1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 10 Stone & Kelso LLC, No. CV-20-00160-TUC-JCH 11 12 Plaintiff, ORDER 13 14 v. 15 16 Allied Insurance Company of America, 17 18 Defendant. 19
20 21 Plaintiff Stone & Kelso LLC ("Stone") alleges that Defendant Allied Insurance 22 Company ("Allied") (1) breached Stone's fire-insurance contract by denying Stone's claim 23 and (2) through Allied's investigation of the claim committed tortious bad faith claims 24 handling. (Doc. 1-3.) Before the Court are Allied's Motion for Summary Judgment 25 ("Motion 1") (Doc. 130), Stone's Motion for Partial Summary Judgment ("Motion 2") 26 (Doc. 149), and Stone's Motion for Leave to Amend ("Motion 3") (Doc. 147). In Motion 1, 27 Allied seeks summary judgment on the breach of contract claim by arguing that as a 28 condition to coverage Stone was required to have and maintain a monitored fire alarm 1 system, and no such system ever existed. Allied also seeks summary judgment on the bad 2 faith claim by arguing it adequately investigated the claim, and the additional legal research 3 Plaintiff alleges Allied should have done would not have supported Plaintiff's legal 4 argument. In Motion 2, Stone cross moves for partial summary judgment on the breach of 5 contract claim by arguing that the policy's requirement that Stone maintain a monitored 6 fire alarm is an unenforceable coverage exclusion under Arizona law. In Motion 3, Stone 7 seeks to add class-action claims to its complaint. For the following reasons, the Court 8 grants Allied's Motion 1, denies Stone's Motions 2 and 3, denies Allied's request for 9 attorney's fees, and enters judgment for Allied. 10 I. FACTS 11 Stone is jointly owned by Amy Burns and Daniel Eftimoff. (Doc. 131 at ¶ 1; Doc. 12 150 at ¶ 1.) In 2012, Stone purchased a commercial property located at 2619 North Stone 13 Avenue, Tucson, Arizona, 85705 (the "Property"). (Doc. 1-3 at ¶ 5; Doc. 150-6 at 24:5– 14 13.) In August 2012, Burns emailed an agent seeking insurance on the Property. (Doc. 131- 15 1 28:15–29:3, 41:1–16.) The agent sent a questionnaire to Burns that included a question 16 asking if there was a centrally monitored fire alarm on the Property. (Doc. 131-1 28:15– 17 29:3, 30:2–4.) Burns lived remotely, so she forwarded the email to Eftimoff to confirm 18 some of the questions, including about the monitored fire alarm system. (Doc. 150-5 at 32– 19 33.) Eftimoff believed that a monitored fire alarm system existed based on what the 20 previous owner's son-in-law told him. (Doc. 131-1 at 18:6–14.) Eftimoff also alleges 21 "personally observ[ing]" a fire alarm system on the Property in 2012 but did not see 22 whether the system was connected to a central fire alarm station. (Id. at 19:2–23.) In any 23 event, Stone's insurance application stated that the Property had a monitored fire alarm 24 system. (Doc. 131-1 at 35:1–6, 89.) 25 Allied's Policy (the "Policy") contained a "Protective Safeguard Endorsement 26 ["PSE"] Advisory Notice" at the beginning of the policy, which stated at the top that "This 27 Notice does not form part of the contract. No coverage is provided by this Notice[.]" (Doc. 28 131-2 at 7.) The notice explained that the "policy is written with a [PSE]" that "provides 1 explicit instructions to preserve coverage." Id. Specifically, the PSE must be "in place, 2 operational, and maintained in good working order at the building shown on the 3 endorsement. Failure to comply with any of these conditions may result in loss of insurance 4 coverage." Id. Another notice appearing on the page describing coverage at the Property 5 reads: 6 PROTECTIVE SAFEGUARDS This premise [sic] has Protective Safeguards identified by the symbols below. Insurance for fire . . . will be 7 excluded if you do not notify us immediately if any of these safeguards are 8 impaired. See PB0430 for a description of each symbol. APPLICABLE SYMBOLS: P-2 9 (Doc. 131-2 at 12.) PB0430 is a form titled "Protective Safeguards" appearing after the 10 coverage section in a section titled "Forms and Endorsements." (Doc. 131-2 at 19.) The 11 "Protective Safeguards" form has two relevant components. The first is Section A of the 12 13 form's first page, which reads: "Condition. As a condition of this insurance, you are required to maintain the applicable protective services or devices denoted by [symbols 14 including the "P-2" referenced above.]" (Doc. 131-2 at 91.) On the next page, the symbol 15 "P-2" is defined as an "Automatic Fire Alarm, protecting the entire building, that is: (a) 16 Connected to a central station; or (b) Reporting to a public or private fire alarm station." 17 (Doc. 131-2 at 91.) The second relevant component of the "Protective Safeguards" form is 18 19 Section B of the form's first page, which reads: "Exclusion. Under Section B. EXCLUSIONS, the following exclusions are added: . . . We will not pay for loss or 20 damages caused by or resulting from fire if, prior to the fire, you: a. Knew or should have 21 known of any suspension or impairment in [the "P-2" protective safeguard] and failed to 22 notify us of that fact; or b. Failed to maintain [the "P-2" protective safeguard] over which 23 you have control, in complete working order[.]” (Doc. 150 at 10–11; Doc. 131-2 at 91.) By 24 renewing the Policy, Stone continued to represent its compliance with the PSE. See Doc. 25 131-2 at 7 ("Note that acceptance of the policy, in the payment of premium, constitutes the 26 insured's understanding and acknowledgement of the risk of loss of insurance at the 27 scheduled building if the protective safeguard is not maintained.") 