Free Reply to Response to Motion - District Court of Arizona - Arizona

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Wayne Gill, Esq., (FL Bar 114953) Walton Lantaff Schroeder & Carson 1700 Palm Beach Lakes Blvd., 7th Floor West Palm Beach, FL 33401 Tel: 561/689-6700 Fax: 561/689-2647 Steven Plitt, Esq. (State Bar No. 007481) Daniel Maldonado, Esq. (State Bar No. 018483) KUNZ PLITT HYLAND DEMLONG & KLEIFIELD 3838 North Central Avenue, Suite 1500 Phoenix, Arizona 85012-1092 Telephone: (602) 331-4600 Facsimile: (602) 331-8600 [email protected]; [email protected] Attorneys for Defendants IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA U-Haul International, Inc.; U-Haul Company Of Pennsylvania; U-Haul Company Of Florida; and Republic Western Insurance Company, Plaintiffs, vs. Lumbermens Mutual Casualty Company, Defendants. CASE NO.: CIV-04-0662-PHX-DGC (Maricopa County Superior Court Cause No. CV 2004-002438) DEFENDANT/COUNTER-PLAINTIFF LUMBERMENS MUTUAL CASUALTY COMPANY'S REPLY TO PLAINTIFFS'/ COUNTER-DEFENDANTS' RESPONSE TO LUMBERMENS MUTUAL CASUALTY COMPANY'S SUMMARY JUDGMENT MOTION (Oral Argument Requested)

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Lumbermens Mutual Casualty Company ("LMC") hereby replies to plaintiffs'
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response to LMC's motion for summary judgment, and states as follows: 1

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This response is supported by memorandum of points and authorities, defendant's Motion for Summary Judgment, exhibits and excerpts of insurance policies listed in defendant's Statement of Undisputed Material Facts in support of its Motion for Summary Judgment ("SOF"), defendant's response to plaintiffs' Motion for Summary Judgment, defendant's Statement of Facts in response to plaintiffs' Motion for Summary Judgment ("DSOF"), and the court's entire file. Document 122 Filed 12/16/2005 Page 1 of 12

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ARGUMENT I. PURSUANT TO THE FACTS AND APPLICABLE LAW, THE REASONABLE EXPECTATIONS DOCTRINE MAY NOT BE APPLIED IN FAVOR OF U-HAUL, AND AGAINST LMC, IN REGARD TO REPUBLIC WESTERN'S RU POLICIES, BUT SHOULD BE APPLIED IN FAVOR OF LMC IN REGARD TO THE POLICIES LMC ISSUED TO UHAUL. The Arizona reasonable expectations doctrine is defined by the following cases:

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Zuckerman v. Transamerican Ins. Co., 132 Ariz. 529, 647 P. 2d 1127 (1982) (a policy
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provision will not be enforced when to do so would defeat the basic intent of the parties
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in entering into the insurance transaction); Vencor v. National States Ins. Co., 303 F.3d
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1024, 1035 (9th Cir. 2002) (the reasonable expectation doctrine ". . . protects
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individuals from over-reaching by 'hold[ing] the drafter to good faith and terms which
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are conscionable'"); Darner Motor Sales v. Universal Underwriters, 140 Ariz. 383, 682
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P.2d 388 (1984) (only those reasonable expectations which are induced by the words or
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conduct of the parties should be considered.
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Also, the doctrine does not bar

enforcement of a standardized policy provision [boilerplate] unless the company that drafted the policy had reason to believe the policyholder would not have accepted the
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policy if the policyholder had been aware of it); Statewide Ins. Corp. v. Dewar, 143
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Ariz. 553, 557, 694 P.2d 1167, 1171 (1984) (the unexpressed intent of either party to the
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insurance transaction is irrelevant); American Nat'l Fire Ins. Co. v. Esquire Labs of
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Arizona, 143 Ariz. 512, 694 P.2d 800, 811 (Ariz. App. 1985) and Gilbreath v. St. Paul
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Fire & Marine Ins. Co., 141 Ariz. 92, 685 P.2d 729 (1984) (the court must determine the
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contracting parties' intent from the standpoint of the insurance company that drafted the
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policy, as well as from the standpoint of the policyholder who purchased the policy);
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Gordinier v. Aetna Cas. & Surety Co., 152 Ariz. 266, 742 P.2d 277 (1987) (there are
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only four situations in which the reasonable expectations doctrine may apply assuming all other requirements are also met). The four situations listed in Gordinier are: (1) Where the contract terms, although not ambiguous to the court, cannot be -2 Document 122 - Filed 12/16/2005
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understood by the reasonably intelligent consumer who might check on his or her rights, the court will interpret them in light of the objective, reasonable expectations of the average insured. (2) Where the insured did not receive full and adequate notice of the term in question, and the provision is either unusual or unexpected, or one that emasculates apparent coverage. (3) Where some activity which can be reasonably attributed to the insurer would create an objective impression of coverage in the mind of a reasonable insured. (4) Where some activity reasonably attributable to the insurer has induced a particular insured reasonably to believe that he has coverage, although such coverage is expressly and unambiguously denied by the policy. Pursuant to the foregoing case law, the reasonable expectations doctrine is not

