United States District Court, D. Arizona
Marcus Labertew a/k/a Mark Labertew and Jane Doe Labertew, Husband and Wife; Joh McDermott a/k/a/ Jack McDermott and Jennifer McDermott, Husband and Wife, Plaintiff,
v.
Chartis Property Casualty Company, Otherwise Known as AIG Casualty Company, and 21st Century North America Insurance Company f/k/a American International Insurance Company, Defendant.
ORDER
David
G Campbell Senior United States District Judge.
Plaintiffs
Marcus Labertew and John and Jennifer McDermott seek to
enforce a judgment against Defendant Chartis Property
Casualty Company, otherwise known as AIG Casualty Company and
21st Century North America Insurance Company, formerly known
as American International Insurance Company. Doc. 42.
Plaintiffs have filed a partial motion for summary judgment
(Doc. 96) and Defendant has filed a motion for summary
judgment (Doc. 94). The motions are fully briefed (Docs. 100,
102, 108, 109), and although Defendant requests oral
argument, the Court concludes that such argument will not aid
its decision. See Fed. R. Civ. P. 78(b); LRCiv
7.2(f). For reasons stated below, the Court will deny
Plaintiffs' motion and grant Defendant's motion.
I.
Background.
The
following facts are undisputed unless otherwise noted.
Plaintiffs
Marcus Labertew and John McDermott were former employees and
officers of BioNovix, Inc., a business engaged in the
distribution and sale of health products. Doc. 95-3 at 3
¶¶ 2, 6. Loral Langemeier was a BioNovix investor
and director. Id. ¶ 2. Ms. Langemeier held a
homeowner's insurance policy and an excess insurance
policy issued by Defendant for the period from June 26, 2009
to June 26, 2010, both of which included personal liability
coverage. Doc. 95 ¶ 1.
Plaintiffs
sued Ms. Langemeier and Fred Auzenne in state court,
asserting breach of contract, defamation, fraud, and other
claims arising out of their employment with BioNovix. Doc.
95-3; see Labertew v. Auzenne, No. CV2010-051209
(Ariz. Super. Ct. Mar. 11, 2010). This lawsuit will be
referred to in this order as the “underlying
lawsuit.” Plaintiffs alleged that Ms. Langemeier and
Mr. Auzenne committed the wrongful acts in their personal
capacity and not on behalf of BioNovix. Id. at 3
¶ 3. After more than two years of litigation, Ms.
Langemeier tendered the defense of the underlying lawsuit to
Defendant. Her tender letter cited Arizona case law and
included a copy of Plaintiffs' first amended complaint,
eight pages of deposition from Mr. McDermott, and seven pages
of an oral argument transcript. Doc. 95 ¶ 6. In a letter
dated February 4, 2013, Defendant informed Ms. Langemeier
that the claims in the underlying lawsuit were excluded by
the director's errors or omission exclusion and the
business pursuits exclusion of her insurance policies. Doc.
48 at 11-15. The letter stated that if Ms. Langemeier
disagreed, she should provide additional materials including
transcripts of all depositions, pleadings, summary judgment
motions, pleadings for other related cases, and any other
documents that may be helpful. Id.
The
underlying lawsuit went to trial in state court, and, on the
third day of trial, Plaintiffs and Ms. Langemeier entered
into a stipulated judgment against Ms. Langemeier for $1.5
million. Doc. 1-16 at 27-28. The judgment was part of what is
commonly called a “Damron agreement”
under Arizona law. It included a covenant not to execute on
the judgment against Ms. Langemeier and an assignment to
Plaintiffs of Ms. Langemeier's insurance coverage and bad
faith claims against Defendant. See Doc. 103-1;
see also Damron v. Sledge, 460 P.2d 997 (Ariz.
1969).
Rather
than filing a new action against Defendant asserting the
claims assigned by Ms. Langemeier, Plaintiffs chose to
attempt to collect the stipulated judgment through a
garnishment action against Defendant. Doc. 1-16 at 41-45.
