Arizona Court of Appeals Holds Insured Waived Objections to UIM Arbitrator’s Alleged Partiality

by Nathan Meyer | Oct 17, 2018 | Insurance

The Holding

In Fisher v. USAA Casualty Insurance Company, 2018 WL 3804114 (Ariz. App. Aug. 7, 2018), a case arising from an underinsured motorist (“UIM”) arbitration, the Arizona Court of Appeals affirmed the trial court’s refusal to vacate an arbitration award because of an arbitrator’s alleged partiality. The Insureds knew about the Arbitrator’s alleged relationship with the Insurer’s counsel before the arbitration, but did not object either before or during the arbitration. Instead, the Insureds waited until they received an unfavorable award. Thus, the Court of Appeals held the objection was untimely, and the Insureds waived their claim of partiality.

The Takeaways

• If an insured has concerns about an arbitrator’s partiality before an uninsured motorist (“UM”) or UIM arbitration, then the insured waives those concerns unless the insured objects before or during the arbitration.
• An arbitrator’s “mere service” in other matters involving an insurer’s counsel is insufficient to trigger a presumption of partiality.

The Facts

The Insureds were involved in two low-impact car accidents within one week. One Insured eventually had spinal fusion surgery. The Insureds made UIM claims, and the parties agreed to resolve the value of the UIM claims in arbitration. One day before the arbitration, the Insureds’ counsel raised concerns about the partiality of the Arbitrator to the Insureds because the Insurer’s counsel often retained the arbitrator. Nonetheless, the Insureds proceeded with the arbitration. The Arbitrator concluded the low-impact accidents did not cause the Insureds’ damages, and the Arbitrator awarded the Insureds nothing. The Insureds filed several Motions to Reconsider with the Arbitrator and eventually filed a Motion to Vacate the arbitration award with the trial court based on the Arbitrator’s failure to disclose the alleged relationship with the Insurer’s counsel. The trial court denied the Insureds’ Motion to Vacate the arbitration award and found the Insureds presented no evidence of partiality.

The Rationale

The Arizona Court of Appeals reasoned as follows:

• Judicial review of arbitration awards is limited because Arizona public policy favors arbitration to achieve a speedy and inexpensive disposition of disputes.
• A party challenging an arbitration award bears the burden of proving a statutory ground to vacate the award.
• The trial court affirms arbitration awards absent an abuse of discretion.
• Arbitrators must disclose existing or past relationships with parties or their counsel if a reasonable person would consider those relationships likely to affect the arbitrator’s impartiality. ARS § 12-3012(A)(2).
• A neutral arbitrator who does not disclose a known, existing, and substantial relationship with a party is presumed to act with evident partiality under ARS § 12-3023(A)(2). ARS § 12-3012(E).
• If a party makes a timely objection, then the trial court may vacate an arbitration award based on an arbitrator’s failure to disclose a substantial relationship with a party or counsel. ARS § 12-3012(D).
• Although Arizona has not interpreted what constitutes a “timely objection” under its arbitration statutes, commentary to the Revised Uniform Arbitration Act (“RUAA”) indicates, and other courts interpreting the RUAA have held, a party must object to an arbitrator’s partiality before or during an arbitration.
• A party cannot wait to see whether an arbitration award is favorable before objecting to an arbitrator’s partiality.
• The Ninth Circuit has adopted an even broader and widely followed approach: “waiver is appropriate where a party to an arbitration has constructive knowledge of a potential conflict but fails to timely object.” Fidelity Fed. Bank, FSB v. Durga Ma Corp., 386 F.3d 1306, 1313 (9th Cir. 2004).
• Thus, the Arizona Court of Appeals agreed: “parties who know or have reason to know of possible partiality must raise an objection with the arbitrator during the course of the arbitration proceeding.”
• Holding otherwise would defeat the primary purpose of arbitration (an inexpensive and speedy alternative to litigation) because it would allow parties to withhold such objections until after an unfavorable award.
• In Fisher, the Insureds presented no evidence that the arbitrator had a substantial or “non-trivial relationship” with the Insurer or the Insurer’s counsel.
• In Fisher, the Insureds also presented no evidence supporting a presumption of partiality.

o   An arbitrator is presumed to act with evident partiality if she fails to disclose a “known, direct, and material interest in the outcome of the arbitration…or a known, existing, and substantial relationship with a party.” ARS 12-3012(E).

o   Although the Insureds alleged the Arbitrator often worked with the Insurer’s counsel, “the cases cited by the [Insureds did] not support the proposition that mere service as an arbitrator in other matters involving a party’s counsel is sufficient to trigger a presumption of partiality.”

Read the entire Fisher decision here.

