Free Order on Motion for Partial Summary Judgment - District Court of Arizona - Arizona

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

VILLAGE SQUARE AT WESTBROOK VILLAGE, an Arizona corporation,

) ) ) Plaintiff, ) ) vs. ) ) STATE FARM FIRE AND CASUALTY CO., ) et al., ) ) Defendants. ) ___________________________________)

2:03-cv-02515-HRH

O R D E R Motions for Summary Judgment Plaintiff moves for summary judgment on its breach of contract claim.1 This motion is opposed and defendant cross-moves Defendant's

for summary judgment on all of plaintiff's claims.2 cross-motion is opposed.3 heard.

Oral argument was requested and has been

1

Clerk's Docket No. 46. Clerk's Docket No. 53. Clerk's Docket No. 57. - 1 -

2

3

Case 2:03-cv-02515-HRH

Document 71

Filed 04/18/2006

Page 1 of 14

Facts Plaintiff is Village Square at Westbrook Village, an incorporated condominium association. Defendant is State Farm Fire and Casualty Company. Plaintiff is insured under a condominium

association policy, policy number 93-04-5440-5, that it purchased from defendant. Village Square is a condominium complex consisting of four buildings. In 1989, a resident in building 4 noticed that the

banister surrounding his balcony was beginning to pull away from the column to which it was attached. Over the next ten years or so, the problem worsened, and other residents in building 4 began to notice similar problems with their balconies. On October 31, 2001,

plaintiff submitted claim #03-H115-322 to defendant for repairs to the three northern balconies on building 4. claim in the amount of $121,704. Thereafter, plaintiff submitted a second claim, claim #03H142-041 ("claim 041"), to defendant for repairs to the remaining balconies on building 4 and the balconies on building 3. The cost Defendant paid this

of the necessary repairs was alleged to exceed $600,000. Defendant has refused to pay claim 041, asserting that there no coverage under plaintiff's policy for the loss in question. Defendant retained Rimkus Consulting to investigate the balcony problem. Jonathan Higgins, an engineer with Rimkus,

prepared three separate reports for defendant, dated August 14, 2002; January 28, 2003; and February 24, 2003.

- 2 -

Case 2:03-cv-02515-HRH

Document 71

Filed 04/18/2006

Page 2 of 14

Policy number 93-04-5440-5 provides that defendant insure[s] for accidental direct physical loss to property insured under this policy unless the loss is: 1. 2. limited in the PROPERTY SUBJECT TO LIMITATIONS section; or excluded in the LOSSES NOT INSURED section that follows.[4]

The LOSSES NOT INSURED section provides: 2. We do not insure for loss either consisting of, or directly and immediately caused by, one or more of the following: . . . p. . . . 3. We do not insure under any coverage for any loss consisting of one or more of the items below. Further, we do not insure for loss described in paragraphs 1. and 2. immediately above regardless of whether one or more of the following: (a) directly or indirectly cause, contribute to or aggravate the loss; or (b) occur before, at the same time, or after the loss or any other cause of the loss: collapse, except as provided in the Extensions of Coverage.

. . . b. . . . faulty, inadequate, defective: unsound or

Policy number 93-04-5440-5 at 4, Exhibit 14, Statement of Facts in Support of Motion for Partial Summary Judgment re: Breach of Contract, Clerk's Docket No. 47. - 3 -

4

Case 2:03-cv-02515-HRH

Document 71

Filed 04/18/2006

Page 3 of 14

(2)

design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction[.5]

The Extensions of Coverage section of the policy provides: 4a. We will pay for any accidental direct physical loss to a covered property involving collapse of a building or any part of a building caused only by one or more of the following: (1) any of the "Specified Causes of Loss" or breakage of building glass, only as insured against in this policy; hidden decay; hidden insect or vermin damage; weight of people or personal property; weight of rain that collects on a roof; use of defective material or methods in construction, remodeling or renovation if the collapse occurs during the course the construction, remodeling or renovation.