28 1 On January 22, 2018, Stone leased the Property to Chuck Blain and Zach Blain, dba 2 Glow Zone Mini Golf, LLC ("Tenants"). (Doc. 150-2 43:7–44:1.) The lease did not include 3 any language pertaining to installing or maintaining a monitored fire alarm system. (Doc. 4 150-5 at 67–90.) Eftimoff testified that when Tenants were remodeling the Property, 5 Eftimoff saw a panel and cameras and asked, "[W]ow, you got a brand new fire and alarm 6 system?" To which a Tenant replied, "Yeah." (Doc. 150 at ¶ 23; Doc. 150-2 115–16.) But 7 Eftimoff also testified that Stone never tested to determine if it was a monitored fire alarm 8 system, or follow up with Tenants to verify there was a monitored fire alarm system. (Doc. 9 150-2 at 39:16–40:9, 101.) And Stone never paid for any bill for central monitoring of a 10 fire alarm service. (Doc. 131 at ¶ 25; Doc. 150 at ¶ 25.) At some point, relations between 11 Tenants and Stone soured. Tenants changed the Property's locks and denied Stone access 12 to conduct inspections. (Doc. 150 at 12.) In October, 2018, Tenants obtained a preliminary 13 injunction prohibiting Stone from accessing the Property. (Id.; Doc. 150-2 at 160–62.) In 14 September 2019, Stone filed a lawsuit to evict Tenants from the Property. (Doc. 131 15 at ¶ 29, Doc. 150 at ¶ 29.) 16 On November 12, 2019, either just after or as Tenants moved out, a fire broke out 17 at the Property. (Doc. 131 at ¶ 30; Doc. 150 at 12.) Stone timely submitted a claim to Allied 18 regarding the loss. On November 15, 2019, Allied hired Joe Sesniak, a fire origin-and- 19 cause expert, to investigate the fire's circumstances. (Doc. 131 at ¶ 31; Doc. 150 at ¶ 31.) 20 On November 19, 2019, Sesniak reported that there was no fire alarm, no wires in the 21 telephone room alarm box, no fire detectors at the Property, and no alarm pull. (Doc. 131 22 at ¶ 32; Doc. 150 at ¶ 32.) On November 21, 2019, Allied's adjuster James Boles inspected 23 the Property with property manager Phillip Fileccia. (Doc. 131 at ¶ 33; Doc. 150 at ¶ 33.) 24 Boles did not see any evidence of a fire alarm, and Fileccia stated that he was not aware of 25 any specific fire alarm on the property. Id. Allied then hired David Komm of Auspurger 26 Komm Engineering, Inc., to inspect the Property for the existence of a monitored fire alarm 27 system. (Doc. 131 at ¶ 34; Doc. 150 at ¶ 34.) In a January 8, 2020 report, Komm stated that 28 he saw no smoke alarms, carbon monoxide alarms, wireless sensors, fire horn, klaxon, or 1 anything interior or exterior indicating a fire alarm system. (Doc. 131 at ¶ 34; Doc. 150 at 2 ¶ 34.) He did note that there was a control unit at the Property "suitable" for fire controls, 3 but "all leads were disconnected or simply cut." (Doc. 150 at 13–14; Doc. 131 at ¶ 34.) 4 Komm concluded with "a reasonable degree of engineering certainty" there was no fire 5 alarm system in place at the Property. Id. Eftimoff also visited the Property after the fire 6 and reported that the panel he had seen previously was ripped out and missing, along with 7 the cameras and wiring. (Doc. 150 at ¶ 32.) 8 On February 18, 2020, Allied denied Stone's insurance claim for damages sustained 9 by the fire based on the Policy language stating that coverage would not exist if the insured 10 failed to maintain a monitored fire alarm system at the Property. (Doc. 131 at ¶ 36; Doc. 11 150 at ¶ 36.) 12 On March 27, 2020, Stone filed its Complaint against Allied in the Pima County 13 Superior Court. (Doc. 1-3.) In it, Stone alleges breach of insurance contract (Count #1); 14 breach of implied duty of good faith and fair dealing, and tortious bad faith claims handling 15 (Count #2). (Id.) On April 14, 2020, Allied filed its Notice of Removal. (Doc. 1.) On 16 February 4, 2022, Allied filed Motion 1, and on March 15, 2022, Stone filed Motion 2 and 17 Motion 3. (Doc. 130; Doc. 149; Doc. 147.) 18 II. SUMMARY JUDGMENT STANDARD 19 At summary judgment, the judge's function is not to weigh the evidence and 20 determine the truth but to determine whether there is a genuine issue for trial. Anderson v. 21 Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). A court must grant summary judgment "if 22 the movant shows that there is no genuine dispute as to any material fact and the movant 23 is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a); see also Celotex Corp. v. 24 Catrett, 477 U.S. 317, 322–23 (1986). The movant bears the initial responsibility of 25 presenting the basis for its motion and identifying those portions of the record, together 26 with affidavits, if any, that it believes demonstrate the absence of a genuine issue of 27 material fact. Celotex, 477 U.S. at 323. 