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El Capitan Hoa v. State Farm Fire and Casualty Co.

United States District Court, D. Arizona

March 14, 2014

El Capitan HOA, Plaintiff,
State Farm Fire and Casualty Co., Defendant.


STEPHEN M. McNAMEE, Senior District Judge.

Pending before the Court is Defendant State Farm Fire and Casualty Co.'s ("State Farm") motion for partial summary judgment, which is fully briefed. (Docs. 41-42, 49-50, 52-53.) State Farm moves for partial summary judgment on Plaintiff El Capitan HOA's ("El Capitan") claims for breach of the covenant of good faith and fair dealing ("bad faith") and punitive damages. After considering the parties' briefing and having determined that oral argument is unnecessary, [1] the Court will grant State Farm's motion for partial summary judgment on bad faith and punitive damages and set this matter for trial on El Capitan's breach of contract claim.


El Capitan is a condominium owners association consisting of 22 condominium owners in 11 buildings along El Capitan Circle in Sun City, Arizona. (Doc. 42-1 at 15.) These condominium units experienced wind and hail damage from a storm occurring on October 5, 2010. (Doc. 41 at 2.) On behalf of El Capitan, Dr. James Longo asked Jasper Contractors ("Jasper") to inspect his roof. (Doc. 42-1 at 15.) When Jasper reported significant hail damage to his roof, Dr. Longo authorized Jasper to conduct roof inspections on all 22 units. (Id. at 8.) Jasper inspected the other roofs that were part of El Capitan from February 17, 2011, through February 18, 2011, and provided damage estimates. (Id. at 29-49.)[2] Following Jasper's roof inspection and damage estimates, El Capitan filed an insurance claim with State Farm for hail damage. (Id. at 11.) On February 17, 2011, State Farm assigned the claim to Adjuster Christina Wagner and an inspection of the roofs was set for March 7, 2011. (Id. at 15.) Prior to State Farm's inspection, El Capitan did not provide State Farm with Jasper's estimates. (Id. at 20.) At the March 7, 2011, [3] inspection, Ms. Wagner met with Rodney Belt from Jasper. (Id. at 16.) She inspected all 11 buildings for wind and hail damage and estimated the total damage to be $6, 129.68. (Id. at 18-19; see also Id. at 50-63.[4]) Ms. Wagner's inspection of the roof included making ten-foot test squares to test for hail damage. (Id. at 16-19; see also Id. at 66.) Following the inspection, Ms. Wagner discussed her findings with Dr. Longo and advised that her estimate would follow by mail. (Id. at 18.) In accordance with Ms. Wagner's estimate, State Farm issued payment to El Capitan HOA in the amount of $6, 129.68, the actual cash value of the loss. (Id. at 19.)

On March 15, 2011, State Farm received a letter from Jasper indicating disagreement with Ms. Wagner's estimate. (Id. at 71.) Ms. Wagner advised Dr. Longo that they received the letter from Jasper, but that a second inspection was not warranted based on Jasper's word without the support of a written estimate. (Id. at 20.) Ms. Wagner also suggested that Dr. Longo call back after he had a chance to review State Farm's written estimate. (Id.) Dr. Longo agreed to call back the following week. (Id.) On March 28, 2011, Dr. Longo called State Farm and requested a second inspection. (Id.) State Farm advised him that it still did not have Jasper's written estimate, something that was needed in order to move forward with a second inspection. (Id.) On April 5, 2011, State Farm received a scanned copy of the Jasper estimate via email from El Capitan's State Farm agent, Bill Johnson. (Id. at 21.) The estimate from Jasper totaled $186, 956.01 and included a complete roof replacement on every building. (Id.)

On April 16, 2011, the file was reassigned to another adjuster for a second inspection. (Id. at 22.) On April 21, 2011, State Farm Adjuster Steve Rinks telephoned all parties to set up the inspection for May 6, 2011. (Id.) On May 6, 2011, Mr. Rinks attended the inspection with Field Claim Representative James Willoughby, and they were joined at the site by Reuben from Jasper. (Id. at 22-24.) They inspected all 11 buildings for storm-related damage that had not been previously identified by Ms. Wagner. (Id.) They found $1, 542.43 in additional wind and hail related damage, and State Farm issued an actual cash value payment in the amount of $1, 317.90. (Id.)