Arizona Court of Appeals Holds Insureds May Assign a Post-Loss Breach of Contract Claim to Contractors

by Nathan Meyer | Aug 7, 2018 | Insurance

The Holding

In Farmers Ins. Exchange v. The Honorable David Udall, 2018 WL 2931906 (June 12, 2018), the Arizona Court of Appeals accepted special action jurisdiction to hold that Insured’s validly assigned post-loss claim/rights under a homeowners policy to a water damage mitigation and remediation contractor.

The Takeaways

• Arizona insured’s may validly assign a post-loss breach of contract claim to a contractor.
• The Arizona Court of Appeals did not address whether Arizona insured’s may validly assign a post-loss bad faith claim to a contractor. 

The Facts

The Insurer issued homeowners policies to Insured’s who required damage mitigation and restoration services after water losses. The policies included an anti-assignment provision requiring the Insurer’s written consent to transfer the Insured’s’ interests under the policies. The Insured’s contracted with a water damage mitigation and restoration contractor (the “Contractor”).  The contracts included assignment of benefits provisions.  The Contractor submitted invoices directly to the Insurer.  The Insurer paid less than the invoiced amount.  The Insured’s, without consent, assigned their rights against the Insurer to the Contractor.  The Contractor filed suit against the Insurer and alleged: (1) the Insured’s assigned their “post-loss” rights to the Contractor, and (2) the Insurer breached the polices by failing to pay the “reasonable, usual, and customary charges to restore the [Insured’s’] property to pre-loss condition.”  The Insurer filed a motion to dismiss and argued the assignments were not valid.  The superior court denied the motion to dismiss, and the Insurer sought special action review.

The Rationale

In holding the Insured’s validly assigned their breach of contract claims to the Contractor, the Court of Appeals reasoned:

• “It is well settled in Arizona that assignees of a chose-in-action [the “right to bring an action to recover a debt, money, or thing”] have standing to pursue the action in their own name.”
• Arizona also, however, recognizes that contract provisions prohibiting assignment without consent may be enforceable.
• Generally, an Arizona insured cannot assign an insurance policy without insurer consent, especially if the policy prohibits assignment, because an insurer has the right “to choose its insured so as to knows its risks.”
• In Aetna Cas. & Sur. Co. v. Valley Nat’l Bank of Ariz., 15 Ariz. App. 13, 15, 485 P.2d 837, 839 (1971), however, the Arizona Court of Appeals held an “assignment made after a loss occurs….is not of the policy itself, but of a claim under, or a right of action on, the policy.  Thus, after a loss has occurred and the rights under the policy have accrued, an assignment may be made without the consent of the Insurer and the rule enforcing anti-assignment provisions is not applicable.”
• Since 2004, Arizona’s Unfair Claims Settlement Practices Act has “expressly recognize[d]” the right of an insured to assign “a loss or claim after a loss has occurred.” ARS § 20-461(A)(7).
• Allowing post-loss assignments appears to be the  majority rule.

Ultimately, the Court of Appeals “h[e]ld the assignments were valid post-loss assignments of benefits under the insurance policies” because they occurred after the water damaged the Insured’s’ homes, and the Insured’s did not assign the policies. Rather, the Insured’s “each assigned a claim under and a right of action on the policy.” In so holding, the Court of Appeals rejected the Insurer’s following arguments:

• An insured may assign post-loss rights only when the claim amount is undisputed;
• The assignments would ultimately increase premiums because the assignments altered policy duties and obligations, increased expenses, and escalated payouts; and
• The assignments allowed the Contractor to pursue the claim “unhampered by the policy’s obligations.”
• The Court of Appeals rejected these arguments primarily because an assignee steps into the assignor’s shoes, an assignee assumes no greater rights or obligations than an assignor, and the policies obligated the Insurer to pay the reasonable costs of repair. The Court of Appeals also carefully limited its decision by stating it only considered assignments of post-loss rights and it did not address whether an insured could assign a post-loss bad faith claim to a contractor.

Read the entire Udall decision here.

Arizona Supreme Court Holds Contractual Liability Exclusion Does Not Apply to Breach of Duty to Reasonably Construct Home

by Alden Thomas | Jul 18, 2018 | Insurance

The Holding

In Teufel v. Am. Family Mut. Ins. Co., 244 Ariz. 383, 419 P.3d 546 (2018), the Arizona Supreme Court recently held that a Contractual Liability Exclusion in homeowner policies did not apply to a claim for negligent excavation against the Insured, an alleged builder-vendor, because the claim arose from the Insured’s alleged breach of a common law duty to construct a home as a reasonable builder rather than solely from the contract between the Insured and the plaintiff.

