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Manios Properties, LLC v. Riverport Insurance Co. of California

United States District Court, D. Arizona

August 15, 2017

Manios Properties, LLC, a California limited liability company, Plaintiff,
Riverport Insurance Company of California, an Iowa corporation, Defendant.


          Douglas L. Rayes, United States District Judge.

         Plaintiff Manios Properties filed suit in state court against its property insurer, Defendant Riverport Insurance Company, for breach of contract, breach of the implied covenant of good faith and fair dealing, and bad faith. The case was removed to this Court based on diversity jurisdiction. (Doc. 1.) Defendant subsequently moved to stay the action and compel arbitration. (Doc. 6.) The motion is fully briefed. (Docs. 13, 18.) For reasons stated below, the motion is denied.[1]

         I. Background

         Plaintiff owns property consisting of five commercial real estate lots in Phoenix. Defendant issued an insurance policy covering the property effective August 30, 2015. Plaintiff alleges that in late October 2015, a hail storm caused considerable damage to the property for which it made a claim under the policy. Defendant denied the claim, asserting that the damage was the result of a prior storm that occurred before the policy took effect. (Doc. 13-5.) Plaintiff hired a public adjuster who sent a letter to Defendant challenging the denial of coverage. (Doc. 13-6.) Defendant acknowledged receipt of the letter, but did not substantively respond. This suit then commenced.

         Defendant contends that Plaintiff's claims are subject to arbitration pursuant to the policy's mandatory arbitration provision, which provides, in pertinent part: “In case we fail to agree with you as to the meaning or effect of any provision of this policy, the disagreement shall be resolved by binding arbitration[.]” (Doc. 1-1 at 41.) Plaintiff argues that the arbitration clause is unenforceable for several reasons: (1) the clause is invalid due to a conflict with Arizona's standard fire insurance policy, (2) the clause is unconscionable, (3) Defendant has waived the right to arbitrate, and (4) the present claims fall outside the scope of the arbitration clause. Because the Court agrees with the latter argument, it need not address the other three.

         II. Legal Standard

         The Federal Arbitration Act (FAA) provides that written agreements to arbitrate disputes “shall be valid, irrevocable, and enforceable except upon grounds that exist at common law for the revocation of a contract.” 9 U.S.C. § 2; see AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011) (discussing liberal federal policy favoring valid arbitration agreements). The district court's role is to answer two threshold questions: does a valid agreement to arbitrate exist, and does the agreement encompass the dispute at issue. Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000). The court must compel arbitration if both questions are answered in the affirmative.

         III. Discussion

         Here, the Court finds that the policy's arbitration clause, even if valid, does not encompass the dispute at issue because the dispute is over the actual date of loss, not the meaning or effect of any policy provision. Under Arizona law, if “the provisions of the contract are plain and unambiguous upon their face, they must be applied as written, and the court will not pervert or do violence to the language used, or expand it beyond its plain and ordinary meaning or add something to the contract which the parties have not put there.” In Re Avondale Gateway Ctr. Entitlement, LLC, No. 02-09-BK-12153-CGC, 2011 WL 1376997, at *1 (D. Ariz. Apr. 12, 2011) (quoting D.M.A.F.B. Fed. Credit Union v. Employers Mut. Liab. Ins. Co., 396 P.2d 20, 23 (Ariz. 1964)). This rule of strict construction applies to provisions of insurance policies that also “are to be construed in a manner according to their plain and ordinary meaning.” U-Haul Int'l, Inc. v. Lumbermens Mut. Cas. Co., No. CV 04-0662 PHC-DGC, 2006 WL 2934352, at *2 (D. Ariz. Oct. 13, 2006) (quoting Sparks v. Republic Nat. Life Ins. Co., 647 P.2d 1127, 1132 (Ariz. 1982)). Thus, because insurance contracts are strictly construed, insureds “are only bound to arbitrate those issues which by clear language they have agreed to arbitrate; arbitration agreements will not be extended by construction or implication.” Allstate Ins. Co. v. Cook, 519 P.2d 66, 68 (Ariz.Ct.App. 1974).

         The arbitration clause in this case, by its express terms, applies only to disagreements over the “meaning or effect of any provision” of the policy. (Doc. 1-1 at 41.) The parties dispute when the loss occurred, but do not disagree as to when the policy was in effect or the meaning of any policy provision. Thus, the arbitration clause - on its face - does not encompass the dispute at issue.

         Defendant alludes in its reply brief to some dispute over whether the damage was covered as a direct physical loss caused by an “accident” (Doc. 18 at 8), but Defendant previously made clear in its denial letter that coverage was being denied based on its determination that “the loss occurred prior to the inception of the very first Riverport policy[.]” (Doc. 13-5 at 2 (emphasis added).) Defendant's investigation of the loss confirms that the coverage dispute is one of timing, as the investigation included research of the National Weather Service hail history and the use of inspectors who purportedly measured the size of the hail damage from the 2010 and 2015 storms. (Id.) Defendant ultimately concluded that the claimed loss occurred from the hail storm in October 2010 rather than the one five years later. (Id.) Thus, while the parties may dispute as a factual matter when the loss occurred, they do not disagree about the meaning or effect of any “provision” of the policy.

         Contrary to Defendant's assertion (Doc. 18 at 8), there is no good faith dispute over whether a hail storm - whenever it occurs - is an “accident” as defined in the policy: “an undesigned, unexpected and rapidly occurring event” (Doc. 13-5 at 3). The denial letter makes clear that coverage was denied because the accident - that is, the hail storm - did not occur during a covered policy period:

As detailed above, investigation evidences that the damage here is not consistent with damage from hail from the October 25, 2015 hail storm but rather damage from a hail storm occurring on October 5, 2010 based on the size of the hail. As such the loss did not result from an accident which occurred during the current policy period nor any prior policy period for which Riverport issued a policy to the insured. Riverport thus denies coverage for this loss. (Id. at 3-4 (emphasis added).)

         It is worth noting that Plaintiff responded to the denial letter by challenging Defendant's conclusion that the hail damage was “likely caused by another storm” and asserting that Defendant has the burden of proving any “pre-existing condition.” (Doc. 13-6 at 2-3.) Even in its reply brief, Defendant makes clear that the heart of the dispute is the actual date of loss: “Here, the parties obviously dispute whether the alleged hail damage resulted from an accident occurring during the policy period (storm in October 2015, as Plaintiff claims), versus an earlier storm (such as the storm in October 2010, as Riverport claims).” (Doc. 18 at 8-9.) In short, the issue in this case ...

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