28 If the movant fails to carry its initial burden of production, the nonmovant need not 1 produce anything. Nissan Fire & Marine Ins. Co., Ltd. v. Fritz Co., Inc., 210 F.3d 1099, 2 1102–03 (9th Cir. 2000). But if the movant meets its initial responsibility, the burden shifts 3 to the nonmovant to demonstrate the existence of a factual dispute and that the fact in 4 contention is material, i.e., a fact that might affect the outcome of the suit under the 5 governing law, and that the dispute is genuine, i.e., the evidence is such that a reasonable 6 jury could return a verdict for the nonmovant. Anderson, 477 U.S. at 248, 250; see Triton 7 Energy Corp. v. Square D. Co., 68 F.3d 1216, 1221 (9th Cir. 1995). The nonmovant need 8 not establish a material issue of fact conclusively in its favor, First National Bank of 9 Arizona v. Cities Service Co., 391 U.S. 253, 288–89 (1968); however, it must "come 10 forward with specific facts showing that there is a genuine issue for trial." Matsushita Elec. 11 Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (internal citation omitted); 12 see Fed. R. Civ. P. 56(c)(1). The evidence of the non-movant is "to be believed, and all 13 justifiable inferences are to be drawn in his favor." Anderson, 477 U.S. at 255. But if the 14 non-movant identifies "evidence [that] is merely colorable or is not significantly probative, 15 summary judgment may be granted." Id. at 249–50 (citations omitted); see also Nilsson v. 16 City of Mesa, 503 F.3d 947, 952 n.2 (9th Cir. 2007) ("a conclusory, self-serving affidavit, 17 lacking detailed facts and any supporting evidence, is insufficient to create a genuine issue 18 of material fact"). 19 III. ANALYSIS 20 A. The Material Facts are Undisputed; there was no Monitored Fire Alarm 21 Allied seeks summary judgment on Stone's breach of contract claim by arguing 22 Stone did not have a monitored fire alarm system as the Policy requires. (Doc. 130 5:13– 23 14.) Allied points to its investigations finding no evidence of a monitored fire alarm and to 24 the numerous warnings in the PSE alerting insureds to the risk of loss of coverage absent 25 a monitored fire alarm system. (Doc. 130 5:14–22.) Allied has met its initial responsibility 26 on this basis, and the burden shifts to Stone to produce evidence that a reasonable jury 27 could return a verdict in Stone's favor. 28 Even viewing Stone's evidence in the most favorable light, it does not create a 1 genuine issue of material fact for a jury whether a monitored fire alarm system existed at 2 the Property. At oral argument, Stone conceded this point. (Trans. at 12:21–23.) Thus, the 3 material facts are not in dispute and the breach of contract claim turns on a legal issue: is 4 Allied's PSE requiring a monitored fire alarm enforceable (or not) under Arizona law? 5 B. Allied's PSE Is Enforceable Under Arizona Law 6 Stone argues that Allied's PSE violates Arizona law by conflicting with the Arizona 7 Standard Fire Policy.1 (Doc. 149 4:23–24.) Stone's argument raises an issue of first 8 impression for Arizona. Arizona Revised Statute § 20-1503(A) provides: 9 No policy of fire insurance covering property located in this state shall be made, issued or delivered unless it conforms as 10 to all provisions and the sequence thereof with the basic policy 11 commonly known as the New York standard fire policy, edition of 1943. Such policy is designated as the Arizona 12 standard fire policy. 13 The Arizona Supreme Court colorfully described Arizona's reasons for adopting the New 14 York standard policy in a 1925 case: 15 The whole history of fire insurance legislation shows a ceaseless struggle on 16 the part of the companies to limit their liability, as expressed on the face of the policy, and as generally understood by the insured, through the use of 17 changing conditions on the back of the policy, and in so-called 'riders' attached thereto, frequently phrased in language whose legal meaning is 18 unintelligible to even the well-educated man, and an equally determined 19 effort by the different Legislatures to hold all contracts of fire insurance to fixed forms, so that, when their legal effect was once established, the insured 20 could rely upon there being no new so-called 'jokers' introduced into his 21 policy, whether by rider or otherwise. The state of New York having, for obvious reasons, had more experience with fire insurance, and worked out a 22 more complete scheme of remedial legislation than any other 23 commonwealth, it was but natural many of the younger and smaller states, and among them Arizona, should have relied on its legislation as a 24 trustworthy guide for them. 25 Scot. Union & Nat'l Ins. Co. v. Phoenix Title & Tr. Co., 28 Ariz. 22, 30 (1925). 26 The New York standard fire policy requires insurers to insure against "all direct loss 27
28 1 Arizona law applies because this dispute arose in Arizona, and the Court sits in diversity jurisdiction. See, e.g., Allstate Ins. Co. v. Hughes, 358 F.3d 1089, 1094 (9th Cir. 2003). 1 by fire . . ., except as hereinafter provided." N.Y. Ins. Law § 3404(e) (McKinney) (emphasis 2 omitted).2 The New York standard policy thereafter lists several exceptions, exclusions, 3 and conditions that void, exempt, suspend, or restrict coverage. N.Y. Ins. Law § 3404(e) 4 2:1–46 (McKinney). For example, the policy is void if "the insured has willfully concealed 5 or misrepresented any material fact or circumstance." N.Y. Ins. Law § 3404(e) 2:1–5 6 (McKinney). The policy excludes "loss by fire or other perils . . . caused, directly or 7 indirectly, by: [enemy attack, invasion, insurrection, rebellion, revolution, civil war, etc.]." 8 N.Y. Ins. Law § 3404(e) 2:11–27 (McKinney). The policy suspends or restricts coverage 9 "[u]nless otherwise provided in writing added hereto" for fire caused by arson, or fire that 10 occurs while the building is vacant for more than 60 days. N.Y. Ins. Law § 3404(e) 2:28– 11 35 (McKinney). Arizona adds an exclusion for loss by fire caused by terrorism to the New 12 York list of limitations. A.R.S. § 20-1503(B). Finally, the New York standard policy (and 13 so too the Arizona standard policy) permits added provisions "not inconsistent with the 14 provisions of this policy." N.Y. Ins. Law § 3404(e) 2:42–46 (McKinney). If a policy's 15 provisions conflict with the standard policy, the standard policy provisions govern. See 16 Nangle v. Farmers Ins. Co. of Arizona, 205 Ariz. 517, 522 (App. 2003). Stone asserts that 17 Allied's PSE is inconsistent with Arizona's standard policy because it purports to add an 18 exclusion restricting coverage for a "direct loss by fire." (Doc. 149 5:27–28.) 