The Takeaway

• The Contractual Liability Exclusion in a homeowner’s policy does not preclude an insurer’s duty to defend a breach of contract claim against an insured when pled with a tort claim arising from a common law duty that exists independent of the contract, even if the tortious conduct would not have occurred but for the contract between a plaintiff and an insured.
•  The Court’s ruling is consistent Desert Mountain Properties Ltd. P’ship v. Liberty Mut. Fire Ins. Co., 225 Ariz. 194, 236 P.3d 421, (Ct. App. 2010), aff’d, 226 Ariz. 419, 250 P.3d 196 (2011), in which the Court of Appeals held a Contractual Liability Exclusion in a CGL policy did not automatically bar coverage for claims involving contracts.

The Facts

The Insured hired a design group, with which he had a loose partnership, to build a mountainside home on a vacant lot.  The Insured ultimately sold the mountainside home, moved into another home, and bought a homeowner’s policy.  The Policy provided coverage for “compensatory damages for which any insured is legally liable” because of “bodily injury or property damage caused by an occurrence.”  Rockslides subsequently occurred at the home and damaged the purchaser’s property.  The purchaser alleged that improper excavation during construction caused the rockslides.  The purchaser sued the Insured,  alleged the Insured was a builder-vendor, and asserted claims for breach of contract, negligence, and fraud. After the Insurer declined coverage, the Insured sued the Insurer for damages and declaratory relief.  The trial court granted summary judgment in favor of the Insurer.  Although the trial court determined the rockslides were an “occurrence” during the Policy period, it held the Contractual Liability Exclusion precluded coverage.  The Arizona Court of Appeals reversed, holding the Contractual Liability Exclusion did not apply.  The Arizona Supreme Court affirmed the Arizona Court of Appeals.

The Rationale

• In affirming the Arizona Court of Appeals’ determination that the Contractual Liability Exclusion did not bar coverage for tort claims, the Arizona Supreme Court reasoned:
• The Contractual Liability Exclusion precluded coverage for “personal liability under any contract or agreement”, but did not define “under.”  The Supreme Court referred to Webster’s definitions of “under” in the contractual context, which are “required by,” “in accordance with,” and “bound by.”  Applying these definitions, it concluded, “the contractual liability exclusion applies to personal liability required by or originating from a contract; it is not triggered simply because a contract brought the injured party and the insured together.”
• The Insured would reasonably expect the Insurer to defend against a stand-alone tort claim regardless of any contractual relationship between plaintiff and the Insured.
• Plaintiff’s negligence claim arose from the common law duty to construct a home as a reasonable builder would, both tort and contract claims may exist when an insured negligently constructs a home, and tort duties may arise independently of contractual duties.
• The Contractual Liability Exclusion did not apply because the complaint sought damages for property damage caused by negligent excavation.  Thus, the Insurer owed the Insured a duty to defend.

The Arizona Court of Appeals affirmed the trial court’s ruling that the Policy’s Business Pursuits Exclusion did not bar coverage, but the Insured did not appeal that determination, and the Arizona Supreme Court did not address the Business Pursuits Exclusion. Read the entire Teuful decision here.

Arizona Court of Appeals Holds Multiple Negligent Acts Constitute a Single Occurrence Under CGL Policy

by Micalann C. Pepe | Jun 27, 2018 | Insurance

The Holding

In Cincinnati Indem. Co. v. Southwestern Line Constructors Joint Apprenticeship and Training Program, et al, 2018 WL 2330627 (May 31, 2018), the Arizona Court of Appeals upheld summary judgment granted to an insurer because, under the Policy’s definition of “occurrence” as an “accident,” a single event caused by several independent acts constitutes a single occurrence.

The Takeaway

Property damage and/or bodily injury claims caused by multiple negligent acts or omissions constitute only one occurrence under Policies defining “occurrence” as an “accident” rather than “any incident, act or omission.”

The Facts

Two electrical linemen were working at the top of a utility pole at the Insured’s training facility when the pole broke, the linemen fell, and the linemen sustained serious injuries. The linemen and the Insured settled for the Policy limits. The Policy included $1 million “occurrence” limits and $2 million aggregate limits. The Insurer sought a declaratory judgment that the linemen’s injuries resulted from a single “occurrence.” The superior court granted summary judgment in favor of the Insurer.

The Rationale

In affirming that the linemen’s separate injuries arose from a single occurrence, the Arizona Court of Appeals reasoned as follows:

• The Policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

• “Accident” means an unforeseen and unplanned event.

• The linemen argued the Insured committed five independent negligent acts that caused the pole to break.

