Quarles & Brady's insurance law team is constantly monitoring the development of Arizona's case law on insurance matters. In 2013, there were several notable decisions addressing: (1) a policy can cover restitution payments; (2) policy interpretation; (3) bad faith where the policy does not provide coverage; (4) attack on a Damron agreement; (5) insurer's waiver of right to appoint defense counsel; (6) title insurance; and (7) a life insurance case with movie-worthy facts.

Insurance coverage for restitution payments. Cohen v. Lovitt & Touché, Inc., 233 Ariz. 45, 308 P.3d 1196 (App. 2013). 

For the first time, Arizona held that an insurance policy may cover unforeseen restitution damages. A company and its directors and officers were found liable for violating Massachusetts' "tip statute" that required the company pay tips collected from its Massachusetts enterprise be paid directly to employees. The directors sought coverage under their director and officer liability policies, but the insurers refused to compensate them, claiming that the coverage for the cost of settling the tip statute lawsuit was uninsurable.  The directors then filed suit against the insurers and against their insurance broker for failing to advise them of non-insured risks.  The plaintiffs settled with the insurers, and appealed the judgment for the broker.  The broker argued coverage for restitution would contradict public policy and was thus "uninsurable." Some courts in other jurisdictions have found that disgorgement of proceeds and restitution payments are not insurable. The court disagreed.  Arizona values the freedom to contract, and there are certain factors a court must consider before invalidating a contract provision based on public policy grounds. The lack of statutes and cases indicate that Arizona does not have a strong policy forbidding coverage for restitution payments. If the concern is that coverage would incentivize insureds to wrongfully acquire property, then the insurer can draft policy language to exclude coverage for wrongfully acquired property. The company and its officers simply did not know about the tip statute and did not willfully engage in misconduct. Barring coverage for the restitution damages would chill commerce by discouraging companies from doing business in other states. 

Interpreting the meaning of coverage terms, and an exclusion. City of Glendale v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA ("Glendale"), No. CV-12-380, 2013 WL 1296418 (D. Ariz. Mar. 29, 2013); Mt. Hawley Ins. Co. v. World Travel Inns Ltd. Partnership VII ("World Travel"), 2013 WL 2325609 (Ariz. App. Ct. May 28, 2013) (unpub.); Nelson v. Navigator Ins. Co., No. CV-12-1620, 2013 WL 5314361 (D. Ariz. Sept. 20, 2013) (Mem.); Chartis Prop. Cas. Co. v. Alpert("Alpert"), No. CV-11-2067-PHX-SMM, 2013 WL 4430957 (D. Ariz. Aug. 16, 2013) (Mem.).

Glendale addressed the interpretation of personal injury coverage and was a victory for the policyholder. The City of Glendale's commercial general liability ("CGL") policies covered damages that Glendale had to pay because of "wrongful entry into or invasion of the right of private occupancy of" premises Glendale leased to a tenant. The insurer insisted the provision required physical invasion, and the tenant suffered only economic harm from discrimination. The court found the provision was ambiguous for the following reasons. Dictionary definitions implied, but did not require, physical intrusion. The other terms in the same provision, "wrongful entry" and "wrongful eviction" did not limit the private occupancy language. The Chartis representative testified he could not define the provision nor give examples of what is covered. Cases from other jurisdictions demonstrated that the phrase is subject to more than one reasonable interpretation. Also, an insurance industry bulletin pre-dating the policies discussed the problems with the lack of definition for the provision. The court decided that social policy supported finding coverage, i.e., that physical invasion is not required for "invasion of the right of private occupancy", because the insurer was relying on undefined terms. 

In World Travel, the court found that a general contractor's abandonment of a project was not an "occurrence" under the CGL policy. Mid-project, the contractor demanded the owner pay more money. The owner refused, and the contractor abandoned the project. The owner obtained a judgment against the contractor, and then sought recovery from the contractor's CGL policy. The policy defined "occurrence" as being caused by an "accident, including continuous or repeated exposure to substantially the same general harmful conditions." Arizona courts have defined "accident" as “an undesigned, sudden, and unexpected event, usually of an afflictive or unfortunate character, and often accompanied by a manifestation of force." Even if the contractor did not intend to abandon the project and did not intend to cause the owner's damages, that deliberate act of abandonment was not an "accident", and therefore, not an occurrence. 

