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Desert Ridge Resort LLC v. Occidental Fire & Cas. Co.

United States District Court, D. Arizona

October 7, 2015

Desert Ridge Resort LLC, Plaintiff,
Occidental Fire & Casualty Company of North Carolina, Defendant

         Decided October 5, 2015

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          For Desert Ridge Resort LLC, a Delaware limited liability company with its principal place of business in Arizona, Plaintiff: Chris Robert Baniszewski, LEAD ATTORNEY, Warner Angle Hallam Jackson & Formanek PLC, Phoenix, AZ; Gary S Thompson, Tara Alyssa Brennan, LEAD ATTORNEYS, Reed Smith LLP - Washington, DC, Washington, DC; Michael S Dingman, LEAD ATTORNEY, Reed Smith LLP - Falls Church, VA, Falls Church, VA.

         For Occidental Fire & Casualty Company of North Carolina, a corporation doing business in Arizona, Defendant: Douglas L Christian, Gena LoPresto Sluga, Lon Haley Johnson, Stephen M Dichter, LEAD ATTORNEYS, Christian Dichter & Sluga PC, Phoenix, AZ.

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         Douglas L. Rayes, United States District Judge.

         Before the Court are Plaintiff Desert Ridge Resort, LLC's (" DRR" ) motion for summary judgment, (Doc. 77), and Defendant Occidental Fire & Casualty Company of North Carolina's (" Occidental" ) motion for summary judgment, (Doc. 89). DRR has also filed a motion to exclude the expert report and testimony of James G. Woelfel, (Doc. 83), and a motion to strike Occidental's reply brief and reply statement of facts, (Doc. 102). Occidental has filed a motion to supplement its statement of facts, (Doc. 114). All the motions are fully briefed, and neither party has requested oral argument. For the reasons stated below, Occidental's motion for summary judgment is granted, DRR's motion for summary judgment is denied, DRR's motion to strike and motion in limine are denied, and Occidental's motion to supplement is denied.


         DRR owns the J.W. Marriott Phoenix Desert Ridge Resort & Spa in Phoenix, Arizona (the " Resort" ). (Doc 1-1, ¶ 2.) In late 2000, DRR hired Hunt Construction Group, Inc. (" Hunt" ) to construct the $140 million Resort. ( Id., ¶ 3.) Hunt subcontracted much of the work to other contractors, including West Coast Marble and Tile Contractor, LLC (" West Coast" ), which tiled the bathrooms and installed the shower stalls, floors, curbs, and thresholds. ( Id. ) In order to limit its liability arising from its work, West Coast purchased two commercial general liability (" CGL" ) policies from Occidental with policy periods extending from February 11, 2003 to February 11, 2004 (" 03-04 policy" ), and February 11, 2004 to February 11, 2005 (" 04-05 policy" ). (Doc. 78, ¶ 3.)

         In March 2010, DRR discovered significant water damage in the Resort's walls caused by construction defects in the shower stalls. ( Id., ¶ 1.) Experts concluded that West Coast improperly installed " end dams" on the shower floors and incorrectly constructed the walls of the shower stall. ( Id. ) As such, from the moment the showers were used, water began continuously leaking into the walls and floor, causing substantial structural damage. ( Id. ) DRR filed suit against West

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Coast and several other subcontractors in Arizona state court alleging negligence, breach of implied warranty, and indemnity (the " Underlying Action" ). (Doc. 1-1, ¶ 6.) Zurich Insurance Company, a CGL insurer, defended all of the subcontractors, including West Coast, in the Underlying Action under a common " project specific" insurance program. (Doc. 78, ¶ 11.) Three additional CGL insurers also provided for West Coast's defense of DRR's suit. ( Id. )

         On March 27, 2012, West Coast filed a claim under each of the two CGL policies it purchased from Occidental requesting a defense and indemnification in the Underlying Action. ( Id., ¶ 7.) Occidental received the claims the next day, and Julie Lindemann was assigned as the file handler. (Doc. 94, ¶ 8.) On May 7, 2012, West Coast sent a letter to Occidental stating that it had not received a response to its tender and requested that copies of the CGL policies be sent by May 21, 2012. ( Id., ¶ 10.)

         Several months later, on November 27, 2012, Occidental denied West Coast's claims under both policies on two independent grounds: (1) the property damage " manifested subsequent to the expiration of the policy period" because it was not discovered until March 2010, and (2) the damage was caused by fungal growth, which is excluded from coverage by the policies. (Docs. 79-4 at 9, 79-5 at 9.)[1] Occidental cited several coverage provisions in the denial letters and stated, " we do not waive any of our rights or any of the other provisions or conditions of the policy[.]" ( Id. ) Shortly thereafter, West Coast requested that Occidental reevaluate the claims and send copies of the policies. (Doc. 94, ¶ ¶ 19-20.)

         On May 22, 2014, the Underlying Action was settled. As part of the settlement, DRR and West Coast entered into an agreement under Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (1969), whereby the parties stipulated to entry of a $12 million judgment in favor of DRR; West Coast assigned all of its rights, claims, and causes of action against Occidental to DRR; and DRR agreed not to take action or collect on the judgment against West Coast. (Doc. 78, ¶ 41.) DRR received a total of $8 million from the other defendants in the Underlying Action. (Doc. 96, ¶ 3.)

