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Nelson v. Navigator Insurance Co.

United States District Court, Ninth Circuit

September 20, 2013

Ryan Nelson, Plaintiff/Counterdefendant,
Navigator Insurance Company, et al., Defendants/Counterclaimants.


STEPHEN M. McNAMEE, Senior District Judge.

Before the Court are Defendants' Motion for Partial Summary Judgment on Breach of Contract (Doc. 36), and Plaintiff's Motion for Rule 56(d) Relief (Doc. 51). The motions are fully briefed. (Doc. 39, 41, 50, 51, 52.) After considering the parties' briefing and oral argument before the Court, the Court will grant Defendants' motion for partial summary judgment, and deny Planitiff's motion for Rule 56(d) relief.


Plaintiff Ryan Nelson brings this action against Defendants Navigator Insurance Company ("Navigator") and NIC Insurance Company ("NIC"), alleging breach of contract and breach of the covenant of good faith and fair dealing. (Doc. 13.)

Plaintiff was an employee of Ikon Steel, L.L.C. ("Ikon"), a company owned by Timothy and Leanne Kirby. (Doc. 40 at 1.) Ikon, located in Apache Junction, Arizona, is a steel-fabrication factory which manufactures steel for installation in commercial buildings. (Doc. 37 at 2.) On September 23, 2006, Plaintiff was severely injured at work, when a chain and pulley assembly that was being used to transport a steel I-beam broke, causing the beam to fall on and crush his legs. ( Id. at 4.)

Plaintiff alleges that at the request of persons investigating the accident, Ikon, acting through its employees, agreed to and then undertook to preserve the chain and pulley assembly so that it could later be examined for defects that may have caused its failure. (Id.) When investigators later sought to obtain the assembly from Ikon however, they discovered that Ikon employees had negligently disposed of the assembly. (Id.)

Plaintiff subsequently filed suit against Ikon and Timothy Kirby on September 23, 2008, in the Pinal County Superior Court of Arizona ("the underlying suit"). (Doc. 40 ¶ 24.) In the underlying suit, Plaintiff alleged two counts: (1) "Tortious Interference; Obstruction of or Interference with Legal Remedies; Negligent Spoliation"; and (2) "Intentional Interference with Legal Remedies and Intentional Spoliation." (Doc. 1-1 at 14-18.)

Timothy Kirby and Ikon tendered defense of the underlying suit to Defendants on February 11, 2009. (Doc. 40 ¶ 25.) Ikon was insured by Defendants in the form of two policies: a commercial general liability ("CGL") policy issued by NIC, and a commercial excess liability policy issued by Navigators. (Doc. 37, ¶¶ 23, 27.)

The CGL policy provided that NIC "will pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury' or property damage' to which this insurance applies." ( Id. ¶ 29.) The CGL policy defined "bodily injury" as "bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time, " and defined "property damage" as "[p]hysical injury to tangible property, " or "[l]oss of use of tangible property that is not physically injured." ( Id. ¶¶ 31-32.)

The CGL policy also contained the following three relevant exclusions. "Exclusion E" precluded coverage for: "Bodily injury' to: (1) An employee' of the insured arising out of and in the course of: (a) Employment by the insured; or (b) Performing duties related to the conduct of the insured's business." ( Id. ¶ 34.) "Exclusion I" precluded coverage for "bodily injury" or "property damage" "expected or intended from the standpoint of the insured." ( Id. ¶ 36.) "Exclusion J" precluded coverage for: "Property damage' to: (1) Property you own...; (4) Personal property in the care, custody or control of the insured." ( Id. ¶ 35.)

Defendants refused Ikon's tender of defense of the underlying suit and instead disclaimed coverage under the CGL policy on February 13, 2009. (Doc. 40 ¶ 26.) Defendants further refused the tender and disclaimed coverage under the excess liability policy on March 4, 2009. ( Id. ¶ 27.) Defendants disclaimed coverage on the grounds that the underlying suit did not assert a claim for damages because of "bodily injury" or "property damage." (Doc. 1-5 at 67.)

