In the past year, Arizona state and federal courts issued opinions focusing on the interpretation of key policy terms, when an insurer can contest facts the insured stipulated to in the underlying case, the application of a broad form additional insured clause, and the discoverability of an insurance company’s attorney communications.
It depends on what you mean: Three cases tackling interpretation.
The Ninth Circuit and U.S. District Court of Arizona issued opinions focusing on the interpretation on minute, but crucial terms in insurance policies.
Interstate Fire & Cas. Co. v. Roman Catholic Church of Diocese of Phoenix, 761 F.3d 953 (9th Cir. 2014). The court held that claims of negligent supervision by the Diocese, allegedly resulting in sexual abuse by priests, fell within the Diocese’s insurance policy’s assault and battery exclusion based on the definition of “any” and “such” and the interpretation of those words. The Diocese had settled four lawsuits alleging sexual abuse by priests, and filed a declaratory judgment for indemnity under its excess liability policy from Interstate Fire & Casualty’s (“IFC”), which promised (following the form of the primary excess policy), “to indemnify the Assured ….” “Assured” was defined to include the Diocese and its employees, acting within the scope of their duties. The policy stated it did not apply “to liability of any Assured for assault and battery committed by or at the direction of such Assured….” (Emphasis added). The analysis hinged on the question: Does ‘any’ mean ‘any’? Or does ‘any’ mean ‘any one’?
The circuit found that “such assured” referred back to “any assured,” and thus the exclusion applied to the Diocese. The court applied the dictionary meaning of “such” as “of a kind or character about to be indicated, suggested, or exemplified” or “having a quality already or just specified—used to avoid repetition of a descriptive term.” The “Assured” “just specified” was “any Assured,” meaning the offending priest and the Diocese. The circuit rejected the Diocese’s contention that the text was unclear. The circuit referred to Arizona cases finding that “any insured” unambiguously means all insureds. The takeaway from the case is that if the insurance policy does not have a severability clause, then the exclusion sweeps broadly to exclude coverage for the offending insured and innocent co-insureds alike.
The majority’s analysis, frankly, seems tortured, and not surprisingly, there was a dissent. The dissent opined that the term “such Assured” did not refer back to “any Assured,” but rather, referred to those Assureds who “have a quality already or just specified.” The quality “just specified” was the quality of having committed an assault or battery. Therefore, the exclusion must only apply to the offending priest. The word “quality” in the definition of “such” indicated that an attribute was used to differentiate individuals – i.e., differentiating the innocent co-insured from the assured who committed assault or battery. Also, if “such” means “any Assured,” then the exclusion’s use of “such Assured” is redundant. The dissent gave examples of other sentences with the same construction that clearly do not indicate that “such” refers to an entire class. “The recess policy does not apply to any student acting up during Mr. Jones’s class, such students are not entitled to recess.” “Such students” clearly does not refer Mr. Jones’s entire class (the “just specified” term), but rather, to the student who acted up. The dissent concluded that at the very least, the term was ambiguous, and must be construed against the insurer.
St. Paul Fire & Marine Ins. Co. v. Ohio Cas. Ins. Co., No. CV-11-1954 (D. Ariz. Mar. 28, 2014). Unlike the very common words at the center of the Diocese case, this case focused on the definition of an industry term: “exterior insulation and finishing systems” or “EIFS.” Developer Del Webb contracted with ANSE, Inc. for plastering a housing development. Homeowners pursued Del Webb for construction defects. Del Webb sought coverage as an additional insured under several of ANSE’s commercial general liability policies. Liberty Mutual Fire Ins. Co. (“Liberty”) denied coverage based on its exclusion for “damages associated with [EIFS].” The insurers defending Del Webb sued Liberty for contribution to the defense costs. They argued that EIFS is an industry term for a specific synthetic waterproof alternative to traditional stucco, and the exclusion did not apply because ANSE performed traditional stucco work. Alternatively, they argued that if the exclusion applied, it would contravene ANSE’s reasonable expectations of coverage.
The court agreed that the exclusion did not apply. In so doing, the court eschewed dictionary definitions and instead looked at the definition of EIFS used in other cases, and in particular the industry, where it was given a narrow meaning. Liberty argued that the stucco ANSE applied was substantially similar to EIFS; however, Liberty admitted that the purpose of the exclusion was to create an exception for a particular type of finish system that has been associated with higher liability risk. Liberty had no evidence that the “traditional” stucco that ANSE applied had the same risks as EIFS.