On October 16, 2011, on behalf of El Capitan, State Farm received a demand letter for $285, 000. (Id. at 24; Id. at 73-75.) Accompanying the demand letter was a roofing damage estimate from Austin Insurance Services, Inc. ("AIS") for $245, 260.04. (Doc. 50-3 at 2-96.) On December 5, 2011, State Farm responded and stated their intention to have an independent roofing expert inspect the properties for the purpose of giving El Capitan's claim additional consideration. (Doc. 42-1 at 81.) Thereafter, State Farm retained the Klingler Group as its roofing expert and on December 15, 2011, and December 16, 2011, Stephen Klingler inspected the roofs at El Capitan for storm damage. (Id. at 85-99.) Mr. Klingler found no hail damage to any of the roofs' composite shingles. (Id.) State Farm reviewed Mr. Klingler's report and determined that all proper payments had already been made under the policy. (Id. at 101.) On February 22, 2012, El Capitan filed the instant lawsuit in Maricopa County Superior Court, alleging breach of contract, bad faith and punitive damages. The case was removed to district court on March 23, 2012. (Doc. 1.)


I. Partial Summary Judgment

Upon motion at any time, a party defending against a claim may move for "partial summary judgment, " that is, "summary judgment in the party's favor as to... any part thereof." Fed.R.Civ.P. 56(b). 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 issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); see Celotex Corp. v. Catrett , 477 U.S. 317, 322-23 (1986); Jesinger v. Nevada 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. The party opposing summary judgment "may not rest upon the mere allegations or denials of [the party's] pleadings, but... must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e); see Matsushita Elec. Indus. Co. v. Zenith Radio , 475 U.S. 574, 585-88 (1986); Brinson v. Linda Rose Joint Venture , 53 F.3d 1044, 1049 (9th Cir. 1995). "[T]he purpose of Rule 56 is to enable a party who believes there is no genuine dispute as to a specific fact essential to the other side's case to demand at least one sworn averment of that fact before the lengthy process of litigation continues." Lujan v. Nat'l Wildlife Federation , 497 U.S. 871, 888-89 (1990).

II. Bad Faith

A federal court sitting in diversity applies state substantive law. See Hambleton Bros. Lumber Co. v. Balkin Enterprises, Inc. , 397 F.3d 1217, 1227 (9th Cir. 2005). Thus, this Court applies Arizona law to the state-law claims at issue. "An insurance contract is not an ordinary commercial bargain; implicit in the contract and the relationship is the insurer's obligation to play fairly with its insured." Zilisch v. State Farm Mut. Auto. Ins. Co. , 196 Ariz. 234, 237, 995 P.2d 276, 279 (2000) (further quotation omitted). Although insurers do not owe fiduciary duties to their insureds, they do owe some duties of a fiduciary nature including equal consideration, fairness and honesty. Id . The insurer is obligated to conduct a prompt and adequate investigation, to act reasonably in evaluating the insured's claim, and to promptly pay a legitimate claim. Id. at 238, 995 P.2d at 280.

"An insurer acts in bad faith when it unreasonably investigates, evaluates, or processes a claim (an objective' test), and either knows it is acting unreasonably or acts with such reckless disregard that such knowledge may be imputed to it (a subjective' test)." Nardelli v. Metro. Group Prop. & Cas. Ins. Co. , 230 Ariz. 592, 597-98, 277 P.3d 789, 794-95 (App. 2012) (citing Zilisch , 196 Ariz. at 238, 995 P.2d at 280). Both the objective and subjective elements of bad faith are applied to the insurer's evaluation of the claim and to the insurer's claims handling process. Id.

