Tapestry on Central Condominium Association v. Liberty Insurance Underwriters Incorporated ( 2021 )

1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 Tapestry on Central Condominium No. CV-19-01490-PHX-MTL Association, 10 ORDER Plaintiff, 11 v. 12 Liberty Insurance Underwriters 13 Incorporated, 14 Defendant. 15 16 Before the Court are the parties’ motions for partial summary judgment. As 17 described herein, Defendant/Counterclaimant Liberty Insurance Underwriters, Inc.’s 18 (“Liberty” or “Defendant”) motion is denied. (Doc. 46.) Plaintiff/Counter-defendant 19 Tapestry on Central Condominium Association’s (“Tapestry” or “Plaintiff”) motion is 20 denied except as to Count IV of Liberty’s Counterclaim. (Doc. 169.) Tapestry has also filed 21 a motion to certify a question to the Arizona Supreme Court, and Liberty has filed two 22 motions to seal. (Docs. 54, 58, 62.) Those motions are denied.1 23 I. BACKGROUND 24 A. Factual History 25 Tapestry is the condominium association for “Tapestry on Central,” an “upscale 26 three-building, seven floor, 292-unit condominium complex” in Phoenix, Arizona. (Doc. 4 27 1 Both parties have submitted legal memoranda and oral argument would not have aided 28 the Court’s decisional process. See Partridge v. Reich, 141 F.3d 920, 926 (9th Cir. 1998); see also LRCiv 7.2(f); Fed. R. Civ. P. 78(b). 1 ¶ 4.) The complex contains residential and commercial units. Tapestry is an Arizona non- 2 profit corporation. (Id.) Liberty is an Illinois insurance company authorized to issue 3 policies in Arizona. (Id. ¶ 2.) 4 Tapestry on Central, LLC (“TOC”), a non-party to this case, owned 11 commercial 5 units at the condominium complex. On November 26, 2012, TOC sent an email to members 6 of Tapestry’s Board of Directors regarding an apparent dispute over parking spaces and 7 alleged construction defects affecting the units. (Doc. 46-1 at 15, 33.) It asserted that 8 Tapestry had previously agreed to provide 15 parking spaces to TOC and to remedy various 9 construction defects. (Id. at 15.) In return, TOC agreed to pay outstanding homeowner 10 association (“HOA”) dues to Tapestry. Instead of honoring its commitment, the email 11 asserts, Tapestry hired a collection agency and placed a lien on TOC’s units. TOC asked 12 for the lien to be removed. (Id.) 13 On January 31, 2013, Tapestry emailed TOC, stating that the Board of Directors 14 would vote to give 15 parking spaces to TOC and to waive any pending fees and penalties. 15 In exchange, TOC would pay its outstanding HOA fees. (Id. at 16.) 16 On March 4, 2013, a “litigation consultant” for Tapestry wrote a letter to an 17 accounting firm stating that litigation “has been threatened informally on numerous 18 occasions by the owner of the commercial units . . . relating to approximately $130[,]000 19 in dues owed the HOA and designated parking spaces.” (Id. at 19.) It further stated that 20 “[t]his unit owner has failed to pay dues to the HOA for much for the commercial space.” 21 (Id.) The owner also “assert[ed] certain construction defects,” that the HOA “stole parking 22 spaces,” and that it “has lost rents and other damages” as a result. (Id.) The letter also stated 23 that on February 26, 2013, Tapestry’s Board of Directors met and voted to forego collection 24 of certain dues, to waive fees and interest, and to provide the 15 parking spots in exchange 25 for TOC’s payment of other dues. (Id.) At the same meeting, “the Board expressed that it 26 would pursue these claims vigorously if this settlement is not accepted.” (Id.) 27 On May 14, 2013, counsel for TOC sent a letter to Tapestry stating, “[a]lthough I 28 understand that there has been some negotiation between the parties, with and without 1 counsel, it appears the discussions have stalled. Meanwhile my client continues to be 2 injured by the actions of the Association in taking [its] parking spaces.” (Doc. 46-1 at 20.) 3 It further stated that TOC “has contacted our firm regarding moving forward with 4 litigation[.]” (Id. at 21.) On May 17, 2013, counsel for Tapestry responded, stating, “You 5 are correct when you state that there have been ongoing negotiations between the parties, 6 with and without counsel, but I do not believe these negotiations have stalled.” (Id. at 22.) 7 Counsel enclosed a proposed Settlement Agreement and Release, which had been approved 8 by Tapestry, for TOC’s consideration. (Id. at 23–28.) A settlement was not reached. 9 On October 15, 2013, Tapestry executed and submitted an insurance application to 10 Liberty. (Doc. 46 at 3; Doc. 46-1 at 29–30.) On October 26, 2013, Liberty issued the 11 liability policy at issue, the Community Association Executive Advantage Policy, No. 12 CAP010206-0212, to Tapestry (the “Policy”). It was effective from October 26, 2013 to 13 October 24, 2014. (Doc. 4 ¶ 6, at 11–35.) The Policy has a $1,000,000 limitation of liability. 14 (Id. at 11.) 15 On January 23, 2014, TOC filed suit in the Superior Court of Arizona against 16 Tapestry and its directors (the “Underlying Action”).2 (Id. ¶ 8.) The second amended 17 complaint stated that Tapestry improperly placed a lien on TOC’s commercial units due to 18 a dispute over unpaid assessments, that TOC was not provided underground parking spots 19 as contracted, and that various construction defects affected its units. (Doc. 46-2 at 58–73.) 