United States District Court, D. Arizona
St. Paul Fire & Marine Ins. Co. et al., Plaintiffs,
Ohio Cas. Ins. Co. et al., Defendants. Transportation Ins. Co. et al., Counter/cross-claimants,
St. Paul Fire & Marine Ins. Co. et al., Counter/cross-defendants. Zurich Am. Ins. Co., Counter/cross-claimant,
St. Paul Fire & Marine Ins. Co. et al., Counter/cross-defendants. Am. Home Assurance Co. et al., Counter/cross-claimants,
St. Paul Fire & Marine Ins. Co. et al., Counter/cross-defendants. Lexington Ins. Co., Counter/cross-claimant,
St. Paul Fire & Marine Ins. Co. et al., Counter/cross-defendants.
MEMORANDUM OF DECISION AND ORDER
STEPHEN M. McNAMEE, Senior District Judge.
Before the Court are two motions for summary judgment. First is American Home Assurance Company's ("AHAC") and Commerce and Industry Insurance Company's ("CIIC") Motion for Partial Summary Judgment Against Liberty Mutual Fire Insurance Company ("LMFIC") (Doc. 264), to which LMFIC responded (Doc. 292), but AHAC and CIIC did not reply. Second is LMFIC's Motion for Summary Judgment Against Plaintiffs' and Cross-claimants' Claims (Doc. 267), to which both Plaintiffs and AHAC/CIIC responded (Docs. 288; 291), and LMFIC replied (Docs. 296; 297). For the reasons that follow, AHAC/CIIC's motion is granted, and LMFIC's motion is denied.
This declaratory judgment action is rooted in a Sun City Grand residential housing development (the "Development") constructed in Surprise, Arizona between 1996 and 2005. The general contractor was Del Webb Home Construction, Inc., ("DWHC") a wholly-owned subsidiary of Del Webb Communities, Inc., ("DWCI"), which is itself a wholly owned subsidiary of Del Webb Corporation ("DWC"). (Doc. 229-2 ¶¶ 2-3.) DWHC entered into various subcontracts (the "Subcontracts") with ANSE, Inc., doing business as Arizona State Plastering ("ANSE"), in which ANSE was to provide "all labor, material, equipment and supervision to perform all operations in connection with the installation of all thin-wall stucco system work." (Doc. 265-3 at 25, 42, 105, 109, 124, 145, 164.)
The Subcontracts also required ANSE to maintain commercial general liability ("CGL") insurance and to endorse the policies to include as additional insureds DWC, DWCI, and DWHC (collectively "Del Webb"). (Id. at 17-18, 72-73, 99-100.) AHAC and CIIC insured ANSE from October 1, 2001, to January 1, 2006. (Doc. 265 ¶¶ 24, 25.) LMFIC issued two policies (the "Policies") insuring ANSE from February 1, 2007, until February 1, 2009 (Docs. 265-1 at 5; 265-2 at 4), during which time 99% of ANSE's work involved application of "traditional" or "natural" stucco (Doc. 288-1 at 67). The premiums charged for the Policies were initially estimated based on the type of business ANSE was involved in: "masonry" and "plastering and stucco work" according to LMFIC's underwriting file. (Id. at 43-45.) LMFIC performed a premium audit in which the auditor described ANSE's operations as the "application of exterior stucco." (Id. at 34.) After the audit, LMFIC charged ANSE an adjusted premium of more than $230, 000.00 for the two years. (Id. at 24, 39.)
On January 25, 2008, hundreds of Development homeowners served DWCI, the entity that sold the homes, with notice of construction defects pursuant to Arizona's Purchaser Dwelling Act, Ariz. Rev. Stat. ("A.R.S.") § 12-1361 et seq., (the "Zelkind Notice") that alleged inter alia stucco defects and collateral property damage resulting therefrom. (Docs. 229-2 ¶ 5; 265 ¶ 8.) On the same day, hundreds of other Development homeowners served DWCI with a Demand for Arbitration that also alleged stucco defects and resultant collateral property damage (the "Roberts Arbitration"). (Docs. 229-2 ¶ 6; 265 ¶¶ 9-10.)
