1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA
9 Millennium Auto Sales LLC, No. CV-20-00322-PHX-JAT
10 Plaintiff, ORDER
11 v.
12 Pacific Specialty Insurance Company, et al.,
13 Defendants. 14 15 At issue is Defendant Pacific Specialty Insurance Company’s (“PSIC”) Motion for 16 Summary Judgment (Doc. 35) and Plaintiff Millennium Auto Sales, LLC’s (“Millennium”) 17 Motion for Partial Summary Judgment (Doc. 36). The Court now rules on these Motions. 18 I. FACTUAL BACKGROUND 19 The following facts are either undisputed or recounted in the light most favorable to 20 the non-moving party. Ellison v. Robertson, 357 F.3d 1072, 1075 (9th Cir. 2004). 21 a. The Insurance Policy 22 PSIC issued a twelve-month Used Car Dealer Insurance Policy (the “Policy”) to 23 Millennium on February 1, 2013, generally providing coverage and mandating a duty to 24 defend for bodily injury and property damage that occurs onsite. (Doc. 1-1 at 5, ¶ 8; Doc. 25 35-6 at 3). The Policy includes a general exclusion for “[a]ny obligation or responsibility 26 assumed under any contract or agreement….” (Doc. 35-6 at 3). 27 As relevant here, the Policy also includes “Section E – Truth in Lending/Federal 28 Odometer Statute Errors and Omissions Coverage.” (Doc. 35-6 at 8). The Federal 1 Odometer Statute provision (the “Odometer Endorsement”) reads: The Company shall pay on behalf of the named insured all 2 sums which the named insured shall become legally obligated 3 to pay as damages solely by operation of Title IV, Odometer Requirements of the Motor Vehicle Information and Cost 4 Savings Act (Public Law 103-272; 108 Stat. 745) because of 5 error or omission committed by the Insured in failing to comply with said Act. The obligation of the Company 6 hereunder shall be limited to the amount of coverage shown in 7 Section I on the Policy Declarations, up to $100,000 for the aggregate total of payments for damages arising from acts, 8 errors or omissions committed during the term of the policy. 9 The Company may defend any suit against the named insured seeking damages on account of such error or omission, even 10 if any of the allegations in the suit are groundless or 11 fraudulent. The Company may make such investigation and settlement of any claim as the Company deems appropriate. 12 This insurance does not apply to, and the Company shall have no duty to defend, any liability arising out of any 13 dishonest, fraudulent, criminal or intentional act(s) 14 committed by the named insured, any of the partners, officers, employees or agents of the named insured or other party in 15 interest acting alone or in collusion with others. 16 (Doc. 35-6 at 8) (emphasis added).1 Millennium renewed the Policy on February 1, 2014, 17 for an additional twelve months. (Id.) 18 b. Dealer Agreement with Gateway One Lending & Finance, LLC 19 Beginning on October 9, 2009, Millennium entered into a Dealer Agreement with 20 Gateway One Lending & Finance, LLC (“Gateway”) by which Millennium assigned Motor 21 Vehicle Retail Installment Sales Contracts (“RISCs”), as between Millennium and 22 financing car buyers, to Gateway. (Doc. 1-1 at 6, ¶ 13). As relevant here, Paragraph 5 of 23 the Dealer Agreement sets forth Millennium’s representations and warranties to Gateway 24 as follows: 25 As to each [RISC] sold by [Millennium] to [Gateway], [Millennium] warrants and represents that, as of the time of 26 such sale and as of the date the [RISC] is purchased by 27 1 The statute identified in the Odometer Endorsement, “Title IV, Odometer Requirements 28 of the Motor Vehicle Information and Cost Savings Act (Public Law 103-272; 108 Stat. 745)” currently appears at 49 U.S.C. § 32701, et seq. (the “Odometer Act”). 1 [Gateway]: a. [Millennium] has satisfied all requirements of … 2 federal, state, local and other laws, regulations or rules 3 applicable to the sale of the Vehicle, the extension of credit or consumer protection or otherwise to the 4 [RISC]; 5 … f. The [RISC] is valid and enforceable according to its 6 terms; 7 … h. [Millennium] does not know of any fact which indicates 8 the uncollectability of the [RISC]; 9 … k. The property, goods, and services sold to Buyer are 10 fully and correctly described in the [RISC] and related 11 documents; … 12 q. [Millennium] has fully complied with, and the [RISC] 13 is valid under, any and all applicable laws, rules, and regulations of the federal government or any state or 14 other governmental agency or authority regulating consumer or installment credit transactions; 15
16 r. None of the Vehicles described in the [RISC] will be subject to certificates of title reflecting a status of … 17 warning-not actual mileage, or similar condition noted 18 on the certificate of title. 19 (Doc. 35-3 at 3, 7–8). Paragraph 6 of the Dealer Agreement sets forth Millennium’s 20 liabilities for breach of the contract, including the representations and warranties set forth 21 in Paragraph 5. (Id. at 8–9). As relevant here, the Dealer Agreement states that if 22 Millennium breaches any provision of or otherwise fails to perform any obligation under 23 the Dealer Agreement or “if the Buyer asserts a claim for recission” under the RISC, 24 Millennium will pay Gateway any unpaid balances of the RISC and “all damages, losses, 25 and expenses paid or incurred” by Gateway as a result, including court costs and attorney’s 26 fees. (Id. at 8). 