Plaintiffs initiated the garnishment action in state court,
and Defendant removed it to this Court and answered the writs
of garnishment, denying that it owed any funds to Plaintiffs.
Docs. 6, 7. Plaintiffs did not file timely objections to the
answers, and Defendant requested that the Court enter
judgment in its favor. Doc. 9. The Court did so, finding that
under Federal Rule of Civil Procedure 69(a), Arizona
procedures governed the removed garnishment proceeding and
Plaintiffs had failed to comply with Arizona's ten-day
objection requirement. Docs. 26; 27. On appeal, the Ninth
Circuit reversed, holding that Rule 69 did not apply to this
case because there was no federal judgment. Doc. 38. The
court of appeals remanded the case with instructions to allow
re-pleading. Doc. 38.
After
remand, Plaintiffs filed an amended complaint asserting the
insurance coverage and bad faith claims assigned to them by
Ms. Langemeier and seeking to recover the $1.5 million
stipulated judgment, as well as damages for insurance bad
faith. Doc. 42 at 3-4. Plaintiffs now move for summary
judgment on the choice of law in this case, arguing that
California law should apply. Doc. 96. Defendant moves for
summary judgment on Plaintiffs' claims. Doc. 94.
II.
Legal Standard.
A 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.” Celotex Corp. v. Catrett,
477 U.S. 317, 323 (1986). Summary judgment is appropriate if
the evidence, viewed in the light most favorable to the
nonmoving party, 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).
Summary judgment is also appropriate against a party who
“fails to make a showing 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, 477 U.S. at 322. Only
disputes over facts that might affect the outcome of the suit
will preclude summary judgment, and the disputed evidence
must be “such that a reasonable jury could return a
verdict for the nonmoving party.” Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248 (1986).
III.
Discussion.
A.
Plaintiff's Motion for Partial Summary Judgment.
1.
Choice of Law for Contracts.
In
diversity cases, “the district court must apply the
choice-of-law rules of the state in which it sits.”
Abogados v. AT & T, Inc., 223 F.3d 932, 934 (9th
Cir. 2000). Arizona follows the Restatement's “most
significant relationship” test. See Bates v. Super.
Ct., 749 P.2d 1367, 1369 (Ariz. 1988); Magellan Real
Estate Inv. Tr. v. Losch, 109 F.Supp.2d 1144, 1155 (D.
Ariz. 2000). The Restatement contains general principles to
be applied to all conflicts, general principles to apply to
contracts, and specific principles to apply to insurance
contracts. Restatement (Second) of Conflict of Laws
§§ 6, 188, 193.
Section
193 provides that the rights created by a contract of fire,
surety, or casualty insurance “are determined 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.” That is “unless with respect to the
particular issue, some other state has a more significant
relationship under the principles stated in § 6 to the
transaction and the parties, in which event the local law of
the other state will be applied.” Restatement (Second)
of Conflicts § 193; see also Beckler v. State Farm
Mut. Auto Ins., 987 P.2d 768, 772 (Ariz.Ct.App. 1999).
Courts should consider the choice-of-law principles in §
6 when considering if another state has a more significant
relationship to the insurance contract and the parties. The
Court may also look to § 188 to inform the § 6
analysis. Id. cmt. c.
Plaintiffs
argue that California law applies because one of Ms.
Langemeier's insured risks is located there, and it has
the most significant relationship to the transaction and the
parties. Doc. 96 at 3-4. Defendant asserts that Arizona law
applies because it governs the underlying Damron
agreement, the insured risk is located in Arizona, and
Arizona has the most significant relationship to the parties.
Doc. 100 at 7-12.
a.
The Insured Risk.
The
insured risk is the object or activity that is the subject
matter of the insurance policy, and its principal location is
in the “state where it will be during at least the
major portion of the insurance period.” Restatement
(Second) of Conflicts § 193 cmt. b. Under § 193,
the location of the insured risk should be given the greatest
weight when determining which state's law applies, so
long as the risk can be located, at least principally, in a
single state. Id. But the importance of the location
of the insured risk varies from case to case. Id.