19 Stone urges the Court to adopt a bright-line rule used in Jin Zun Zou v. American 20 Modern Home Ins. Co., 86 F.Supp.3d 1050 (D. Minn. 2015). There, a basement-bedroom 21 fire caused extensive smoke damage to the rest of insured Jin Zun Zou's home. Id. at 1052. 22 The insurer American Modern denied Jin Zun Zou's claim because the policy included a 23 PSE requiring policy holders to maintain operational smoke detectors. Id. In fact, Jin Zun 24 Zou did maintain smoke detectors that worked as designed to alert the occupants to the fire, 25 but American Modern still denied the claim because it found additional non-functional 26 2 For convenience, the Court cites to the modern statute. The 1943 edition is identical. 27 Compare N.Y. Ins. Law § 3404 et seq., with William Edward Baldwin, New York 28 Insurance Law, Annotated 41–42 (Banks-Baldwin Law Publishing Co., 34th ed. Supp. 1948). 1 smoke detectors in a closet. Id. The district court ruled for Jin Zun Zou, noting the absurdity 2 of denying a claim where functioning smoke detectors were present because additional 3 non-functioning smoke detectors were stored in the house. Id. at 1054. As a secondary 4 reason for ruling for Jin Zun Zou, the court found that American Modern's PSE was also 5 unenforceable because the Minnesota standard fire policy permitted some exclusions (for 6 sprinklers) but not others (such as for smoke detectors). Id. at 1055. Stone seizes on this 7 portion of the Minnesota decision, urging the Court similarly to adopt a bright-line rule and 8 reject any provisions not found in the 165 lines of the New York standard policy that might 9 be used to deny coverage. 10 Stone is effectively relying on the negative-implication canon of interpretation. See 11 Scalia & Garner, Reading Law: An Interpretation of Legal Texts (2012), at 107 ("The 12 expression of one thing implies the exclusion of others (expressio unius est exclusio 13 alterius)."). Stone's argument is essentially this: (1) the Arizona legislature explicitly 14 adopted the New York standard fire policy; (2) the New York policy calls out several 15 permitted exceptions, exclusions, and conditions; (3) PSEs are not among the listed 16 exceptions, exclusions, and conditions in the New York policy; therefore, (4) Arizona's 17 legislature chose to exclude any exclusions not listed, including PSEs, when it adopted the 18 New York standard policy. (See Doc. 149 at 9:24–26.) Despite its intuitive appeal, this 19 argument overlooks other important interpretive canons, the plain language of the policy 20 itself, and available Arizona and New York precedent. See Scalia & Garner, at 59 ("No 21 canon of interpretation is absolute. Each may be overcome by the strength of differing 22 principles that point in other directions."). 23 First, Stone's argument fails to construe the text as a whole. Scalia & Garner, at 167. 24 The text at issue is not merely the isolated language of the Arizona statute, or even just the 25 language of the 1943 edition of the New York standard policy. See Scottish Union, 22 Ariz. 26 at 29–30 ("The question then arises as to what was included in the 'New York standard' 27 policy when our Legislature adopted it in 1913. There can be no doubt, from the wording 28 of [the statute], that the Legislature intended to follow the rules adopted by the state of New 1 York in all respects, so far as the form of policy was concerned."). Arizona acknowledged 2 this holistic view again in 1927, reviewing a similar fire-insurance provision to Allied's 3 PSE. See Queen Ins. Co. v. Watson, 31 Ariz. 340, 342–43 (1927). In Watson, the Court 4 considered a "clear-space clause" requiring the insured to maintain a clear space of not less 5 than 100 feet between stored cotton and any cotton gin, mill, or other building. Id. at 343. 6 The Court agreed with the trial court that the clear-space clause was invalid because 7 Arizona required fire-insurance policies to conform with the New York standard form as 8 it was in 1913, when the Arizona adopted it, and in 1913 the clear-space clause had not 9 been adopted by New York as a standard fire policy rider. Id. Here, the Court faces a similar 10 issue with one change: the Arizona statute now specifies the 1943 version of the New York 11 statute. The question then becomes whether in or before 1943 PSEs like Allied's were 12 permitted as a matter of standard New York fire-policy law. 13 New York insurance law before 1943 comfortably permitted endorsements like 14 Allied's PSE as "warranties," and continues to do so today. In 1939, for example, New 15 York insurance law defined a "Warranty" as: 16 any provision of an insurance contract which has the effect of requiring, as a condition precedent of the taking effect of such 17 contract or as a condition precedent of the insurer's liability 18 thereunder, the existence of a fact which tends to diminish, or the non-existence of a fact which tends to increase, the risk of 19 the occurrence of any loss, damage, or injury within the 20 coverage of the contract. 