27 c. Torrence Martin’s Vehicle and Subsequent Gateway Litigation 28 On December 10, 2014, during the renewal term of the Policy, Millennium 1 purchased a vehicle (“the Vehicle”) from Metro Auction with an accompanying odometer 2 statement that reflected the Vehicle’s mileage as 104,000 miles.2 (Doc. 1-1 at 6, ¶ 14). Four 3 days later, Millennium entered into a RISC with Torrence Martin for the Vehicle, which 4 Millennium subsequently assigned to Gateway under the Dealer Agreement. (Id.) In early 5 2016, Mr. Martin filed a lawsuit against Gateway “in which he claims that his [RISC] is 6 unenforceable because Millennium [] misrepresented the Vehicle’s actual mileage or 7 otherwise violated federal and state odometer laws.” (Id. at 6–7, ¶ 16; Doc. 35-3 at 4, ¶ 10). 8 In response, Gateway demanded Millennium pay the outstanding balance of Mr. Martin’s 9 RISC. (Doc. 1-1 at 6–7, ¶ 16; Doc. 35-7 at 2–3). Millennium allegedly refused to pay. (Doc. 10 35-3 at 5, ¶ 15). 11 On August 19, 2016, after Millennium’s failure to resolve the issue with Gateway, 12 Gateway terminated the Dealer Agreement and sued Millennium for breach of contract 13 (“the Gateway lawsuit”) based at least in part on Mr. Martin’s lawsuit alleging a failure to 14 comply with the applicable state and federal odometer laws. (Doc. 1-1 at 8, ¶ 20; Doc. 35- 15 3 at 4, ¶¶ 8–12). 16 d. Millennium’s Insurance Claim 17 On February 29, 2016, after Gateway’s first demand for payment, Robert Block, on 18 behalf of Millennium, contacted PSIC seeking defense and indemnity for Gateway’s 19 demand. (Doc. 1-1 at 7, ¶ 18–19; see Doc. 35-8). On March 14, 2016, PSIC declined “to 20 provide a defense and/or indemnity” for Millennium because, according to PSIC, “there 21 has been no bodily injury or physical damage, [as required under the Policy’s duty to 22 defend provisions], and because this arises from an obligation or responsibility assumed 23 2 At some time prior to procuring the Vehicle, Millennium’s CEO, Paul Jones, alleges that 24 he identified a Car Fax Report indicating the mileage on the vehicle was 167,000, not 104,000. (Doc. 1-1 at 6, ¶ 15). Mr. Jones, however, alleges that he determined the Car Fax 25 Report incorrectly conflated kilometers with miles, such that the 104,000 miles listed on 26 the Vehicle’s odometer statement was accurate at the time of sale to Mr. Martin. (Id.) Regardless, the Gateway lawsuit alleges that “[t]he Certificate of Titled issued by the 27 Arizona Department of Transportation – Motor Vehicle Division for the Vehicle bears an 28 odometer code of “C – NOT Actual Mileage, WARNING ODOMETER DISCREPANCY.” (Doc. 35-3 at 4, ¶ 11). 1 under a contract,” for which there is no coverage. (Doc. 35-9 at 4). 2 After Gateway filed its lawsuit, Mr. Block provided notice to PSIC and again 3 tendered Millennium’s defense under the Policy. (Doc. 1-1 at 8, ¶ 21). On September 6, 4 2016, PSIC again declined coverage under the Policy and refused to defend and indemnify 5 Millennium in the Gateway lawsuit. (Id. at 9, ¶ 22). Specifically, PSIC stated the following 6 reasons for denying coverage, defense, and indemnity: The language in the lawsuit alleges that Millennium 7 misrepresented the odometer mileage when it entered into a 8 sales contract with the buyer of a Lincoln Navigator, Torrence Martin. Because the odometer amount was misrepresented, 9 Mr. Martin was able to void the contract and has left the 10 amount unpaid. This misrepresentation was a violation of the contract between Millennium and [Gateway], therefore 11 [Gateway] is asking for payment from Millennium to recover 12 the remaining unpaid amounts.
13 Please note the policy contains an exclusion for any obligation 14 or responsibility assumed under any contract or agreement. The main allegation in the lawsuit relates to your liability 15 arising out of the contract between Millennium and [Gateway]. 16 That is clearly excluded under your insurance policy. Additionally, the Federal odometer coverage excludes any 17 liability arising out of dishonest or intentional acts. The allegation is that you misrepresented the odometer amount on 18 the sales contract, despite the DMV report on the mileage. 19 Therefore, because this lawsuit arises from excluded acts, there is no coverage for this claim or for a defense related to the 20 excluded claim. 21 (Doc. 35-10 at 3). 22 Following PSIC’s denial of coverage, Millennium retained its own counsel to 23 represent it in the Gateway lawsuit, which ultimately led to a default judgment against 24 Millennium. (Doc. 1-1 at 9, ¶ 23; see Doc. 37-1). On October 23, 2017, Mr. Block, again 25 on behalf of Millennium, provided notice of the default to PSIC and requested 26 reconsideration of the denial of coverage and sought PSIC’s defense to set aside the default 27 judgment. (Id. at 9–10, ¶ 24). On the same day, PSIC responded that it was reviewing 28 Millennium’s claim but ultimately did not change its decision. (Id. at 10, ¶ 25). Millennium 1 subsequently retained new counsel to set aside the default, but the court affirmed the 2 original decision. (Id. at 10, ¶ 26). On February 27, 2019, Mr. Block again contacted PSIC 3 to seek reconsideration of the denial. (Id. at 10–11, ¶ 27). PSIC continues to deny coverage 4 under the Policy. (Id. at 11, ¶ 28). 5 II. PROCEDURAL BACKGROUND 6 On October 16, 2019, Millennium sued PSIC in Maricopa County Superior Court, 7 asserting claims of bad faith and breach of contract. (Doc. 1-1 at 4, 12–16). On February 8 12, 2020, PSIC removed the case to this Court on diversity jurisdiction grounds pursuant 9 to 28 U.S.C. § 1441(b). The Parties have both moved for summary judgment. (Docs. 35 10 and 36). 