In their letter refusing tender, NIC stated that Plaintiff's alleged injury in the underlying suit was to intangible property (Plaintiff's lost potential claim against the chain manufacturer) rather than tangible property, and thus was not covered under the property damage clause's "loss of use" term in the policy. ( Id. at 68.) Furthermore, NIC stated that there was no coverage under the "property damage" clause, because exclusion "j" precluded coverage for property owned by the insured, or property under the care, custody, or control of the insured. (Id.) NIC further stated that no coverage existed for Ikon against Plaintiff's claim for intentional spoliation, because exclusion "I" precluded coverage for intentional acts. (Id.)

Ikon proceeded with the underlying suit without Defendants' participation in its defense. Ikon subsequently moved to dismiss the underlying suit for failure to state a claim upon which relief could be granted. (Doc. 37 ¶ 54.) On July 3, 2009, prior to oral argument on the motion to dismiss, Plaintiff's attorney provided Ikon with a draft Damron agreement. ( Id. ¶ 55.) Oral argument on the motion to dismiss was stayed, and on December 14, 2009, the Damron agreement was signed. ( Id. ¶¶ 56, 58.) The Damron agreement contained a covenant not to execute the judgment against Ikon and Kirby; in exchange for the covenant, Ikon and Kirby agreed to withdraw their motion to dismiss. ( Id. ¶ 59.)

The underlying suit proceeded to a default judgment hearing on July 26, 2010. ( Id. ¶ 60.) In attendance at the hearing were Plaintiff and two of Plaintiff's attorneys, one serving as a "valuations expert witness." (Id.) Following the hearing, the Court entered default judgment in the amount of $4.2 million, which judgment was subsequently entered on November 1, 2011. ( Id. ¶¶ 61, 62.)

Plaintiff thereupon brought this action pursuant to the Damron agreement obtained in the underlying suit, asserting that Defendants breached their insurance contracts with Ikon by failing to defend the underlying suit, and acted in bad faith in denying coverage for the underlying suit. (Doc. 13.) Defendants answered the Complaint with two counterclaims, for declaratory judgment that the CGL Policy and Excess Policy did not provide coverage for the underlying complaint, and declaratory judgment that the $4.2 million stipulated judgment is invalid and unenforceable. (Doc. 1-4 at 27.) Now, Defendants bring this motion for partial summary judgment against Plaintiff's claim for breach of contract, and partial summary judgment in favor of Defendants' claims for declaratory judgment, arguing that the stipulated judgment below is unenforceable, and that Plaintiff's claim for breach of contract fails as a matter law. (Doc. 36.)


I. Partial Summary Judgment

A court must grant summary judgment if the pleadings and supporting documents, viewed in the light most favorable to the nonmoving party, "show[] that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a); see Celotex Corp. v. Catrett , 477 U.S. 317, 322-23 (1986); Jesinger v. Nev. Fed. Credit Union , 24 F.3d 1127, 1130 (9th Cir. 1994). Substantive law determines which facts are material. See Anderson v. Liberty Lobby , 477 U.S. 242, 248 (1986); see also Jesinger , 24 F.3d at 1130. "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson , 477 U.S. at 248. The dispute must also be genuine, that is, the evidence must be "such that a reasonable jury could return a verdict for the nonmoving party." Id .; see Jesinger , 24 F.3d at 1130.

A principal purpose of summary judgment is "to isolate and dispose of factually unsupported claims." Celotex , 477 U.S. at 323-24. Summary judgment is appropriate against a party who "fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Id. at 322; see also Citadel Holding Corp. v. Roven , 26 F.3d 960, 964 (9th Cir. 1994). The moving party need not disprove matters on which the opponent has the burden of proof at trial. See Celotex , 477 U.S. at 323-24. The party opposing summary judgment need not produce evidence "in a form that would be admissible at trial in order to avoid summary judgment." Id. at 324. However, the nonmovant must set out specific facts showing a genuine dispute for trial. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp. , 475 U.S. 574, 585-88 (1986); Brinson v. Linda Rose Joint Venture , 53 F.3d 1044, 1049 (9th Cir. 1995).