(2) (3) (4) (5) (6)

. . . c. Collapse does not include settling, cracking, shrinking, bulging or expansion.[6] 1)

Plaintiff's complaint alleges two causes of action:

a breach of contract claim based on defendant's refusal to pay claim 041 and 2) a bad faith claim based on defendant's refusal to pay
5

Id. at 5-7. Id. at 7-8. - 4 -

6

Case 2:03-cv-02515-HRH

Document 71

Filed 04/18/2006

Page 4 of 14

claim 041 and on defendant's alleged failure to conduct an adequate investigation. Plaintiff moves for summary judgment on the breach Defendant cross-moves for summary judgment

of contract claim only. on both claims.

Discussion Summary judgment is appropriate when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). The initial burden is

on the moving party to show that there is an absence of genuine issues of material fact. 325 (1986). Celotex Corp. v. Catrett, 477 U.S. 317,

If the moving party meets its initial burden, then the

non-moving party must set forth specific facts showing that there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477

U.S. 242, 247-48 (1986). In deciding a motion for summary judgment, the court views the evidence of the non-movant in the light most favorable to that party, and all justifiable inferences are also to be drawn in its favor. Id. at 255. "[T]he court's ultimate inquiry is to determine whether the 'specific facts' set forth by the nonmoving party, coupled with undisputed background or contextual facts, are such that a rational or reasonable jury might return a verdict in its favor based on that evidence." T.W. Elec. Serv.,

Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 631 (9th Cir. 1987). When, as here, the court is faced with cross-motions for

summary judgment, each motion must be considered separately on its merits. Fair Housing Council of Riverside County, Inc. v. Riverside Two, 249 F.3d 1132, 1136 (9th Cir. 2001). - 5 -

Case 2:03-cv-02515-HRH

Document 71

Filed 04/18/2006

Page 5 of 14

Breach of Contract Claim Plaintiff contends that defendant breached the insurance contract by failing to pay claim 041 because the problem with the balconies is a covered loss under the collapse provision of the policy. Defendant contends that it did not breach the insurance

contract because the problem with the balconies is not a covered loss under the collapse provision of the policy. Defendant further contends that even if the problem with the balconies fell under the collapse provision, there would still be no coverage because the loss would be excluded under the construction defect provision of the policy. To resolve the dispute over whether the problem with the balconies is a covered loss under the collapse provision of the policy, the court must determine what "collapse" means in policy number 93-04-5440-5. question of law. Interpretation of an insurance contract is a

Sparks v. Republic Nat'l Life Ins. Co., 647 P.2d The court "construe[s] provisions of an

1127, 1132 (Ariz. 1982).

insurance policy according to their plain and ordinary meaning." Liristis v. Amer. Family Mut. Ins. Co. 61 P.3d 22, 25 (Ariz. Ct. App. 2002). "The language used in an insurance contract must be

viewed from the standpoint of the average layman who is untrained in the law or the field of insurance." Id. at 25-26. "[T]he policy may not be interpreted so as to defeat the reasonable expectations of the insured." (Ariz. 2002). Samsel v. Allstate Ins. Co., 59 P.3d 281, 284

"Where the language employed is unclear and can be

reasonably construed in more than one sense, an ambiguity is said - 6 -

Case 2:03-cv-02515-HRH

Document 71

Filed 04/18/2006

Page 6 of 14

to exist and such ambiguity will be construed against the insurer." Sparks, 647 P.2d at 1132. "A policy term is not ambiguous, however, merely because one party assigns a different meaning to it in accordance with his or her own interest." Millar v. State Farm Fire and Cas. Co., 804 P.2d 822, 825 (Ariz. Ct. App. 1990). is subject to two different interpretations, then If the term the court

construes the term "by examining the language of the clause, public policy considerations, and the purpose of the transaction as a whole." State Farm Mut. Auto. Ins. Co. v. Wilson, 782 P.2d 727, 733 (Ariz. 1989). "Collapse" is not defined in the policy, beyond the limitation that "[c]ollapse does not include settling, cracking, shrinking, bulging or expansion",7 nor has the Arizona Supreme Court had occasion to construe the term "collapse" in the context of an insurance policy.8 Therefore, this court "'must predict how the

highest state court would decide the issue using intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and restatements as guidance.'" Eichacker v.