11 III. LEGAL STANDARD 12 a. Summary Judgment Standard 13 Summary judgment is appropriate when “the movant shows that there is no genuine 14 dispute as to any material fact and the movant is entitled to judgment as a matter of law.” 15 Fed. R. Civ. P. 56(a). “A party asserting that a fact cannot be or is genuinely disputed must 16 support that assertion by ... citing to particular parts of materials in the record, including 17 depositions, documents, electronically stored information, affidavits, or declarations, 18 stipulations ... admissions, interrogatory answers, or other materials,” or by “showing that 19 materials cited do not establish the absence or presence of a genuine dispute, or that an 20 adverse party cannot produce admissible evidence to support the fact.” Id. 56(c)(1)(A-B). 21 Thus, summary judgment is mandated “against a party who fails to make a showing 22 sufficient to establish the existence of an element essential to that party’s case, and on 23 which that party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 24 317, 322 (1986). 25 Initially, the movant bears the burden of demonstrating to the Court the basis for the 26 motion and the elements of the cause of action upon which the non-movant will be unable 27 to establish a genuine issue of material fact. Id. at 323. The burden then shifts to the non- 28 movant to establish the existence of material fact. Id. A material fact is any factual issue 1 that may affect the outcome of the case under the governing substantive law. Anderson v. 2 Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The non-movant “must do more than simply 3 show that there is some metaphysical doubt as to the material facts” by “com[ing] forward 4 with ‘specific facts showing that there is a genuine issue for trial.’” Matsushita Elec. Indus. 5 Co. v. Zenith Radio Corp., 475 U.S. 574, 586–87 (1986) (quoting Fed. R. Civ. P. 56(e)). A 6 dispute about a fact is “genuine” if the evidence is such that a reasonable jury could return 7 a verdict for the non-moving party. Liberty Lobby, Inc., 477 U.S. at 248. The non-movant’s 8 bare assertions, standing alone, are insufficient to create a material issue of fact and defeat 9 a motion for summary judgment. Id. at 247–48. However, in the summary judgment 10 context, the Court construes all disputed facts in the light most favorable to the non-moving 11 party. Ellison v. Robertson, 357 F.3d 1072, 1075 (9th Cir. 2004). 12 At the summary judgment stage, the Court’s role is to determine whether there is a 13 genuine issue available for trial. There is no issue for trial unless there is sufficient evidence 14 in favor of the non-moving party for a jury to return a verdict for the non-moving party. 15 Liberty Lobby, Inc., 477 U.S. at 249–50. “If the evidence is merely colorable, or is not 16 significantly probative, summary judgment may be granted.” Id. (citations omitted). 17 b. Insurance Policy Interpretation 18 The tenets of insurance policy contract interpretation are well-established. 19 Generally, “[t]he interpretation of an insurance contract is a question of law” for the Court. 20 Liristis v. Am. Family Mut. Ins. Co., 61 P.3d 22, 26 (Ariz. Ct. App. 2002) (citation omitted). 21 An insurance policy “must be read as a whole, so as to give a reasonable and harmonious 22 effect to all of its provisions.” Charbonneau v. Blue Cross, 634 P.2d 972, 975 (Ariz. Ct. 23 App. 1981) (citation omitted). The Court must “construe the written terms of [the policy] 24 to effectuate the parties’ intent,” and “to protect the reasonable expectations of the insured,” 25 Liberty Ins. Underwriters, Inc. v. Weitz Co., 158 P.3d 209, 212 (Ariz. Ct. App. 2007) 26 (citations omitted), and the policy’s language “must be viewed from the standpoint of the 27 average layman who is untrained in the law or the field of insurance.” Liristis, 61 P.3d at 28 25–26 (citation omitted). Where the language of the policy is clear, the Court shall “afford 1 it its plain and ordinary meaning and apply it as written.” Liberty Ins. Underwriters, Inc., 2 158 P.3d at 212 (citation omitted). If ambiguity exists after considering the plain and 3 ordinary meaning of the policy language, Arizona courts turn to consideration of the 4 “legislative goals, social policy, and the transaction as a whole.” First Am. Title Ins. Co. v. 5 Action Acquisitions, LLC, 187 P.3d 1107, 1110 (Ariz. 2008). 6 In other words, “[i]n the insurer/insured context, ... Arizona’s public policy favors 7 insureds. Hence Arizona law requires that undefined terms be given the meaning used by 8 laypeople in everyday usage and that terms and provisions that remain ambiguous after all 9 relevant considerations be interpreted in favor of coverage and against the insurer.” Young 10 v. Owners Ins. Co., No. CV-20-08077-PCT-DWL, 2021 WL 6503853, at *3 (D. Ariz. Dec. 11 17, 2021) (quoting Equity Income Partners, LP v. Chicago Title Ins. Co., 387 P.3d 1263, 12 1268 (Ariz. 2017)). 13 However, “[i]nterpretation of a contract is [only] a question of law for the court 14 when its terms are unambiguous on its face.” Ash v. Egar, 541 P.2d 398, 401 (Ariz. Ct. 15 App. 1975); Chandler Med. Bldg. Partners v. Chandler Dental Grp., 855 P.2d 787, 791 16 (Ariz. Ct. App. 1993). “[I]f there are ambiguities and it is necessary to consider the 17 circumstances in determining its meaning, it is a question for the trier of fact to determine 18 what those circumstances were.” Ash, 541 P.2d at 401; see also In re Bataa/Kierland LLC, 19 496 B.R. 183, 192 (D. Ariz. 2013) (“Where there is an ambiguity, the trier of fact must 20 determine ‘the intent of the parties, based on extrinsic evidence.’” (quoting Leo Eisenberg 21 & Co., Inc. v. Payson, 785 P.2d 49, 52 (Ariz. 1989)). 