Free Response in Opposition to Motion - District Court of Arizona - Arizona


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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 vs. Correctional Medical Services, Inc., a Missouri corporation, Dr. Antonio DiMaano, Dr. Reynaldo Figueroa, Nurse Lorraine Lopez-Moreno, Nurse Trina Carrasco, Nurse Jacqueline Cornwell, and ABC Insurance Company, Defendants. UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA Northland Insurance Company, a Minnesota corporation, Plaintiff, No. CV 04-347 PHX-FJM NORTHLAND' RESPONSE TO S DEFENDANTS' MOTION FOR SUMMARY JUDGMENT BASED ON GUARANTY ACTS And CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT ON THE EFFECT OF THE GUARANTY ACTS STEPTOE & JOHNSON LLP Collier Center 201 East Washington Street Suite 1600 Phoenix, Arizona 85004-2382 Telephone: (602) 257-5200 Facsimile: (602) 257-5299 Karl M. Tilleman (013435) P. Bruce Converse (005868) Attorneys for Plaintiff

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Introduction and Summary Northland' claims are not barred by either the Arizona or the Missouri Guaranty s Fund Act. Neither of these statutory schemes allows a party, guilty of gross medical negligence causing a 28-year-old man to go permanently blind, to escape all liability and avoid paying any of the $5.7 million judgment that resulted in part by that party' gross s negligence. CMS asks this Court to interpret these statutes in a manner that not only leads to an extraordinarily absurd and unfair result, but also in a manner inconsistent with the plain meaning of the statutes, when read as a whole. The Arizona Guaranty Fund Act bars claims against insureds only to the extent of the $100,000 maximum recovery from the Arizona Guaranty Fund. The Missouri

Guaranty Fund Act does not apply. Northland' subrogated claim for indemnity against s CMS should be allowed to proceed. Moreover, neither guaranty act bars other claims which were not covered by the policy issued by the insolvent insurer in the first place. The purpose of the guaranty acts is to provide some limited protection for insureds against the consequences of an insolvent insurer. If a claim would not have been covered anyway, then it matters not to the purpose of the statute whether the insurer was solvent or insolvent. Accordingly, Northland' s claims for breach of contract and fraud, which it asserts by way of assignment from CSC, are not barred by either act, and must proceed. The Relevant Facts Correctional Services Corporation (" CSC" operated the Florence West prison ) under an agreement with the State. Northland insured CSC for liability from its operations at Florence West up to a per-occurrence limit of $5 million, and the State was an additional insured under that policy. (NSOF ¶¶ 9-11) CSC in turn contracted with CSM to provide medical care to inmates at Florence West, and thus the primary care nurses and other medical personnel at Florence West were -1Doc. #486498 v.2

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employees of CSM. In their agreement, CSM agreed to name CSC as an additional insured, and maintain insurance coverage with per incident limits of at least $3 million. (NSOF ¶¶ 12-14) On February 25, 1999, Jose Valdez was transferred from the State of Arizona' s Alhambra facility to the Florence West prison, where he was to serve out his prison term. CMS begin medical care the very day Mr. Valdez arrived at Florence West. (NSOF ¶¶ 1516) Almost immediately upon his arrival at Florence West, Mr. Valdez informed CMS nurses that he was having a serious medical problem with his eyes and head. On February 25, 1999, the same day Mr. Valdez arrived at Florence West, he submitted a Health Needs Request (" HNR" asking to see a medical professional because Mr. Valdez felt he had ) " eyes lazy eye might need glasses." (NSOF ¶ 17) In the early hours of morning on bad February 26, 1999, the CMS night nurse on staff, Nurse Lorraine Lopez-Moreno, reviewed this HNR, and recommended that Mr. Valdez be sent to the Health Clinic at Florence West and seen by a nurse to check his visual acuity. (NSOF ¶ 18) That same night, Nurse Lopez reviewed and evaluated Mr. Valdez' medical s records that had come with him from the prior facility (the State' Alhambra facility). s (NSOF ¶ 19) At a minimum, Nurse Lopez became aware from her review of those Alhambra medical records that: (1) Mr. Valdez had been diagnosed with decreased visual acuity in his right eye on February 8, 1999, (2) that on February 19, 1999 (six days before arriving at Florence West), the security guards at the prior prison facility had referred him to the Health Unit in that facility on the afternoon of that day because Mr. Valdez had been complaining since the morning of dizziness, headaches and tongue numbness; and (3) that he was later diagnosed on that same day by a doctor as having " strabismus" a floating or eye, and told to see a Spanish Speaking provider if he continued to experience these conditions. (NSOF ¶ 20) -2Doc. #486498 v.2