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applicable to U-Haul's aforesaid alleged expectations because:
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(1)
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There is no evidence of record as to whether U-Haul had any expectations

as to whether Republic Western's payment of defense costs would reduce the RU policies' liability limits, or as to whether reduction of the RG and RX policies' limits
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would cause the RU policy and/or the LMC policy to apply before an amount equal to
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the combined stated underlying policy limits has been exhausted by payment of
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indemnity only.
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Plaintiffs' reliance on the testimony of three Republic Western

employees is misplaced for several reasons. First, as employees of Republic Western, their personal expectations are not evidence of U-Haul's expectations. Second, Bell and
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Amoroso did not start work at Republic Western until after the subject policies were
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issued. (See, SOF Exhibit 1, Depo. Bell, p. 16, l. 24 - p. 17, l. 2; SOF Exhibit 2, Depo.
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Amoroso, p. 41, ll. 5-17.) Third, former Republic Western employee McCarty gave no
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testimony as to Republic Western's expectation for the policy years in question (4/1/9922

01), but only as to the preceding policy year (4/1/98-99). Also, there is no evidence that
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McCarty's signed handwritten application dated 2/3/98 was ever submitted to AON or
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LMC. (2) LMC was not a party to the insurance transaction between U-Haul and

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Republic Western, U-Haul's decision to accept Republic Western's RU policies was not induced by LMC's words or conduct, was not induced by any promise from LMC, and none of the four situations listed in Gordinier, supra, apply. The testimony of AON's manager Mizrachi, and LMC's underwriter Tibbs shows it was the mutual expectation of LMC and U -Haul (by and through U -Haul's agent AON) that the RU policy limits would not be reduced by Republic Western's payment of defense costs, and that LMC would have no obligation to pay a judgment or settlement until an amount equal to Republic Western's combined stated occurrence limits ($7,000,000) has been paid for indemnity only. (See, SOF Exhibit 10, Depo. Mizrachi; SOF Exhibit 27, Depo. Tibbs.) The court is required by Arizona's reasonable expectations doctrine to protect this basic intent of the parties (i.e., LMC's intent and the intent of U-Haul as expressed to LMC by U-Haul's agent AON) pursuant to Esquire Labs, supra, and Gilbreath, supra. Therefore, the Arizona reasonable expectations

doctrine applies to the insurance transaction between LMC and U -Haul's agent AON and constitutes an independent basis for granting LMC's summary judgment motion. Alternatively, the same facts support summary judgment in favor of LMC based on LMC's affirmative defense of estoppel (19th affirmative defense) (Dkt. 25). Mr. Tibbs' inability to remember in January 2005 whether he read the RU policies in 1999 and 2000 is immaterial since LMC contends that the provisions of the RU policies support LMC's summary judgment motion. II. NONE OF THE DEFENSE COSTS FOR WHICH PLAINTIFFS MAKE CLAIM IN THIS ACTION ARE DEFENSE COSTS AS DEFINED BY THE RU POLICIES' DEFINITION OF "ULTIMATE NET LOSS." The only part of the RU policies' definition of "ultimate net loss" that pertains to defense costs is subparagraph (2). Subparagraph (1) of the definition, which pertains to indemnity payments, states: "All sums which the insured or any carrier as his insurer or both become legally obligated to pay as damages . . ." Republic Western could have