22 “Under Arizona law, a contract is not ambiguous merely because the parties cannot 23 agree to its meaning; rather, an agreement is ambiguous only if the language can reasonably 24 be construed in more than one sense and the interpretation cannot be determined within the 25 four corners of the instrument.” In re Bataa/Kierland LLC, 496 B.R. at 192 (citing D. Land 26 Co. v. Killian, 762 P.2d 124, 126 (Ariz. Ct. App. 1988); Richards Dev. Co. v. Sligh, 358 27 P.2d 329, 330 (Ariz. 1961)). “That is, language is not ambiguous just because it is vague 28 or general, but because it lends itself to two or more contradictory meanings.” Young, 2021 1 WL 6503853, at *3 (citations omitted). “The court thus applies a ‘standard of 2 reasonableness’ in determining whether language is susceptible to more than one 3 interpretation.” Farnam Companies, Inc. v. Stabar Enterprises, Inc., No. CV 03-503-PHX- 4 NVW, 2005 WL 3369473, at *4 (D. Ariz. Dec. 12, 2005) (citing Gesina v. General Elec. 5 Co., 780 P.2d 1380, 1386 (Ariz. Ct. App. 1988). 6 IV. PSIC’S MOTION FOR SUMMARY JUDGMENT 7 The underlying dispute here is whether the Policy provided coverage for 8 Millennium’s claim, defense, and indemnity in the Gateway lawsuit under the Odometer 9 Endorsement, which provides coverage for damages arising “solely by operation” of 10 federal and state odometer laws. (Doc. 35 at 6). In other words, the root of both motions 11 for summary judgment requires an interpretation of the Odometer Endorsement and a 12 determination of whether the claims alleged in the Gateway lawsuit fall within it. (Doc 35 13 at 10; Doc. 36 at 1). 14 A. Duty to Defend Under the Odometer Endorsement 15 PSIC has two arguments for why it had no duty to defend Millennium in the 16 Gateway lawsuit as a matter of law: (1) the Odometer Endorsement does not mandate a 17 duty to defend; and (2) if a duty to defend is mandated by the Odometer Endorsement, the 18 Gateway lawsuit does not allege claims that trigger coverage under that endorsement. The 19 Court addresses the arguments in turn. 20 a. Discretionary Duty to Defend and Equitable Estoppel 21 PSIC first contends that it did not owe a duty to defend Millennium against the 22 Gateway lawsuit because the Odometer Endorsement uses discretionary language 23 regarding PSIC’s duty to defend Millennium. (Doc. 35 at 8). In particular, PSIC points to 24 the phrase “[PSIC] may defend any suit against the named insured” (Doc. 35-6 at 8) to 25 support its position that PSIC had “the right, but not the duty, to defend Plaintiff” (Doc. 35 26 at 8). 27 Millennium responds that PSIC should be estopped from arguing that the Odometer 28 Endorsement does not mandate a duty to defend because PSIC did not assert this as a reason 1 to deny coverage in its prior noncoverage decision letters. (Doc. 38 at 10). Millennium 2 contends that it relied on PSIC’s previously asserted reasons for noncoverage to its 3 detriment because, had it known that PSIC was contesting its duty to defend instead of 4 denying coverage based on the stated policy exclusions, Millennium would have let the 5 judgment go into default without incurring attorney’s fees. (Doc. 38 at 11). The incurred 6 attorney’s fees appear to be the injury Millennium alleges under its estoppel theory. 7 PSIC’s Reply contests the application of equitable estoppel, arguing that the case 8 on which Millennium relies, Pueblo Santa Fe Townhomes Owners’ Ass’n v. 9 Transcontinental Ins. Co., is applicable only in cases where the insurer undertakes a 10 defense and does not expressly reserve its rights to later deny coverage. (Doc. 40 at 4–5). 11 PSIC also points out that, although its current argument was not stated in its noncoverage 12 letters, both letters expressly reserved its rights “to deny coverage based on any policy 13 provision, coverage or contract issue in relation to this matter, whether or not contained 14 herein.” (Doc. 40 at 5 citing Doc. 35-10 at 4). 15 At the outset, the Court considers whether the issues raised by Millennium’s 16 estoppel argument are properly resolved by the Court or a jury. The Ninth Circuit has held 17 that, in diversity cases, because “equitable estoppel was originally available only in courts 18 of equity, it is equitable in nature and, therefore, except for any issues which may be 19 common to [the parties’] legal claims, [any] equitable estoppel defense presents issues to 20 be resolved by the court.” Granite State Ins. Co. v. Smart Modular Technologies, Inc., 76 21 F.3d 1023, 1027 (9th Cir. 1996). Regarding the commonality of the parties’ legal claims 22 and Millennium’s estoppel argument, the Court finds no common issues. Millennium’s 23 Complaint asserts claims for bad faith and breach of the insurance policy contract for 24 PSIC’s failure to defend and indemnify Millennium in the Gateway lawsuit. (Doc. 1-1 at 25 12, 15). Millennium’s estoppel argument seeks to preclude PSIC from raising an additional 26 reason for denial of coverage than those asserted in PSIC’s denial letter. However, the 27 underlying issues to be decided by the Court regarding the estoppel argument do not touch 28 on the main issues in the case, namely, whether PSIC breached the contract or acted in bad 1 faith.3 Instead, the Court must decide whether equitable estoppel is available to Millennium 2 and whether it reasonably relied on PSIC’s denial letter in incurring legal fees in the 3 Gateway lawsuit based on PSIC’s stated reasons to deny coverage. Thus, there are no 4 common factual issues between Millennium’s estoppel argument and Millennium’s claims 5 in the complaint or PSIC’s arguments on summary judgment that would require 6 Millennium’s estoppel argument to be resolved by a jury.. 7 Turning to the substantive issue, “[e]quitable estoppel applies if (1) the party to be 8 estopped intentionally or negligently induces another to believe certain material facts, (2) 9 the