Public policy also supported construing the exclusion in favor of coverage. Under Arizona law, consumers are entitled to get what they pay for. Stucco is not mentioned in the exclusion, and exclusions are strictly construed in favor of coverage. The entire purpose of the transaction was to insure ANSE’s stucco operations and satisfy its obligations under the subcontracts with Del Webb, and therefore Liberty and ANSE must have intended EIFS to mean a specific type of system and not the natural stucco applied by ANSE. Furthermore, Liberty accepted ANSE’s premiums after auditing ANSE and knowingthat ANSE only used stucco, not EIFS. Liberty’s interpretation would bar ANSE from making any claims under the policies. Thus the doctrine of reasonable expectations supported finding the exclusion did not apply.
Torres v. Transguard Ins. Co. of America Inc., No. CV-13-01578 (D. Ariz. June 20, 2014). The burning question in this case was whether you can be asleep and still be “on duty.” The plaintiff, a truck driver for Megatrux Transportation Inc., bought a Transguard occupational accident insurance policy. In purchasing the policy, he agreed to notfile a statutory workers’ compensation claim against Megatrux. The policy provided coverage if Torres suffered an “injury,” that arose “solely out of and in the course of [the insured’s] regular occupation while ‘under dispatch’ and on duty and ‘under contract’ with the contract carrier….” (Emphasis added). “Under dispatch” was defined to include en route to pick up a load, picking up a load, en route to deliver a load, unloading a load or en route returning from delivery. “Under contract” meant Torres was working 30 hours each week. “On duty” was undefined.
Torres and his partner were transporting a load. Torres was in the sleeper berth while his partner took a turn at the wheel. A drunk driver hit the truck and Torres was thrown from the bed, suffering serious injuries. Transguard denied coverage because Torres was asleep and thus not “on duty” at the time of the accident. The court found, however, that “on duty” is ambiguous. The dictionary has multiple definitions, including ones that indicate a person is on duty even when not actively doing his/her job. Having found “on duty” ambiguous, the court looked at legislative goals. While there were no statutes directly on point, there is a statute stating it is negligence for a person to be sleeping on duty; meaning that a person could be asleep and still on duty. The insurance company failed to define an important term, and therefore it was interpreted against the drafter. Also, looking at the transaction as a whole supported Torres’s interpretation. He would have been covered by workers’ compensation, but he had waived that benefit in obtaining the insurance from Transguard.
Insurer’s right to contest stipulated facts in the underlying case.
The Arizona Supreme Court held in Quihuis v. State Farm Mut. Auto. Ins. Co., CV-14-0092-CQ (Oct. 1. 2014) that where an insured seeks coverage, the insurer can dispute facts that were determined in the underlying cases by stipulation of the insured and the plaintiff, so long as those facts bear on whether coverage applies. Our prior analysis of this case is available here.
Additional insured status in construction contracts.
In a case of first impression, KB Home Tucson, Inc. v. The Charter Oak Fire Insurance Company, et al., No. 1 CA-CV 12-0681 (Ariz. Ct. App. Nov. 25, 2014) addressed when a blanket endorsement for additional insureds applies. The endorsement at issue provided coverage when the insured had a written agreement with the contracted company requiring it to name the latter as an additional insured. The court found that the insured’s contract requiring it to comply with the contracted company’s requirements, combined with letters from the contracted company stating that it must be an additional insured was a written agreement. Our prior analysis of this case is available here.
When is an insurance company’s attorneys’ records discoverable?
In Nguyen v. American Commerce Ins. Co., No. 1 CA-CV 12-0862 (Ariz. Ct. App. Apr. 8, 2014) (unpub.), the court found that just because an insurance company’s attorney did some investigation of the insured’s claim does not render all of the attorney’s communications discoverable. Nguyen added his wife’s diamond ring to their homeowner’s insurance policy. The Nguyens reported the ring was stolen. American Commerce Insurance Co. (“ACIC”) investigated the theft, and earlier claims by the Nguyens. ACIC retained an attorney to examine the Nguyens under oath. ACIC denied the claim because the Nguyens refused to provide certain requested documents. The Nguyens sued, and sought discovery of ACIC’s unredacted claim file. The appellate court affirmed the trial court holding that the attorney-client privilege applied to the redacted communications between the attorney and the insurer. Although the attorney did conduct some investigation, that investigation did not render all communications between the attorney and ACIC discoverable.
The Nguyens also argued that ACIC waived the privilege by asserting an advice-of-counsel defense. The court disagreed. Even though ACIC’s claim denial claim may have been based on the attorney’s investigation and legal advice, that did not demonstrate that ACIC expressly relied on an advice-of-counsel defense. ACIC only argued that its denial was “objectively reasonable”; it did not assert that it relied on the attorney’s evaluation for denial.