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worded subparagraph (2) of the RU policies' ultimate net loss definition to be similar to subparagraph (1) of the definition by stating: "all expenses incurred by the insured or his insurer, or both. . ." However, Republic Western instead restricted subparagraph (2) of the definition to "all expenses incurred by the insured. . ." This clear policy language must be enforced as written. III. SINCE THE RU POLICIES' DUTY TO DEFEND UNDER THEIR DEFENSE, SETTLEMENT AND SUPPLEMENTAL PAYMENTS PROVISION HAS NOT BEEN EXTINGUISHED, THE LAST PARAGRAPH OF THE RU POLICIES' ULTIMATE NET LOSS DEFINITION CONSTITUTES AN ADDITIONAL REASON WHY REPUBLIC WESTERN IS BARRED FROM RECOVERING ITS DEFENSE COSTS FROM LMC. The last sentence of the RU policies' definition of ultimate net loss states: "This policy shall not apply to defense, investigation, settlement, or legal expenses covered by underlying insurance." The Minnesota Supreme Court has construed this type of

provision as prohibiting an underlying carrier (such as Republic Western) from compelling a higher level carrier (such as LMC) from reimbursing defense costs that were incurred by the underlying carrier, prior to exhaustion of the underlying carrier's duty to defend. The Home Ins. Co. v. National Union Fire Ins. Co. of Pittsburg, 658 N.W. 2d 522 (Minn. 2003). For the reasons stated in LMC's summary judgment motion, and in LMC's response to plaintiffs' summary judgment motion, defense costs paid by Republic Western are in addition to the RU policy limits. continuing duty to defend that never exhausts. Thus, the RU policies have a Since the RU policies have an

inextinguishable duty to defend, all defense costs paid by Republic Western must be paid by the RU policies to the extent not paid by the underlying RG and RX policies. Republic Western's duty to defend U-Haul under the RG, RX and RU policies would be rendered illusory if the court were to allow Republic Western to recoup all of its defense costs from LMC.

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IV.

THE RU AND LMC POLICIES DO NOT DROP DOWN DUE TO THE RG AND RX POLICIES BEING REDUCED BY REPUBLIC WESTERN'S PAYMENT OF DEFENSE COSTS, AND PLAINTIFFS HAVE NOT CITED ANY CASE LAW TO THE CONTRARY. Arizona does not require an insurance policy's attachment point to drop down

due to reduction or exhaustion of underlying limits. Maricopa County v. Federal Ins.
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Co., 157 Ariz. 308, 757 P.2d 112 (Ariz. App. 1988). Plaintiffs attempt to distinguish
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Maricopa on the ground that there the underlying limits were reduced by insolvency
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rather than by defense costs. But, that is not a distinguishing factor and plaintiffs fail to
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give any argument as to why it should be a distinguishing factor.
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The RU policies' insuring agreement does not require Republic Western "to
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indemnify the insured for the ultimate net loss." Instead it requires Republic Western
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"to indemnify the insured for the ultimate net loss in excess of the applicable
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underlying (or retained limit) above hereafter stated." (Emphasis supplied.) The
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RU policies' insuring agreement therefore prevents the RU policies from dropping down
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to attach at a level less than the combined stated underlying policy limits. (See, DSOF,
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¶ 38.) The phrase "applicable limit" when used in an excess policy's insuring agreement
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refers to the liability coverage limit stated in the schedule of underlying insurance, and
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not to any reduction of those limits. Vickodil v. Lexington Ins. Co., 587 N.E. 2d 777
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(Mass. 1992).
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Therefore, as a matter of law, Republic Western's RU policies, and LMC's
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policies, are not required to drop down to apply immediately in excess of any reduced
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underlying limits (except to the extent any such limits have been reduced by payment of
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indemnity only). See, e.g., Hudson Ins. Co. v Gelman Sciences, Inc., 921 F2d 92 (7th Cir. 1990)(holding that where language of policy clearly stated that excess insurer was

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not liable until underlying insurers had p or were held liable to pay excess carrier aid was not required to drop down). Also, paragraph B6 of LMC's insuring agreement

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prohibits LMC from dropping down to attach at a lower level due to Republic Western's payment of defense costs because LMC's definition of "loss" does not include defense costs paid by Republic Western. This is because defense costs paid by Republic

Western do not come within the RU policies' definition of ultimate net loss. Further, plaintiffs admit on page 8 of their response that "Plaintiffs do not contend that the LMC and RU policies 'drop down.'" It is therefore clear that LMC has no obligation to pay a judgment or settlement until after an amount equal to Republic Western's combined stated underlying limits (i.e., $7,000,000) has been paid for indemnity only. V. PLAINTIFFS HAVE FAILED TO DISTINGUISH PLANET INS. CO. V. MEAD REINSURANCE CO. LMC's summary judgment motion cites Planet Ins. Co. v. Mead Reinsurance Co.,