20 It asserted claims for breach of contract, breach of the implied covenant of good faith and 21 fair dealing, breach of oral contract, various tort claims, fraud, and for a declaratory 22 judgment. (Id. at 73–93.) Tapestry also filed a counterclaim against TOC in the Underlying 23 Action. (Doc. 46 at 6.) 24 Tapestry tendered the Underlying Action to Liberty for defense and indemnity. 25 (Doc. 4 ¶ 9.) Liberty denied coverage in a March 6, 2014 letter. (Id. ¶ 10; Doc. 46-2 at 26 105.) That letter stated that “there appears to be no coverage available under the Policy for 27 28 2 The case was styled Tapestry on Central, LLC v. Tapestry on Central Condominium Association, No. 2014-090103 (Ariz. Super. Ct.). 1 this matter.” (Doc. 46-2 at 106.) It stated that the lawsuit did “not constitute a Claim first 2 made during the Policy Period,” as those terms were defined in Policy; that the Policy did 3 not provide coverage for any “Construction Defect”; and that there was reason to believe 4 that the material submitted in Tapestry’s application was not “materially true and accurate.” 5 (Id. at 106–109.) Lastly, Liberty stated that it “expressly reserves all rights and defenses 6 under the Policy and at law including the right to deny coverage and/or rescind the Policy 7 based upon any of the foregoing bases and to deny coverage and/or rescind the Policy based 8 on additional and alternative bases as other terms, conditions, exclusion, and endorsements 9 of the Policy, including matters contained in any Application, are found to apply.” (Id.) 10 On December 31, 2015, Tapestry filed suit against Liberty—in the first lawsuit 11 between the two regarding the Underlying Action—alleging that Liberty breached the 12 Policy by refusing the defend Tapestry in connection with the Underlying Action. (Id. 13 ¶ 11.) In early 2017, the parties entered into a settlement agreement under which Liberty 14 agreed to defend Tapestry for the duration of the Underlying Action. (Id.) 15 The Underlying Action proceeded to a jury trial in August 2017. (Id. ¶ 12.) The jury 16 ruled for the plaintiff, TOC, on its breach of the implied covenant of good faith and fair 17 dealing claims. (Doc. 47-1 at 7.) It also found for Tapestry, the defendant, on its 18 counterclaim for unpaid assessments. The Superior Court judge entered judgment in TOC’s 19 favor on both its breach of contract (Count II) and breach of the implied covenant of good 20 faith and fair dealing (Count IV) claims. The court entered a net judgment of $1,627,118.87 21 plus interest against Tapestry. (Id.) Tapestry appealed to the Arizona Court of Appeals. It 22 requested that Liberty indemnify the judgment and continue to defend it on appeal. 23 On December 14, 2017, Liberty sent a letter to Tapestry reiterating its prior denial 24 of indemnity. This letter raised, for the first time, that the judgment was subject to exclusion 25 under Section 5.2 of the Policy, which precludes coverage for “liability of any Insured 26 under any contract.” (Doc. 46-3 at 65.) It also asserted that the Underlying Action did not 27 constitute a “Claim” made during the policy period under Section 9.2, and invoked a 28 construction defect exclusion (Section 4.11). (Id. at 66.) Ultimately, Liberty’s position was 1 that “no indemnity coverage is afforded for the Judgment. Notwithstanding, Liberty may 2 be amenable to a settlement of this matter if [Tapestry] and TOC likewise are interested.” 3 (Id.) 4 On June 18, 2018, Liberty’s counsel informed Tapestry’s counsel that it would not 5 participate in an upcoming settlement conference because there was no indemnity coverage 6 for the judgment. (Doc. 46-4 at 22.) TOC and Tapestry participated in a settlement 7 conference on appeal on July 24, 2018. In December 2018, Tapestry, TOC, and other 8 parties entered into a “global settlement agreement” that resolved the Underlying Action 9 and several other disputes between the parties. (Doc. 46 at 8.) 10 B. Procedural History 11 Tapestry filed its present Complaint against Liberty in Arizona Superior Court on 12 February 1, 2019. (Doc. 4.) Liberty timely removed the case to this Court on March 4, 13 2019. (Doc. 1.) The Complaint alleges that Liberty breached the Policy by refusing to 14 indemnify Tapestry in connection with the judgment in the Underlying Action and that it 15 “lacked an objectively reasonable basis for its coverage position and for refusing to 16 participate in settlement discussions.” (Id. ¶ 24.) It asserts claims for breach of contract and 17 bad faith. (Id. at 6–8.) Tapestry seeks compensatory, consequential, special, and punitive 18 damages, its costs and attorney’s fees, and pre- and post-judgment interest. (Id. at 9.) 19 Liberty filed a counterclaim against Tapestry with claims for declaratory judgment, breach 20 of the parties’ settlement agreement, fraudulent inducement, and rescission of the Policy. 21 (Doc. 10.) Liberty seeks various declarations that no coverage exists under various Policy 22 terms, or, alternatively, that the Policy is “rescinded and void”; compensatory, 23 consequential, and punitive damages; costs and attorney’s fees; and pre- and post-judgment 24 interest. (Doc. 10 at 20–21.) 25 Both parties filed their respective motions for partial summary judgment. (Docs. 46, 26 47.) The motions are now fully briefed. (Docs. 53, 57, 64, 65.) On the same day that it filed 27 a response to Liberty’s motion for summary judgment, Tapestry also filed a motion for 28 certification of a question of law to the Arizona Supreme Court pursuant to A.R.S. § 12- 1 1861. (Doc. 54.) That motion is also now fully briefed. (Docs. 61, 69.) Liberty has filed 2 two motions to seal, which are also ripe for adjudication. (Docs. 58, 62, 66–68, 70.) 