The insurer may challenge claims which are fairly debatable. See Noble v. National Amer. Life Ins. Co. , 128 Ariz. 188, 190, 624 P.2d 866, 868 (1981). Where the insurance company has a reasonable basis for denying or failing to process a claim, or where the claim is fairly debatable, a cause of action for bad faith will not lie. See Lasma Corp. v. Monarch Ins. Co. of Ohio , 159 Ariz. 59, 63, 764 P.2d 1118, 1122 (1988). To determine fair debatability, the Court first looks to whether the insurer's actions were objectively reasonable, which is based upon a simple negligence standard-whether the insurance company acted in a manner consistent with the way a reasonable insurer would be expected to act under the circumstances. See Trus Joist Corp. v. Safeco Ins. Co. of Am. , 153 Ariz. 95, 104, 735 P.2d 125, 134 (App. 1986). If the insurer acted objectively unreasonably, then the Court moves to the subjective inquiry and determines if the insurer knew or was conscious that its conduct was unreasonable. Id . Generally, the insurer's subjective "belief in fair debatability is a question of fact to be determined by the jury." Zilisch , 196 Ariz. at 280, 995 P.2d at 279 (further citation and quotation omitted). However, if the insured offers no significantly probative evidence that calls into question the insurer's subjective belief regarding fair debatability, the court may rule on the issue as matter of law. See Knoell v. Metropolitan Life Ins. Co. , 163 F.Supp.2d 1072, 1076 (D. Ariz. 2001); see also Aetna Cas. & Sur. Co. v. Superior Court In & For Cnty. Of Maricopa , 161 Ariz. 437, 440, 778 P.2d 1333, 1336 (App. 1989) (stating that "there are times when the issue of bad faith is not a question appropriate for determination by the jury.").

III. Punitive Damages

In a bad faith tort case against an insurance company, punitive damages may only be awarded if the evidence reflects "something more" than the conduct necessary to establish the tort. Rawlings v. Apodaca , 151 Ariz. 149, 160, 726 P.2d 565, 576 (1986). In Rawlings, the Arizona Supreme Court explained the parameters of punitive damages as follows:

We restrict [the availability of punitive damages] to those cases in which the defendant's wrongful conduct was guided by evil motives. Thus, to obtain punitive damages, plaintiff must prove that defendant's evil hand was guided by an evil mind.... [P]unitive damages will be awarded on proof from which the jury may find that the defendant was aware of and consciously disregard[ed] a substantial and unjustifiable risk that' significant harm would occur.

151 Ariz. at 162 , 726 P.2d at 578 (citations omitted). Summary judgment for defendant on the issue of punitive damages must be denied if a reasonable jury could find the requisite evil mind by clear and convincing evidence; summary judgment should be granted if no reasonable jury could find the requisite evil mind by clear and convincing evidence. Thompson v. Better-Bilt Aluminum Prod. Co. , 171 Ariz. 550, 558, 832 P.2d 203, 211 (1992). The court construes the evidence and all reasonable inferences drawn from the evidence in a light most favorable to the non-moving party. Id.


I. Bad Faith

State Farm moves for summary judgment on El Capitan's bad faith claim contending that its investigation was thorough, prompt, and reasonable, that it reasonably evaluated, promptly handled, and paid El Capitan's insurance claim. (Doc. 41 at 6-15.) Based on the material facts, State Farm contends that El Capitan fails to show that it unreasonably evaluated or handled this claim. (Id. at 15.)

El Capitan argues that its bad faith claim is not subject to summary judgment because State Farm did not conduct an adequate investigation and deliberately ignored roof damage evidence that contradicted their adjuster's findings. (Doc. 49 at 4-9.) Because State Farm's investigation was inadequate, El Capitan contends State Farm cannot rely on a fairly debatable defense or otherwise be entitled to summary judgment. (Id. at 4.) El Capitan further argues that State Farm failed to investigate and reconcile the gaping differences between the scope of loss it evaluated and El Capitan's evaluation of loss. (Id. at 8-9.) Finally, El Capitan offers its expert report concluding that State Farm's claim handling was carried out in bad faith. (Id. at 9-10.)

State Farm did not move for summary judgment on El Capitan's breach of contract claim. Thus, whether or not State Farm breached the insurance contract by devaluing El Capitan's claim will be set for trial.[5] At issue is whether State Farm is entitled to summary judgment on El Capitan's bad faith claim. In the arena of insurance bad faith, an insurer acts in bad faith when it unreasonably investigates, evaluates, or processes a claim (an "objective" test), and either knows it is acting unreasonably or acts with such reckless disregard that such knowledge may be imputed to it (a "subjective" test). Nardelli , 230 Ariz. at 597-98, 277 P.3d at 794-95. Both the objective and subjective elements of bad faith are applied to the insurer's evaluation of the claim and to the insurer's claims handling process. Id . Thus, in order to establish bad faith, a party bears the burden of proving both the objective and subjective prongs of bad faith. In order to establish its bad faith claim, El Capitan alleges that State Farm's investigation was inadequate and that it did not properly attempt to reconcile the scope of loss between the estimates provided by the insured and its own estimates.