Paul Revere Life Ins. Co., 354 F.3d 1142, 1145 (9th Cir. 2004) (quoting S.D. Myers, Inc. v. City and County of San Francisco, 253 F.3d 461, 473 (9th Cir. 2001)).
7

In matters of first impression

Policy number 93-04-5440-5 at 8, Exhibit 14, Statement of Facts in Support of Motion for Partial Summary Judgment re: Breach of Contract, Clerk's Docket No. 47. This court certified this question to the Arizona Supreme Court. See Clerk's Docket No. 64. The Arizona Supreme Court declined to accept jurisdiction of the certified question. See Clerk's Docket No. 66. - 7 8

Case 2:03-cv-02515-HRH

Document 71

Filed 04/18/2006

Page 7 of 14

relating to the construction of insurance policies, the Arizona Supreme Court has long looked to decisions from other jurisdictions and followed those that most comport with justice and Arizona public policy. 1932). Other jurisdictions have defined "collapse", but many of these decisions offer the court no guidance because they involve policies that are materially different from policy number 93-045440-5. Some jurisdictions have defined "collapse" in the context See Peterson v. Hudson Ins. Co., 15 P.2d 249, 250 (Ariz.

of policies that do not have a "settling, cracking" exclusion.9 Such policies are materially different from policy number 93-045440-5, which does contain a "settling, cracking" exclusion. Some

jurisdictions have defined "collapse" in the context of policies that provide coverage for the risk of direct physical loss involving a collapse.10 Such policies are materially different from policy Rather,

number 93-04-5440-5, which is not a "risk of loss" policy.
9

See Whispering Creek Condo. Owner Ass'n v. Alaska Nat'l Ins. Co., 774 P.2d 176, 178 (Alaska 1989); and Olmstead v. Lumbermens Mut. Ins. Co., 259 N.E.2d 123, 125 (Ohio 1970). See 401 Fourth Street, Inc. v. Investors Ins. Group, 879 A.2d 166, 168 (Pa. 2005); Monroe Guar. Ins. Co. v. Magwerks Corp., 829 N.E.2d 968, 971 (Ind. 2005); Assurance Co. of Amer. v. Wall & Assocs. LLC of Olympia, 379 F.3d 557, 559 (9th Cir. 2004) (applying Washington law); Sandalwood Condo. Ass'n at Wildwood, Inc. v. Allstate Ins. Co., 294 F. Supp. 2d 1315, 1317 (M.D. Fla. 2003); Ocean Winds Council of Co-Owners, Inc. v. Auto-Owner Ins. Co., 565 S.E.2d 306, 307 (S.C. 2002); Rankin ex rel. Rankin v. Generali-U.S. Branch, 986 S.W.2d 237, 238 (Tenn. Ct. App. 1998); Doheny West Homeowners' Ass'n v. Amer. Guar. & Liability Ins. Co., 70 Cal. Rptr. 2d 260, 261 (Cal. Ct. App. 1997); American Concept Ins. Co. v. Jones, 935 F. Supp. 1220, 1226 (D. Utah 1996); and Heintz v. U.S. Fidelity and Guar. Co., 730 S.W.2d 268, 268 (Mo. Ct. App. 1987). - 8 10

Case 2:03-cv-02515-HRH

Document 71

Filed 04/18/2006

Page 8 of 14

policy number 93-04-5440-5 provides coverage only for the "direct physical loss to a covered property involving collapse...."11 The jurisdictions which have defined "collapse" in the context of a policy that uses language similar to that of policy number 93-04-5440-5 have reached varying results. In Nationwide