3 II. SUMMARY JUDGMENT STANDARD 4 Summary judgment is appropriate if the evidence, viewed in the light most favorable 5 to the nonmoving party, demonstrates “that there is no genuine dispute as to any material 6 fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). A 7 genuine issue of material fact exists if “the evidence is such that a reasonable jury could 8 return a verdict for the nonmoving party,” and material facts are those “that might affect 9 the outcome of the suit under the governing law.” Anderson v. Liberty Lobby, Inc., 477 10 U.S. 242, 248 (1986). At the summary judgment stage, “[t]he evidence of the non-movant 11 is to be believed, and all justifiable inferences are to be drawn in his favor.” Id. at 255 12 (internal citations omitted); see also Jesinger v. Nevada Fed. Credit Union, 24 F.3d 1127, 13 1131 (9th Cir. 1994) (court determines whether there is a genuine issue for trial but does 14 not weigh the evidence or determine the truth of matters asserted). 15 III. DISCUSSION 16 A. Liberty’s Motion for Partial Summary Judgment (Doc. 46) 17 Liberty moves for entry of summary judgment on Tapestry’s claims (for breach of 18 contract and bad faith), as well as on Counts I, II, III, V, and VII of its counterclaim. (Doc. 19 46 at 1.) The Court addresses Liberty’s arguments in turn. 20 1. Contract Liability Exclusion 21 Liberty first argues that Section 5.2 of the Policy, the “contract liability exclusion,” 22 bars coverage for the judgment in the Underlying Action. (Doc. 46 at 10.) It asserts that, 23 because TOC prevailed against Tapestry on only its claims for breach of contract and 24 breach of the implied covenant of good faith and fair dealing, Section 5.2 “unambiguously 25 bars coverage.” (Id. at 12.) It moves for summary judgment on Tapestry’s claims and Count 26 II of its own counterclaim,3 which seeks a declaratory judgment that no coverage exists 27 3 As described below, per the parties’ request, this case is being conducted in two phases. 28 Phase Two, which has not yet commenced, addresses the Tapestry’s bad faith claim. (Doc. 20 at 7.) 1 based on the contract liability exclusion. (Doc. 10 at 17.) Tapestry does not dispute this 2 substantive position, but instead argues that Liberty’s general reservation of rights was 3 insufficient to invoke the exclusion under Arizona law. As an initial matter, the Court 4 agrees with Liberty that, on its face, Section 5.2 bars coverage for the judgment in the 5 Underlying Action. But, ultimately, there is a genuine dispute as to whether Tapestry’s 6 reservation of rights properly invoked the contract liability exclusion under Arizona law, 7 thereby precluding summary judgment. 8 a. Policy Terms 9 The interpretation of an insurance contract is a question of law.4 See Wilshire Ins. 10 Co. v. S.A., 224 Ariz. 97, 99 ¶ 6 (Ct. App. 2010). An insurance policy “must be read as a 11 whole, so as to give a reasonable and harmonious effect to all of its provisions.” 12 Charbonneau v. Blue Cross, 130 Ariz. 160, 163 (Ct. App. 1981) (citation omitted). Courts 13 interpret insurance policies according to their plain and ordinary meaning. Desert 14 Mountain Props. Ltd. P’ship v. Liberty Mut. Fire Ins. Co., 225 Ariz. 194, 200 ¶ 14 (Ct. 15 App. 2010). The insured has the burden of establishing coverage under an insuring clause. 16 Keggi v. Northbrook Prop. & Cas. Ins. Co., 199 Ariz. 43, 46 ¶ 13 (Ct. App. 2000). The 17 insurer has the burden of proving the applicability of any exclusion. Id. 18 Section 5.2 of the parties’ Policy states, “[t]he Insurer shall not be liable to pay any 19 Loss in connection with any Claim for any actual or alleged liability of any Insured under 20 any contract or agreement, express or implied, written or oral, except for employment 21 related obligations which would have attached absent such contract or agreement.”5 (Id. at 22 10–11; Doc. 4 at 14 ¶ 5.2.) A “Loss” includes, in part, “sums which the Insureds are legally 23 obligated to pay solely as a result of any Claim insured by this Policy, including damages, 24 judgments, settlement amounts, legal fees and costs awarded pursuant to judgments.” (Id. 25 4 The parties agree that Arizona law applies to this case because Arizona has the most 26 significant relationship to the parties and the transaction. Cardon v. Cotton Lane Holdings, Inc., 841 P.2d 198, 202 (Ariz. 1992). 27 5 Paragraph 5.2 also states that “these exclusions shall not apply to the Insurer’s duty to 28 defend and to pay Defense Costs.” (Id.) That provision, and Liberty’s defense of Tapestry, is not at issue in this case. 1 at 20 ¶ 23.14.) A “Claim” is defined as a “written demand for monetary or non-monetary 2 relief against an Insured” or “the commencement of a civil or criminal judicial proceeding 3 or arbitration against an Insured.” (Id. at 18 ¶ 23.3.) 