• The Court of Appeals distinguished Arizona Property and Casualty Insurance Guaranty Fund v. Helme, 153 Ariz. 129 (1987), which held the number of acts producing the injury determined the number of occurrences, because the Helme policy defined “occurrence” as “any incident, act or omission, or series of related incidents, acts or omissions resulting in injury.” Thus, two omissions constituted two occurrences in Helme. In Southwestern Line, however, the Policy defined “occurrence” as an  “accident.”

• The pole collapse was one accident and, therefore, one occurrence under the Policy.

Read the entire Southwestern Line opinion here.

Arizona Court of Appeals Holds Anti-Stacking Provision Inapplicable in Policies Issued by “Affiliated Insurers”

by Nathan Meyer | Jun 8, 2018 | Insurance

The Holding

In Hanfelder v. Geico Indem. Co., WL 2018 WL 2315949 (May 22, 2018), the Arizona Court of Appeals reversed summary judgment granted to an Insurer because the Policy’s “imprecise” anti-stacking language did not apply to the “Affiliated Insurers”—GEICO Casualty Company and GEICO Indemnity Company.

The Takeaway

If affiliated insurers issue multiple policies to the same insureds, then the affiliated insurers should consider incorporating the definition of “insurer” in ARS § 20-259.01(H) into their anti-stacking provisions and/or including “affiliated insurers” language in their anti-stacking provisions.

The Facts

An Insured made UIM claims under two policies issued by affiliated Insurers. The “First Affiliated Insurer” paid policy limits. The “Second Affiliated Insurer” denied the claim based on the Policy’s anti-stacking provision: “If separate policies or coverages with us are in effect for you or any person in your household, they may not be combined to increase the limit of our liability for a loss; howeveryou have the right to select which policy or coverage is applicable to the loss.” (underlining emphasis added).  The Insured filed a declaratory judgment action against the Second Affiliated Insurer. The trial court granted summary judgment to the Second Affiliated Insurer because it determined the Anti-Stacking Provision applied to the Affiliated Insurers.

The Rationale

In holding the Anti-Stacking Provision did not apply to the Affiliated Insurers, the Arizona Court of Appeals reasoned as follows:

• ARS § 20-259.01(H) allows anti-stacking provisions and defines an insurer to include affiliated insurers: “For the purposes of this subsection, ‘insurer’ includes every insurer within a group of insurers under common management.”

• Arizona construes its UIM statutes “liberally and in favor of providing coverage” and “UIM policy exclusions strictly and narrowly.”

• Although ARS § 20-259.01(H) authorized the “Insurer”—the First Affiliated Insurer and the Second Affiliated Insurer—to limit coverage to one policy, the Policy’s anti-stacking provision did not do so because it applied to “separate policies or coverages with us”—but the Policy did not define “us.”

• The Policy used the term “we” to refer to solely to the Second Affiliated Insurer, so it would “defy common sense” to construe the term “us” as referring to the Second Affiliated Insurerand the First Affiliated Insurer.

• ARS § 20-259.01(H) is not self-executing—an insurer must include policy language to incorporate its limitations.

• The Policy did not incorporate ARS § 20-259.01(H)’s definition of an insurer to include “every insurer within a group of insurers under common management.”

• The Insured’s receipt of a multi-policy discount did not place the Insured on notice that his coverage would be limited.

• The Second Affiliated Insurer could have drafted the Policy to apply to separate policies or coverage purchased from any Insurer “affiliate” but did not so.

Read the entire Hanfelder opinion here.

Arizona District Court Excludes Expert Opinion Regarding Insurer’s State of Mind

by Nathan Meyer | Mar 28, 2018 | Insurance

The Holding

In Hunton v. American Zurich Ins. Co., 2018 WL 1182550 (D. Ariz. Mar. 7, 2018), an insurance bad faith case arising from a workers compensation claim, the Arizona District Court excluded an Insured’s expert opinion that the Insurer’s alleged “claims handling failures” were “pervasive enough to support the conclusion that upper management had to have known of, and approved, the [alleged] deficient staffing levels, inadequate training, inadequate oversight by middle management, and the ethics-related lapses related to the financial incentives granted to employees.”

The Takeaway

Insurers should move to strike Insured experts’ opinions regarding Insurers’ alleged state of mind in Arizona bad faith cases.

The Rationale

The District Court excluded the Insured expert’s opinion regarding the Insurer’s state of mind primarily because:

• “Courts routinely exclude as impermissible expert testimony as to intent, motive, or state of mind.” Hunton, 2018 WL 1182550 * 2.
• “Expert testimony as to intent, motive, or state of mind offers no more than the drawing of an inference from the facts of the case.  The jury is sufficiently capable of drawing its own inferences regarding intent, motive, or state of mind from the evidence…” Id.
• “Permitting expert testimony on [intent, motive, or state of mind] would merely be substituting the expert’s judgment for the jury’s and would not be helpful to the jury.” Id.