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789 F.2d 668 (9th Cir. 1986) as requiring that this court hold that the RU policies'
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definition of ultimate net loss does not include defense costs. Plaintiffs' response fails
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to distinguish Planet because the dispositive holding in Planet is that the definition of
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ultimate net loss must not be construed to include defense costs because that would
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impair the insurer's ability to meet its defense obligation under the Defense, Settlement
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and Supplementary Payments provision, and also because allowing defense costs to be
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included in the definition of ultimate net loss "could deplete or eradicate the coverage
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(i.e., coverage for indemnity) contemplated by the first clause" of the ultimate net loss
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definition. This holding applies to the RU policies' definition of "ultimate net loss"
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because the first clause of the definition provides for the payment of indemnity, and
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because Section II of the RU policies contains a similar Defense, Settlement and
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Supplementary Payments provision. Since Planet applied Arizona law, its holding
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constitutes an additional reason why this court should find that the defense costs paid by Republic Western do not come within the RU policies' definition of ultimate net loss,

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and why neither the RU policy nor the LMC policy drop down to attach at a lower level due to the RG and RX policies' limits being reduced by the amount of defense costs paid by Republic Western. VI. PLAINTIFFS' ARGUMENT THAT LMC'S POLICIES DEFINE "LOSS" TO INCLUDE DEFENSE PAYMENTS "IF SUCH PAYMENTS ARE INCLUDED WITHIN THE LIMITS OF LIABILITY OF THE RESPECTIVE 'UNDERLYING INSURANCE,' BY THE TERMS OF THAT POLICY" IS NON- RESPONSIVE AND NOT APPLICABLE. Republic Western's payment of defense costs does not constitute "loss" within this definition from the LMC policy because such payments do not reduce the RU policy limit. As to why Republic Western's payment of defense costs do not reduce RU's policy limit, LMC refers to and incorporates by reference herein the legal arguments in support thereof that are stated in its motion for summary judgment and in its response to plaintiffs' motion for summary judgment. VII. PLAINTIFFS' CITATION TO LMC'S COMMERCIAL EXCESS FOLLOWING FORM ENDORSEMENT SUPPORTS LMC'S MOTION FOR SUMMARY JUDGMENT. Paragraph (C) of the form states: "Nothing contained in this endorsement shall obligate us to provide a duty to defend or investigate any claim or suit before the Underlying Insurance Limits shown in the Schedule of Underlying Insurance are exhausted by payment of judgments, claims or settlements." The only damages sought by plaintiffs are for reimbursement of the defense costs paid by Republic Western. If Republic Western were allowed to recoup its defense costs from LMC, then that would retroactively transfer the duty to defend from Republic Western to LMC. Any such retroactive transfer of Republic Western's duty to defend U-Haul is expressly barred by this endorsement because it is undisputed that the said underlying limits (i.e., $7,000,000) have not been exhausted by the payment of judgments, claims, or settlements.

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VIII. IT IS IMMATERIAL THAT THE RU POLICIES DO NOT EXPRESSLY EXCLUDE DEFENSE COSTS. Plaintiffs, at page 7 of their response, incorrectly state that the RU policies' definition of "ultimate net loss" includes defense costs. This allegation is not true and plaintiffs cannot make it true by repeating it. The RU policies' definition of ultimate net

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loss does not state that it "includes defense costs." Instead, what subparagraph (2) states
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is "All expenses incurred by the insured in the investigation, negotiation, settlement,
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and defense of any claim or suit. . ." (Emphasis supplied.) The only defense costs that
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are the subject of this litigation are defense costs paid by Republic Western. Since
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plaintiffs' claim does not include a claim for defense costs "incurred by the insured (U10

Haul)," the fact that the RU policy does not expressly exclude defense costs of any type
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is immaterial.
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LMC's summary judgment motion cited Westchester Fire Ins. Co. v. Stuart &
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Stevenson, 31 S.W. 3d 654 (Tex. App. 2000) for its holding that the use of the term
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"obligated to pay by reason of the liability imposed by law" in the definition of
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"ultimate net loss," does not include defense costs. This is another reason why Republic
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Western's defense costs do not come within RU's definition of "ultimate net loss."
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Plaintiffs have not stated any disagreement with this argument. Instead, plaintiffs cite
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Westchester only for its comment that "had the parties wished to include defense costs
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as a covered loss, it is unlikely that they would have rewritten the 'loss' definition to
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delete any reference of defense costs." That type of reasoning supports LMC's summary
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judgment motion because, if Republic Western had wished to include all defense costs
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within the definition of ultimate net loss, and not just defense costs incurred by the
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insured, then Republic Western presumably would not have omitted the words "which
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the insured or any carrier as his insurer or both" from subparagraph (2) while keeping those words in subparagraph (1).