Plaintiffs argue that the insured risks in this case are
located in Nevada and California because those are the
locations of the properties covered by Ms. Langemeier's
homeowner's and excess liability insurance policies. Doc.
96 at 3.
Courts
are split on whether an “insured risk” under a
homeowner's policy would continue to be the home when the
suit is filed under the policy's personal liability
coverage. Compare Metropolitan Prop & Cas. Ins. v.
Gilson, No. CV-09-01874-PHX-GMS, 2010 WL 2721906, at *2
(D. Ariz. July 7, 2010) (location of the home is the location
of the insured risk), with AIG Prop. Casualty Ins. v.
Green, 217 F.Supp.3d 415, 425 n.11 (D. Mass. Nov. 8,
2016) (noting that the insured's personal liability is
the insured risk, so the proper location should be the
insured's domicile).
In
Beckler v. State Farm Mut. Auto. Ins., 987 P.2d 768
(Ariz.Ct.App. 1999), the plaintiffs sought payment from an
underinsured motorist policy when their son was injured as a
pedestrian by a hit-and-run driver. Id. Plaintiffs
resided in Nebraska, but their son and their insured car were
in Arizona. Id. In its choice-of-law analysis, the
Arizona Court of Appeals determined that the location of
plaintiffs' Arizona vehicle was dispositive because the
automobile was the policy's insured risk. Id.
Even though underinsured motorist policies will cover the
insured individual around the world, the policy coverage
would not exist but for the plaintiffs' car. Id.
n.4.
Ms.
Langemeier's personal liability coverage applies to
actions she personally takes that give rise to liability, not
conditions in her homes, and therefore logically could attach
to her, not her homes. But the liability insurance would not
exist without her homes, and, under Beckler, the
homes therefore are the “insured risks” for
purposes of construing her insurance contracts. Ms.
Langemeier's homeowners' insurance policy covers
three homes in Nevada. See Doc. 103-3 at 3-40. And her excess
liability policy covers three homes in Nevada and one in
California. Doc. 103-3 at 80. The locations of the insured
risks are therefore Nevada for the homeowner's policy and
California and Nevada for the excess liability policy.
See Doc. 97 ¶ 9.
Defendant
argues that the insured risk is the defense of the suit in
Arizona (Doc. 100), but this argument is not consistent with
the definition of “insured risk.” The insured
risk was the liability arising from Ms. Langemeier's
actions, not the lawsuit itself. Defendant also argues that
the place of insured risk is less important because this is a
multiple risk policy, considered under comment f to §
193. Doc. 100 at 7-8. A multiple risk insurance policy is one
in which a single policy insures risks in several states.
Restatement (Second) of Conflicts § 193 cmt. f. A
multiple risk policy usually incorporates any special local
laws of the location of the insured risk. Id. While
Ms. Langemeier's excess liability policy does appear to
be a multiple risk policy, Defendant does not explain why
that fact would affect the Court's analysis because none
of the insured risks were located in Arizona.
b.
Section 6 and 188 Factors.
After
determining the location of the insured risk, the Court must
consider whether another state has a more significant
relationship to the contract and the parties. See
Restatement (Second) of Conflicts § 193. To determine if
there is another state with a more significant relationship,
the Court must examine the principles in § 6, as well as
the factors in § 188. Id. The significant
relationship test is qualitative not quantitative. See
Bates, 749 P.2d at 1370.
Section
6 identifies several underlying principles to aid in
evaluating all conflicts: (1) the needs of the interstate and
international systems; (2) the relevant policies of the
forum; (3) the relevant policies of other interested states
and the relative interests of those states in determination
of the particular issue; (4) the protection of justified
expectations; (5) the basic policies underlying the
particular field of law; (6) certainty, predictability, and
uniformity of result; and (7) ease in the determination and
application of the law to be applied. Restatement (Second) of
Conflict of Laws § 6.
