Prescott Lakes Community Association Incorporated v. Owners Insurance Company et al, No. 3:2014cv08201 - Document 55 (D. Ariz. 2015)
Court Description: ORDER granting in part and denying in part Defendant Auto-Owners' 40 Motion for Summary Judgment Regarding Morris Agreement. The Morris agreement is valid as to those claims for which Auto-Owners agreed to defend under a reservation of ri ghts and invalid as to claims for which Auto-Owners withdrew its reservation of rights. Discovery deadlines are reset as follows: Discovery due by March 11, 2016, Dispositive Motions due by May 13, 2016. All other aspects of the Court's 54 scheduling Order remain in effect. See document for complete details. Signed by Judge John J Tuchi on 12/16/2015. (ATD)
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Prescott Lakes Community Association Incorporated v. Owners Insurance Company et al 1 WO Doc. 55 NOT FOR PUBLICATION 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 Prescott Lakes Community Association Incorporated, 10 Plaintiff, 11 12 13 No. CV-14-08201-PCT-JJT ORDER v. Auto-Owners Insurance Company, et al., Defendants. 14 15 At issue is Defendant Auto-Owners Insurance Company’s (“Auto-Owners”) 16 Motion for Summary Judgment Regarding Morris Agreement (Doc. 40, Mot.), to which 17 Plaintiff Prescott Lakes Community Association, Inc. (the “Association”) filed a 18 Response (Doc. 48, Resp.), and Auto-Owners filed a Reply (Doc. 51, Reply). The Court 19 finds these matters appropriate for decision without oral argument. See LRCiv 7.2(f). For 20 the reasons that follow, the Court grants in part and denies in part Defendant Auto- 21 Owners’ Motion for Summary Judgment as to the validity of the Settlement Agreement 22 and Stipulated Judgment. 23 I. BACKGROUND 24 The following facts are undisputed unless otherwise noted. The insurance dispute 25 at issue arises out of claims asserted in an underlying construction defect lawsuit. See 26 Prescott Lakes Cmty. Assoc., Inc. v. Canavast Builders, Inc. et al., No. CV2011-01685 27 (the “underlying lawsuit”). The underlying lawsuit involved construction of Willow Park 28 Estates – 23 duplex buildings with 26 single family units – at Prescott Lakes Community. Dockets.Justia.com 1 Willow Park Estates was built from 2004 to 2006, and in 2011, the Prescott Lakes 2 Community Association filed the underlying lawsuit naming the following entities as 3 defendants and alleging that they were involved in the development and sale of the 4 property: Canavest Builders, Inc.; Canavest Development, LLC; Canavest Development 5 II, LLC; The Canavest Group; and Willow Park/Canavest, LLLP. The Association 6 alleges construction defects related to the property and claimed damages of 7 $2,045,136.74 for the cost to repair all defects and $245,834.10 for interim repair costs. 8 The Association also claims expert and attorney fees and costs, which it alleges are still 9 accruing. 10 Auto-Owners issued an insurance policy to The Canavast Group and related 11 entities that was effective August 1, 2004 through August 1, 2010. Canavest 12 Development, LLC, Canavest Development II, LLC, and WPE/Canavest, LLLP were 13 named insured on the policy from August 1, 2004 through August 1, 2006. In the 14 underlying lawsuit, Auto-Owners provided a defense to its insured. It first reserved all of 15 its rights in a 2012 reservation of rights letter; then on June 3, 2013, it issued an updated 16 reservation of rights letter; and then on May 21, 2014, it issued another updated 17 reservation of rights letter (the “Munzer letter”). 18 Auto-Owners maintains that in the 2014 Munzer letter, it withdrew its reservation 19 of rights with respect to certain claims and maintained its reservation as to the remaining 20 claims. The Munzer letter included a section entitled “Withdrawal of Reservation of 21 Rights as to Certain Claims,” and, below that heading, a list of damages/repairs for which 22 Auto-Owners maintains it specifically withdrew its reservation of rights. The Association 23 objects to Auto-Owners’ assertion and maintains that Auto-Owners did not specifically 24 withdraw its reservation as to certain damages/repairs because the letter did not identify 25 specific claims or amounts. 26 On September 24, 2014, the Association and the insureds/defendants in the 27 underlying case entered into a Morris agreement under which the parties settled the 28 claims and the Association obtained an assignment of all claims against Auto-Owners. -2- 1 Under the Morris agreement, the parties entered into a stipulated judgment against 2 Canavest Builders, Inc.; Canavest Development, LLC; Canavest Development II, LLC; 3 The Canavest Group; and Willow Park/Canavest, LLLP for $2.5 million, and a judgment 4 in the underlying case was entered on October 10, 2014.1 The Association covenanted not 5 to execute against the insureds/defendants in the underlying case. The judgment only 6 provides one lump sum amount against all defendants. The Association alleges that the 7 Morris agreement is valid and reasonable and that the sum set forth in the stipulated 8 judgment is covered under the Auto-Owners’ policies. 