21 Insurance Law of the State of New York, Laws of 1939 136–37 (§ 150) (Paul R. Taylor, 22 ed., Albany Williams Press, Inc. 1953). That definition is still good New York law today 23 and squarely encompasses Allied's PSE because a monitored fire alarm system tends to 24 diminish the risk of loss from fire. See N.Y. Ins. Law § 3106 (McKinney) (2022) (identical 25 language). Furthermore, several recent New York cases have relied on that warranty 26 definition to permit similar PSEs. See Si Meat Vill., Inc. v. Amguard Ins. Co., 208 F. Supp. 27 3d 490, 492 (E.D.N.Y. 2016) (noting that under New York law, a PSE is a warranty (a type 28 of condition), and granting summary judgment for the insurer where the insured had no fire 1 alarm despite representing it did on its insurance application) (citing Triple Diamond Cafe, 2 Inc. v. Those Certain Underwriters at Lloyd's London, 124 A.D.3d 763, 765 (N.Y. App. 3 Div. 2015) (affirming summary judgment for insurer where insured was required to have 4 a fully operational central-station fire and burglar alarm but did not set the alarm on the 5 day a burglary caused an all-consuming fire); see also Anghel v. Utica Mut. Ins. Co., 127 6 A.D.3d 897, 899 (N.Y. Ct. App. 2015) (acknowledging that a PSE is a permissible 7 "warranty" related to fire loss); 31 N.Y. Prac., New York Insurance Law § 16:54 (2021– 8 2022 ed.) ("[New York] [f]ire insurance policies may require the insured to maintain fire- 9 fighting apparatus, which requirement is usually regarded as a promissory warranty or 10 condition subsequent that must be strictly complied with."). The Court is therefore 11 persuaded that because PSEs do not impermissibly restrict New York's standard policy 12 under New York law, they do not impermissibly restrict New York's standard policy under 13 Arizona law. Viewing Arizona law as a whole—including 1943 New York insurance law 14 defining warranties and subsequent case law relying on it—Stone's argument that PSEs are 15 invalid by negative implication fails. 16 Second, Stone's argument does not adequately consider the standard policy as a 17 whole, which contemplates "added provisions not inconsistent" with the rest of the policy. 18 N.Y. Ins. Law § 3404(e) 2:42–46 (McKinney). Again, New York case law is particularly 19 persuasive here. See Stankova v. Metropolitan Property & Casualty Insurance Co., 788 20 F.3d 1012, 1015 (9th Cir. 2015) (looking to New York law and treatises for guidance to 21 establish the meaning of a term in an Arizona standard fire policy); Nangle v. Farmers Ins. 22 Co. of Arizona, 205 Ariz. 517, 522 (App. 2003) (looking to New York's interpretation of 23 the standard policy for guidance). As in Arizona, in New York "[n]o policy or contract of 24 fire insurance shall be made . . . unless it shall conform as to all provisions, stipulations, 25 agreements and conditions with [the New York standard policy]." New York Ins. Law § 26 3404(b)(1) (substantially similar language to A.R.S. § 20-1503(A)). Arizona and New 27 York fire-policy law are also similar because both require fire policies that do not conflict 28 with and are "no less restrictive" than New York's standard policy. Compare Sciranko v. 1 Fid. & Guar. Life Ins. Co., 503 F. Supp. 2d 1293, 1313–14 (D. Ariz. 2007) ("To the extent 2 that original policy terms conflict with statutory terms, the trick is to identify the terms that 3 provide the most generous coverage. Statutory language will govern if contrary privately 4 contracted language is less favorable to the insured."), with Quaker Hills, LLC v. Pac. 5 Indem. Co., 728 F.3d 171, 180 (2d Cir. 2013) ("[Under New York law,] while an insurer is 6 free to deviate from the New York Standard Form by providing terms that are more 7 favorable . . . a fire insurance policy must include terms and provisions no less favorable 8 to the insured than those contained in the standard fire policy." (emphasis added)). In short, 9 in both Arizona and New York a provision is "consistent" with the standard policy if it 10 grants equal or broader coverage than the standard policy, and "inconsistent" if it grants 11 narrower coverage. Stone characterizes Allied's PSE as providing narrower coverage 12 because it is an "exclusion restricting coverage for a 'direct loss by fire.'" (See Doc. 149 at 13 5:26–28.) 14 But a condition is different from an exclusion, despite their somewhat similar effect, 15 and Allied's PSE is clearly the former. A condition is different from an exclusion because 16 "the breach of [a condition will] terminate or suspend insurance while the effect of [an 17 exclusion] is to declare that there never was insurance with respect to the included risk." 6 18 Couch on Ins. § 81:19. Put differently, a condition is an act or event that creates a reciprocal 19 duty to perform a promise, see Rst. (2d) of Contracts § 224 (1981), but an exclusion is an 20 explicit recognition of something not promised. Although conditions are generally 21 disfavored because they tend to work a forfeiture, they may be created by "contractual 22 language demonstrating the parties' unequivocal intent to create the condition." Angle v. 23 Mario Builders, Inc., 128 Ariz. 396 (1981) (citing L. Harvey Concrete, Inc. v. Agro. Constr. 24 & Supply Co., 189 Ariz. 178, 182 (App. 1997) (internal quotations omitted)). 