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Then, at approximately noon on February 26, 1999, less than 24 hours after he had submitted his initial HNR at Florence West, two CMS nurses were called to Mr. Valdez' s cell on a potential emergency because he was found on the floor after having apparently passed out or having had seizures. (NSOF ¶ 21) Mr. Valdez complained to the nurses that day of headaches, dizziness, and he informed them that he had been kicked in the head by a horse in October 1998. (NSOF ¶ 22) The nurses took Mr. Valdez back to the health unit in a wheelchair, checked his visual acuity, and found that had 20/40 vision in his right eye, 20/50 in his left, and 20/50 in both. (NSOF ¶ 23) These nurses gave him 24 200 mg. tablets of Ibuprofen for the pain, and told him to submit another HNR if he continued to experience these problems. (NSOF ¶ 24) The CMS nurses also recommended that Mr. Valdez see an optometrist at some undefined point in the future to have his visual acuity checked (it took over two months for this actually to occur). (NSOF ¶ 25) On the form prepared for the optometrist, Nurse Trena Carrasco informed the optometrist of the following observations/impressions she had: " [Valdez] fell off horse 10/98 eye injury." (NSOF ¶ 26) On March 17, 1999, Mr. Valdez became significantly more desperate in his pleas for help from the CMS nurses. He wrote an alarming HNR that stated: " have sent a I request about 1 week ago. I pass out about 1 ½ weeks ago. I' getting severe headaches m and dizziness because of my eyes. I need some help. I can'see hardly and having a t bad time." (NSOF ¶¶ 27-28) Accordingly, the CMS medical personnel then knew that Mr. Valdez was having severe headaches and dizziness, that he directly connected those conditions to his eyes, and that he could hardly see anything. He understandably pleaded for " some help."In response, the CMS nurses didn'even see him again, but rather Nurse t Carrasco explained two days later that he was scheduled to see an optometrist and would be notified when that was going to occur. (NSOF ¶ 27) They did nothing else in response to this HNR, which was part of a medical file that contained all the previous complaints -3Doc. #486498 v.2

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and conditions Mr. Valdez had made at Florence West and at Alhambra (as reflected in the records that came with him). Just three days later, Mr. Valdez sent in another, even more alarming, HNR. On March 20, 1999, he wrote: " Since I got here in this unit which is February the 25th I sand [sic] a kite [prison language for HNR] to see a doctor because I' having problems with m my eyes and each day it is getting worse. I don'know what it is, I have some itching t and can'see very much. I need to see a doctor immediately. (NSOF ¶ 29) In response, t the CMS nurses checked to see if Mr. Valdez had any foreign object in his eye, which he obviously did not; instead, he was quite simply going blind from pressure caused by swelling in his head that was, among other things, putting pressure on, and killing, his optic nerve. (NSOF ¶¶ 30, 38-41) At this point, the CMS nurse supervisor told Mr. Valdez that he was going to see an optometrist, he had been informed of that fact three times since he arrived at Florence West, and -- amazingly -- " not kite [complain] about do this issue again."(NSOF ¶ 31) Having been instructed on March 20, 1999, not to complain again, Mr. Valdez waited until April 27, 1999 before he sent in his next HNR, which simply said: " [sic] Its been 5 days that I can'see." (NSOF ¶ 32) With all the information they had concerning t the severity of Mr. Valdez' medical condition, the last of which was his reporting he s could not see for five days, the CMS nurses once again said, " have already been seen you by medical and referred to the eye clinic. Please do not re-kite [re-complain]." (NSOF ¶ 33) On April 29, the optometrist examined Mr. Valdez (two days after he said it had been five days since he could last see), noted that his visual acuity in the right was not even 20/400, and recommended referral " opthalmology for retina exam!"(NSOF ¶ 34) to On May 6, 1999, an attorney representing the family of Mr. Valdez wrote the Warden at Florence West and informed him (1) that Mr. Valdez had made repeated -4Doc. #486498 v.2

