Cachet Residential Builders, Inc. v. Gemini Insurance Company, et al, No. 2:2007cv01256 - Document 82 (D. Ariz. 2009)

Court Description: ORDER granting 41 Defendants' Motion for Partial Summary Judgment on the Pleadings. Plaintiff's Second Cause of Action shall be DISMISSED with prejudice. Plaintiff's Fifth Cause of Action shall be DISMISSED with prejudice as to both Defendants. Signed by Judge Roslyn O Silver on 3/17/09.(LSP)
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Cachet Residential Builders, Inc. v. Gemini Insurance Company, et al 1 Doc. 82 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 Cachet Residential Builders, Inc., Plaintiff, 10 11 vs. 12 Gemini Insurance Co., et al., 13 Defendants. 14 ) ) ) ) ) ) ) ) ) ) ) ) No. CV-07-1256-PHX-ROS ORDER 15 16 17 Pending before the Court is Defendants’ Motion for Partial Judgment on the Pleadings (Doc. 41). For the reasons stated herein, Defendants’ Motion shall be granted. BACKGROUND 18 19 Plaintiff Cachet Residential Builders (“Cachet”) purchased five insurance policies 20 from Defendant Gemini Insurance Company (“Gemini”) for residential projects they were 21 developing. These policies provided commercial general liability insurance coverage, 22 including coverage for construction defect claims. Cachet paid Gemini a substantial 23 “Advance Premium” on each policy, and each policy provided that, in the event it was 24 cancelled, Gemini would remit to Cachet the “premium refund due,” calculated in a pro rata 25 manner. 26 On February 27, 2006, Cachet canceled one of the policies in question and requested 27 a refund of $225,000 of the $300,000 Advance Premium. Gemini and Defendant Cromwell 28 Management Corporation (“Cromwell”), which was hired by Gemini to serve as its Dockets.Justia.com 1 underwriting manager, refused. Using a different method to calculate the pro rata refund, 2 they refunded only $100,259.10. 3 The parties failed to reach agreement on the correct method of calculating the 4 premium refund. Cachet, taking the position that Gemini has also anticipatorily breached the 5 contracts for the policies that have been cancelled, brought suit against Gemini for Breach 6 of Contract, Unjust Enrichment and Breach of the Covenant of Good Faith, against Cromwell 7 for Tortious Interference with Contract, and against both Gemini and Cromwell for Breach 8 of Fiduciary Duty. 9 10 In this Motion, Cromwell and Gemini argue that Cachet’s claims of Bad Faith and Breach of Fiduciary Duty are invalid on the face of the pleadings. 11 STANDARD OF REVIEW 12 Motion for judgment on the pleadings under Rule 12(c) is generally used to “resolve 13 the substantive merits of the controversy as disclosed on the face of the pleadings.” Wright 14 & Miller, Federal Practice & Procedure § 1367 (1999). In the modern context, it “only ha[s] 15 utility when all material allegations of fact are admitted or not controverted by the pleadings 16 and only questions of law remain to be decided by the district court.” Id. “Judgment on the 17 pleadings is proper when, taking all the allegations in the pleadings as true and construed in 18 the light most favorable to the nonmoving party, the moving party is entitled to judgment as 19 a matter of law.” Living Designs, Inc. v. E.I.. Dupont de Nemours and Co., 431 F.3d 353, 20 360 (9th Cir. 2005).” 21 ANALYSIS 22 A. Breach of the Covenant of Good Faith 23 “The law implies a covenant of good faith and fair dealing in every contract.” 24 Rawlings v. Apodaca, 726 P.2d 565, 569 (Ariz. 1986) (citing Wagenseller v. Scottsdale 25 Memorial Hosp., 710 P.2d 1025, 1038 (1985); Restatement (Second) of Contracts § 205 26 (1985); 5 Williston on Contracts § 670 at 159 (3rd ed., Jaeger ed. 1961)). “The essence of 27 that duty is that neither party will act to impair the right of the other to receive the benefits 28 which flow from their agreement or contractual relationship.” Id. (citing Wagenseller, 710 -2- 1 P.2d at 1038). An insurer breaches the covenant of good faith when it fails to “give equal 2 thought to the end that both the insured and the insurer shall be protected.” Farmers Ins. 3 Exch. v. Henderson, 313 P.2d 404, 406 (Ariz. 1957); see also General Accident Fire & Life 4 Assurance Corp. v. Little, 443 P.2d 690, 698 (Ariz. 1968). Accordingly, an insurer violates 5 its duty when it is “moved by partiality to itself” in deciding to accept or reject a reasonable 6 settlement offer (nor is it required “to give the interests of the insured preferential 7 consideration”). Id. Similarly, “an insurer that intentionally and unreasonably denies or 8 delays payment breaches the covenant of good faith owed to its insured,” Noble v. National 9 Am. Life Ins. Co., 624 P.2d 866 (1981), as did an insurer that “groundlessly asserted that it 10 had no obligation to continue payments once the policy was terminated.” Rawlings, 726 P.2d 11 at 572 (citing Sparks v. Republic National Life Insurance Co., 647 P.2d 1127 (Ariz. 1982). 