4 The court in the Underlying Action entered judgment “in favor of TOC and against 5 [Tapestry] . . . on TOC’s second and fourth claims for relief.” (Doc. 46-3 at 60 ¶ 7.) TOC’s 6 second claim was for breach of contract against Tapestry. Its second amended complaint 7 stated that Tapestry materially breached the “Declaration of Condominium and of 8 Covenants, Conditions and Restrictions for Willowalk, a Condominium”6 (the “CC&Rs”) 9 and that TOC was damaged as a result. (Doc. 46-2 at 75–76 ¶¶ 103–08.) The fourth claim 10 stated that Tapestry breached the implied covenant of good faith and fair dealing because 11 it owed TOC “a duty to deal fairly, and in good faith pursuant to the CC&Rs, and breached 12 that duty by the conduct alleged herein.” (Id. at 77–78 ¶¶ 113–16.) Accordingly, Liberty 13 argues, the contract liability exclusion bars coverage “for any Loss (i.e., judgment or 14 settlements) resulting from any Claim (i.e., the Underlying Action) for any liability of an 15 Insured (i.e., [Tapestry]) under any contract whether express (i.e., the CC&Rs) or implied 16 (i.e., the implied covenant of good faith and fair dealing.” (Doc. 46 at 12.) 17 The Court agrees with Liberty that, on its face, the contract liability exclusion 18 precludes coverage for the judgment in the Underlying Action. TOC identified the CC&Rs 19 as the binding contract that Tapestry breached. Arizona law also recognizes that “CC & Rs 20 constitute a contract between property owners as a whole and individual lot owners.” 21 Cypress on Sunland Homeowners Ass’n v. Orlandini, 227 Ariz. 288, 297 ¶ 31 (Ct. App. 22 2011). See also Ahwatukee Custom Ests. Mgmt. Ass’n, Inc. v. Turner, 196 Ariz. 631, 634 23 ¶ 5 (Ct. App. 2000) (“CC & Rs constitute a contract between the subdivision’s property 24 owners as a whole and individual lot owners.”). 25 Further, as to the breach of the duty of good faith and fair dealing claim, TOC 26 asserted that Tapestry “owed Plaintiff a duty to deal fairly, and in good faith pursuant to 27 28 6 Tapestry “was originally known as Willowalk Condominium Association.” (Doc. 46-2 at 59.) 1 the CC&Rs.” (Doc. 46-2 at 77 ¶ 114) (emphasis added). Under Arizona law, the covenant 2 of good faith and fair dealing is implied “in every contract.” Wells Fargo Bank v. Arizona 3 Laborers, Teamsters & Cement Masons Loc. No. 395 Pension Tr. Fund, 201 Ariz. 474, 4 490 ¶ 59 (2002), as corrected (Apr. 9, 2002). A cause of action for breach of the implied 5 covenant of good faith and fair dealing generally “arises as a matter of contract law, not 6 tort law.” Ramos v. Wells Fargo Home Mortg., No. CV-17-00316-PHX-GMS, 2017 WL 7 3978701, at *2 (D. Ariz. Sept. 11, 2017). A plaintiff can seek relief as a matter of tort law 8 if there is a “special relationship between the two parties.” Id. See also Burkons v. Ticor 9 Title Ins. Co. of California, 168 Ariz. 345, 355 (1991) (“[T]he remedy for breach of this 10 implied covenant is ordinarily by action on the contract, but in certain circumstances, the 11 breach of the implied covenant may provide the basis for imposing tort damages.”). Seeing 12 no such assertion from TOC in the Underlying Action, or from Tapestry in the present case, 13 the Court understands both claims to have arisen “under any contract or agreement, express 14 or implied.” (Doc. 4 at 14 ¶ 5.2.) Therefore, on its face, the Court agrees with Liberty that 15 the contract liability exclusion is applicable. 16 b. Reservation of Rights 17 As Tapestry argues, though, this does not end the inquiry. Tapestry states that the 18 “core coverage issue in this case is whether the contract liability exclusion applies.” (Doc. 19 53 at 3.) It asserts that this issue is “more complicated” than Liberty’s other arguments 20 because it requires “close analysis of Arizona coverage law.” (Id.) Tapestry asserts that the 21 primary question is “whether Liberty’s general reservation of rights, which did not mention 22 the contract liability exclusion, was sufficient to preserve the exclusion as a basis for 23 denial.” (Id.) 24 As noted, Liberty’s initial March 6, 2014 letter stated that “there appears to be no 25 coverage available under the Policy for this matter.” (Doc. 46-2 at 108.) It stated that the 26 Underlying Action did not constitute a “Claim” made during the policy period, that the 27 construction defect exclusion precluded relief (Section 4.11), and that it “reserve[ed] all 28 rights” with respect to Tapestry’s potential misrepresentation in its insurance application. 1 (Id.) It did not specifically invoke the contract liability exclusion. That letter also stated 2 that Liberty “expressly reserves all rights and defenses under the Policy. . .” (Id. at 109.) 3 Tapestry states that, as a result, it “had no reason to suspect Liberty was contemplating 4 denial” based on the contract liability exclusion. (Doc. 53 at 8.) 5 In Arizona, a liability insurer owes express duties to defend and, if coverage and 6 liability exist, to indemnify the insured. See Waddell v. Titan Ins. Co., 207 Ariz. 529, ¶ 14 7 (Ct. App. 2004). Arizona law provides three options to an insurer that receives notice from 8 an insured about a potential claim. The insurer can “1) unconditionally accept coverage 9 and defend the claim; 2) reject the claim and refuse to defend; or 3) defend the claim under 10 a reservation of rights.” Great Am. Assurance Co. v. PCR Venture of Phoenix LLC, 161 F. 11 Supp. 3d 778, 782 (D. Ariz. 2015). Under Arizona law, when an insurer selects the third 12 option, it “must defend its insured under a properly communicated reservation of rights or 13 it will lose its right to later litigate coverage.” United Servs. Auto. Ass’n v. Morris, 154 14 Ariz. 113, 116 (1987). See also Farmers Ins. Co. of Arizona v. Vagnozzi, 138 Ariz. 443, 15 448 (1983) (“If the insurer defends the insured pursuant to a contractual duty to defend, the 16 insurer must do so under a properly communicated reservation of rights to later litigate 17 coverage.”).7 The reservation of rights notice must “fairly inform[ ] the insured of the 18 insurer’s position.” Equity Gen. Ins. Co. v. C & A Realty Co., 148 Ariz. 515, 518 (Ct. App. 19 1985). A reservation of rights must also be “timely,” as an “insured is entitled to know 20 early in the litigation process whether the insurer intends to honor [its] duty [to defend] in 21 order that the insured may take steps to defend [itself].” Penn Amer. Ins. Co. v. Sanchez, 22 220 Ariz. 7, 12 ¶ 26 (Ct. App. 2008) (emphasis in original) (citation omitted). 