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complaints that he is experiencing intense headaches and loss of vision, (2) that he had not received medical treatment, and (3) that Mr. Valdez'family had seen him several times at s Florence West and were getting increasingly concerned that he was seriously ill and that his condition was worsening. (NSOF ¶ 35) The Warden asked the nurse superintendent -Nurse Cornwell -- to obtain information so the Warden could respond. Remarkably, in her response to the Warden, Ms. Cornwell left out virtually every significant complaint Mr. Valdez had concerning his eyes -- including his statement that on April 27, 1999, it had been five days since he could see. (NSOF ¶ 36) Therefore, no urgency was afforded to Mr. Valdez' condition even in response to a letter from an attorney, to which the CMS s nurses responded by omitting many key facts that indicated Mr. Valdez had a very serious medical condition causing him to go blind. (NSOF ¶ 37) It was not until May 19, 1999, that CMS provided a specialist to diagnose and treat Mr. Valdez. (NSOF ¶ 38) He was diagnosed with hydrocephalus and papilledema, and transported to Tucson for emergency surgery. (NSOF ¶ 39) A shunt was placed in his brain to relieve the intracranial pressure, but it was too late to save his vision. (NSOF ¶ 40) He is now permanently blind. (NSOF ¶ 41) Procedural History As explained further below, Northland has paid the $5.7 million judgment that Mr. Valdez obtained as a result of these and other acts of extreme negligence. CMS has never paid a dime as a result of the egregious acts and omissions of its medical personnel. Now, in this action in which Northland is attempting to recoup some of its payment from the culpable parties, CMS argues that because its insurer at the time filed for liquidation, the Arizona " guaranty acts" protects CMS from paying anything as a result of its negligence. That simply cannot be the proper interpretation of that statute, as explained below, after a brief procedural history is provided.

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On January 5, 2000, Mr. Valdez brought suit against the State of Arizona, CSC and others (the " Valdez Action" CSC tendered its defense of the Valdez Action to CMS, ). which CMS rejected. CSC asserted a third-party claim in the Valdez Action against CMS, seeking indemnity on the basis that its liability was due to the negligence of CMS employees. CSC also contended that it was not liable for the portion of Valdez'blindness s attributable to negligent medical care received at other prison facilities prior to his arrival at Florence West. (NSOF ¶¶ 42-45) On February 1, 2001, CSC moved for partial summary judgment against all parties that it had no independent negligence, and was only liable vicariously for the acts of others. The court granted that motion on May 7, 2001. CMS was a party to the Valdez Action at the time. (NSOF ¶¶ 46-48) On May 25, 2001, CMS moved to sever the third-party actions from the underlying liability claims of Mr. Valdez. The Court granted CMS' motion on August 1, 2001. The issues related to the extent of CMS'liability for Valdez' injury were to be tried s separately, after Valdez' claim for negligent injury was established in a first trial. The s first trial was set to begin on September 18, 2001. (NSOF ¶¶ 49-52) Settlement negotiations in August were unsuccessful. In order to ensure that

neither of its insureds (the State and CSC) were exposed to liability in excess of its policy limits, CSC and Northland entered into a " high-low" agreement with Mr. Valdez, pursuant to which Mr. Valdez agreed to limit any judgment to a maximum of $5 million, and Northland agreed to pay a minimum of at least $1.5 million to Valdez, regardless of the outcome of the trial. (NSOF ¶¶ 53-54) As part of the agreement, the claim by Mr. Valdez against CSC was dismissed. There was no need for this claim, as the remaining direct defendant, the State, was also vicariously liable, and insured by Northland, for any liability of CSC. Moreover, CSC remained a party to the cross-claims and third-party claims, pursuant to which any ultimate -6Doc. #486498 v.2