induced party takes action in reliance on its reasonable belief of those facts and (3) the 10 induced party is injured by so relying.” Pueblo Santa Fe Townhomes Owners’ Ass’n v. 11 Transcontinental Ins. Co., 178 P.3d 485, 493 (Ariz. Ct. App. 2008) (citing Joy Enters., Inc. 12 v. Reppel, 537 P.2d 591, 594 (Ariz. 1975)). Moreover, the alleged injury or prejudice “must 13 be actual and substantial, and not merely technical or formal.” Weiner v. Romley, 381 P.2d 14 581, 583 (Ariz. 1963). “Prejudice may be shown through loss of a favorable settlement of 15 the case, inability to produce any material witness, loss of the benefit of any defense in law 16 or fact through reliance upon the insurer’s [promise] to defend, or withdrawal by the insurer 17 so near in time to trial that the insured is unable to prepare his defense.” Pueblo, 178 P.3d 18 at 496 (citing R.A. Hanson Co. v. Aetna Casualty & Surety Co., 550 P.2d 701, 703 (Wash. 19 App. 1976)). 20 The Court agrees with PSIC that the only case Millennium cites for its equitable 21 estoppel argument is distinguishable from this case. See Pueblo, 178 P.3d 485. In Pueblo, 22 the Arizona Court of Appeals determined the insurer was estopped from denying coverage 23 of the insureds because the insurer assumed the insured’s defense for eighteen months 24 without reserving any rights to later deny coverage and the insureds relied on the insurer’s 25 assumption of their defense to their detriment. Id. at 493–96. In so finding, the court 26 explained that the insureds were prejudiced because they lacked the opportunity to 27 participate in their own defense to the lawsuit. Id. at 495. Here, Millennium admits that it
28 3 Nor are there common issues between the estoppel argument and PSIC’s asserted interpretation that the Odometer Endorsement does not mandate at duty to defend. 1 took control of its own defense in the Gateway lawsuit and retained its own counsel after 2 receiving PSIC’s noncoverage letters. Thus, the Court finds Pueblo and its application of 3 estoppel inapposite to this case. Millennium cites to no other cases, nor is the Court aware 4 of any, that support its contention that estoppel applies under these facts. 5 Moreover, the Court finds that Plaintiff fails to sufficiently articulate reasonable 6 reliance on PSIC’s noncoverage letters. Plaintiff’s reliance was not reasonable because, as 7 explained above, PSIC’s letters both expressly reserved the right to raise future coverage 8 defenses. Although Plaintiff argues that it would not have retained counsel in the Gateway 9 lawsuit with knowledge of PSIC’s current position that any duty to defend under the Policy 10 was discretionary, the Court finds that in view of the terms of the Policy and the reservation 11 of rights in the denial letters, such a position of reliance is unreasonable. See Guberman v. 12 William Penn Life Ins. Co., 538 N.Y.S.2d 571, 574 (N.Y. App. Div. 1989) (“Where the 13 insurer expressly states that its assertion of one defense should not be construed as a waiver 14 of other defenses, it is difficult to imagine how, if at all, the plaintiff could have been misled 15 into acting on a reasonable belief that the company had waived some provision of the 16 policy.”) (quotations omitted). 17 Accordingly, the Court finds that estoppel does not apply to preclude PSIC from 18 raising its current defense that it merely had a right, and not a duty, to defend Millennium 19 in the Gateway lawsuit. 20 Turning to the language of the Odometer Endorsement, it reads in relevant part: The Company shall pay on behalf of the named insured all 21 sums which the named insured shall become legally obligated 22 to pay as damages solely by operation of Title IV, Odometer Requirements of the Motor Vehicle Information and Cost 23 Savings Act (Public Law 103-272; 108 Stat. 745) because of 24 error or omission committed by the Insured in failing to comply with said Act.… The Company may defend any suit 25 against the named insured seeking damages on account of 26 such error or omission, even if any of the allegations in the suit are groundless or fraudulent.… This insurance does not 27 apply to, and the Company shall have no duty to defend, any 28 liability arising out of any dishonest, fraudulent, criminal or intentional act(s) committed by the named insured, any of the 1 partners, officers, employees or agents of the named insured or other party in interest acting alone or in collusion with others. 2 3 (Doc. 35-6 at 8) (emphasis added). The Court notes that the Odometer Endorsement does 4 use the discretionary term “may” with respect to defending lawsuits seeking damages for 5 “error or omission committed by the Insured in failing to comply with” the Odometer Act. 6 (Id.) This language appears to suggest that PSIC did not have an affirmative duty to defend 7 Millennium and that it instead had the option to do so. See Oxford English Dictionary (3rd 8 ed. 2001) (defining “may” as “a possibility”); see also W. Corr. Grp., Inc. v. Tierney, 96 9 P.3d 1070, 1074 (Ariz. Ct. App. 2004) (“To determine the plain meaning of a term, [courts] 10 refer to established and widely used dictionaries.”). 11 However, the next sentence in the above quote is an exclusionary one, stating that 12 if the liability arises “out of any dishonest, fraudulent, criminal or intentional act(s) 13 committed by the named insured,” then “the Company shall have no duty to defend.” (Id.) 14 This exclusion appears to suggest by implication that if there are no dishonest, fraudulent, 15 criminal or intentional acts, PSIC would have a duty to defend Millennium. Such an 16 interpretation is consistent with the well-established Arizona law that “an insurer typically 17 owes… a duty to defend the insured against any claim ‘potentially covered by the policy.’” 