9 In its Controverting Statement of Facts, the Association states that, through 10 Canavest’s attorneys, it provided Auto-Owners with the following: Prescott 11 Lakes/Willow Park Estate Association’s Interim Repair Chart dated March 3, 2014; 12 Nautilus General Contractors’ Preliminary Estimate of Costs Willow Park Estates dated 13 May 5, 2014; and Nautilus Building Consultants, Inc.’s Report of Findings for Willow 14 Park Estates dated May 5, 2014. 15 In its Controverting Statement of Facts, the Association also sets forth the groups 16 of interim repair invoices as listed in Auto-Owners’ Munzer letter and states what the 17 Association “guessed” Auto-Owners was referring to. The Association alleges that Auto- 18 Owners did not set forth a specific sum for which it would indemnify Canavest regarding 19 the repair invoices and that the repairs as Auto-Owners listed them excluded additional 20 services and repairs listed in the original invoices. Auto-Owners further alleges that the 21 original invoices did not itemize costs for individual repairs, but only listed one lump 22 sum. The Court now resolves Auto-Owners’ Motion for Summary Judgment regarding 23 the Morris agreement. 24 /// 25 /// 26 /// 27 28 1 The Court refers to the settlement agreement and stipulated judgment together as the “Morris agreement” throughout this Order. -3- 1 II. LEGAL STANDARDS 2 A. Summary Judgment 3 Under Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment is 4 appropriate when: (1) the movant shows that there is no genuine dispute as to any 5 material fact; and (2) after viewing the evidence most favorably to the non-moving party, 6 the movant is entitled to prevail as a matter of law. Fed. R. Civ. P. 56; Celotex Corp. v. 7 Catrett, 477 U.S. 317, 322–23 (1986); Eisenberg v. Ins. Co. of N. Am., 815 F.2d 1285, 8 1288–89 (9th Cir. 1987). Under this standard, “[o]nly disputes over facts that might affect 9 the outcome of the suit under governing [substantive] law will properly preclude the 10 entry of summary judgment.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). 11 A “genuine issue” of material fact arises only “if the evidence is such that a reasonable 12 jury could return a verdict for the non-moving party.” Id. 13 In considering a motion for summary judgment, the court must regard as true the 14 non-moving party’s evidence if it is supported by affidavits or other evidentiary material. 15 Celotex, 477 U.S. at 324; Eisenberg, 815 F.2d at 1289. The non-moving party may not 16 merely rest on its pleadings; it must produce some significant probative evidence tending 17 to contradict the moving party’s allegations, thereby creating a question of material fact. 18 Anderson, 477 U.S. at 256–57 (holding that the plaintiff must present affirmative 19 evidence in order to defeat a properly supported motion for summary judgment); First 20 Nat’l Bank of Ariz. v. Cities Serv. Co., 391 U.S. 253, 289 (1968). 21 “A summary judgment motion cannot be defeated by relying solely on conclusory 22 allegations unsupported by factual data.” Taylor v. List, 880 F.2d 1040, 1045 (9th Cir. 23 1989). “Summary judgment must be entered ‘against a party who fails to make a showing 24 sufficient to establish the existence of an element essential to that party’s case, and on 25 which that party will bear the burden of proof at trial.’” United States v. Carter, 906 F.2d 26 1375, 1376 (9th Cir. 1990) (quoting Celotex, 477 U.S. at 322). 27 28 -4- 1 B. Liability Insurance Contracts 2 In a liability insurance contract, the insurer agrees to indemnify the insured if 3 liability under the policy is established. United Servs. Auto. Ass’n v. Morris, 741 P.2d 4 246, 250 (Ariz. 1987). The insurer “obligates itself to defend any claim potentially 5 covered by the policy.” Id. The insured also has an obligation under the insurance policy 6 and must cooperate with the insurer when the insurer defends the insured in accordance 7 with the insurer’s contractual obligation. Id. The insured “may not settle with the 8 claimant without breaching the cooperation clause [in the insurance policy] unless the 9 insurer first breaches one of its contractual duties.” Id. “If the insurer performs its 10 obligations, the cooperation clause applies with full force, and settlement by the insured 11 constitutes a breach of the [insurance] policy.” Id. at 250–51. 