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liability would be apportioned among these parties in a second phase of the litigation. (NSOF ¶¶ 55-57) The jury in the first trial awarded Mr. Valdez $6 million in damages. Judgment was entered for $5 million, based on the high-low agreement. (NSOF ¶¶ 58) Immediately following the trial, the State filed a separate action against Northland, seeking a declaration that Northland' policy covered all of the conduct at issue in the s Valdez Action including any negligence at other prison facilities prior to Mr. Valdez' s arrival at Florence West! The Superior Court ruled in favor of the State, and Northland appealed. The Court of Appeals reversed, but not until September, 2004. (NSOF ¶¶ 5961) While the appeal was pending, Northland paid the underlying $5 million Valdez judgment (plus an additional $700,000 in accrued interest), which extinguished the State' s cross-claim against CSC, and subrogated Northland to CSC' third-party claim for s indemnity against CMS. However, Northland was not a party to the Valdez Action, so CSC voluntarily dismissed its third party claim for indemnity against CMS, but only after all parties were aware that Northland, as subrogee of that claim, would pursue that claim (and others) in this action. (NSOF ¶¶ 62-63) In this action, Northland has asserted the indemnity claim to which it was subrogated by virtue of the payment of the judgment on behalf of CSC. Under that claim, Northland seeks indemnity for that portion of the $5.7 million judgment it paid (and the expense it incurred) which are attributable to the gross negligence of CMS employees. Northland also asserts two other non-subrogated claims which were assigned by CSC to Northland. First, Northland asserts that CMS breached its medical services agreement with CSC in several ways; second, Northland asserts that CMS committed fraud upon CSC in connection with its insurance obligations to CSC. (NSOF ¶¶ 64-66)

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Argument NORTHLAND' INDEMNITY CLAIM IS NOT BARRED BY THE S APPLICABLE GUARANTY FUND ACT. CMS contends that Northland' indemnity claim is barred by both the Arizona s Guaranty Fund Act1 and the Missouri Guaranty Fund Act2 because its insurer PHICO was adjudged insolvent in February, 2002, before it paid anything to CSC or Northland. Both acts are remedial statutes designed to provide limited protection to insureds from the consequences of their insurer'insolvency. However, the Arizona Guaranty Fund Act does s not bar the indemnity claim for any amount in excess of the $100,000 maximum recovery a claimant may have against the fund. The Missouri Guaranty Fund Act does not apply.

11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 A. The Arizona Guaranty Fund Act Applies, and the Missouri Guaranty Fund Act Does Not.

A federal district court exercising diversity jurisdiction applies the choice of law rules of the state in which it sits. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). Arizona courts apply the Restatement (Second) Conflict of Laws. Schwartz v. Schwartz, 103 Ariz. 562, 565, 447 P.2d 254, 257 (1968); Beckler v. State Farm Mut. Auto. Ins.,, 195 Ariz. 282, 286, 987 P.2d 768, 772 (Ct. App. 1999). Section 187 of the

Restatement confirms that " law of the state chosen by the parties to govern their the contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement."Restatement (Second) of Conflict of Laws § 187 (1971). Section 193 of Restatement provides more specifically: " validity of a contract of fire, surety, or casualty insurance and the rights created the thereby are determined by the local law of the state which the parties understood to be the principal location of the insured risk during the term of the policy, unless with respect to
1 2

