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Groth v. Owners Ins. Co.

United States District Court, D. Arizona

May 23, 2014

Patricia A. Groth, Plaintiff,
Owners Ins. Co., Defendant.


STEPHEN M. McNAMEE, Senior District Judge.

Before the Court are three motions: Defendant's Motion for Summary Judgment (Doc. 22); Plaintiff's Motion for Summary Judgment (Doc. 31); and Defendant's Motion to Strike Affidavit of William Sublette (Doc. 39). All three motions are fully briefed. (Docs. 33, 35, 40, 42, 43, 44.) For the reasons that follow, all three motions are denied.[1]


This declaratory judgment action concerns a defectively constructed home in Lake Havasu City, Arizona. The following facts are undisputed unless otherwise noted. Sunmeadow Homes ("Sunmeadow") constructed the home at issue but subcontracted the rough grading and soil compaction, as well as the concrete work. (Doc. 34 ¶ 2.) After construction was complete, Sunmeadow received a certificate of occupancy from the City of Lake Havasu on April 12, 2000. (Docs. 1-1 at 5; 4 at 2.) On February 20, 2001, Sunmeadow conveyed the home by warranty deed to the original homeowner, who sold the home to Plaintiff Patricia Groth ("Groth") on February 10, 2003. (Docs. 34 ¶ 4; 36 ¶ 5.)

On or about spring of 2005, Groth noticed damage to her kitchen floor tiles and after discussions with licensed contractors sometime in 2006, Groth learned that there was a significant problem with the foundation due to improper soil compaction and concrete slab construction. (Docs. 34 ¶¶ 6-7; 36 ¶¶ 8-10, 12-14, 16-18.) On December 26, 2006, counsel for Groth sent Sunmeadow a Notice and Opportunity to Repair pursuant to Arizona's Purchaser Dwelling Act. (Doc. 23-2 at 5-7.) On November 15, 2007, Groth filed suit against Sunmeadow in Mohave County Superior Court-Groth v. Sunmeadow Homes, Mohave Superior Court Case No. CV2007-2059 (the "underlying action")-alleging breaches of the implied warranties of habitability and workmanship. (Doc. 23-1 at 2-7.)

Sunmeadow's commercial general liability ("CGL") insurance carrier-Defendant Owners Insurance Company ("Owners")-defended Sunmeadow pursuant to a reservation of rights. (Doc. 36 ¶¶ 19-21.) Eventually, on February 15, 2012, Sunmeadow stipulated to its liability and executed an agreement with Groth in which Sunmeadow assigned its breach of contract claims to Groth in exchange for Groth's covenant not to execute the stipulated judgment against Sunmeadow. (Doc. 23-8.) This agreement was accepted by the trial court on April 13, 2012, and pursuant to the agreement's terms, Groth and Sunmeadow recited that "Sunmeadow hired a rough grading subcontractor responsible for soil compaction as well as a concrete subcontractor responsible for laying the foundation, " and that the work performed by these subcontractors "fell below applicable construction standards." (Id. at 3, 5-6.) Groth and Sunmeadow further agreed that the "defects resulted in continuous and progressive property damage... from and after April 12, 2000 through present." (Id. at 6.)

On August 8, 2012, Groth filed suit against Owners in Maricopa County Superior Court seeking a declaration of Owners' duty to indemnify and supplemental relief pursuant to Arizona's Declaratory Judgments Act. (Doc. 1-1 at 4-8.) Owners removed on the basis of diversity. (Doc. 1.) The Court bifurcated the proceedings so that the issue of insurance coverage would be determined first, and would be followed by a determination of the reasonableness of the consent judgment. (Doc. 10.) The parties have fully briefed cross-motions for summary judgment on the issue of coverage. (Docs. 22; 31; 33; 35; 40; 42.) Owners also filed a motion to strike Groth's expert affidavit which is fully briefed. (Docs. 39, 43, 44.)


"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). Substantive law determines which facts are material; "[o]nly disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248 (1986). For a dispute to be genuine, the evidence must be such that a finder of fact could reasonably resolve the issue in favor of either party. Anderson , 477 U.S. at 248, 250-51. One of the principal purposes of summary judgment "is to isolate and dispose of factually unsupported" issues. Celotex Corp. v. Catrett , 477 U.S. 317, 323-24 (1986).

The movant bears the initial burden of proving the absence of a genuine issue of material fact. Id. at 323. Where the movant would bear the burden of proof at trial, the initial burden is met by marshaling the evidence and foreclosing the possibility that a rational trier of fact could find for the non-movant. Adickes v. S. H. Kress & Co. , 398 U.S. 144, 157-58 (1970). For an issue as to which the non-movant would bear the burden of proof at trial, the movant can satisfy its initial burden by showing the absence of evidence to support non-movant's case. Celotex , 477 U.S. at 325. Either way, if the movant carries its initial burden, then the non-movant must designate admissible evidence in the record from which a jury could reasonably find in the non-movant's favor. Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 586-87 (1986).

According to Arizona's choice of law rules, see Zinser v. Accufix Research Inst., Inc. , 253 F.3d 1180, 1187 (9th Cir. 2001), Arizona law governs this insurance contract action, see Beckler v. State Farm Mut. Auto. Ins. Co. , 195 Ariz. 282, 286, 987 P.2d 768, 772 (App. 1999) (citing Restatement (Second) of Conflict of Laws § 193 (1971)).