12 Where the insurer asserts a coverage defense and defends the insured under a 13 reservation of rights, not unconditionally assuming liability under the policy, there is no 14 breach of the cooperation clause if the insured enters into a settlement agreement with the 15 claimant without the insurer’s consent. Id. at 252. Under Morris, an agreement can be 16 made that allows a plaintiff and defendant, “whose insurer will only defend under a 17 reservation of rights, to agree that judgment may be entered against the defendant in a 18 specified amount with the understanding that the plaintiff will not execute on the 19 judgment against the defendant.” Munzer v. Feola, 985 P.2d 616, 618 (Ariz. Ct. App. 20 1999). The plaintiff may then “proceed against the defendant’s insurer, and if the plaintiff 21 prevails on the coverage issue, it may collect its judgment from the insurer to the extent 22 that the judgment is what a reasonable and prudent defendant would have paid to settle 23 the case.” Id. at 618–19. Where the insurer issues a reservation of rights, it must “fairly 24 inform the insured of the insurer’s position.” Desert Ridge Resort LLC v. Occidental Fire 25 & Cas. Co. of N. Carolina, No. CV-14-01870-PHX-DLR, 2015 WL 6600079, at *3 (D. 26 Ariz. Oct. 7, 2015) (quoting Equity Gen. Ins. Co. v. C & A Realty Co., 715 P.2d 768, 771 27 (Ariz. Ct. App. 1985)). 28 -5- 1 III. ANALYSIS 2 A. Munzer Letter 3 In Munzer, the Arizona Court of Appeals considered the validity of a Morris 4 agreement where an insurer was only defending some, but not all, of the claims against 5 the insured under a reservation of rights. 985 P.2d at 616. Munzer involved the insurers of 6 an insured law firm that originally offered to defend the firm with a reservation of rights 7 as to all claims, but later, partially withdrew their reservation of rights as to the claim for 8 general damages while continuing to defend the malpractice claim under a reservation of 9 rights. Id. at 618. The claimants and the insured law firm entered into a settlement 10 agreement for all claims with a judgment that was approximately all of the claimant’s 11 alleged damages entered against the insured law firm. Id. at 619. The court held that the 12 Morris agreement was valid only as to the claims for which the insurer reserved its rights. 13 Id. at 619–21. Because the insurer withdrew its reservation of rights as to the general 14 damages claim against the insured law firm, the insured law firm breached the 15 cooperation clause of the insurance contract and voided the policy as to that claim by 16 entering into the Morris agreement. Id. at 621. The court did not hold that the entire 17 Morris agreement was invalid, but only that part involving the claims for which the 18 insurer withdrew its reservation of rights. 19 Auto-Owners argues that its May 21, 2014 Munzer letter clearly set forth that it 20 was withdrawing its reservation of rights as to certain damages and repairs. (Reply at 5– 21 9.) Auto-Owners contends that, as a result, the Morris agreement is invalid because it 22 includes claims that Auto-Owners withdrew its reservation of rights to and thus the 23 insured, Canavest, breached the cooperation clause. The Association argues that Auto- 24 Owners’ Munzer letter was illusory and did not unconditionally agree to indemnify 25 Canavast for any certain claim. (Resp. at 9.) The Association contends that, from the 26 letter, it was unascertainable what Auto-Owners was specifically indemnifying because 27 the damages/repairs listed in the letter did not identify which invoices they were 28 associated with and the damages/repairs referred to were specific items included as part -6- 1 of lump sum invoices for which there were no individual costs. (Resp. at 11–16.) The 2 Association also argues that the Munzer letter was ineffective because the 3 damages/repairs listed could only be made in conjunction with other repairs for which 4 Auto-Owners did not withdraw its reservation of rights. (Resp. at 11.) 5 This case presents a situation similar to that in Munzer because Auto-Owners 6 changed its position from defending under a complete reservation of rights to 7 withdrawing its reservation of rights as to certain claims in its Munzer letter. (See Munzer 8 letter at 15.) Despite the Association’s contention that the Munzer letter was illusory, the 9 Court finds that, taken as a whole, the Munzer letter fairly informed a reader of average 10 intelligence that Auto-Owners was withdrawing its reservation of rights as to certain 11 damages/repairs. See Equity Gen. Ins. Co., 715 P.2d at 770–71. The first page of the 12 Munzer letter states: 13 14 15 16 17 18 19 20 Auto-Owners further recognizes, however, that some of the claims may be covered, in which case Auto-Owners will indemnify those entities that qualify as insureds for those claims. Auto-Owners has determined that it will continue to provide this defense to the Canavest entities