A.R.S. § 20-661 et. seq. Mo. Rev. State § 375.771 et seq. -8Doc. #486498 v.2

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the particular issue, some other state has a more significant relationship under the principles stated in § 6." Restatement (Second) of Conflict of Laws § 193 (1971). Here, either generally or " with respect to the particular issue" --operations at Florence West-- Arizona has the most significant relationship. Section 6 considers: (a) the needs of the interstate and international systems, (b) the relevant policies of the forum, (c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue, (d) the protection of justified expectations, (e) the basic policies underlying the particular field of law, (f) certainty, predictability and uniformity of result, and (g) ease in the determination and application of the law to be applied. Restatement (Second) of Conflict of Laws § 6 (1971). " significant relationship test is qualitative rather than quantitative." Beckler, The 195 Ariz. at 289, 987 P.2d at 775. As to factor (a), applying Arizona law over Missouri law does not affect the needs of the interstate system, because the insurers are free to provide a contrary provision in their own contracts. Id. As to factor (b), " Arizona has a strong interest in applying Arizona law." Id. As to factor (c), Missouri has less interest in the resolution of this particular issue: the matter relates to an Arizona inmate at an Arizona prison facility, which is the single common bond between all of the parties: CMS is domiciled in Missouri, CSC is domiciled in Florida, Northland is domiciled in Minnesota, PHICO is domiciled in Pennsylvania, and the Nurses are residents of Arizona. As to factor (d), the CMS' reasonable expectations were that any disputes arising out of the relationship would be governed by Arizona law. The agreement between CSC and CMS states that " [t]his Agreement and the rights and obligations hereto shall be governed by, and construed according to, the laws of the State of Arizona."(NSOF ¶ 67) As to factor (e), the purpose of the Guaranty Fund Act scheme in both states is the same--to protect insured and claimants. As to factors (f) and (g), application of Arizona law " provides for at least the -9Doc. #486498 v.2

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same ease in application as would [Missouri' laws. s]

Therefore, because no state has a

more significant relationship to the matter than Arizona, the location of the risk, Arizona law applies under Section 193 as well. Thus the Arizona Guaranty Fund Act applies, and the Missouri Guaranty Fund Act does not apply. B. Arizona' Guaranty Fund Act Bars at Most $100,000 of Northland' s s Claim for $5.7 Million.

The core of the Arizona Guaranty Fund Act is A.R.S. § 20-667, which specifies the obligations of the guaranty fund, and limits recovery from the guaranty fund to the amount of a covered claim in excess of $100 but less than $100,000. The extent of the protection afforded by the entire statutory scheme is limited by this section. The Act " exists to mitigate the adverse effects caused by the insolvency of insurers, [but] not to fully replace the coverage that would have existed if those insurers were solvent." Jangula v. Arizona Property and Cas. Ins. Guar. Fund, 207 Ariz. 468, 88 P.3d 182 (Ct. App. 2004). That limiting provision informs and applies to the remainder of the Act. A.R.S. § 20-673(A) contains further limitations on recovery from the guaranty fund, and cannot be construed or even understood without reference to the $100,000 limitation in A.R.S. § 20667. Section 673(A) provides in pertinent part: Any person having a claim against an insurer under any provision in an insurance policy that is also a covered claim shall be required to exhaust first all rights under such a policy. Any amount payable on a covered claim pursuant to this Article shall be reduced by the amount of such recovery under the claimant'insurance policy. Any recovery pursuant to this article s shall be reduced by the amount of the recovery under the claimant' s insurance policy. A member insurer or other insurer which pays such insurer' own policy, shall have no right of subrogation or recovery against s the insured of an insolvent insurer. The meaning of a particular statutory provision must be derived from the entire context of the statutory scheme, which includes construing all of its provisions in a way that gives meaning to the whole. Rake v. Wade, 508 U.S. 464, 471, 113 S.Ct. 2187, 2192 (1993) - 10 Doc. #486498 v.2

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(Thomas, J.) (" avoid ` To deny[ing] effect to a part of a statute,' accord ` we ` significance and effect . . . to every word.' ) (citations omitted); Adams v. Bolin, 74 Ariz. 269, 276, ' " 247 P.2d 617, 621 (1952) (" the interpretation of a statute, . . . the cardinal principle is to In give full effect to the intent of the lawmaker, and each word, phrase, clause and sentence must be given meaning so that no part will be void, inert, redundant or trivial." Arizona ); Dept. of Revenue v. Raby, 204 Ariz. 509, 511, 65 P.3d 458, 460 (Ct. App. 2003) (In construing statute, " consider the statute as a whole and attempt to give it a fair and we sensible meaning while avoiding a construction that produces an absurd result." An ). individual sentence or word cannot be read out of context or in isolation as CMS urges. Section 673, which deals with prior exhaustion of remedies and non-duplication of recovery, must be construed in the context of the maximum amount of recovery payable under the Guaranty Fund Act. None of these provisions can be understood without