18 Pueblo, 178 P.3d at 491 (quoting United Services Automobile Ass’n v. Morris, 741 P.2d 19 246, 250 (Ariz. 1987)). 20 Moreover, insurance policies must be interpreted in a way that read as a whole give 21 “reasonable and harmonious meaning and effect to all its provisions.” National Bank v. St. 22 Paul Fire & Marine Ins. Co., 975 P.2d 711, 714 (Ariz. Ct. App. 1999) (quoting Federal 23 Ins. Co. v. P.A.T. Homes, Inc., 547 P.2d 1050, 1053 (Ariz. 1976)). PSIC’s interpretation 24 would render the exclusionary clause of the Odometer Endorsement virtually meaningless 25 if PSIC reserved unfettered discretion to decide to defend the insured for any reason, 26 including dishonest or fraudulent acts, through its use of “may” in the preceding sentence. 27 On the other hand, requiring PSIC to have an absolute duty to defend would render the 28 discretionary language in the clause similarly meaningless. “The Court is required to 1 interpret insurance policies in such a way that each provision is given meaning.” Team 44 2 Restaurants LLC v. American Insurance Company, No. CV-21-00404-PHX-DJH, 2021 3 WL 4775106, at *5 (D. Ariz. Oct. 13, 2021) (citing Liberty Ins. Underwriters, Inc. v. Weitz 4 Co., 158 P.3d 209, 212 (Ariz. Ct. App. 2007)). 5 As such, the inconsistency of these two statements renders the applicability of a 6 duty to defend in this case ambiguous and the Court cannot decide as a matter of law 7 whether the provision imposes a duty to defend on PSIC. In re Bataa/Kierland LLC, 496 8 B.R. at 192 (“Where there is an ambiguity, the trier of fact must determine the intent of the 9 parties, based on extrinsic evidence.”) (quotations omitted). 10 b. Scope of PSIC’s Duty to Defend 11 PSIC also argues that the language of the Odometer Endorsement excludes coverage 12 for the Gateway lawsuit so any duty to defend was not triggered. (Doc. 35 at 10). 13 Specifically, PSIC argues that the phrase “solely by operation of” in the Odometer 14 Endorsement requires that any cause of action must specifically claim damages under the 15 Odometer Act itself. (Id. at 11). PSIC cites to several cases interpreting the phrase “solely 16 by operation” in other contract interpretation contexts. (Id. at 12–14). Millennium responds 17 that PSIC’s duty to defend was triggered by the facts asserted in the Gateway lawsuit. (Doc. 18 38 at 11). Specifically, Millennium contends that the Odometer Endorsement covered the 19 Gateway lawsuit because Gateway’s breach of contract claims stem from Millennium’s 20 violation of the Odometer Act in selling the Vehicle to Mr. Martin. (Doc. 38 at 11–14). 21 Because PSIC failed to defend Millennium in the underlying Gateway lawsuit, Millennium 22 asserts that PSIC breached the insurance contract and the implied covenant of good faith 23 and fair dealing. (Doc. 1-1 at 12, 15). 24 i. Triggering Duty to Defend 25 The Arizona Supreme Court has held that “there is no absolute duty to defend” an 26 insured, regardless of the claims alleged. Kepner v. Western Fire Ins. Co., 509 P.2d 222, 27 224 (Ariz. 1973); see also U.S. Fidelity & Guar. Corp. v. Advance Roofing & Supply Co., 28 Inc., 788 P.2d 1227, 1231 (Ariz. Ct. App. 1989) (describing Kepner as “[t]he leading 1 Arizona decision relating to an insurer’s duty to defend”). Rather, “generally,” where “the 2 complaint in the action brought against the insured upon its face alleges facts which come 3 within the coverage of the liability policy,” then “the insurer is obligated to assume defense 4 of the action, but if the alleged facts fail to bring the case within the policy coverage,” then 5 “the insurer is free of such obligation.” Kepner, 509 P.2d at 224 (citations omitted); see 6 also Quihuis v. State Farm Mut. Auto. Ins. Co., 334 P.3d 719, 727 (Ariz. 2014). The 7 Arizona Supreme Court went on to state that “the duty to defend should focus upon the 8 facts rather than upon the allegations of the complaint which may or may not control the 9 ultimate determination of liability,” but couched the statement by noting that only in some 10 cases would the pleading not serve as the “the decisive factor in determining whether there 11 exists a duty” to defend. Kepner, 509 P.2d at 224. Moreover, the Arizona Supreme Court 12 has also intimated that the insurer has the option to decline to defend the insured based on 13 factual allegations contained in the complaint, albeit at its own risk. Quihuis, 334 P.3d at 14 729; Kepner, 509 P.2d at 332. The relevant Odometer Endorsement language reads: [PSIC] shall pay on behalf of [Millennium] all sums which 15 [Millennium] shall become legally obligated to pay as damages 16 solely by operation of Title IV, Odometer Requirements of the Motor Vehicle Information and Cost Savings Act (Public Law 17 103-272; 108 Stat. 745) because of error or omission 18 committed by [Millennium] in failing to comply with said Act.” 19 (Doc. 35-6 at 8) (emphasis added). The cited Odometer Act, presently codified at 20 49 U.S.C. § 32701, et seq., provides civil and criminal liability for various types of 21 odometer tampering and mileage misrepresentation related to the sale of used motor 22 vehicles. As relevant here, the Odometer Act sets forth odometer disclosure requirements 23 for a seller transferring ownership of a vehicle to a buyer, including that “[a] person 24 transferring ownership of a motor vehicle may not…give a false statement to the transferee 25 in making the disclosure” of the vehicle’s actual mileage. 49 U.S.C. § 32705(a)(2). If 26 violated, the Odometer Act provides for both governmental enforcement and civil actions 27 brought by private persons. 