under a reservation of rights for certain claims as asserted herein, but withdraws its reservation of rights as to other claims. (Munzer letter at 1.) The Munzer letter then includes a section under the heading “WITHDRAWAL OF RESERVATION OF RIGHTS AS TO CERTAIN CLAIMS,” which states: 21 22 23 24 25 Based upon the information that Auto-Owners has obtained during the course of its investigation in this matter, and subject to all of the other applicable terms, provisions and exclusions contained in the policy, it appears that coverage may be available to the extent that any insured is found liable for the following damages/repairs, as have been claimed by plaintiff in this lawsuit and set forth in the above-noted reports. 26 (Munzer letter at 15.) The letter then lists the types of damages/repairs, such as stucco 27 and roof tile, and specific repairs identified by date, type of repair, and Bates number. 28 (See Munzer letter at 15–17.) -7- 1 2 After the list of the various repairs, the letter clarifies Auto-Owners’ withdrawal of its reservation of rights: 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Auto-Owners does not reserve its rights as to those items of resultant damage, as itemized above, and will agree to indemnify any insured entity should it be found liable for this resultant damage and the associated repairs for such damages, as itemized above. This withdrawal of the reservation of rights includes only those bolded items listed above, as set forth in the Nautilus Estimate of Costs, and the specific repairs designated above, as included in the Interim Repair Chart. Further, this withdrawal of the reservation of rights applies only to such damage, as set forth above, that occurred prior to 8/1/06. (Munzer letter at 17) (emphasis in original). The Munzer letter goes on to discuss that Auto-Owners continues to reserve its rights relating to such damage, “other than as identified above for which Auto-Owners has expressly withdrawn its reservation of rights.” (Munzer letter at 19) (emphasis in original). Finally, the letter cites to Morris and Munzer, noting that any settlement the insured enters into for any claim for which AutoOwners “has accepted coverage or withdrawn its reservation of rights” will violate the conditions of the insurance policy. (Munzer letter at 20.) The Association points to language in the Munzer letter that it contends evinces its illusory nature. The Association refers to the following language: “some of the claims may be covered” (Munzer letter at 1; Resp. at 10) (emphasis added); “it appears that coverage may be available to the extent that any insured is found liable for the following damages/repairs” (Munzer letter at 15; Resp. at 10) (emphasis added); and “[t]o the extent that the faulty work itself and/or the faulty product itself has resulted in damage to other property, Auto-Owners does not reserve its rights” (Munzer letter at 17; Resp. at 10) (emphasis added). The Association also points to language on page 18 of the Munzer letter, under the heading “CONTINUING RESERVATION OF RIGHTS,” and notes that Auto-Owners never defined the specified scope of the phrase “your work” as included in the policy (Munzer letter at 18; Resp. at 10–11). Finally, the Association 28 -8- 1 points to the above-quoted language on page 19 of the Munzer letter, contending that it 2 states that Auto-Owners may not cover anything. (Resp. at 11.) 3 The Court does not find persuasive the Association’s references to the somewhat 4 vague language scattered throughout the Munzer letter and the language under the 5 “Continuing Reservation of Rights” section. The Munzer letter clearly provided a section 6 entitled “Withdrawal of Reservation of Rights as to Certain Claims,” provided a detailed 7 list of damages/repairs, and stated that Auto-Owners “does not reserve its rights as to 8 those items of resultant damage, as itemized above.” (Munzer letter at 15–17) (emphasis 9 in original). Moreover, the Munzer letter instructed the insured to advise Auto-Owners if 10 the insured believed that Auto-Owners misstated or omitted any material facts. (Munzer 11 letter at 19.) The Court determines that, taken as a whole, the Munzer letter fairly 12 informed the Association of Auto-Owners’ intent to withdraw its reservation of rights as 13 to certain, listed damages/repairs. Accordingly, Auto-Owners withdrew its reservation of 14 rights as to certain claims, barring a settlement agreement as to those claims. See Munzer, 15 985 P.2d at 619–21. 