Section
188 provides additional contract-specific factors, including
the (1) place of contracting; (2) place of negotiation of the
contract; (3) place of performance; (4) location of the
subject matter of the contract; and (5) domicile, residence,
nationality, place of incorporation, and place of business of
the parties. Restatement (Second) of Conflict of Laws §
188(2).
Considering
the relevant factors, Arizona is the state with the most
significant relationship. The parties are all residents of
Maricopa County, Arizona, and BioNovix's principal place
of business is Arizona. See 95-3 ¶ 2. The
relevant underlying events, including all BioNovix business
interactions, phone calls, and employment contracts occurred
in Arizona. See id. ¶¶ 6-26. The only
event that did not occur in Arizona was the arrest Plaintiffs
alleged to support their false imprisonment claim.
Id. ¶¶ 38-42. The arrest occurred in South
Korea when Mr. McDermott was traveling on BioNovix business,
and Ms. Langemeier called the Korean distributor from Arizona
to report Mr. McDermott for withholding funds from their
Korean distributor. See id. When Ms. Langemeier
tendered her defense, she cited Arizona law, and Defendant
sought Arizona coverage analysis to determine if Ms.
Langemeier's claims were covered. See Doc. 103-2
at 1-3, 13-14. Further, the underlying lawsuit was filed in
Arizona and under Arizona law, and no party discussed
California law before this motion. The weight of the evidence
shows that the parties expected Arizona law to apply.
Plaintiffs cite no evidence to the contrary.[1]
Plaintiffs
argue that California law should govern because it is the
location where performance and breach of the insurance
contract occurred. Doc. 96 at 4. The claims handling was in
California and the denial of defense and indemnification
occurred in California and was later approved in New Jersey.
Id. But as noted above, Defendant applied Arizona
law in analyzing its duty to defend, and the alleged breach
of contract is the failure to defend, which occurred in
Arizona. See cf. Landi v. Arkules, 835 P.2d 458,
462-63 (Ariz.Ct.App. 1992) (finding Arizona law applied where
the only connection to Illinois was the location of the
private investigator's office, but the investigation and
all of the parties were in Arizona). Under Plaintiffs'
reading, every insured would be subject to the law of the
state where their claims were processed, giving insurers the
choice of law based on where they send the claim. See cf.
Bates, 749 P.2d at 1372 (as a national coverage provider
the insured could not reasonably expect that every aspect of
its conduct would be governed by the law of the state in
which the contract originated). This is not a logical
application of § 6 or § 188.
Plaintiffs
also note that California law has a public policy prohibiting
insurance carriers from refusing a defense without having all
the facts before it. Doc. 109 at 9 (citing Mullen v.
Glens Falls Ins., 73 Cal.App.3d 163, 173-74 (Ct. App.
1977). Plaintiffs misrepresent the holding of
Mullen, which states that the duty to defend arises
whenever the insurer “ascertains facts which give rise
to the potential of liability under the policy.” 73
Cal.App. at 169. In these circumstances under California law,
the crucial question is whether the insurer is in possession
of factual information giving rise to potential liability.
Id. at 170. If an insurer has such information, then
the insurer cannot refuse to defend the lawsuit without
further investigation. Id. at 173 (“[A]n
insurance company, without making an investigation of any
kind, [cannot] deny an insured a defense at a time when it
has reason to believe that there is potential liability under
the insurance policy.”). This is substantially similar
to Arizona law, which requires an insurer to investigate if
“the insured makes some factual showing that the suit
is actually one for damages resulting from events that fall
under policy terms.” Lennar Corp. v. Auto-Owners
Ins., 151 P.3d 538, 547 (Ariz.Ct.App. 2007). No. strong
policy difference warrants applying California law.
The
Court finds Arizona is the state with the most significant
relationship and that Arizona law ...