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IX.

THE AGGREGATE LIABILITY LIMITS CONTAINED IN THE RGMM, RXMM, AND RUMM POLICIES ARE NOT REDUCED BY REPUBLIC WESTERN'S PAYMENT OF DEFENSE COSTS. There is nothing in RGMM's and RXMM's products aggregate endorsements that

reduce the aggregate limit by the amount of defense costs. The aggregate endorsements' statement that they are "Subject to the limit of each 'occurrence' or each 'accident'" merely acknowledges that RGMM's and RXMM's occurrence limits may have already been reduced by Republic Western's payment of defense costs. The endorsement then proceeds to impose a further limitation on RGMM's and RXMM's occurrence limit by subjecting the occurrence limits to an annual aggregate limit ". . . for all damages because of 'bodily injury' and 'property damage' included within the Products and Completed Operations Hazard . . . " Republic Western could have chosen to not limit the scope of RGMM's and RXMM's products aggregate endorsements to "damages because of 'bodily injury' and 'property damage,'" but did not do so. Republic Western is bound by the language it used when it drafted these endorsements. Accordingly, Republic Western's payment of defense costs under RGMM and RXMM in connection with the Martinez claim and suit does not reduce RGMM's and RXMM's products aggregate limit for the subsequent settlement of the Fernandez claim and suit. For the same reasons, RUMM's products aggregate limit, which is set forth in an identical products-completed operations aggregate limit endorsement, is not reduced by Republic Western's payment of defense costs in connection with the Martinez claim and suit. X. LMC'S SECOND AMENDED COMPLAINT SUFFICIENTLY PLACES PLAINTIFFS ON NOTICE THAT THEIR CLAIM AGAINST LMC IS SUBJECT TO LMC'S PRODUCTS-COMPLETED OPERATIONS AGGREGATE LIMIT. Plaintiffs' response does not cite any legal authority in opposition to the inclusion of the aggregate exhaustion issue in LMC's summary judgment motion. LMC

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acknowledges that the court's order of August 3, 2005 denied LMC's motion for leave to amend its answer and counterclaim to specifically plead exhaustion of its productscompleted operations aggregate limit of liability for the April 1, 2000-2001 policy period based upon the prior Martinez settlement. However, as stated in its motion, it is LMC's position that the requested amendment was not necessary in order for LMC to be able to raise this exhaustion issue but that LMC nevertheless filed its motion to amend in an abundance of caution to specifically request such a ruling. If the court finds that it was not necessary for LMC to have amended its second amended complaint to specifically plead its exhaustion of aggregate limit defense, then that defense completely bars Republic Western's claim for reimbursement as to the Fernandez settlement. CONCLUSION LMC's summary judgment motion should be granted for each of the reasons stated in this reply, as well as for each of the reasons stated in LMC's summary judgment motion, and in its response to plaintiffs' summary judgment motion. DATED this 16th day of December, 2005. WALTON LANTAFF SCHROEDER & CARSON LLP Wayne T. Gill, Esq. Southtrust Center 1700 Palm Beach Lakes Blvd., #700 West Palm Beach, FL 33401 KUNZ PLITT HYLAND DEMLONG KLEIFIELD Steven Plitt, Esq. Daniel Maldonado, Esq. 3838 N. Central Ave., Suite 1500 Phoenix, AZ 85012-1902 By: s/Daniel Maldonado ___________________________ Daniel Maldonado, Esq.

Attorneys for Defendant/Counter-Plaintiff

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Filed electronically this 16th day of December, 2005, and copies electronically served/mailed to: Gerald Gaffaney, Esq. David J. Ouimette, Esq. Mariscal, Weeks, McIntyre & Friedlander, P.A. 2901 North Central, Suite 200 Phoenix, AZ 85012 Attorneys for Plaintiff Bruce Friedman, Esq. Mark S. Fragner, Esq. Rubin, Fiorella & Friedman, LLP 292 Madison Avenue New York, NY 10017 Attorneys for Plaintiff s/Joye Gilsinger__________

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