After receiving the Zelkind Notice and the Roberts Arbitration Demand, Del Webb tendered its defense and indemnity as provided for in the Subcontracts. (Doc. 265 ¶ 18.) Upon Del Webb's tender, AHAC and CIIC acknowledged their duty to defend and have paid-and continue to pay-defense costs. (Doc. 265 ¶¶ 25, 26.) LMFIC, however, denied any duty to defend because the Policies "exclude damages associated with exterior insulation and finishing systems, " or "EIFS." (Id. ¶ 19.) The Zelkind Notice eventually matured into a civil action in which over 500 homeowners sued Del Webb for construction defects; the case, Glen Zelkind et al. v. Del Webb Communities, Maricopa Superior Court Case No. CV2008-3089 (the "Zelkind Action"), is ongoing and has gone to trial. (Docs. 265 ¶¶ 11-16; 332.) As of January 3, 2014, more than $13 million had been spent defending Del Webb in the Zelkind Action alone. (Doc. 332.) Similarly, the Roberts Arbitration, American Arbitration Association case number 76 110 Y 00073 08, grew to include over 500 homeowners and resulted in a total award against Del Webb in excess of $13.5 million, which Del Webb is appealing. (Docs. 226-4 at 56; 265 ¶ 17.) The defense of Del Webb in the Zelkind Action and the Roberts Arbitration (collectively the "Underlying Actions") thus exceeds $26 million, and continues to climb.
The brunt of the costs of defense has been borne by St. Paul Fire and Marine Insurance Company, Charter Oak Fire Insurance Company, and Travelers Indemnity Company of America (collectively "Plaintiffs"). On October 6, 2011, Plaintiffs filed this action against insurers that had a duty to contribute to Del Webb's defense but either refused to contribute, or did not contribute enough. (Doc. 197.) Plaintiffs and Counter/Cross-claimants seek a declaration of the parties' duties to defend and entitlement to reimbursement. (Docs. 120; 153; 154; 155; 197; 214). On April 16, 2012, the Court held a Rule 16 Scheduling Conference at which the Court and all the parties agreed the best way to proceed was by bifurcating the proceedings so that questions of coverage were resolved before reaching issues of policy exhaustion and apportionment of defense costs. (Docs. 97; 98; see Doc. 319.)
LMFIC moved for summary judgment against Plaintiffs and Cross-claimants positing that they had no duty to defend because ANSE's stucco work at the Development falls within the EIFS exclusion. Plaintiffs and AHAC/CIIC responded that EIFS is an industry term for a synthetic water-proof alternative to traditional stucco and thus does not apply to the traditional stucco work performed by ANSE. Plaintiffs also argue that even if stucco does fall within the exclusion, enforcing it as such would contravene ANSE's reasonable expectation of coverage. LMFIC replied that the reasonable-expectations doctrine does not apply, that traditional stucco is within the EIFS exclusion, and that Plaintiffs' and AHAC/CIIC's evidence to the contrary is inadmissible. AHAC/CIIC's summary judgment motion encompasses the same issues, plus an additional issue of whether LMFIC owed Del Webb a defense from the date of tender. (Doc. 264 at 19.) LMFIC argues the Court should not consider any argument outside the narrow scope of argument agreed upon between AHAC/CIIC and LMFIC: the applicability of the EIFS exclusion.