Adequate Investigation

State Farm contends that its investigation was not just adequate, but thorough, prompt, and reasonable; and that it reasonably evaluated, promptly handled, and timely paid the insured's claim. (Doc. 41 at 8-15.)

El Capitan alleges that State Farm's initial adjuster, Christina Wagner, was not properly trained to evaluate roofing problems. (Doc. 49 at 5.) For instance, Ms. Wagner testified that she did not understand the function of granules on a composite roof shingle. ( Id., (citing Doc. 50-2 at 4).) When she was asked to explain the function of granules, she responded, "[t]hey protect and provide a way to properly shed water off a roof." (Doc. 50-2 at 4.) When asked whether granules served any other function, Ms. Wagner responded, "I don't know." (Id.) El Capitan further alleged that Ms. Wagner was unaware that the unsealing of shingles due to high wind is considered wind-induced damage. (Doc. 49 at 5, (citing Doc. 50-2 at 5-6).) Based on El Capitan's allegation that Ms. Wagner lacked a basic working knowledge of roof systems and that she was unable to identify wind damage to shingle roofs, El Capitan contends that State Farm should have consulted with a qualified roofer or assign appropriate weight to a qualified roofer's findings. (Doc. 49 at 5-6.) El Capitan further alleges that State Farm refused its request for a second inspection and ignored the findings and damages estimate of Jasper Roofing, a qualified roofer. (Id. at 6-7.) Therefore, El Capitan asserts that such is competent evidence of unreasonable conduct by State Farm precluding summary judgment.

State Farm assigned Ms. Wagner to El Capitan's claim. (Doc. 42-1 at 15.) State Farm trained her to inspect for and identify hail and wind damage to property. (Doc. 50-2 at 3.) Ms. Wagner conducted the first inspection on El Capitan's 11 buildings and wrote an estimate for hail and wind damage. (Doc. 42-1 at 50-63.) Ms. Wagner's activity log shows that she drew a test square on each of the roof surfaces and noted the number of hail hits she found per test square on each roof with the designation "hl/sq." (Doc. 42-1 at 16-19; see also Doc. 42-1 at 66.) Ms. Wagner found hail damage, discussed those findings with the insured, and provided the insured with her report. (Doc. 42-1 at 18, 50-63.) Ms. Wagner also found wind damaged shingles. (Id. at 16-18.) Nevertheless, El Capitan asserts that Ms. Wagner did not find enough wind damaged shingles because she "was unaware that the unsealing of shingles due to high wind is considered wind-induced damage." (Doc. 49 at 5.) Ms. Wagner testified that when looking for wind damage she looks for unsealed shingles that have been flipped or creased or that have debris obstructing their ability to re-seal. (Doc. 42-1 at 66-67.) This is the same criteria used by Steve Rinks, the State Farm adjuster who conducted the second State Farm site inspection, along with a representative from Jasper Roofing. (Id. at 22-23; Doc. 53-1 at 10-12.) As to El Capitan's argument that Ms. Wagner is unqualified, Ms. Wagner's inspection for hail and wind damage was supported by the estimates of subsequent adjuster Rinks and by State Farm's retained roofing expert, Stephen Klingler, who reported less hail and wind damage than was found by Ms. Wagner. (Doc. 42-1 at 92.)

Although El Capitan argues that State Farm refused its request for a second inspection and ignored Jasper's findings and damages estimate, the evidence of record is otherwise. State Farm did not ignore Jasper's findings and estimate; rather, when State Farm received them, it set up a second site inspection and evaluation. (Doc. 42-1 at 21-24, 27-49.) Steve Rinks, a State Farm adjuster, reviewed Jasper's findings and estimate, performed the second site inspection and evaluation, and forwarded its adjustment and further payment to the insured. (Id. at 21-24, Doc. 53-1 at 10-12.) At the second site inspection, Jasper had a representative who participated with State Farm. (Id.) Thus, the record shows that when State Farm was provided with Jasper's written estimate, State Farm gave the claim further consideration by conducting an additional second inspection for wind and hail damage. Moreover, after receiving AIS's estimate recommending roof replacement, State Farm retained an independent roofing expert, Stephen Klingler, to inspect the property and give the claim additional consideration in light of the new estimate submitted on behalf of El Capitan. (Doc. 42-1 at 24-25, 81, 85-99; Doc. 50-3 at 2-96.)