Mut. Fire Ins. Co. v. Tomlin, 352 S.E.2d 612, 615 (Ga. Ct. App. 1986), the court found the term "collapse" ambiguous and construed "collapse" to mean "any serious impairment of the structural

integrity." In Weiner v. Selective Way Ins. Co., 793 A.2d 434, 44344 (Del. Super. Ct. 2002), the court found the term "collapse" ambiguous and construed "collapse" to mean "any serious impairment of structural integrity that connotes imminent collapse threatening the preservation of the insured property." In Krug v. Millers'

Mutual Ins. Ass'n of Ill., 495 P.2d 949, 954 (Kan. 1972), the court found that the term "collapse" was not ambiguous but did not define the term because it was undisputed that the loss involved only "settling", which was expressly excluded from the definition of "collapse." Plaintiff urges the court to adopt the broadest definition of "collapse", which is the "substantial impairment of structural integrity" definition. Defendant urges the court to adopt the "actual falling

narrowest definition of "collapse, which is the down" definition.

Neither party suggests that the court adopt the

Policy number 93-04-5440-5 at 7, Exhibit 14, Statement of Facts in Support of Motion for Partial Summary Judgment re: Breach of Contract, Clerk's Docket No. 47. - 9 -

11

Case 2:03-cv-02515-HRH

Document 71

Filed 04/18/2006

Page 9 of 14

definition of "collapse" that includes both an imminent collapse as well as an actual falling down. Arizona law directs the court to give a term in an insurance policy its ordinary and plain meaning. "Collapse" is an

ordinary word that has a plain, common meaning that any layperson would understand in the context in which the term is used in policy number 93-04-5440-5. The policy covers losses involving a collapse of a building or a part of a building. In this context, the common, ordinary meaning of "collapse" is "to cave in, fall in, or give way."12 Nothing in the policy suggests that "collapse" should be construed to have anything other than its common, ordinary meaning. "Collapse", as used in policy number 93-04-5440-5, is not ambiguous. The language of the policy is not unclear. Policy number 93-04-

5440-5 states that it provides coverage if a building or part of a building collapses due to a listed reason. Or, in other words, the

policy states that it provides coverage for losses resulting from a building or part of a building falling down. If the policy were

one which covered losses resulting from the risk of collapse, the court might have been persuaded to find the term ambiguous.

Policies that the cover loss resulting from the risk of collapse introduce a potential ambiguity because a "risk of collapse" is different from a "direct physical loss involving a collapse." Here, though, there is no such ambiguity.
12

Webster's Third New International Dictionary 443 (1981).

- 10 -

Case 2:03-cv-02515-HRH

Document 71

Filed 04/18/2006

Page 10 of 14

It could be argued that "collapse" has two meanings. Indeed, at least one court has employed a different, recognized definition13 in concluding that "collapse" should be defined in terms of "substantial impairment of structural integrity." See Jones, 935 F. Supp. at 1227-28. reach a result. Respectfully, the Jones court strained to

The alternative definition of "collapse" employed

in Jones has a plain biological connotation that a layperson would understand if the subject were the collapse of a person. When, as

here, "collapse" is employed in the context of an inanimate object, a building, a person of ordinary understanding would know that "collapse" simply means "to fall down." In sum, the court finds that "collapse" is not ambiguous and that it means "to fall down." This interpretation is supported Settling,

by the "settling, cracking" exclusion in the policy.

cracking, and bulging are the types of problems that a layperson would reasonably understand precede an actual falling down of a building or a part of a building. The policy makes clear that these types of problems are not covered losses and that the risk of these types of problems falls on the insured. The policy also makes

clear, in a manner that a layperson could reasonably understand, that an actual falling down of a building or part of a building is a covered loss. Because the balconies that are the subject of claim 041 did not collapse as the court has construed that term, the loss in "Collapse" means "a breakdown in vital energy, strength, or stamina." Jones, 935 F. Supp. at 1227-28. - 11 13

Case 2:03-cv-02515-HRH

Document 71

Filed 04/18/2006

Page 11 of 14

question was not a covered loss.