The issue in this case is whether Owners has a duty to indemnify Sunmeadow for Groth's claims of defective home construction. Owners' indemnity obligation is contractual in nature and depends on the language of the policies. See Flood Control Dist. of Maricopa Cnty. v. Paloma Inv. Ltd. P'ship ("Paloma") , 230 Ariz. 29, 36, 279 P.3d 1191, 1198 (App. 2012). "The interpretation of an insurance contract is a question of law" in which the Court construes the policy terms "in a manner according to their plain and ordinary meaning" and "from the viewpoint of one not trained in law or in the insurance business." Sparks v. Republic Nat. Life Ins. Co. , 132 Ariz. 529, 534, 647 P.2d 1127, 1132 (1982). "Generally, the insured bears the burden to establish coverage under an insuring clause, and the insurer bears the burden to establish the applicability of any exclusion." Keggi v. Northbrook Prop. & Cas. Ins. Co. , 199 Ariz. 43, 46, 13 P.3d 785, 788 (App. 2000).

Owners issued three different policies to Sunmeadow: the first policy was effective from June 22, 1995, to June 22, 2006 (the "First Policy" or the "Policy"); the second policy was effective from October 5, 2007, to October 5, 2008 ("the "Second Policy"); and the third policy was effective from October 5, 2008, to October 5, 2013 (the "Third Policy"). (Doc. 25 ¶¶ 1, 9, 12.) The parties agree that the earliest relevant policy period is June 22, 2000, to June 22, 2001. (Doc. 25 ¶ 2.) The First Policy provides in pertinent part that Owners "will pay those sums that the insured becomes legally obligated to pay as damages because of... property damage' to which this insurance applies." (Doc. 25-1 at 32.)

According to the terms of the Policy, insurance applies only if the "property damage' is caused by an occurrence'" and "occurs during the policy period." (Id.) "Property damage" is defined as "[p]hysical injury to tangible property, " and "occurrence" is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." (Id. at 44-45.) Therefore, to establish coverage, there must be (1) physical injury to tangible property (2) during the policy period (3) that was caused by an accident. As explained below, it is undisputed that an accident resulted in property damage, but there is a genuine dispute on the coverage-dispositive issue of when this damage occurred.

I. The Binding Effect of Stipulated Facts

As a preliminary matter, the Court must resolve the parties' dispute about the binding effect of facts that were stipulated to as part of Groth's and Sunmeadow's consent judgment, assignment of rights, and covenant not to execute-commonly referred to as a "Morris agreement, " which derives its title from the eponymous case of United Servs. Auto. Ass'n v. Morris , 154 Ariz. 113, 741 P.2d 246 (1987). Associated Aviation Underwriters v. Wood , 209 Ariz. 137, 142 & n.1, 98 P.3d 572, 577 & n.1 (App. 2004). Generally, an insurer is free to litigate the issue of insurance coverage in a post-Morris agreement declaratory relief action over the insurer's indemnity obligation (a "post-Morris DRA"). Morris , 154 Ariz. at 120, 741 P.2d at 253. However, the court in Morris recognized that the divergent interests of insured and insurer presented a problem regarding the binding effect of facts stipulated to as part of the consent judgment. 154 Ariz. at 119-20 , 741 P.2d at 252-53. On the one hand, there needed to be some binding effect "because claimants would never settle with insureds if they never could receive any benefit." Id. at 120, 741 P.2d at 253. On the other hand, insureds would generally be "willing to agree to anything as long as plaintiff promised them full immunity." Id . (quoting Miller v. Shugart , 316 N.W.2d 729, 735 (Minn. 1982)).

Morris balanced these competing interests by distinguishing the insured's liability to the claimant from the insurer's duty to indemnify the insured for that liability. Generally, the binding effect of stipulated facts depends on whether they prove the liability of the insured or the insurer. Consistent with "general principles of indemnification law, " an insurer litigating coverage in a post-Morris DRA is bound by facts that establish the insured's liability to the claimant, but not by facts that would establish the insurer's liability to the insured. Id . If a stipulated fact establishes an element of coverage, it is not binding upon the insurer if the consent judgment could be sustained without that fact. Id .; see Farmers Ins. Co. of Ariz. v. Vagnozzi , 138 Ariz. 443, 448, 675 P.2d 703, 708 (1983) (suspending the preclusive effect of collateral estoppel when "there is an adversity of interests"); see also Restatement (Second) of Judgments § 58 (1982). This prevents the insured from using a Morris agreement as a vehicle "to obtain coverage that the insured did not purchase." Id.

For example, the tort claimant in Morris was shot after breaking into the insured's home. 154 Ariz. at 115 , 741 P.2d at 248. The insurer reserved its right to deny payment based on whether the shooting was negligent or intentional; the former mental state was covered while the latter was the subject of an exclusion. Id . As part of the consent judgment, it was stipulated that the "actions during the shooting incident were either negligent or intentional." Id. at 120, 741 P.2d at 253. The consent judgment could have been sustained either because the shooting was negligent or because the shooting was intentional, but the insurer would be obligated to indemnify only in the former scenario. Therefore, a stipulation that ...

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