"The court shall grant summary judgment if the movant shows 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). "The substantive law determines which facts are material; only disputes over facts that might affect the outcome of the suit under the governing law properly preclude the entry of summary judgment." Nat'l Ass'n of Optometrists & Opticians v. Harris , 682 F.3d 1144, 1147 (9th Cir. 2012) (citing Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248 (1986)). To prove the absence of a genuine dispute, the moving party must demonstrate that "the evidence is such that [no] reasonable jury could return a verdict for the nonmoving party." Liberty Lobby , 477 U.S. at 248. In determining whether a party has met its burden, a court views the evidence in the light most favorable to the non-moving party and draws all reasonable inferences in the non-moving party's favor. Liberty Lobby , 477 U.S. at 255. While a court may consider only admissible evidence in ruling on a motion for summary judgment, the focus is not "on the admissibility of the evidence's form, " but "on the admissibility of its contents." Fraser v. Goodale , 342 F.3d 1032, 1036-37 (9th Cir. 2003).
Federal courts sitting in diversity apply the forum state's choice of law rules to determine controlling substantive law. Klaxon Co. v. Stentor Elec. Mfg. Co. Inc. , 313 U.S. 487, 496 (1941). Arizona adheres to Restatement (Second) of Conflict of Laws § 193 (1971), which states that insurance contracts are generally governed "by the local law of the state which the parties understood was to be the principal location of the insured risk during the term of the policy." Beckler v. State Farm Mut. Auto. Ins. Co. , 195 Ariz. 282, 286, 987 P.2d 768, 772 (App. 1999). Since the principal location of the insured risk was in Arizona, Arizona law governs the Policies.
"The traditional view of the law of contracts is that a written agreement adopted by the parties will be viewed as an integrated contract which binds those parties to the terms expressed within the four corners of the agreement." Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co. , 140 Ariz. 383, 390, 682 P.2d 388, 395 (1984). However, "the usual insurance policy is a special kind of contract, " id., in part because it is not "arrived at by negotiation between the parties, " Zuckerman v. Transamerica Ins. Co. , 133 Ariz. 139, 144, 650 P.2d 441, 446 (1982). Instead, "[i]t is largely adhesive; some terms are bargained for, but most terms consist of boilerplate, not bargained for, neither read nor understood by the buyer, and often not even fully understood by the selling agent." Darner , 140 Ariz. at 391, 682 P.2d at 396. Moreover, "[t]he adhesive terms generally are self-protective; their major purpose and effect often is to ensure that the drafting party will prevail if a dispute goes to court." Gordinier v. Aetna Cas. & Sur. Co. , 154 Ariz. 266, 271, 742 P.2d 277, 282 (1987). Accordingly, "special contract rules should apply." Id.
Interpretation of insurance policies is a question of law. Sparks v. Republic Nat. Life Ins. Co. , 132 Ariz. 529, 534, 647 P.2d 1127, 1132 (1982). "Provisions of insurance policies are to be construed in a manner according to their plain and ordinary meaning, " id., but if a clause is reasonably susceptible to different interpretations given the facts of the case, the clause is to be construed "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). While ambiguities are generally construed against the insurer, courts are "not compelled in every case of apparent ambiguity to blindly follow the interpretation least favorable to the insurer." Emp'rs Mut. Cas. Co. v. DGG & CAR, Inc. , 218 Ariz. 262, 264, 183 P.3d 513, 515 (2008) (quoting Wilson , 162 Ariz. at 257, 782 P.2d at 733). Instead, the question is "how the language of the policy applies to the specific facts of the case." Id . (quoting Preferred Risk Mut. Ins. Co. v. Lewallen , 146 Ariz. 83, 85, 703 P.2d 1232, 1234 (App. 1985)).