Nelson also explored the definition of a coverage term. The question was whether there was "property damage" under the CGL and excess policies. An employee sued its employer, the insured, for negligently disposing of the equipment that injured him, thereby denying him the ability to sue the equipment manufacturer. The court agreed with the insurers that the employee was not suing for loss of the piece of equipment, but rather, for loss of his legal claim against the manufacturer. That legal claim was intangible, and thus not within the CGL policy's scope of coverage for damage to tangible property.  

In contrast to the three cases above, Alpert addressed an exclusion under a homeowner's policy, and personal excess liability policy. The question that arose is what is the dividing line between an insured's work and personal life? Mr. Alpert's claim for coverage was based on his work life, and so there was no coverage under his homeowner's insurance. Mr. Alpert quit his consulting work for a company ("ELH"), and then made statements about ELH to its competitor and the Texas Attorney General, resulting in the competitor and the state of Texas filing lawsuits against ELH. Mr. Alpert saw it as blowing the whistle, and an act his conscience compelled him to take. ELH sued him for making disparaging statements. The Alperts' homeowner's policy covered defamation claims as "personal injury," but excluded coverage for personal injury "arising out of an insured person’s business … pursuits, investment activity or any activity intended to realize a profit for either an insured person or others." The court found that the statements arose out of Mr. Alpert's business pursuits because they related to his regular consulting work. Also, Mr. Alpert started a new company and allegedly solicited the ELH employees. The economic fallout from the statements demonstrated Mr. Alpert's profit motive. Although Mr. Alpert's alleged statements may have been more clearly related to his business, this exclusion is one to keep in mind when the insured is engaged in activities that are mixed business and personal. 

The insured can proceed on bad faith claim, even though the policy did not provide coverage. Inscription Canyon Ranch Sanitary Dist. v. American Alternative Ins. Corp., No. CV-12-8109, 2013 WL 5200169 (D. Ariz. Sept. 16, 2013); Everett v. American Family Mut. Ins. Co., CV-11-836-PHX-SMM, 2013 WL 967825 (D. Ariz. Mar. 12, 2013) (Mem.).

In these two cases, the District of Arizona held that even though the insurers had not breached the contract terms, the insureds could proceed on their bad faith claims. In the underlying lawsuit in Inscription, plaintiffs sought injunctive relief and attorneys' fees and costs from the sanitary district.  The district had a management liability policy, which covered sums that insured was legally obligated to pay as "monetary damages arising out of a 'wrongful act'", but stated the insurer would not provide a defense for an action for injunctive relief. In the coverage case, the court concluded that the plaintiffs' claim for attorneys' fees and costs was not a claim for "damages" for the plaintiffs' injury. Therefore, the insured lost on the claim that the insurance company breached its duty to defend. But there was evidence that the insurer had failed to promptly and adequately investigate before denying coverage, and therefore, the court denied the motion for summary judgment on the breach of the implied good faith and fair dealing in the insurance policy contract. 

In Everett, the homeowner sought coverage for theft when his ex-wife took personal property prior to the entry of the divorce decree.  The court agreed with the insurer that there was no coverage  because the taking was not actually "theft." But the insured did present evidence that the insurance company tried to discourage his claim by making him resubmit lists of missing property in different formats, and by assuming his ex-wife's statements were accurate and his were not. Thus, the court denied the insurance company's motion for summary judgment on the bad faith claim.

Defeating an insurer's attack on a Damron agreement. Nelson v. Navigator Ins. Co., No. CV-12-1620, 2013 WL 5314361 (D. Ariz. Sept. 20, 2013) (Mem.)

An injured employee sued his employer for spoliation of evidence, and the CGL and excess insurers refused to defend the employer. The employee and employer signed a "Damron agreement" wherein the employer stipulated to a $4.2 million judgment and assigned its claims against the insurance companies to the employee, in exchange for the employee agreeing to not execute on the judgment against the employer. The employee sued the insurance companies, who argued that the Damron agreement should be voided because the employer had not properly defended the action by the employee. The insurers did not demonstrate that the Damron agreement was collusive.

"Were the Court to allow Defendants to collaterally attack the Damron agreement here, the Court would be disregarding the policy reasons behind Damron agreements as a whole, and allowing Defendants to refuse to defend insureds with impunity, safe in the knowledge that they could always later collaterally attack any Damron agreement by arguing that the agreement was “collusive” because the insured did not fully pursue an available defense." The court thus found theDamron agreement enforceable as to the defendants. 