25 Here, Allied's PSE appears in a notice at the front of the contract that explicitly 26 states "This Notice does not form part of the insurance contract. No coverage is provided 27 by this Notice, nor can it be construed to replace any provisions of the policy (including its 28 endorsements)." (Doc. 131-2 at 7.) The Notice further states, "Note that acceptance of the 1 policy, in the payment of premium, constitutes the insured's understanding and 2 acknowledgment of the risk of loss of insurance at the scheduled building if the protective 3 safeguard is not maintained. . . . The condition in this endorsement applies to all coverages 4 provided by the insurance . . . ." Id. Further, in the "Protective Safeguards" description later 5 in the policy, another "Notice" states, "As a condition of this insurance, you are required 6 to maintain [an "Automatic Fire Alarm, protecting the entire building, that is: a. Connected 7 to a central station; or b. Reporting to a public or private fire alarm station."]. (Doc. 131-2 8 at 91–92.) Although one of the forms refers to the protective safeguard both as an 9 "exclusion" and a "condition," the balance tips heavily toward the description of it as a 10 "condition." See Doc. 131-2 at 91. The Court finds that this contractual language 11 demonstrates an intent to create a condition—not an exclusion—to coverage.3 12 Furthermore, a condition requiring a monitored fire alarm system is not 13 "inconsistent" with a standard policy ensuring "all direct loss from fire." Stone relies most 14 heavily on Stankova to support its position. 788 F.3d at 1012. There, a massive wildfire in 15 Northern Arizona destroyed insured Stankova's detached garage and all vegetation on a 16 nearby hillside. Id. at 1013. One month later, a mudslide and runoff water from the hillside 17 destroyed Stankova's house. Id. Stankova's insurance provider Metropolitan agreed to 18 cover the loss of the garage but not the house because Stankova's policy covered "direct" 19 loss caused by fire but excluded loss caused by water damage or mudslide. Id. at 1013– 20 1014. The district court concluded the fire could not, as a matter of law, have "directly" 21 caused the mudslide, but the Ninth Circuit reversed and remanded to determine causation. 22 Id. at 1013. At the end of its opinion, the court considered Metropolitan's "anti-concurrent 23 causation" provision (ACC), which purported to limit coverage where an excluded cause 24 3 At oral argument, Allied argued that the requirement to have a monitored fire alarm is a 25 condition, and the requirement to maintain the monitored fire alarm is an exclusion. (Trans. 26 at 7:12–18.) Allied distinguished between the two by reference to the contract itself, where it discusses the former in a section titled “Conditions” and the latter in a section titled 27 “Exclusions.” Id.; see also Doc. 131-2 at 91. Here, the legal issue before the Court is 28 whether the requirement to have a monitored fire-alarm conflicts with Arizona law, and that is the issue the Court decides. 1 (mudslide) was a cause of the loss even if it was not the only cause. Id. at 1017. The court 2 reasoned that the ACC was unenforceable because it conflicted with Arizona's statutorily 3 mandated standard fire insurance policy, which insures against all direct loss by fire. Id. 4 Stone argues that Allied's PSE is similar to the ACC in Stankova, and similarly 5 unenforceable. Doc. 149 5:27–28, 6:1–7. 6 But Stankova is distinguishable because its ruling was primarily about causation: 7 whether the fire "directly caused" the damage to Stankova's house. The ACC provision also 8 involved causation: it attempted to exclude damage directly caused by fire if the damage 9 was also caused by a policy exclusion like mudslide, which is inconsistent with a standard 10 policy requiring coverage of all direct damage directly caused by fire. By contrast, Allied's 11 PSE says nothing about causation; whatever a fire's cause, and however it directly causes 12 a loss, Allied's PSE states only what the insured has promised to do—have a monitored fire 13 alarm—to lower the risk of loss.4 14 Stone's other cases are not particularly helpful because they involve obvious 15 inconsistencies between an issued policy and the standard policy. For example, Stone cites 16 a Seventh Circuit case where a policy excluding fire caused by "any insured" conflicted 17 with the Standard Fire Policy exclusion of fire caused by "the insured." (Doc. 149 at 8.) 18 (citing Streit v. Metropolitan Cas. Ins. Co., 863 F.3d 770, 773 (7th Cir. 2017). Similarly, 19 Stone cites an Arizona case where the fire policy excluded asbestos removal costs even 20 though they were a direct consequence of a fire, and an Illinois case where the fire policy 21 excluded damage from fire caused by vandalism. (Doc. 149 at 8.) (citing Lukes v. Am. 22 Family Mut. Ins. Co., 455 F. Supp.2d 1010, 1014 (D. Ariz. 2006); Lundquist v. Allstate 23 Ins. Co., 314 Ill. App.3d 240 (2000)). But as with Stankova, these cases offer little guidance 24 because Allied's PSE does not exclude coverage based on a cause or effect of fire. The PSE 25 requires insureds to agree to reduce the fire risk by having a monitored fire alarm and, if 26 they agree, Allied extends them full coverage for all direct loss caused by fire. Allied's PSE