23 The parties dispute whether Liberty’s statement that it “expressly reserves all rights 24 and defenses under the Policy. . . ,” in itself, “properly communicated” its reservation of 25 right to invoke the contract liability exclusion. (Doc. 46-2 at 109.) For its part, Tapestry 26 7 As is not disputed in this case, an insurer generally may “reserve its rights on coverage 27 while providing a defense in the underlying action, without thereby waiving its right to 28 raise the question of liability under the terms of the policy at a later date.” Damron v. Sledge, 105 Ariz. 151, 155 (1969) (internal quotations and citation omitted). 1 asserts that there is a “stark contrast” between reservations stating specific grounds and 2 general reservations. (Doc. 53 at 8.) It does not cite any Arizona case law in support of this 3 position. The Court acknowledges that other states disapprove of general reservations of 4 rights. See, e.g., Specialty Surplus Ins. Co. v. Second Chance, Inc., No. C03-0927C, 2006 5 WL 2459092, at *8 (W.D. Wash. Aug. 22, 2006) (“[G]enerally-worded reservations of 6 rights are disapproved . . . Such reservations of rights are faulted for not stating the specific 7 policy defenses upon which the insurer intends to rely.”) (Washington law); Harleysville 8 Grp. Ins. v. Heritage Communities, Inc., 803 S.E.2d 288, 299 (S.C. 2017) (distinguishing 9 between a reservation that “state[s] the specific grounds for contesting coverage” and a 10 “non-specific—‘we will let you know later’—purported reservation of rights.”) (South 11 Carolina law). Liberty counters that this “is not the rule in Arizona.” (Doc. 64 at 4.) As 12 Liberty characterizes the dispute, its “continued and unwavering representation to 13 [Tapestry] that it was reserving all of its rights under the Policy. . . somehow was 14 insufficient to put [Tapestry] on notice that Liberty was doing exactly as it said it was 15 doing—reserving all of its rights under the Policy.” (Id. at 3.) Liberty does not cite case 16 law in support of this specific position. 17 The Court finds that a genuine dispute precludes summary judgment in Liberty’s 18 favor. The Court notes, for example, that in Medical Protective Co. v. Pang, 606 F. Supp. 19 2d 1049 (D. Ariz. 2008), this court concluded that an insurer was not estopped from seeking 20 rescission of the policy based on fraud “just because it did not ‘preserve’ fraud in its initial 21 reservation of rights letter.” Id. at 1060. This conclusion would seem to support Liberty’s 22 argument. That said, the court also noted that the insurer “did not even learn of the alleged 23 fraud until well after it defended” the insured. Id. The same is not true in this case. Based 24 on TOC’s claims in the Underlying Action, which included claims for breach of contract 25 and breach of the implied covenant of good faith and fair dealing, Liberty either knew or 26 should have known that it could have reserved the right to invoke the contract liability 27 exclusion. Further, in Mutual Insurance Co. of Arizona v. Bodnar, 164 Ariz. 407 (Ct. App. 28 1990), the Arizona Court of Appeals noted that if an insurer believes that a “valid 1 exclusion” would relieve it of a duty to provide coverage, the insurer must “communicate 2 its reservation of rights to the insured to inform the insured of its position as to coverage.” 3 Id. at 412. Based on this language, a reasonable juror may conclude that, by its omission, 4 Liberty waived its ability to argue that the contract liability exclusion was valid. On the 5 other hand, in Equity General Insurance Co., 148 Ariz. at 517, the Arizona Court of 6 Appeals found that a broad reservation of rights8 letter “in a straightforward manner, 7 informed a reader of average intelligence that while the insurer was providing a defense, it 8 was doing so without waiving any rights to contest liability under the policy.” Id. at 518. 9 This would appear to support Liberty’s position that a reasonable juror could conclude that 10 it clearly and properly notified of Tapestry of its ability to invoke the contract liability 11 exclusion (as well as any other Policy provision). 12 Ultimately, “the intent of the parties—insurer and insured—must prevail.” United 13 Servs. Auto. Ass’n v. Morris, 154 Ariz. 113, 117 (1987) (emphasis in original). Tapestry 14 states that, absent a further update, it “reasonably assumed the only grounds for denial were 15 those stated in the March 2014 denial letter.” (Doc. 53 at 8.) Liberty’s position is that 16 Arizona law requires it to “fairly communicate” its reservation of rights, and it “did just 17 that here.” (Doc. 64 at 2.) A genuine dispute of material fact exists as to whether Liberty 18 “properly communicated” its reservation of rights under Arizona law. This precludes the 19 20 8 The reservation of rights letter stated, in relevant part: 21 Certain allegations of the complaint assert a right on the part of the plaintiff to recovery of damages known as punitive or exemplary 22 damages. It is the position of the insurer that such damages are not an 23 insured liability . . . Therefore, while Equity General Insurance Company intends to 24 protect your interest, they do so with the following reservations and qualifications: 25 1. The defense or investigation of this claim shall be without waiver 26 of or prejudice to the right of the insurer to contend that any . . . loss or damage associated with the above captioned claim is not within the 27 terms, conditions, and provisions of the insurance coverage afforded 28 by the subject insurance certificate. Id. at 517. 