49 U.S.C. §§ 32709, 32710. 28 The parties have not cited to any cases, and the Court is not aware of any, using 1 Arizona law to interpret the statutory language at issue here. Instead, PSIC relies on cases 2 from other jurisdictions interpreting “solely by operation of” or similar language in 3 insurance contracts. (See Doc. 35 at 10–14). Millennium did not provide any response to 4 PSIC’s argument on the interpretation of “solely by operation of,” other than its reasonable 5 expectations argument discussed below. 6 In TIG Ins. Co. v. Joe Rizza Lincoln-Mercury, a Northern District of Illinois Court 7 interpreted a similar clause4 under Illinois law and held that “the narrow coverage provided 8 by the Endorsement is triggered only by a damage claim under the Truth In Lending Act. 9 If, and only if, the claimant seeks damage under the Act is there potential coverage.” No. 10 00-C-5182, 2002 WL 406982, at *9 (N.D. Ill. Mar. 14, 2002). The TIG court held that the 11 contract language was unambiguous and cited to several decisions of other courts reaching 12 the same outcome. Id., 2002 WL 406982, at *8; see also John Markel Ford, Inc. v. Auto- 13 Owners Ins. Co., 543 N.W.2d 173 (Neb. 1996) (examining endorsement covering damages 14 “brought solely under” Section 130 of the TILA and holding that coverage is limited to 15 damages awarded under the TILA); see also Heritage Mut. Ins. Co. v. Ricart Ford, Inc., 16 663 N.E.2d 1009 (Ohio 1995) (finding endorsement covering “damages solely due to 17 Section 130” of TILA requires a complaint to seek Section 130 damages); see also Tynan’s 18 Nissan Inc. v. American Hardware Mut. Ins. Co., 917 P.2d 321 (Colo. 1995) (reaching the 19 same outcome for an endorsement containing the phrase “shall become legally obligated 20 to pay as damages solely because of error or omission in failing to comply with § 130.”). 21 Although the above cited cases deal with TILA endorsements and not the Odometer 22 Act, the language used in the clauses is nearly identical. Thus, the Court finds these cases 23 and their reasoning persuasive and so holds that the Odometer Endorsement of PSIC’s 24 policy is limited to damages awarded pursuant to the Odometer Act as a matter of law. Ash, 25 541 P.2d at 401 (“Interpretation of a contract is a question of law for the court when its 26 terms are unambiguous on its face.”) So, the Court now must determine whether PSIC’s
27 4 The clause at issue TIG reads: “We will pay all sums the ‘insured’ legally must pay as damages solely be (sic) operation of Section 130, Civil Liability, of Title 1 (Truth in 28 Lending Act) of the Consumer Credit Protection Act (Public Law 90-321.82 Stat.146 et seq.)” TIG, 2002 WL 406982, at *2. 1 duty to defend was triggered based on the facts asserted in the Gateway lawsuit given the 2 limited scope of the Odometer Endorsement. 3 Here, the Court has two layers of underlying lawsuits to consider. First, Mr. Martin 4 filed a lawsuit against Gateway seeking recission of his RISC because of Millennium’s 5 alleged failure to abide by federal and state odometer laws. (Doc. 35-3 at 4). Second, the 6 Gateway lawsuit seeks damages for Millennium’s alleged breach of the Dealer Agreement 7 based on the unenforceability of Mr. Martin’s RISC. (Id.) Millennium appears to concede 8 that neither of these lawsuits are asserting claims for damages under the Odometer Act. 9 (Doc. 35-1 at 3–5). Instead, it is undisputed that both of the underlying lawsuits are breach 10 of contract actions, and the Court finds that both fall outside the scope of the Odometer 11 Endorsement’s unambiguous language. 12 ii. Implied Duty to Defend 13 Although not directly in response to PSIC’s contract interpretation arguments, 14 Millennium asserts that it “reasonably expected coverage for an alleged violation of the 15 Federal Odometer Act,” regardless of whether the allegations are styled as breach of 16 contract or another type of claim. (Doc. 38 at 15). According to Millennium, “[t]his 17 expectation would apply to any sale, including any financed sale, in which the contract for 18 sale is assigned to the financing company, a standard practice in the industry.” (Id.) PSIC 19 disputes the application of the reasonable expectations doctrine here. (Doc. 40 at 6). 20 Under Arizona law, even unambiguous policy language will not be enforced against 21 the insured if the insured had a reasonable expectation of coverage. Darner Motor Sales, 22 Inc. v. Universal Underwriters Ins. Co., 682 P.2d 388, 396 (Ariz. 1984). The reasonable 23 expectations doctrine stems from the covenant of good faith and fair dealing which is 24 implied in every contract. Bike Fashion Corp. v. Kramer, 46 P.3d 431, 434 ¶ 13 (Ariz. Ct. 25 App. 2002). This covenant “guarantees the protection of the parties’ reasonable 26 expectations,” and is breached either “by exercising express discretion in a way 27 inconsistent with a party’s reasonable expectations [or] by acting in ways not expressly 28 excluded by the contract’s terms but which nevertheless bear adversely on the party’s 1 reasonably expected benefits of the bargain.” Id. at 434–35 ¶¶ 13–14. 