27 4 Stone argues that this feature makes Allied’s PSE a “super-ACC” because it restricts 28 coverage whatever the cause of the loss. (Doc. 149 at 6.) The situation is simpler than that. The PSE’s lack of causal language weakens rather than strengthens its analogy to the ACC. 1 therefore avoids Stankova's reasoning and remains consistent with Arizona's standard 2 policy. 3 Finally, the Court disagrees with Stone's assertion that the Court's decision here is 4 contrary to public policy. Stone correctly notes that New York's standard fire policy was 5 adopted in Arizona and elsewhere primarily to protect insureds from unexpected 6 limitations. (Doc. 149 6:8–10.) Stone captures this "consumer protection principle" in a 7 Minnesota decision stating that the Standard Fire Policy "was enacted to 'do away with the 8 evils arising from the insertion in policies of conditions ingeniously worded which 9 restricted the liability of the insurer and gave the insured less protection than he might 10 naturally suppose he was getting under his contract.'" (Id. (citing Watson v. United Servs. 11 Auto. Ass'n, 566 N.W.2d 683, 689 (Minn. 1997))). But the sensible concern that consumers 12 might be tricked into purchasing inadequate coverage is not at play here, where the terms 13 of Allied's PSE condition are written in plain language and posted conspicuously at the 14 beginning and throughout the policy. Stone was not tricked or misled. (See Doc. 150-5 at 15 32–33.) Stone warns that permitting unscrupulous insurance companies to characterize 16 every exclusion as a condition would "gut" Arizona's statute and render the standard policy 17 "worthless." (Doc. 149 at 10:16; Doc. 167 at 2:3–4.) But Stone's warning is substantially 18 weakened by the fact that the New York standard policy was not gutted in New York when 19 New York began permitting PSEs as warranties. 20 a. Stone's remaining arguments fail because they are premised on the existence of a monitored fire alarm system that did not exist. 21 Next, Stone marshals several arguments that even if the PSE is valid, there are 22 questions of fact (1) whether Stone "believed" the safeguard was in place, (2) whether 23 Stone knew or should have known of an "impairment" in the safeguard, and (3) whether 24 Stone had control over the premises and failed to maintain the safeguard. (Doc. 149 at 11– 25 14.) The Court need not address these disputes because they do not relate to material facts. 26 The material fact is whether there was a monitored fire alarm system, and Stone conceded 27 there was not. (Trans. at 12:21–23.) The requirement to have and maintain a monitored fire 28 alarm system was unambiguous. See Doc. 131-9 at 91 ("You risk the loss of certain 1 insurance coverage at premises designated in the declarations if you fail to maintain any of 2 the applicable protective safeguards"); Doc. 131-2 at 7 ("The scheduled protective 3 safeguard(s) scheduled endorsement must be: in place; operational; and maintained in good 4 working order at the building shown on the endorsement. Failure to comply with any of 5 these conditions may result in loss of insurance coverage."); Doc. 150-5 at 32–33. The 6 Allied PSE requires the fact of a monitored fire alarm system, not a belief in one. 7 b. Allied did not waive its PSE by not refunding Stone's premiums because Allied was unaware the monitored fire alarm system did not 8 exist when Allied issued Stone's policy. 9 Stone argues that Allied waived the PSE by not refunding Stone's premiums. But 10 the cases Stone cites are inapposite because they deal largely with issues around insurance 11 coverage of an event after the application is completed but before the policy is issued. See, 12 e.g., McCollum v. Continental Cas. Co., 151 Ariz. 492, 494 (App. 1986). Another of 13 Stone's cases cuts against Stone's position, showing that Arizona courts are comfortable 14 directing a verdict for an insurer where a material misrepresentation on the application was 15 not known to the insurer when the policy issued. See Greber v. Equitable Life Assur. Soc., 16 43 Ariz. 1, 9–11 (1934). The waiver issue arises when an insurer knows of facts that would 17 invalidate the policy but issues it anyway. Id. Here, Allied did not know that Stone's 18 building did not have a monitored fire alarm system until after its investigations into the 19 circumstances of the fire. 20 B. Motion 1 Bad Faith Claim 21 An insurer "commits the tort of insurance bad faith when it 'intentionally denies, 22 fails to process or pay a claim without a reasonable basis.'" Fid. Nat'l Title Ins. Co. v. 23 Osborn III Partners LLC, 250 Ariz. 615, 628 (App. 2021), review granted (Aug. 23, 2022) 24 (citing Zilisch v. State Farm Mut. Auto. Ins. Co., 196 Ariz. 234, 238 (2000) (en banc)). 25 Where "the issue turns on questions of contract interpretation," it is a question of law for 26 the Court to decide. Id. (affirming summary judgment where insurer reasonably relied on 27 an exclusion and the operative facts were simple and not in dispute). A failure to investigate 28 adequately is material if further investigation would have revealed relevant facts. Aetna 1 Cas. & Sur. Co. v. Superior Ct. In & For Cnty. Of Maricopa, 161 Ariz. 437, 440 (App. 2 1989). 3 a. Allied's investigation created a reasonable basis for denying Stone's claim. 