16 B. Morris Agreement 17 Auto-Owners argues that because it withdrew its reservation of rights as to certain 18 claims in its Munzer letter, the insured was barred from entering into a settlement 19 agreement as to those claims, and because the Morris agreement included those claims, 20 the Morris agreement is invalid as a matter of law. (Mot. at 9–13.) Although the Morris 21 agreement did not distinguish between covered and non-covered claims and only 22 provided for a lump-sum payment, the Morris agreement is not invalid as a whole. As in 23 Munzer, the Morris agreement is valid with respect to those claims that Auto-Owners had 24 reserved its rights, but invalid with respect to the claims for which Auto-Owners had 25 withdrawn its reservation of rights pursuant to the Munzer letter. See Munzer, 985 P.2d at 26 621. 27 The Court agrees with Auto-Owners that because the Morris agreement in this 28 case does not allocate between covered and non-covered claims, this case is different than -9- 1 Munzer, where the two claims at issue and the associated damages were clearly 2 delineated. In this case, the Court cannot yet determine what portion of the $2.5 million 3 Morris agreement is attributable to covered and non-covered claims or claims identified 4 in the Munzer letter. This uncertainty, however, will be resolved in the next steps in this 5 case and does not require the invalidation of the entire Morris agreement, as Auto- 6 Owners contends. 7 IV. CONCLUSION 8 The Munzer letter fairly informed a reasonable reader, including the Association, 9 that Auto-Owners was withdrawing its reservation of rights as to some claims, and the 10 Morris agreement is valid as to only those claims for which Auto-Owners reserved its 11 rights. The Court recognizes the continuing uncertainty regarding the scope of the 12 withdrawal of Auto-Owners’ reservation of rights in the Munzer letter and thus, what the 13 Morris agreement could include. Given what is before the Court thus far, it cannot yet 14 make that determination, but will do so in the next steps of this case. 15 When parties have entered into a Morris agreement, neither the fact nor amount of 16 liability in the settlement or stipulated judgment is binding on the insurer unless the 17 claimant can show that the settlement was reasonable and prudent under all the 18 circumstances. See Morris, 741 P.2d at 253; Munzer, 985 P.2d at 618–19. The parties are 19 given the opportunity to present their arguments in a reasonableness hearing – an 20 evidentiary hearing “where the stipulated damages amount, or stipulated judgment, in a 21 . . . Morris agreement . . . is subject to review or the amount has been left open and is to 22 be determined by the trial judge or fact finder without reference to a figure stipulated to 23 by the parties.” Himes v. Safeway Ins. Co., 66 P.3d 74, 79 (Ariz. Ct. App. 2003). Thus, 24 while uncertainty with regard to the Morris agreement still exists, such uncertainty will 25 be resolved through the litigation of the underlying claims, including the determination of 26 the insurance policy coverage and the reasonableness of the Morris agreement. 27 The Court acknowledges Auto-Owners’ request to strike the Declaration of 28 William Shore (Doc. 50), submitted in support of the Association’s Response. (See - 10 - 1 Doc. 52 at 3, 4, 7.) Because the Court did not consider the Declaration in its resolution of 2 Auto-Owners’ Motion, the Court denies Auto-Owners’ request to strike the Declaration 3 as moot. 4 Finally, the Court finds that there is no question of material fact as to the validity 5 of the settlement agreement and stipulated judgment. The Court finds that the Morris 6 agreement is valid as to those claims for which Auto-Owners reserved its rights and 7 invalid as to those claims for which Auto-Owners withdrew its rights. The Court thus 8 declines to invalidate the entire Morris agreement. 9 IT IS THEREFORE ORDERED granting in part and denying in part Defendant 10 Auto-Owners’ Motion for Summary Judgment Regarding Morris Agreement (Doc. 40). 11 The Morris agreement is valid as to those claims for which Auto-Owners agreed to 12 defend under a reservation of rights and invalid as to claims for which Auto-Owners 13 withdrew its reservation of rights. IT IS FURTHER ORDERED resetting discovery deadlines pursuant to the Court’s 14 15 September 24, 2015 Order (Doc. 54), as follows: 16 1. Fact discovery shall be completed by March 11, 2016. 17 2. All discovery must be completed by March 11, 2016. 3. 18 The parties must complete all pre-trial disclosure required under Fed. R. 19 Civ. P. 26(a)(3), of all exhibits to be used and all witnesses to be called at trial, on or 20 before January 15, 2016. 4. Good Faith Settlement discussions are to be held no later than April 15, 23 5. All dispositive motions shall be filed no later than May 13, 2016. 24 6. All other aspects of the Court’s scheduling Order (Doc. 54) remain in 21 22 25 26 2016. effect. Dated this 16th day of December, 2015. 27 28 Honorable John J. Tuchi United States District Judge - 11 -
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