reference to the maximum recovery provision of A.R.S. § 20-667(B). The first sentence of Section 673(A) provides that a person with a claim on another policy must first seek recovery from on that policy before seeking recovery from the Guaranty Fund. The next two sentences of Section 673(A) explain that both the amount payable on the covered claim, and any recovery under the Guaranty Fund Act, must be reduced by the recovery obtained under the other insurance policy. Indeed, the second and third sentences of the section would be redundant without importation of the maximum recovery limitation of A.R.S. § 20-667(B). The fourth sentence of A.R.S. § 20-673(A) deals with the (solvent) insurer from whom the claimant in the first three sentences has recovered. It provides that " member a insurer or other insurer, which pays such insurer' own policy, shall have no right of s subrogation or recovery against the insured of an insolvent insurer." Just like the first three sentences, it can be understood only with reference to the $100,000 limit on recovery provided A.R.S. § 667(B). Considering the meaning of the statute in context of all of the - 11 Doc. #486498 v.2

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words of Subsection A, the statute does not make sense if it cuts off the insurer' right to s recovery above the maximum recovery from the Guaranty Fund. An absolute bar on such claims would place the tortfeasor insured in a better position if its insurer becomes insolvent (thus cutting of all recovery) than if solvent (where the insured still has risk above the policy). This would encourage tortfeasors to insure themselves with financially unsound insurers, and pay only for the lowest limits possible, in the hope of a windfall when the insurer becomes insolvent. Indeed, other guaranty acts expressly limit their bar provisions to the policy limits by including simple, straightforward language to that effect.3 Likewise, if the legislature had intended to confer immunity beyond the $100,000 cap, it would have placed that provision in the general definition section or in a separate section altogether, as other guaranty acts have done, rather than placing it in a section providing for non-duplication of recovery and prior exhaustion of remedies.4 Because Arizona did not expressly extend bar up to the policy limits or organize the Act' sections in a way to signal some other s intent, and because it would be absurd to confer absolute immunity on insureds beyond their own policy limits5 (something not a single jurisdiction has done), the legislature must

See, e.g., Miss. Code Ann. § 83-23-109(f) (the bar provision " preclude[s] recovery . . . to the extent of the policy limits" R.S. Mo. § 375.772.2(7)(c)(c) (the bar provision ); " shall not apply with respect to those amounts that exceed the limits" O.R.S. § ); 734.695(1) (bar applies " to the applicable limits of . . . the insurance policy" Tex. Ins. up ); Code. Art. 21.28-C, § 5(8) (bar applies " the extent of the applicable liability limits of to the policy" ). 4 See, e.g., Miss. Code Ann. § 83-23-109(f); R.S. Mo. § 375.772.2(7)(c)(c); O.R.S. § 734.695(1); Tex Ins. Code. Art. § 21.28-C(5)(8). 5 Absolute immunity beyond the policy limits, moreover, would probably violate the due process rights of insurers because bar beyond the limits would likely not be rationally related to the government' legitimate interest in protecting claimants or s insureds from insurers' insolvency. Ariz. Dep'of Revenue v. Trico Elec. Co.-op., Inc., t 151 Ariz. 544, 549, 729 P.2d 898, 903 (1986) (" withstand constitutional scrutiny, [a] To statute must rest on a rational basis rather than result from an arbitrary or capricious legislative decision." ). - 12 Doc. #486498 v.2

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have intended the bar provision to be limited to $100,000 maximum recovery that is uniformly applied to the remaining sentences of A.R.S. § 20-673(A). II. NORTHLAND' BREACH OF CONTRACT CLAIMS ARE NOT BARRED S BY THE ARIZONA GUARANTY ACT. Northland'breach of contract claims are not barred by the Arizona Guaranty Fund s Act for two reasons. First, they are not covered under the PHICO policy anyway, and thus the solvency of CMS' insurer would not affect or protect CMS. Extending the bar of the Arizona Guaranty Fund Act beyond protection from insolvency of insurers would clearly be extending the Act further than the legislature' intent. Second, Northland' claims are s s asserted by way of assignment, rather than subrogation, and are outside the scope of the statute' bar language, which is limited to claims by " s insurers for subrogation or recovery." Both words clearly apply to direct claims by insurers to recover amounts paid out; by contrast, the breach of contract claims are claims which Northland does not have by right of subrogation or recovery, but only by virtue of assignment. A. Northland' Breach of Contract Claims Are Not Covered Under the s PHICO Policy.

