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Cosgrove v. National Fire & Marine Insurance Co.

United States District Court, D. Arizona

April 10, 2017

KAREN COSGROVE, a single person, Plaintiff,
NATIONAL FIRE & MARINE INSURANCE COMPANY, a foreign insurer, Defendant.


          H. Russel Holland United States District Judge.

         Partial Summary Judgment Motions

         Plaintiff moves for partial summary judgment.[1] This motion is opposed, [2] and defendant also moves for partial summary judgment.[3] Defendant's motion for partial summary judgment is opposed.[4] After hearing oral argument on plaintiff's motion, the court granted plaintiff's motion on the record. Defense counsel agreed that in light of the court's ruling, defendant's motion for partial summary judgment was moot. What follows is a detailed order explaining the court's decision as to plaintiff's motion for partial summary judgment.


         Plaintiff is Karen Cosgrove. Defendant is National Fire & Marine Insurance Company.

         In October 2003, plaintiff hired WTM Construction, which was owned by William and Lana Marie Mitzel, to remodel her house. Plaintiff contended that WTM did a poor job, and on April 10, 2009, plaintiff sued WTM Construction and the Mitzels in state court.

         WTM was insured by defendant under policy number 72LP156131 for the period of April 28, 2003 through April 28, 2004. On July 10, 2009, defendant advised WTM that it would “assume the defense of WTM in the [state-court] Suit subject to a full and complete reservation” of rights.[5] Defendant advised WTM that it had retained Richard Righi to defend WTM.[6] Defendant also advised WTM that the policy contained a Subcontractora Exclusion (Endorsement M-5095) and thus

[t]o the extent that the damaged alleged in [the state-court Suit] arose out of operations performed for you by independent contractors or subcontractors and such independent contractors or subcontractors did not agree in writing to defend, indemnify and hold WTM harmless, failed to carry insurance with the provisions required by the Independent Contractors and Subcontractors Coverage Requirement Exclusion endorsement form(s) or otherwise failed to fulfill the requirements of the endorse-ment(s) in any respect, the Policy does not provide coverage for the [state-court] Suit.[7]

         The Subcontractors Exclusion provided:

This insurance does not apply to “bodily injury, ” “property damage, ” or “personal or advertising injury” arising out of operations performed for you by independent contractors or subcontractors unless:
(1) Such independent contractors or sub-contractors agree in writing to defend, indemnify, and hold harmless you and your affiliates, subsidiaries, directors, officers, employees, agents, and their representatives from and against all claims, damages, losses, and expenses attributable to, resulting from, or arising out of the independent contractor's or sub-contractor's operations performed for you, caused in whole or in part by any act or omission of the independent contractor or sub-contractor or any one directly or indirectly employed by any of them or anyone for whose acts any of them may be liable, regardless of whether or not it is caused in part by you; and
(2) Such independent contractors or sub-contractors carry insurance with coverage and limits of liability equal to or greater than those carried by you, including commercial general liability, workers' compensation and employers' liability insurance; and
(3) Such commercial general liability insurance provides coverage for the independent contractors' or subcontractors' indemnity obligations set forth in paragraph (1) above; and
(4) Such commercial general liability insurance names you as an individual insured with coverage consistent with the coverage provided in the ISO CG 2009 endorse-ment.[8]

         On June 2, 2009, Mr. Righi wrote to Anne Rohling, the adjuster handling the claim for defendant, to advise that he had “met with” Mr. Mitzel “to initiate the defense of” the state-court Suit and that he would “initiate attempts to gather as much information as possible regarding the plaintiffs' allegations and the extent to which WTM Construction actually performed work at the Cosgrove residence.”[9] Mr. Righi advised Rohling that “[a]s soon as I gather this information, I will provide you with an initial analysis for your file.”[10]

         On June 30, 2009, Mr. Righi provided his initial evaluation to Rohling.[11] Mr. Righi advised that he had learned that “[a]ll construction work was done by sub-contractors except for the framing” and that “[w]e have been unable to locate any sub-contract agreements.”[12]Mr. Righi testified that he thought he learned this information both from Mr. Mitzel and from a “review of the job file.”[13] Although the job file was eventually produced to all parties in the state-court Suit pursuant to Rule 26.1, Arizona Rules of Civil Procedure, the job file had not been produced in discovery as of June 30, 2009.[14]

         As it turned out, the initial information that Mr. Righi obtained about the subcontractors might not have been completely accurate. In a July 8, 2010 update, Mr. Righi informed Rohling that “[i]t appears that WTM did not perform the framing on this Project, but rather retained a company called Extreme Framing.”[15] Mr. Righi also advised Rohling that “[w]e have been unable to locate written contracts between WTM and th[e] subcontractors who performed work on the project. At this point, we are doubtful any such contracts exist.”[16]

         At his deposition, Mr. Righi was asked what led him to change his conclusion about whether WTM had done the framing on the project, and he responded:

I'm not exactly sure. What I think happened was Bill Mitzel must have found some documents and jogged his memory about the scope of the work and who did what. Because at the beginning of the case, he just wasn't clear about a lot of the details. You know, it was a 6-year old project at that time. And so he just didn't have a real specific memory of certain ... details. And it took a while for us to obtain documents that would help us sort of recreate the project. And I think that's probably what happened is we found some additional materials or he remembered additional details somehow.[17]