When an insurer has the right to appoint counsel to defend the insured. Nucor Corp. v. Employers Ins. Co. of Wausau,  __ F. Supp. 2d. __, 2013 WL 5428751 (D. Ariz. Sept. 27, 2013).

The long-running Nucor case has provided several noteworthy decisions. This latest is a ruling on the right of the insurance company, Wausau, to appoint counsel to defend the insured. Wausau agreed to defend Nucor under a reservation of its rights to later deny coverage. Nucor retained a law firm to handle its defense. For two years, Wausau did not try to appoint different counsel and communicated to the firm that Nucor hired about the case status and strategy. During that time, however, not much happened in the litigation. Then, Wausau refused to pay some of the law firm's bills and asserted its right to choose counsel. Nucor balked. The court agreed with Wausau that it did not waive its right to appoint counsel merely by issuing the reservation of rights letter. However, the court did not grant summary judgment to the Wausau because there was evidence Wausau may have waived its appointment right by its conduct over the past two years. 

Title insurance issues. Equity Income Partners LP v. Chicago Title Ins. Co. ("EIP"), 2013 WL 6498144 (D. Ariz. Dec. 11, 2013); Centennial Dev. Gp., LLC v. Lawyer's Title Ins. Corp., 233 Ariz. 147, 310 P.3d 23 (Ct. App. Sept. 19, 2013);Wenima Development, LLC v. Lawyers Title Ins. Corp., No. CA-CV 11-0749, 2013 WL 85246 (Ct. App. Jan. 8, 2013), rev. denied (July 8, 2013).

In EIP, a lender had insurance policies for the lender's interest in properties under deeds of trust. The lender sought coverage under the policies for losses due to unmarketability of title and lack of right of access to the properties. However, the lender had already foreclosed and purchased the properties by credit bids for the full amount of the debt under the loans. The policies stated that the amount of insurance was reduced by any satisfaction of the insured mortgages. The debt was extinguished and therefore, there was no coverage remaining under the lender's policies.

In contrast, when the insured was a former property owner and not a lender, the court found there was coverage. InCentennial, the insured claimed it paid more for the property than it should have because undisclosed easements reduced the property value. The insured had already sold the property when it brought the title claim. But it was not too late, the court found. The insured's claim was dependant on its losses from when it purchased and owned the property.

In Wenima, the outcome was based on the identity of those who could attack the insured title. Wenima purchased property and then learned that the seller had made misrepresentations about access to the property. Wenima sued the seller. In arbitrating that dispute, the arbitrator found the seller, due to bankruptcy, could not have delivered clear title to the property. Wenima then sought coverage from the title insurer for Wenima's lost profits from having to delay development during the litigation with the seller, and for the fees Wenima incurred in litigating. The court granted summary judgment to the insurance company because there was no third-party challenge to the insured title. The seller's former partners were the only ones who could challenge title, and they had not made a challenge. It was questionable if those former partners could mount a challenge to the title, and moreover, the insurance company had agreed to defend any third-party attack on title.

Life insurance drama.  Liberty Life Ins. Co. v. Myers, No. 10-2024-PHX-JAT, 2013 WL 530317 (D. Ariz. Feb. 12, 2013).

Arizona resident Eric Myers increased his Liberty Life insurance policy coverage in 1989, and then two years later disappeared. Subsequently, his brother, defendant Donald Myers, had a court name him conservator for the life insurance policy, and he changed the beneficiaries to Eric's daughters, defendants Erin and Kirsten. In 1996, Donald obtained a presumptive death certificate for Eric and sought payment of the policy benefits. After investigation, Liberty concluded that Eric had indeed died.  Liberty paid more than $870,000 into Erin's and Kirsten's trusts. But Eric was not dead. He was living in Mexico, Canada and California, and using two different aliases. He reappeared in 2007.[1] Liberty sued Eric, Donald, Erin, and Kirsten for fraud and other claims. The court issued judgment for Liberty on its fraud claim against Eric. By deliberately disappearing, he misrepresented his identity to Liberty, causing it to pay the benefits. Liberty also won on its unjust enrichment claims against Erin and Kirsten. They argued the payment of benefits was a compromise or settlement of claims. No, the court found; Liberty paid the benefits because all involved were under the mistaken assumption that Eric was dead. When that mistake was uncovered, Liberty was entitled to restitution for its mistaken payment of benefits. Liberty also won on its claim that Donald converted the  funds by disbursing the benefits from the trusts because he knew Liberty had made a mistake and was trying to prevent Liberty from recovering the funds.