"In determining whether there is an ambiguity that should be construed against the insurer, the language should be examined from the viewpoint of one not trained in law or the insurance business, " Samsel v. Allstate Ins. Co. , 204 Ariz. 1, 4, 59 P.3d 281, 284 (2002), and in the light of parol evidence, Taylor v. State Farm Mut. Auto. Ins. Co. , 175 Ariz. 148, 154-55 & n.2, 854 P.2d 1134, 1140-41 & n.2 (1993). In making this determination, a court's interpretive analysis is "not limited to considering only the text of the agreement, " Burkons v. Ticor Title Ins. Co. of Cal. , 168 Ariz. 345, 350, 813 P.2d 710, 715 (1991), and "may always consider the surrounding circumstances, " Smith v. Melson, Inc. , 135 Ariz. 119, 122, 659 P.2d 1264, 1267 (1983). "If, for example, parties use language that is mutually intended to have a special meaning, and that meaning is proved by credible evidence, a court is obligated to enforce the agreement according to the parties' intent, even if the language ordinarily might mean something different." Taylor , 175 Ariz. at 153, 854 P.2d at 1139 (citing Restatement (Second) Contracts § 212 cmt. b, illus. 3 & 4 (1981)).
Furthermore, "the policy may not be interpreted so as to defeat the reasonable expectations of the insured." Samsel , 204 Ariz. at 4, 59 P.3d at 284. "Under this doctrine, a contract term is not enforced if one party has reason to believe that the other would not have assented to the contract if it had known of that term." First Am. Title Ins. Co. v. Action Acquisitions, LLC , 218 Ariz. 394, 400, 187 P.3d 1107, 1113 (2008); accord Averett v. Farmers Ins. Co. , 177 Ariz. 531, 533, 869 P.2d 505, 507 (1994) (quoting Gordinier , 154 Ariz. at 272, 742 P.2d at 283); Darner , 140 Ariz. at 392, 682 P.2d at 397. "One of the basic principles which underlies [the doctrine] is simply that the language in the portion of the instrument that the customer is not ordinarily expected to read or understand ought not to be allowed to contradict the bargain made by the parties." Averett , 177 Ariz. at 533, 869 P.2d at 507 (quoting State Farm Mut. Auto. Ins. Co. v. Bogart , 149 Ariz. 145, 151, 717 P.2d 449, 455 (1986), superseded by statute on other grounds as recognized in Consolidated Enters., Inc. v. Schwindt , 172 Ariz. 35, 38, 833 P.2d 706, 709 (1992)).
The insured bears the burden of proving the applicability of the reasonable expectations doctrine at trial. State Farm Fire & Cas. In. Co. v. Grabowski , 214 Ariz. 188, 190, 150 P.3d 275, 277 (App. 2007). The doctrine applies only if two predicate conditions are present. First, the insured's "expectation of coverage must be objectively reasonable." Millar v. State Farm Fire and Cas. Co. , 167 Ariz. 93, 97, 804 P.2d 822, 826 (App. 1990). Second, the insurer "must have had a reason to believe that the [insured] would not have purchased the... policy if they had known that it included" the complained of exclusion. State Farm Fire & Cas. In. Co. v. Grabowski , 214 Ariz. 188, 193-94, 150 P.3d 275, 280-81 (App. 2007). Provided both of these conditions are satisfied, "Arizona courts will not enforce even unambiguous boilerplate terms in standardized insurance contracts in a limited variety of situations." Gordinier , 154 Ariz. at 272, 742 P.2d at 283.
Finally, insurers expressly obligate themselves to defend their insureds against any claim of liability potentially covered by the policy. Ariz. Prop. & Cas. Ins. Guar. Fund v. Helme , 153 Ariz. 129, 137, 735 P.2d 451, 459 (1987); United Servs. Auto. Ass'n v. Morris , 154 Ariz. 113, 118, 741 P.2d 246, 250 (1987). The duty to defend is triggered if the complaint facially "alleges facts which come within the coverage of the liability policy..., but if the alleged facts fail to bring the case within the policy coverage, the insurer is free of such obligation." Kepner v. Western Fire Ins. Co. , 109 Ariz. 329, 331, 509 P.2d 222, 224 (1973) (quoting C. T. Drechsler, Annotation, Allegations in Third Person's Action Against Insured as Determining Liability Insurer's Duty to Defend, 50 A.L.R. 2d 458 §3, at 464 (1956)). "If the insurer refuses to ...