         Throughout his representation of WTM, Mr. Righi provided Rohling with updates.[18] He testified that his firm “report[s] our cases the same way. We provide information that is out there in the public domain... Certainly nothing secretive, nothing privileged in the sense that it could harm the client.”[19] Mr. Righi further testified that “we report all the facts, all the developments, everything that happens, because what we're reporting is ... in the record. It's in a deposition or disclosure or it's in a depository. It's out there for public consumption. So if that's the case, we report it.”[20] But, Mr. Righi testified that “if a client tells me something privileged, tells me something important, I'm not going to report that.”[21] Mr. Righi did not consider the information about the subcontracts to be confidential or privileged information because it “was very clear in the documents. It was published to everyone.”[22]

         In April 2010, Mr. Righi filed a third-party complaint in state court on behalf of WTM against seven of the subcontractors.[23] Mr. Righi testified that such third-party complaints are filed “[i]n any case where we are representing a general contractor” because “it's important to transfer the risk to the extent we can.”[24] In the third-party complaint, WTM asserted common law implied indemnity claims against the subcontractors.[25] Mr. Righi testified that common law implied indemnity claims were asserted, as opposed to express indemnity claims, because there were no subcontractor agreements.[26] Mr. Righi testified that “by filing a third-party complaint and only having common law claims, it's obvious that there are no subcontracts.”[27]

         At some point in time, Rohling determined that defendant had an 80% chance of defeating coverage based on the Subcontractors Exclusion.[28] She testified that two of the facts she relied on in reaching this determination were that subcontractors had done all or most of the work on plaintiff's home and that WTM had no contracts with any of the subcontractors.[29] In fact, Rohling noted that “Coverage Counsel advises that under Arizona law, [the Subcontractors Exclusion] may exclude coverage on this claim. Per defense Counsel, WTM did no[t] produce contracts with subcontractors. Therefore, I estimated that the court would allow the exclusion and decide that there is no coverage under the policy 80% of the time.”[30]

         Rohling's determination that there was an 80% chance of defeating coverage impacted settlement negotiations in the state-court Suit. For example, at one point Mr. Righi recommended settling the state-court Suit for $110, 000 and Rohling recommended $23, 000.[31]Rohling testified that the difference between Mr. Righi's recommendation and hers was “[t]he analysis on the coverage.”[32] As another example, in February 2011, plaintiff made a $109, 000 Offer of Judgment to settle her claims against WTM.[33] Mr. Righi requested “authority of up to $109, 000 with which to negotiate a settlement.”[34] But, defendant rejected the $109, 000 offer.[35]

         In April 2013, on the eve of trial, plaintiff, WTM, and the Mitzels settled the state-court Suit, and on September 17, 2013, “they executed a Morris agreement[, ]”[36] stipulating to a judgment of $443, 690.[37] The state court held a reasonableness hearing, in which defendant participated. The state court concluded that “a reasonable total settlement would be $304, 373[.]”[38] From the $304, 373 total settlement, $50, 000 was deducted for the $25, 000 WTM and the Mitzels had agreed to pay to settle a fraud and misrepresentation claim and the $25, 000 that WTM and the Mitzels agreed to pay “if Cosgrove collected less than $443, 690 from WTM's insurance carrier.”[39] Thus, the court found that “the net reasonable settlement is $254, 373.”[40] “Under the Morris Agreement, WTM assigned to Cosgrove all of its rights, title, interests, proceeds, causes of action, and claims of any kind whatsoever related to the project that WTM may have had against its insurers, including [defendant].”[41]

         On July 25, 2014, plaintiff commenced this action in state court. The case was subsequently removed to this court. In her amended complaint, plaintiff asserts a breach of contract claim and a bad faith claim against defendant. Plaintiff alleges that defendant has breached the WTM insurance policy “by failing to meet its indemnity obligations under the insurance policy and by failing to make payment for the $254, 373 judgment.”[42] Plaintiff also alleges that defendant has breached the WTM insurance policy

by waiting an unreasonable amount of time to make a determination as to indemnification and/or giving untimely notice to WTM that it would not indemnify it for any damages awarded Cosgrove or judgment entered against WTM, thereby prejudicing and damaging WTM by precluding it from (a) settling the matter for a lesser amount, (b) avoiding a larger judgment, and (c) avoiding the $25, 000 payment to Cosgrove.[43]

         Plaintiff alleges that defendant breached its duty of good faith by “seek[ing] to reduce the amount of judgment from $443, 690 to $254, 373, thereby ensuring that WTM would be liable to Cosgrove for the $25, 000 payment.”[44] Plaintiff further alleges that defendant breached its duty of good faith when it rejected her $109, 000 settlement offer, which was less than the policy limits.[45] Plaintiff alleges that defendant “gave more consideration to its interests than WTM's and thereby placed its interests before WTM's when it rejected the offer - an offer that was predicated on WTM's and National Fire's own assessment of the damages Cosgrove had incurred as a result of WTM's conduct on the project.”[46]

         In its answer to plaintiff's amended complaint, defendant asserted a number of affirmative defenses, including that it “did not breach the contract; at all relevant times, National Fire acted in good faith; [and] the policy from which [p]laintiff seeks recovery does not cover the losses alleged in the Amended Complaint[.]”[47] Defendant has also asserted a counterclaim for declaratory relief. Defendant seeks a declaration that it “has no obligation to indemnify any party for any judgment or settlement reached” in the state-court Suit and that its “policies provide no coverage for the claims asserted in” the state-court Suit “and/or the stipulated judgment entered” therein.[48]

         Plaintiff moved for summary judgment that defendant is estopped from asserting its coverage defenses, although her briefing is limited to the coverage defense based on the Subcontractors Exclusion. And, defendant moved for partial summary judgment on ...

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