12 However, the insurer is not required to prevent all harm to the insured. “As long as 13 it acts honestly, on adequate information and does not place paramount importance on its 14 own interests, it should not be held liable because of a good faith mistake in performance or 15 judgment.” Id. at 573 (citing Little, 443 P.2d at 697; City of Glendale v. Farmers Ins. 16 Exchange, 613 P.2d 278, 281 (1980)). Nor is “every breach of an express covenant in an 17 insurance contract . . . a breach of the covenant of good faith and fair dealing.” Id. Instead, 18 “[t]he implied covenant is breached, whether the carrier pays the claim or not, when its 19 conduct damages the very protection or security which the insured sought to gain by buying 20 insurance.” Id. One case stated the principle even more narrowly: “[t]he tort of bad faith 21 only arises when the insurance company intentionally denies or fails to process or pay a 22 claim without a reasonable basis for such action.” Deese v. State Farm Mut. Auto Ins. Co., 23 838 P.2d 1265, 1268 (Ariz. 1992). Applying these principles, one Arizona appellate court 24 concluded that an insurer’s decision whether to pay dividends on a workers’ compensation 25 policy or how much to pay did not give rise to a cause of action for bad faith, as “the insured 26 employer is not at risk of losing the contracted for security or protection from the insured risk 27 of claims by an injured employee. Instead, the employer is at risk of losing, at most, only a 28 -3- 1 potential profit or commercial advantage in the form of a refund of a portion of the premium 2 paid.” Beaudry v. Ins. Co. of the W., 50 P.3d 836, 842 (Ariz. Ct. App. 2002). 3 This case is nearly indistinguishable. Plaintiffs had already cancelled their premiums 4 and the dispute is over the amount of the refund to them. No claim was being paid on the 5 policy, or defense of Plaintiffs being undertaken by the insurance company. Accordingly, 6 they are looking merely at a pecuniary issue rather than one involving their protection or 7 security. This is quite different from a decision not to accept a settlement offer or to 8 gratuitously deny a valid claim; in those situations, insured parties are put in the position of 9 being refused or unable to afford medical treatment or other protection that they had 10 specifically insured themselves for. While Plaintiff attempts to distinguish the two cases by 11 arguing that only one insurance premium was at issue in Beaudry while five are here, 12 establishing a pattern of bad behavior, the number of insurance premiums was not critical to 13 the holding of Beaudry, quoted above. Rather, it was discussed in the context of what was, 14 essentially, dicta on the topic of punitive damages. 15 Accordingly, judgment on this count shall be granted to Defendants. B. Breach of Fiduciary Duty 16 17 Defendants argue that fiduciary duties do not generally arise in the context of ordinary 18 commercial relationships generally or insurers and insured more specifically and that, 19 therefore, Plaintiffs’s claim for Breach of Fiduciary Duty against both Gemini and Cromwell 20 must be dismissed. 21 “A commercial contract creates a fiduciary relationship only when one party agrees 22 to serve in a fiduciary capacity.” Urias v. PCS Health Sys. Inc., 118 P.3d 29, 25 (Ariz. Ct. 23 App. 2005). As a general rule, courts have given great effect to the language in the 24 agreements between the parties. See, e.g., Morgan v. American Fidelity Fire Ins. Co., 210 25 F.2d 53, 55(8th Cir. 1954) (noting that “[t]he contract here specifically provided that 26 defendant in his transactions with the plaintiff was acting in a fiduciary capacity.”) (cited in 27 Urias, 119 P.3d at 25). 28 -4- 1 Where no such language exists, however, the situation is less clear. One Arizona 2 court found that “insurance agents generally are not fiduciaries, but instead owe only a duty 3 of ‘reasonable care, skill, and diligence’ in dealing with clients.” Webb v. Gittlen, 174 P.3d 4 275, 279 (Ariz. 2008). Similarly, “although the insured is entitled to expect that the insurer 5 will be ‘on his side’ at least to the extent of treating him honestly and fairly, [the Arizona 6 Supreme Court did not] go so far as to hold that the insurer is a fiduciary, but [did] hold that 7 it has some duties of a fiduciary nature. Equal consideration, fairness and honesty are among 8 them.” Rawlings, 726 P.2d at 571 (internal citations omitted); see also, Twin City Fire Ins. 9 Co. v. Burke, 63 P.3d 282, 286 (Ariz. 2003); Walter v. Simmons, 818 P.2d 214, 223 (Ariz. 10 Ct. App. 1991) (“Although not strictly a fiduciary, an insurer’s duty of good faith is of a 11 fiduciary nature.”) In Beaudry, the court implied that a finding that there was no fiduciary 12 duty was coterminous with finding that there was no cause of action for good faith. 50 P.3d 13 at 842. 14 None of this language states or even implies that these duties of a fiduciary nature 15 give rise to a cause of action against an insured for breach of fiduciary duty. If such an 16 action can exist, however – this Court sees no need to decide that question in the abstract – 17 there is certainly no indication that it exists here, where the alleged breach does not relate to 18 the provision of safety and protection. The special duties of an insurer recognized by 19 Arizona courts lie in that arena. This action, on the other hand, concerns a dispute over the 20 calculation of a refund after the premium after a policy has been cancelled rather than the 21 payment of a claim and therefore is divorced from an insurer’s duties of protection. 22 Plaintiff cannot bring a claim against either Gemini or Cromwell for Breach of 23 Fiduciary Duty. The claim against Cromwell further fails because it had no contractual 24 relationship with Plaintiff. As stated above, a fiduciary relationship can be created only 25 when one party agrees to serve as a fiduciary for another. 26 Accordingly, 27 IT IS ORDERED Defendants’ Motion for Partial Judgment on the Pleadings is 28 GRANTED. -5- 1 2 3 4 IT IS FURTHER ORDERED Plaintiff’s Second Cause of Action shall be DISMISSED with prejudice. IT IS FURTHER ORDERED Plaintiff’s Fifth Cause of Action shall be DISMISSED with prejudice as to both Defendants. 5 DATED this 17th day of March, 2009. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -6-