Because there is no coverage,

defendant did not breach the insurance contract by failing to pay claim 041. Plaintiff's other arguments to the contrary are

unavailing. Plaintiff suggests that there are facts in dispute that would prevent the court from determining the meaning of "collapse". Interpretation of an insurance contract is a question of law. Facts which are disputed in this case are not material; they have no bearing on the court's interpretation of "collapse." Plaintiff also argues that the settlement of the earlier claim is relevant to whether there should be coverage for claim 041. The court disagrees. Whether defendant paid an earlier claim has

nothing to do with the meaning of "collapse" and whether there is coverage for the loss that is the subject of claim 041. Although

we know that defendant considered the meaning of "collapse" in deciding plaintiff's first claim, we do not know exactly why defendant changed its mind and decided to pay the first claim, after having initially decided that there was no coverage for that claim either. The court will not speculate about why defendant ultimately decided to pay plaintiff's first claim. Plaintiff also makes much of the fact that defendant could have included a definition of "collapse" in the policy. While

plaintiff is correct that defendant could have included such a definition, the fact that defendant did not do so does not give the court any guidance as to how "collapse" should be defined.

- 12 -

Case 2:03-cv-02515-HRH

Document 71

Filed 04/18/2006

Page 12 of 14

Bad Faith Claim Under Arizona law, to prevail on a claim that an insurance company committed the tort of bad faith, the insured must prove that the insurance company breached its implied contractual duty of good faith and fair dealing by showing both that the insurer acted unreasonably and that it either knew its conduct was unreasonable or "acted with such reckless disregard that such knowledge could be imputed to it." Nahom v. Blue Cross and Blue Shield of Arizona, Inc., 885 P.2d 1113, 1122 (Ariz. Ct. App. 1994) (quoting Deese v. State Farm, 838 P.2d 1265, 1268 (Ariz. 1992)). An insurer cannot be "held liable for bad faith denial of coverage in the face of a final judicial

determination that there was no coverage."

Manterola v. Farmers

Ins. Exchange, 30 P.3d 639, 646 (Ariz. Ct. App. 2001). Because there is no coverage, defendant argues that plaintiff's bad faith claim fails as well. This argument ignores

the fact that plaintiff not only alleges that defendant acted in bad faith because it had no reasonable basis for denying plaintiff's claim but also that defendant failed to conduct an adequate

investigation prior to denying coverage.14

An inadequate or incom-

plete pre-denial investigation can expose an insurer to liability for bad faith. Rawlings v. Apodaca, 726 P.2d 565, 576 (Ariz. 1986). However, "[a]n insurance company's failure to adequately investigate only becomes material when a further investigation would have disclosed relevant facts."
14

Aetna Cas. and Sur. Co. v. Superior

Plaintiff's Complaint at 3, ¶ XI, attached to Notice of Removal, Clerk's Docket No. 1. - 13 -

Case 2:03-cv-02515-HRH

Document 71

Filed 04/18/2006

Page 13 of 14

Court In and For County of Maricopa, 778 P.2d 1333, 1336 (Ariz. Ct. App. 1989). Assuming without deciding that defendant failed to

adequately investigate claim 041, plaintiff's bad faith claim still fails. Any failure to investigate in this instance was immaterial. Further investigation would not have revealed any relevant facts because no amount of investigation would have ever revealed that the balconies that are the subject of claim 041 actually fell down. Defendant is entitled to summary judgment on plaintiff's bad faith claim. Conclusion Plaintiff's denied.15 granted.16 motion for partial for summary summary judgment judgment is is

Defendant's

cross-motion

The clerk of court shall enter judgment dismissing

plaintiff's complaint with prejudice.

DATED at Anchorage, Alaska, this 18th day of April, 2006.

/s/ H. Russel Holland United States District Judge

15

Clerk's Docket No. 46. Clerk's Docket No. 53. - 14 -

16

Case 2:03-cv-02515-HRH

Document 71

Filed 04/18/2006

Page 14 of 14