2 Gordinier clarified Darner, holding that Arizona’s reasonable expectations doctrine 3 only applies in the following limited situations: 1. Where the contract terms, although not ambiguous to the 4 court, cannot be understood by the reasonably intelligent 5 consumer who might check on his or her rights, the court will interpret them in light of the objective, reasonable expectations 6 of the average insured; 7 2. Where the insured did not receive full and adequate notice 8 of the term in question, and the provision is either unusual or 9 unexpected, or one that emasculates apparent coverage; 10 3. Where some activity which can be reasonably attributed to the insurer would create an objective impression of coverage 11 in the mind of a reasonable insured; 12 4. Where some activity reasonably attributable to the insurer 13 has induced a particular insured reasonably to believe that he has coverage, although such coverage is expressly and 14 unambiguously denied by the policy. 15 Gordinier, 742 P.2d at 283–84. However, regardless of the circumstances, “an implied 16 covenant of good faith and fair dealing cannot directly contradict an express contract term.” 17 Bike Fashion Corp., 46 P.3d at 434-35 ¶ 14. 18 If no material issue of fact exists in a reasonable expectations case, the issue of 19 whether the policy language should be strictly applied or is subject to the insured’s 20 reasonable expectations is a question of law for the Court to decide. State Farm Mut. Auto. 21 Ins. Co. v. Falness, 39 F.3d 966, 967 (9th Cir. 1994). If there is a question of fact, then it 22 is for the jury to decide whether the reasonable expectations doctrine is to be applied under 23 the circumstances of the case. 24 Here, although asserting the reasonable expectations doctrine, Millennium does not 25 provide the Court with any circumstances regarding its alleged expectation of coverage 26 that would create a disputed issue of fact for the jury. The Court notes that during oral 27 argument Millennium’s counsel asserted that Mr. Jones’s declaration sets forth the 28 circumstances supporting application of the reasonable expectations doctrine here. 1 However, the Court reviewed both of Mr. Jones’s filed declarations and found no mention 2 of the circumstances giving rise to Millennium’s alleged reasonable expectations of 3 coverage other than Millennium’s bare assertion that coverage existed under the Odometer 4 Endorsement. (Doc. 36-1 at 3–4; see also Doc. 39-1). 5 So, while Millennium asserts that it understood the policy to provide coverage for 6 any lawsuits related to violations of the Odometer Act, “[a]s pointed out in State Farm Fire 7 & Cas. Co. v. Powers, 786 P.2d 1064, 1067 (Ariz. Ct. App. 1989), coverage cannot be 8 defeated ‘by simply putting the insured on the witness stand and asking him ... did you 9 reasonably expect that you would be covered?’ Without more, the reasonable expectations 10 doctrine does not render [a policy clause] unenforceable.” Cooper v. American Family Mut. 11 Ins. Co., 184 F.Supp.2d 960, 966 (D. Ariz. 2002). Moreover, Millennium’s assertion that 12 the implied covenant of good faith and fair dealing requires the Court to find coverage for 13 all lawsuits including allegations of odometer tampering directly contradicts the express, 14 unambiguous language of the Odometer Endorsement, as discussed above. Such an 15 interpretation is not allowable under Arizona law. Bike Fashion Corp., 46 P.3d at 434-35 16 ¶ 14. 17 iii. Conclusion 18 Therefore, the Court GRANTS summary judgment, finding that PSIC did not have 19 an affirmative duty to defend Millennium in the Gateway lawsuit because the Gateway 20 lawsuit was not covered by the express terms of the Odometer Endorsement. 21 B. Duty to Indemnify and Bad Faith 22 PSIC also argues that it owed no duty to indemnify Millennium for the Gateway 23 lawsuit default judgment and that it cannot be liable for a bad faith denial of coverage 24 because its decision to deny coverage was correct. (Doc. 35 at 14–15). 25 Having determined there is no coverage for Millennium’s claim under the Policy as 26 a matter of law, the Court need not reach the issues of whether PSIC had a duty to 27 indemnify or acted in bad faith, because both theories as alleged in this case are contingent 28 on the Court finding coverage under the policy. 1 V. MILLENNIUM’S MOTION FOR PARTIAL SUMMARY JUDGMENT 2 For its part, Millennium seeks a finding that, as a matter of law, PSIC had a duty to || defend and indemnify Millennium in the Gateway lawsuit and because PSIC failed to do 4|| so, PSIC breached the insurance contract in bad faith. (Doc. 36 at 1, 15). Consistent with || its position in its own Summary Judgment Motion, PSIC argues that the Odometer 6 || Endorsement does not mandate a duty to defend, and in the alternative, if a duty to defend || 1s found within the policy, it was not triggered by the Gateway lawsuit. (Doc. 37 at □□□□□□□ 8 The Court notes that for Millennium’s motion, as the movant, Millennium has the 9|| burden to show “that there is no genuine dispute as to any material fact and the movant is 10 || entitled to judgment as a matter of law,” Fed. R. Civ. P. 56(a), and PSIC, as the nonmovant, 11 || is entitled to the Court’s construction of all disputed facts in its favor, Ellison v. Robertson, 357 F.3d 1072, 1075 (9th Cir. 2004). 13 For the reasons stated above, the Court finds no disputed issues of material fact on the issue of whether there was coverage under the policy. The Court having concluded 15} there was no coverage under the policy, Millenntum’s Motion for Partial Summary 16 || Judgment is DENIED in its entirety. 17 VI. CONCLUSION 18 Accordingly, 19 IT IS ORDERED THAT PSIC’s Motion for Summary Judgment (Doc. 35) is 20 || GRANTED, as set forth above. 21 IT IS FURTHER ORDERED THAT Millennium’s Motion for Partial Summary || Judgment (Doc. 36) is DENIED. 23 IT IS FURTHER ORDERED THAT the Clerk of the Court shall enter judgment, 24 || accordingly. 25 Dated this 18th day of May, 2022. 26 A 27 28 James A. Teil Org Senior United States District Judge
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