1 entry of summary judgment in Liberty’s favor on Tapestry’s claims and on Count II of its 2 counterclaim.9 3 2. Untruthful Answer to Question 6 4 Liberty also argues that Tapestry’s “untruthful answer” to question 6 of its insurance 5 application bars coverage in this case. Liberty asserts that it may deny coverage or rescind 6 the entire Policy as a result. (Doc. 46 at 13.) It seeks summary judgment on Tapestry’s 7 claims and Counts I and VIII of its counterclaim. (Doc. 46 at 18.) Tapestry responds, in 8 addition to other arguments, that because Liberty did not assert this alleged 9 misrepresentation in its ultimate denial letter, it is precluded from doing so now. 10 Question 6 to Tapestry’s application for insurance, dated October 26, 2013, asked, 11 “Does anyone for whom insurance is sought have any knowledge or information of any 12 act, error, omission, fact, or circumstance which may give rise to a Claim which may fall 13 within the scope of the proposed insurance?” (Doc. 46-1 at 30.) Tapestry answered, “No.” 14 (Id.) Liberty points to various facts indicating that Tapestry was, in fact, aware of disputes 15 with TOC and TOC’s recent threat to sue. (Doc. 46 at 13.) It points, for example, to TOC’s 16 November 26, 2012 email to members of Tapestry’s Board of Directors regarding a dispute 17 over parking spaces and alleged construction defects; the January 31, 2013 email from 18 Tapestry to TOC stating that the Board would give TOC 15 parking spaces and waive any 19 fees and penalties in exchange for TOC’s outstanding HOA fees; the March 4, 2013 letter 20 stating that litigation “has been threatened [against Tapestry] informally on numerous 21 occasions by the owner of the commercial units . . . relating to approximately $130[,]000 22 in dues owed the HOA and designated parking spaces”; the May 14, 2013 letter from 23 TOC’s counsel stating that he had been hired “regarding moving forward with litigation”; 24 and Tapestry’s counsel’s May 17, 2013 proposed Settlement Agreement and Release for 25 TOC’s consideration. (Doc. 46-1 at 15, 16, 19, 21, 23–28.) The Court agrees with Liberty 26 9 In light of the Court’s ruling, the Court need not reach Tapestry’s additional arguments, 27 including that it need not to prove prejudice due to Liberty’s failure to reserve the 28 exclusion, but that even if required, Tapestry could demonstrate prejudice. (Doc. 53 at 11– 17.) 1 that, based on these facts, Tapestry had, or should have had, knowledge of information that 2 “may” give rise to a claim falling within the scope of the proposed insurance. (Id. at 30.) 3 a. Voiding Insurance Policy 4 The issue, then, is one of remedy. Liberty first argues that the entire Policy is void. 5 (Doc. 14 at 23.) It points to Section 6 of the Policy, which states: 6 The Insureds represent that the statements and representations 7 contained in the Application are true and shall be deemed material to the acceptance of the risk or the hazard assumed by 8 the Insurer under this Policy. This Policy is issued in reliance 9 upon the truth of such statements and representations. 10 The Insureds agree that if the Application contains any material statements or representations that are untrue, this Policy shall 11 be void as to the Insured Organization and any Insured Person 12 who knew the facts that were not truthfully disclosed, provided that such knowledge shall not be imputed to any other Insured 13 Person. 14 (Doc. 4 at 14 ¶¶ 6.1, 6.2.) The Court agrees that this “clear and explicit language” could, 15 theoretically, have permitted Liberty to void the Policy with Tapestry. Fed. Ins. Co. v. 16 Homestore, Inc., 144 F. App’x 641, 647 (9th Cir. 2005). 17 Liberty also invokes A.R.S. § 20-1109 as a separate basis for voiding the Policy, 18 which permits an insurer to prevent recovery if “[m]isrepresentations, omissions, 19 concealment of facts and incorrect statements” are “[f]raudulent,” “[m]aterial either to the 20 acceptance of the risk, or to the hazard assumed by the insurer,” and “[t]he insurer in good 21 faith would either not have issued the policy, or would not have issued a policy in as large 22 an amount, or would not have provided coverage with respect to the hazard resulting in the 23 loss, if the true facts had been made known to the insurer as required either by the 24 application for the policy or otherwise.” A.R.S. § 20-1109. The parties dispute the 25 application of this provision, including whether the fraud prong requires an intent to 26 deceive, and whether the Court may rely on Liberty’s attached declaration of Todd Weber, 27 its Underwriting Manager and Associate Vice President. (Doc. 46 at 16; Doc. 46-3; Doc. 28 1 53 at 22.) 