Northland asserts that CMS breached its contract with CSC in several ways: by its failure to provide medical services to Mr. Valdez, failure to obtain insurance which identified CSC by name as an additional insured, failure to promptly forward CSC'tender s to its insurer PHICO, and failure to notify CSC that a physically debilitated inmate was transferred by the State to Florence West. None of these contract claims are covered under the PHICO policy. The basic insuring agreement under the PHICO policy does not include liability for breach of contract. (NSOF ¶ 68) Moreover, the policy also expressly excludes provides that it: does not apply . . . (f) to any claim arising from the acts of another for which the insured has assumed responsibility under contract or agreement, whether written or oral, other than any written contract provision under which the named insured - 13 Doc. #486498 v.2

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agrees to hold a third-party harmless for claims arising from the conduct of an insured under this policy for an event for which coverage is otherwise provided under this policy. (NSOF ¶ 69) This " breach of contract exclusion" excludes any claim for liability for any CMS breaches of the CMS contract other than those a) in writing, b) agreeing to hold the third-party harmless, c) for claims arising from conduct insured under this policy, and d) for an event that is covered under the policy. CMS admits that " [Health Services the Agreement] contained no indemnification [or hold harmless] provision between CSC and CMS"and the Health Services Agreement " not State that CMS is required to did indemnify CSC for any reason." (Mot. at 13; DSOF ¶ 22) Thus, Northland' breach of s contract claims fall outside the exception, and squarely within the exclusion in the PHICO policy. The PHICO policy also provides that " policy does not apply to any claim this arising from the failure to effect and maintain insurance, including policies, bonds, or selfretention service." (NSOF ¶ 70) Northland' breach of contract claims for CMS' s failure to name CSC and the State as additional insureds are simply not covered under the policy and cannot be extinguished by the Guaranty Fund Acts. CMS agreed to " maintain professional liability insurance covering CMS, its employees, its officers, and agents" and to name CSC " an additional insured under the as CMS' policies." (NSOF ¶ 71) CSC " furnished CMS a copy of the contract requirements [imposed by the State]"and CMS " agreed to abide by and comply with applicable requirements." (NSOF ¶ 72) CSC' contract with the State required CMS to " s provide

and maintain and cause its subcontractors to provide and maintain insurance coverage." (NSOF ¶ 73) CSC' contract with the State further required that " policies shall name s the the State of Arizona and the Department of Corrections as additional insureds." (NSOF ¶ 74) The State and CSC communicated this understanding to CMS. (NSOF ¶ 75) CMS specifically undertook the obligation to obtain and maintain insurance for the benefit of - 14 Doc. #486498 v.2

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CSC and the State, but failed to do so properly or as promised. (NSOF ¶ 76) Northland also asserts that CMS breached the Health Services Agreement by failing to " immediately notify CSC in the event the Arizona Department of Corrections (ADC) transfers any physically debilitated inmate to the Facility." (NSOF ¶ 76) All of these claims are based on a breach of a direct contractual obligation owed by CMS, and are outside the scope of the PHICO policy. Because they are not covered by the PHICO policy, PHICO' s

insolvency has not affected CMS' exposure on these claims, and the Arizona Guaranty Fund Act does not and should not bar them. B. Northland' Breach of Contract Claims Are Asserted by Assignment, s Not by Subrogation.