Based on these material facts, the Court does not find that State Farm conducted an inadequate investigation before valuing and paying El Capitan's claim. Rather, the Court finds that State Farm conducted an adequate investigation and did not treat the insured unreasonably. No reasonable juror could consider the material facts argued by El Capitan and conclude that State Farm's investigation was conducted in bad faith. Although an incomplete pre-denial investigation can expose an insurance company to liability for bad faith, see Rawlings v. Apodaca , 151 Ariz. 149, 160, 726 P.2d 565, 576 (1986), no reasonable juror could consider the facts argued by El Capitan and conclude that State Farm's investigation and processing of this claim established a prima facie case of insurance bad faith.

Scope of Loss

Next, El Capitan argues that State Farm failed to investigate and reconcile the substantial difference between the scope of loss submitted by State Farm and that by El Capitan. (Doc. 49 at 8-9.)

There can be no liability for bad faith if the insurer's actions (even if ultimately proven wrong) are "fairly debatable." See Trus Joist , 153 Ariz. at 104, 735 P.2d at 134. Here, the Court finds that State Farm did attempt to reconcile differences between the estimates of its adjusters and El Capitan's contractors. At the first claim assessment, Rodney Belt from Jasper joined State Farm's adjuster, Ms. Wagner. (Doc. 42-1 at 16.) During the inspection, Mr. Belt pointed to areas that he believed were hail damaged; Ms. Wagner examined those areas and exercised her own judgment to conclude that they were not hail damaged. (Doc. 53-1 at 14.) By listening to Mr. Belt, considering his point of view, and ultimately disagreeing with him about the scope of hail damage, Ms. Wagner made a fair and reasonable attempt to reconcile the contractor's opinion with her own estimate. After Ms. Wagner's estimate, Jasper forwarded their objection to Ms. Wagner's assessment. (Doc. 42-1 at 71.) Subsequently, State Farm received Jasper's estimate for a roof replacement. (Id. at 27-50.) Adjuster Rinks looked at Jasper's estimate before conducting the second inspection. (Id. at 157.) At the re-inspection, Mr. Rinks was again joined by a Jasper representative, and he offered that person chalk to allow them to tell him what they identified as hail and wind damage. (Doc. 42-1 at 156, Doc. 53-1 at 12.) Ultimately, Mr. Rinks did not agree with Jasper's damage assessment, but it was not for lack of trying to reconcile his opinion with Jasper. (Doc. 42-1 at 23.)

When El Capitan forwarded the AIS estimate, State Farm responded by offering El Capitan the additional consideration of a roofing expert investigation. (Doc. 42-1 at 24-25, 81, 85-99; Doc. 50-3 at 2-96.) Mr. Klingler reviewed AIS's estimate prior to conducting his inspection. (Doc. 42-1 at 96.) However, Mr. Klingler did not agree with AIS's recommended roof replacements and rendered a report consistent with his own opinion. (Id. at 85-93.) Mr. Klingler stated that he has personally performed roof repairs and warranties his workmanship on such repairs. (Doc. 42-2 at 7-8.) Further, he stated that spot repairs to a roof are common and are regularly warrantied by other roofers in the community.[6] (Id.)

The Court finds that State Farm gave El Capitan additional consideration at each point in the investigation. State Farm's additional consideration attempted to reconcile the differences between the roofing contractor's estimates and its own estimates. El Capitan has not argued material facts precluding summary judgment on this point. No reasonable juror could conclude that despite the additional consideration given regarding the scope of loss, State Farm's decision to pay based on its own estimates was evidence of a bad faith failure to reconcile.

Expert Report

State Farm argues that El Capitan's expert report authored by Charles Miller is inadmissible because the factual basis upon which his opinions rest are not supported by the record evidence, and therefore lacks a sufficient factual basis. (Doc. 41 at 8; Doc. 52 at 7, (citing Fed. R. EvId. 702(b)).) Consequently, Miller's report is merely conclusory statements connected to the facts of this case only by his arbitrary and dogmatic assertions. (Id. at 7.)

El Capitan contends that Mr. Miller's report is admissible because it is "based on [his] own experience, observations and his studies..." (Doc. 49 at 9.) El Capitan further contends that the factual basis of Mr. Miller's report ...

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