2 The Court finds a genuine dispute as to whether Liberty waived its ability to void 3 the Policy. Under Arizona law, one “seeking rescission of a contract must act promptly 4 under the existing circumstances in stating and intent to rescind.”10 Dewey v. Arnold, 159 5 Ariz. 65, 71 (Ct. App. 1988). The opportunity to rescind upon fraud or misrepresentation 6 “is lost if the injured party after having acquired knowledge, actual or constructive, of the 7 fraud, manifests to the other party an intention to affirm or exercises domination of 8 things[.]” Id. (citation omitted). These principles apply to insurers. See CenTrust Mortg. 9 Corp. v. PMI Mortg. Ins. Co., 166 Ariz. 50, 55 (Ct. App. 1990) 10 Here, as Tapestry points out, Liberty was aware of the allegedly false answer as 11 early as its March 2014 initial denial letter, which stated: 12 [T]he Insured completed and submitted an Application dated 13 October 15, 2013 representing to Liberty that all information submitted was materially true and accurate. At the time the 14 Application was executed, it appears that the Association was 15 aware of the November 26, 2012 Demand as well as circumstances which could reasonably be expected to give rise 16 to a Claim under the Policy. Therefore, Liberty reserves all 17 rights with regard to the warranties set forth in connection with the underwriting of the Policy and the Application. 18 19 (Doc. 46-2 at 109.) Yet, as Tapestry points out, for years to come, Liberty “engaged in 20 conduct wholly incompatible with unwinding the policy at this late date.” (Doc. 53 at 21.) 21 For example, Liberty never returned the policy premium, defended Tapestry in the 22 Underlying Action and subsequent appeal, and renewed the Policy three times, all 23 following March 2014.11 (Id.) 24 10 As Tapestry notes, “[r]escinding and voiding a policy are essentially the same thing.” 25 (Doc. 52 at 21.) “‘[V]oidable” agreement would be one subject to rescission or ratification 26 whereas a ‘void’ agreement would be incapable of ratification or disaffirmance.” Hodges v. Hodges, 118 Ariz. 572, 574 (Ct. App. 1978). 27 11 Tapestry also argues that Liberty waived this argument by failing to raise it in prior 28 lawsuits involving the same parties. (Id. at 21.) Based on the Court’s conclusion that Liberty otherwise may have waived voiding the Policy through its conduct, the Court need 1 “What constitutes a reasonable time in which to communicate an intention to rescind 2 is a question of fact unless the facts are such that only one inference could be derived 3 therefrom in which case it would become a question of law.” Dewey, 159 Ariz. at 71 4 (quotations omitted). The Court will leave this determination to the trier of fact. See Verex 5 Assur., Inc. v. John Hanson Sav. & Loan, Inc., 816 F.2d 1296, 1302 (9th Cir. 1987) (“Once 6 an insurance company acquires knowledge of facts constituting grounds for rescission, it 7 must promptly rescind the policy or the right to rescind may be waived. The essence of 8 waiver is knowledge.”) (applying Oregon law) (internal citations omitted); Princess Plaza 9 Partners v. State, 187 Ariz. 214, 222 (Ct. App. 1995) (“Rescission is governed by equitable 10 principles. Persons seeking rescission must act promptly in stating an intent to rescind.”) 11 (citation omitted). Liberty’s request to void the Policy is denied. 12 b. Coverage Precluded 13 Liberty also argues, separately, that it may deny coverage based on Tapestry’s 14 untruthful response to question 6 of the insurance application. (Doc. 46 at 17.) The 15 application stated, in bold and capital letters following question 6, “[i]t is understood and 16 agreed that if anyone for whom this insurance is sought has any knowledge of any such 17 act, error, omission, fact, or circumstance, any claim emanating therefrom shall be 18 excluded from coverage under the proposed insurance.” (Doc. 46-1 at 30) (formatting 19 omitted). Liberty asserts, without citing to an Arizona authority, that courts “routinely” 20 hold that when application statements like these are violated, the insurer can “rescind the 21 policy or fully deny coverage.” (Doc. 46 at 17.) 22 Nonetheless, Liberty did not invoke this provision—or Tapestry’s allegedly 23 untruthful answer generally—in its ultimate denial notice. (Doc. 46-3 at 64–67.) “No 24 insurer shall deny a claim on the grounds of a specific policy provision, condition, or 25 exclusion unless reference to such provision, condition or exclusion is included in the 26 denial.” Ariz. Admin. Code R20-6-801(G)(1)(a). See also Kaman Aerospace v. Ariz. Bd. 27 of Regents, 217 Ariz. 148, ¶ 29 (Ct. App. 2007) (“The same principles of construction that 28 not reach these arguments. 1 apply to statutes also apply to administrative rules and regulations, . . . and a public entity’s 2 regulations, if consistent with its statutory scheme, are entitled to be given the force and 3 effect of law.”) (citations omitted). Liberty does not address this argument in its reply. 4 (Doc. 64.) Seeing no argument to the contrary, the Court agrees with Tapestry that Liberty 5 may not properly invoke this provision of the insurance application to preclude coverage 6 at this time.12 7 The Court notes that Tapestry also argues in its response that Liberty’s efforts to 8 void the Policy and deny coverage based on its application fail because the application is 9 inadmissible pursuant to A.R.S. § 20-1108(C). That provision states: 10 As to kinds of insurance other than life insurance, an 11 application for insurance signed by or on behalf of the insured is not admissible in evidence in any action between the insured 12 and the insurer arising out of the policy so applied for, if the 13 insurer has failed, at the expiration of thirty days after receipt by the insurer of written demand therefor by or on behalf of the 14 insured, to furnish to the insured a copy of the application 15 reproduced by any legible means. 