Second, Northland does not assert the foregoing contractual claims under a subrogation theory, but rather under an assignment theory. (NSOF ¶ 77) The Guaranty Fund Act bars only those that are considered " subrogation or recovery." A.R.S. § 20673(A). Subrogation is a distinct legal theory from assignment, governed by different rules. Subrogation is the " ` substitution of another person in the place of a creditor, so that the person in whose favor it is exercised succeeds to the rights of the creditor in relation to the debt.' Liberty Mut. Ins. Co. v. Thunderbird Bank, 113 Ariz. 375, 377, 555 P.2d 333, " 335 (1976) (quoting Mosher v. Conway, 45 Ariz. 463, 468, 46 P.2d 110, 112 (1935)). It is a" ` creature of equity, and was adopted from the Roman and not from the common law.' " Id. Assignment, however, arises independently from a right of subrogation. Indeed, " the existence of an equitable right of subrogation is logically irrelevant to the question of whether a party may transfer, by assignment, an otherwise assignable claim."Liberty Mut. Ins. Co., 113 Ariz. at 336, 555 P.2d at 378. When a claim is assigned, therefore, " it necessarily follows that the [assignee' rights are measured by the law of contract and not s] by the equitable doctrine of subrogation." Id.; see also Kroeker v. State Farm Mut. Auto Ins. Co., 466 S.W.2d 105, 109-110 (Mo. App. 1971) (similarly concluding that - 15 Doc. #486498 v.2

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subrogation and assignment are distinct legal theories). Here, CSC assigned its contractual claims to Northland. (NSOF ¶ 77) Assignment is not " subrogation or recovery" under the Guaranty Fund Acts and is not barred even under the reading urged by CMS.6 III. NORTHLAND' FRAUD CLAIM IS NOT BARRED BY THE GUARANTY S FUND ACTS. Northland' fraud claim is specifically excluded under the PHICO policy and s cannot be barred by the Guaranty Fund Acts. The PHICO policy provides that " policy the does not apply . . . (a) to any claim arising from the performance of any dishonest, fraudulent, criminal or malicious act, or omission, by or with the knowledge and consent of, or at the direction of, the insured." (NSOF ¶ 78) Thus, for the same reasons as apply to Northland' contract claims, Northland'fraud claims are not covered under the policy s s and are not barred by the Guaranty Fund Act. Conclusion For the foregoing reasons, CMS' motion for summary judgment should be denied in its entirety and Northland is entitled to summary judgment in its own favor that the Arizona Guaranty Fund Act does not bar its claims against CMS over $100,000. Moreover, neither guaranty act bars other claims which were not covered by the policy issued the insolvent insurer in the first place. Accordingly, Northland'claims for breach s of contract and fraud, which it asserts by way of assignment from CSC, are not barred by either act.

The distinct nature of the breach of contract claims and the indemnity claims can be illustrated by comparing the elements of damages. CSC, under its self-insured retention, itself incurred over $70,000 in unreimbursed attorneys' fees in defending the case. Accordingly, these fees and other damages are not covered losses under Northland' s indemnity theory, but Northland, as assignee of CSC, is entitled to collect these from CMS pursuant to CSC'breach of contract claim. s - 16 Doc. #486498 v.2

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DATED this 5th day of December, 2005. STEPTOE & JOHNSON LLP

By: S/S Karl M. Tilleman Bruce Converse 201 East Washington, Suite 1600 Phoenix, Arizona 85004 Attorneys for Defendant Northland Insurance Company

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CERTIFICATE OF SERVICE I hereby certify that on the 5th day of December 2005, I caused the attached document to be electronically transmitted to the Clerk'Office using the CM/ECF System s for filing and transmittal of a Notice of Electronic Filing to the Following CM/ECF Registrants: Dennis E. O' Connell Bryan Cave LLP 211 North Broadway, Suite 3600 St. Louis, Missouri 63102-2750 Attorneys for Correctional Medical Services, Inc. Stephen Paul Forrest, Esquire Holloway Odegard Forrest Kelly & Kasparek 3101 North Central Avenue, Suite 1200 Phoenix, Arizona 85012 Attorneys for Defendants Correctional Medical Services, Inc., Lorraine Lopez-Moreno, Trina Carrasco, and Jacqueline Cornwell

With a COPY of the foregoing mailed / hand-delivered on December 5, 2005, to: Honorable Frederick J. Martone United States District Court Sandra Day O' Connor U.S. Courthouse Suite 526 401 West Washington Street, SPC 62 Phoenix, AZ 85003-2158 STEPTOE & JOHNSON LLP By: S/L Karl M. Tilleman P. Bruce Converse 201 East Washington, Suite 1600 Phoenix, Arizona 85004 Attorneys for Defendant Northland Insurance Company

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