II. Breach of Contract

Because jurisdiction here is based on diversity of citizenship, the Court applies the substantive law of Arizona to resolve the insurance coverage issues. See Erie v. Tompkins , 304 U.S. 64, 78 (1938). In an action for breach of contract, the plaintiff has the burden of proving "the existence of a contract, breach of the contract, and resulting damages." Chartone, Inc. v. Bernini , 207 Ariz. 162, 170, 83 P.3d 1103, 1112 (App. 2004) (citing Thunderbird Metallurgical, Inc. v. Ariz. Testing Lab. , 5 Ariz.App. 48, 423 P.2d 124 (1976)).

Provisions of insurance contracts should be construed according to their plain and ordinary meaning. National Bank v. St. Paul Fire & Marine Ins. Co. , 193 Ariz. 581, 584, 975 P.2d 711, 714 (App. 1999). The interpretation of an insurance contract is a question of law, as is the question of whether the contract's terms are ambiguous. Id . In Arizona, courts must construe a clause which is subject to differing interpretations by "examining the language of the clause, public policy considerations, and the purpose of the transaction as a whole." State Farm Mut. Auto. Ins. Co. v. Wilson , 162 Ariz. 251, 257, 782 P.2d 727, 733 (1989). Unambiguous provisions must be given effect as written. Benevides v. Ariz. Prop. & Cas. Ins. Guar. Fund , 184 Ariz. 610, 613, 911 P.2d 616, 619 (1995).

An insurance policy is ambiguous if there is more than one reasonable interpretation of its terms. Desert Mountain Props. Ltd. P'ship v. Liberty Mut. Fire Ins. Co. , 225 Ariz. 194, 200, 236 P.3d 421, 427 (App. 2010). Arizona courts may consider extrinsic evidence to identify and resolve ambiguities in an insurance policy. Lennar Corp. v. Transamerica Ins., Co. , 227 Ariz. 238, 244, 256 P.3d 635, 641 (App. 2010). However, "neither language nor apparent ambiguity alone is dispositive." Wilson , 162 Ariz. at 257, 782 P.2d at 733. "If a clause appears ambiguous, [the court] interpret[s] it by looking to legislative goals, social policy, and the transaction as a whole. If an ambiguity remains after considering these factors, [the court] construe[s] it against the insurer." First Am. Title Ins. Co. v. Action Acquisitions, LLC , 218 Ariz. 394, 397, 187 P.3d 1107, 1110 (2008) (citations omitted); see also Wilshire Ins. Co. v. S.A. , 224 Ariz. 97, 99, 227 P.3d 504, 506 (App. 2010) ("We construe the clause against the insurer, however, if ambiguity remains after we apply those interpretive guides.").

A. Damron Agreements

In Damron v. Sledge, the Arizona Supreme Court held that when an insurer fails to defend its insured, the duty of cooperation does not prevent the insured from entering into a settlement with the claimant and assigning his or her rights under the policy to the claimant. 105 Ariz. 151, 460 P.2d 997 (1969); see also United Servs. Auto. Ass'n v. Morris , 154 Ariz. 113, 119, 741 P.2d 246, 252 (1987) (insured may enter similar agreement if insurer defends but reserves its right to dispute coverage).

A settlement made under such circumstances, however, must not be fraudulent, collusive, or otherwise against public policy. Arizona Property and Cas. Ins. Guar. Fund v. Helme, 153 Ariz. 129, 138, 735 P.2d 421, 460 (1987). The courts have recognized the risks inherent in these types of settlements: "the insured has little incentive to minimize the amount of the judgment, and the ability of the insured to subject an insurer to tort damages in excess of the policy limits creates the opportunity for collusive settlements that bear little relation to the merits of the underlying case." Leflet v. Redwood Fire and Cas. Ins. Co. , 226 Ariz. 297, 300, 247 P.3d 180, 183 (App. 2011).

However, in the absence of fraud or collusion, the general rule is that "an insurance company which refuses to defend its insured is bound by a judgment against its insured with respect to all matters which were litigated or could have been litigated in that action." State Farm Mut. Auto. Ins. Co. v. Paynter , 122 Ariz. 198, 200, 593 P.2d 948, 950 (App. 1979). By refusing to defend, the insurer takes the risk that it may have erred in determining that the policy did not provide ...

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