLC, AZ Digital Farm, LLC, Robert and Hillary Alpert, Michael and Jane Doe Chadwick, Chris and Jane Doe Yeagy, Case No. CV-2011-051139, Maricopa County Superior Court, was filed on March 30, 2011. (Doc. 37-4 at 2-25.) Two of the defendants, AZ Digital Farm, LLC and Copia Mobile, LLC are Alpert's companies either directly or indirectly through other companies he controls. (Doc. 46 at 3.) The ELH Complaint asserted nine counts against the Alperts and others: (1) Tortious Interference with Contract; (2) Breach of Contract: Breach of Confidentiality Provision; (3) Breach of Contract: Non-Solicitation, Non-Interference, and Non-Disparagement Provisions; (4) Breach of Contract: Non-Competition Provision; (5) Breach of Fiduciary Duty; (6) Inducing Breach of Fiduciary Duty; (7) Common Law Misappropriation of Trade Secrets; (8) Statutory Misappropriation of Trade Secrets; and (9) Conspiracy. (Doc. 46 at 3.) Of these, only Counts 1, 2, 6, 7, 8, and 9 were claims aimed at the Alpert defendants; the remainder of the claims were asserted against others. (Doc. 46 at 3.)
The Complaint alleged that Alpert and the other defendants tortiously interfered with ELH's business and employment relationships and that a conspiracy existed among the defendants to compete unfairly with ELH. (Doc. 37-4.) The Complaint alleged that in September 2008, ELH began employing Defendant Robert Alpert as a consultant. (Doc. 37-4 at 8.) The Complaint alleged that Alpert signed a Confidentiality and Non-Disclosure Agreement when he began work. (Doc. 37-6 at 2-3.) This agreement allowed both parties to share confidential information in connection with possible business relationships. (Doc. 37-6 at 2-3.)
While consulting for ELH, the Complaint alleged that Alpert founded two companies that competed with ELH, Copia Mobile and AZ Digital Farm. (Doc. 37-4 at 8.) The Complaint alleged that per Alpert's recommendation, ELH hired Michael Chadwick as its Chief Operations Officer. (Doc. 37-4 at 8-9.) Shortly thereafter, Chadwick ended his employment relationship with ELH and allegedly began to work for Copia Mobile. (Doc. 37-4 at 11-13.) The Complaint alleged that both Alpert and Chadwick began to solicit employees from ELH. (Doc. 37-4 at 10-13.)
The Complaint alleged that ELH sent a cease and desist letter to Chadwick and Alpert regarding solicitation of ELH employees. (Doc. 37-4 at 13.) After receiving the letter, Alpert entered into a joint defense agreement with Chadwick which allowed them to share information. (Doc. 64.) During this information sharing process, Alpert testified that he first became aware of information-protected by attorney-client privilege-which indicated to him that ELH was engaged in consumer fraud. (Doc. 64.) Chadwick allegedly responded to the cease and desist letter through counsel with his own allegations in a 7-page letter about the manner in which ELH conducted its business, which is referred to in the Complaint as "Chadwick's Extortion Letter." (Doc. 37-4 at 13.)
The Complaint further alleged: "[ELH] later learned that Chadwick's vile attack on its business practices was more than just fodder for his lawyer's letter, as it provided the bases for false and disparaging allegations that Alpert made to Verizon Wireless and the Texas Attorneys General, in an effort to derail, if not destroy, [ELH]'s business." (Doc. 37-4 at 13.) The Complaint further alleged that in January/February 2011, "[h]aving gained connections at Verizon Wireless while consulting for [ELH], Alpert, with [Michael] Chadwick's help, provided Verizon Wireless and the Texas Attorney General with alleged false information, resulting in Verizon and the Texas AG filing separate ill-founded lawsuits against [ELH], on the same day, March 7, 2011." (Doc. 37-4 at 4.) The Complaint further alleged that Alpert was attempting to compete with ELH through Alpert's businesses by hiring away ELH's employees and disseminating information harmful to ELH to third parties in order to gain a competitive advantage. (Doc. 37-4 at 13-18, 22-25.)
Because the Complaint alleged that Alpert engaged in false and disparaging comments about ELH to Verizon, Alpert tendered the matter to Chartis asking them for defense and indemnification as the policies provide for defense of suits where the insured is being sued for defamation, libel or slander. (See, e.g., Doc. 37-2 at 9-10.)
Business Pursuits Exclusion
The homeowner's policy and the excess policy issued by Chartis to the Alperts provides for comprehensive personal liability coverage. Chartis agreed to pay all sums which the Alperts became legally obligated to pay as damages because of "personal injury or property damage caused by an occurrence covered by the policy anywhere in the world, unless stated otherwise or an exclusion applies. " (Doc. 37-2 at 17, emphasis added.) Chartis also agreed to defend any suit against the insured alleging such bodily injury or property damage and seeking damages which are payable under the terms of the policies. (Doc. 37-2 at 17.) A claim for personal injury includes "defamation, libel or slander." (Doc. 37-2 at 9-10.) However, the policies did not apply to any business pursuits of an insured. (Doc. 37-2 at 18-19; Doc. 37-3 at 17-18.)
In the homeowner's policy, the "business pursuits" exclusion issued by Chartis states as follows:
This policy does not provide coverage for liability, defense costs or any other cost or expenses for:
11. Business Pursuits
Personal injury or property damage arising out of an insured person's business property or business pursuits, investment activity or any activity intended to realize a profit for either an insured person or others. However, this exclusion does not apply to:
a. Volunteer work for an organized charitable, religious or community group;
b. Incidental business activity; or
c. Limited Residence Premises Business Liability Coverage.
The term "business" is defined to mean, "a part-time or full-time trade, occupation or profession, including farming or ranching, ...