         In July 2014, DRR, as assignee of West Coast's rights under the policies, filed the instant action against Occidental alleging claims for breach of contract, insurance bad faith, and a declaratory judgment that Occidental had a duty to defend and indemnify West Coast in the Underlying Action. (Doc. 1-1.) Both parties now move for summary judgment on all claims.[2]


         I. Legal Standard

         Summary judgment is appropriate when, viewing the facts in a light most favorable to the nonmoving party, " 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). Summary judgment may also be entered " against a party who fails to make a showing

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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." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The party seeking summary judgment " bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact." Id. at 323. The burden then shifts to the non-movant to establish the existence of a material fact. Id. at 324. The non-movant " must do more than simply show that there is some metaphysical doubt as to the material facts, " and instead must " come forward with 'specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (quoting Fed.R.Civ.P. 56(e) (1963)). A dispute about a fact is " genuine" if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). When presented with cross-motions for summary judgment, " the court must consider each party's evidence, regardless under which motion the evidence is offered." Las Vegas Sands, LLC v. Nehme, 632 F.3d 526, 532 (9th Cir. 2011).

         II. Analysis

         Occidental argues the policies do not cover the damage caused by West Coast's faulty construction of the showers. Specifically, it asserts (1) the damage is not covered because it occurred before the policies came into effect (" pre-existing damage" clause), (2) at least part of the damage is not covered because it includes the cost of removing and replacing West Coast's own work (" your work" exclusion), and (3) certain damages are excluded because they were caused by mold (mold exclusion). DRR asserts Occidental is precluded from raising these grounds for denying coverage because they were not identified in Occidental's November 2012 denial letters. DRR also argues that none of these grounds bar recovery under the policies.

         A. Grounds for Denial in the Damron Context

         The threshold issue in this case is whether Occidental may raise previously unidentified bases for denying coverage under the policies. Occidental initially denied West Coast's claims because: (1) the damage manifested after the policy periods expired, and (2) some of the damage was barred by the mold exclusion. (Doc. 79-4 at 9; Doc. 79-5 at 9.) Although Occidental quoted the " your work" exclusion, it did not specifically rely on it as a basis for denying the claims. Additionally, it is undisputed that Occidental did not rely on the " pre-existing damage" clause as a ground for denying the claims. (Doc. 78, ¶ 12; Doc. 94, ¶ 12.) DRR argues that, in the Damron context, an insurer may only litigate its previously identified bases for denying coverage, and thus Occidental cannot raise either of these new grounds as defenses to this action.

         A Damron agreement is a " settlement agreement between an insured and an injured party in circumstances where the insurer has declined to defend a suit against the insured. In such an agreement, the insured agrees to liability for the underlying incident and assigns all rights against the insurance company to the injured party." Quihuis v. State Farm Mut. Auto Ins. Co., 748 F.3d 911, 912 n.1 (9th Cir. 2014). Damron agreements do not " create coverage that the insured did not purchase. . . . To the contrary, [the insurer]

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is liable for the stipulated judgment only if the judgment constituted a liability falling within its policy." Colo. Cas. Ins. Co. v. Safety Control Co., 230 Ariz. 560, 567, 288 P.3d 764, 771 (Ct.App. 2012) (internal quotations and citations omitted).

         Similarly, where the insurer agrees to defend the insured but does so under a reservation of rights to later contest coverage, and the insured and injured party later enter into a stipulated judgment and assignment of rights, the agreement is called a Morris agreement. See United Servs. Auto. Ass'n v. Morris, 154 Ariz. 113, 119, 741 P.2d 246, 252 (1987). The insurer's reservation of rights must " fairly inform[] the insured of the insurer's position, " Equity Gen. Ins. Co. v. C& A Realty Co., 148 Ariz. 515, 518, 715 P.2d 768, 771 (Ct.App. 1985), and " an insurer with a coverage defense must defend its insured under a properly communicated reservation of rights or it will lose its right to later litigate coverage, " Morris, 154 Ariz. at 116, 741 P.2d at 249.

          Morris agreements require the insurer to identify all of its bases for denying coverage. Grounds not identified in the reservation of rights may not be asserted later by the insurer as defenses to coverage. The policy behind this rule for Morris agreements stems from the competing interests of the insured and insurer that arise during the insurer's defense of the third-party action. When the insurer defends the insured under a reservation of rights, the insurer controls the defense of the insured, including the right to settle the case with the injured third-party. No conflict of interest exists in cases where the insurer has not indicated that it may deny coverage for the potential liability because the insured likely believes any liability it faces will be covered by the policy. But " when a claimant seeks damages the insurer may contend are not covered under the policy, the interests of the insured and insurer diverge." Pueblo Santa Fe Townhomes Owners' Ass'n v. Transcon. Ins. Co., 218 Ariz. 13, 19, 178 P.3d 485, 491 (Ct.App. 2008). If the insured does not know the grounds on which the insurer may contest coverage, the insured is placed at a disadvantage because it loses the opportunity to investigate and prepare a defense on its own. Therefore, in the Morris context, where " [b]y virtue of its duty to defend, an insurer gains 'the advantage of exclusive control' over the litigation[, ]" id. at 18, 178 P.3d at 490 (quoting Morris, 154 Ariz. at 117, 741 P.2d at 250), it would be unreasonable to permit the insurer to not disclose potential bases for denying coverage. If the insured is aware of the grounds on which it intends to deny coverage, the insured " may protect itself from the sharp thrust of personal liability by assigning to the claimant the insured's coverage rights ...

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