4 Stone argues that Allied's investigation lacked a reasonable basis because Allied did 5 not investigate Stone's allegation that the PSE violated Arizona law. (Doc. 1-3 at 7–8; Doc. 6 149 at 16.) But even assuming that is true, Allied's investigation into Arizona law would 7 not have revealed any binding authority holding PSE's invalid, and several persuasive New 8 York cases holding PSEs valid under the New York standard policy.5 Moreover, Allied's 9 investigation as a whole was adequate and provided a reasonable basis for denying Stone's 10 claim. The operative fact of whether Stone's building had a monitored fire alarm system 11 was established beyond dispute by (1) Allied's adjuster, who inspected the building after 12 the fire and saw no components of a monitored fire alarm system; (2) Allied's fire cause- 13 and-origin expert, who saw no evidence of a monitored alarm; and (3) Allied's engineering 14 expert, who also saw no evidence of a monitored alarm system. (Doc. 131 at ¶¶ 31, 33, 15 34; Doc. 150 at ¶¶ 31, 33, 34.) Nor does Stone's insurance expert's report raise issues of 16 material fact because the report either fails to allege shortcomings in Allied's investigation 17 that would have revealed a monitored fire alarm system, see, e.g., Doc. 131-6 at ¶¶ 36, 44, 18 or alleges failures in Allied's investigation that are immaterial given the absence of 19 evidence of a monitored fire alarm system. See, e.g., Doc. 131-6 at ¶¶ 37, 41, 56. There is 20 therefore no genuine dispute between Allied and Stone whether Allied's denial of Stone's 21 claim was in bad faith, and Allied is entitled to summary judgment on the bad faith claim. 22 b. Allied is entitled to summary judgment on punitive damages. 23 Stone argues that Stone is due punitive damages because Allied "consciously 24 disregarded" the "Standard Fire Policy Issue." Where summary judgment is granted on a 25
26 5 Because a legal investigation would not have revealed binding or clearly instructive authority, whether or not Allied undertook one is immaterial. In different circumstances, a 27 failure to investigate the possibility of legal invalidity might raise issues of implied waiver 28 of attorney-client privilege. See, e.g., State Farm Mut. Auto. Ins. Co. v. Lee, 199 Ariz. 52 (2000). 1 bad faith claim, it is also appropriate on an accompanying punitive damages claim. Regal 2 Homes, Inc. v. CNA Ins., 217 Ariz. 159, 171 (App. 2007). Summary judgment on a punitive 3 damages claim is also appropriate "in the absence of facts sufficient to show by clear and 4 convincing evidence that the defendant acted with the requisite evil mind." Jones v. 5 Metcalf, 252 Ariz. 270 (App. 2021). An "evil mind" is demonstrated either by intending to 6 injure the plaintiff, or consciously pursuing "a course of conduct knowing that it create[s] 7 a substantial risk of serious harm to others." Id. (citing Quintero v. Rogers, 221 Ariz. 536, 8 ¶ 17 (App. 2009)). 9 Here, the Court will grant summary judgment for Allied on Stone's bad faith claim, 10 and so also grants summary judgment for Allied on Stone's punitive damages claim. The 11 Court separately notes that Stone has presented no evidence suggesting that Allied acted 12 with an evil mind in denying Stone's claim. Rather, Allied conducted a prompt and 13 reasonable investigation into the fire, discovered that Stone lacked a monitored fire alarm 14 system as required by Stone's policy, and, consistent with the policy's plain language, fairly 15 denied the claim on that basis. 16 C. Allied’s request for attorneys' fees is denied. 17 Allied seeks attorneys’ fees under A.R.S. § 12-341.01 as the prevailing party in an 18 action arising out of contract. Allied argues it is entitled to attorneys' fees because Stone's 19 claims "lack any merit," and had Stone's "Counsel been more objective, this litigation could 20 have been avoided." (Doc. 158 at 11.) The Court has discretion whether to award attorneys’ 21 fees and looks to several factors when making that determination: (1) the merits of the 22 claim or defense presented by the unsuccessful party; (2) whether the litigation could have 23 been avoided or settled, rendering the successful party's efforts completely superfluous; (3) 24 whether assessing fees against the unsuccessful party would cause an extreme hardship; 25 (4) whether the successful party did not prevail with respect to all relief sought; and (5) the 26 novelty of the legal question presented, and whether such claim or defense had previously 27 been adjudicated in the jurisdiction. Associated Indem. Corp. v. Warner, 143 Ariz. 567, 28 570 (1985) (en banc). 1 Here, the core issue—the validity of Allied's PSE under Arizona law—is a novel 2|| one. There is no controlling case law on point. Both sides made cogent, credible arguments 3 || supported by persuasive case law. Stone has not stated whether awarding fees would cause 4|| it extreme hardship, but the Court recognizes that Stone has now been denied insurance 5 || coverage for a loss caused by fire, which results in an unexpected financial blow. The Court || therefore exercises its discretion not to award Allied attorneys’ fees. 7 D. Stone's Motion 3 is denied as moot because Allied's Motion 1 is granted. 8 In Motion 3, Stone seeks leave to file a Second Amended Complaint, adding class || action claims against Allied on the theory that Allied's PSE is invalid under Arizona law. || Because the Court grants Allied's Motion 1, Stone's Motion 3 is now moot. The Court 11 || therefore denies Stone's Motion 3 as moot. IV. ORDER 13 For the reasons stated above, 14 IT IS ORDERED GRANTING Allied's Motion 1 (Doc. 130). 15 IT IS FURTHER ORDERED DENYING Allied's request for award of □□□□□□□□□□ fees. 17 IT IS FURTHER ORDERED DENYING Stone's Motion 2 (Doc. 149). 18 IT IS FURTHER ORDERED DENYING Motion 3 (Doc. 147). The Clerk of 19 |) Court must enter judgment accordingly. 20 Dated this 27th day of September, 2022. 21 22 23 9 He Lherrh onorable John C. Hinderaker 24 United States District Judge 25 26 27 28
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