16 A.R.S. § 20-1108(C). Tapestry references a July 18, 2014 email from its counsel, 17 Christopher LaVoy, requesting from TOC a copy of all “extrinsic evidence” supporting 18 Liberty’s coverage position, including the “October 15, 2013 policy application.” (Doc. 19 47-3 at 2.) Tapestry states that it did not receive a copy within 30 days of the request. (Doc. 20 53.) 21 Even assuming that A.R.S. § 20-1108(C) applies here, it applies to admissibility of 22 the insurance application at trial. To “survive summary judgment, a party need not 23 necessarily produce evidence in a form that would be admissible at trial, as long as the 24 party satisfies the requirements of Federal Rules of Civil Procedure 56.” Block v. City of 25 Los Angeles, 253 F.3d 410, 418–19 (9th Cir.2001); see also Fed. Deposit Ins. Corp. v. N.H. 26 Ins. Co., 953 F.2d 478, 485 (9th Cir. 1991) (“[T]he nonmoving party need not produce 27 28 12 This is in contrast with the contract liability exclusion, for example, which is referenced in the December 2017 denial letter. (Doc. 46-3 at 65.) 1 evidence in a form that would be admissible at trial in order to avoid summary judgment.”) 2 (quotation marks and citation omitted). While the parties may dispute the admissibility of 3 the insurance application at trial, Liberty’s motion fails for the other reasons described 4 herein.13 5 Liberty’s motion for summary judgment on Tapestry’s claims, as well as on Counts 6 I and VIII of its own counterclaim, is denied. 7 3. Construction Defects 8 Liberty also moves for summary judgment on Tapestry’s claims and Count III of its 9 counterclaim based on the construction defect exclusion. (Doc. 46 at 18.) Section 4.11 of 10 the Policy states that it “does not apply to any Claim made against any Insured . . . based 11 upon, arising from, or in any way related to any Construction Defect.” (Doc. 4 at 12–14 12 ¶ 4.11.) A “Construction Defect” means “any actual or alleged defective, faulty or delayed 13 construction or other matter recognized as a construction defect under appliable common 14 or statutory law. . .” (Id. at 21 ¶ 23.23.) Count III of Liberty’s counterclaim requests a 15 declaratory judgment “that there is no coverage for the Judgment entered in the Underlying 16 Action by virtue of the Construction Defect Exclusion and that, as a result, Liberty has no 17 obligation to pay the Association for the Judgment entered in the Underlying Action.” 18 (Doc. 10 at 17 ¶ 53.) 19 Liberty argues that during closing argument in the Underlying Action, TOC’s 20 counsel presented “six different things to look for” as proof of its breach of contract and 21 implied covenant of good faith and fair dealing claims. (Doc. 46-3 at 52.) Liberty 22 references three of the six: “it took the better part of a decade to fix a minor crack, a 23 cosmetic crack in a concrete wall”; Tapestry had not “offered any evidence that the 24 firestopping in Building C is done, a very serious building and safety issue”; and Tapestry 25 had a “poorly engineered parking garage, rendering the cooling load impossible to meet 26 with the existing equipment.” (Id. at 52–53.) It asserts that, under the terms of the Policy 27 13 Liberty also notes that Tapestry’s insurance broker was in possession of the application, 28 and therefore, Tapestry effectively was, as well. (Doc. 57 at 16.) The Court need not address this factual dispute. 1 and under Arizona law, at least these three items qualified as “Construction Defects.” (Doc. 2 46 at 19); see also A.R.S. § 12-1361(4)(a) (defining “construction defects” to mean, among 3 other things, “a material deficiency in the design, construction, manufacture, repair, 4 alteration, remodeling or landscaping of a dwelling that is the result of . . . [a] violation of 5 construction codes applicable to the construction of the dwelling.”). Therefore, Liberty 6 argues that the judgment in the Underlying Action was “based upon, arising from, or in 7 any way related to any Construction Defect,” and therefore is precluded from coverage. 8 (Doc. 4 at 12–14 ¶ 4.11.) 9 The Court is not convinced by this argument. As Tapestry argues, even accepting 10 that three of the six items involved construction defects as defined in the Policy, it is 11 “impossible to know which theory the jury had in mind because a general verdict form was 12 used.” (Doc. 53 at 23.) Indeed, a review of the jury verdict form indicates no justifications 13 for the jury’s findings. (Doc. 47-1 at 6–8.) Accordingly, Tapestry cannot say with certainty 14 that the Underlying Judgment was based upon, arising from, or in any way related to any 15 construction defect. See State Farm Fire & Cas. Co. v. Nycum, 943 F.2d 1100, 1106 (9th 16 Cir. 1991) (“[T]he problem with a general verdict form is that a reviewing court cannot 17 know what the jury found. All we can say on review is that the jury, having been instructed 18 on different theories, might have found either negligence, or intentional harm, or both. It 19 was the responsibility of the parties to argue before the district court which of these theories 20 has support in the record.”). Tapestry may plausibly convince a jury in this matter that the 21 underlying judgment was based on the parties’ dispute over parking spaces, for example— 22 which no party argues arises from a construction defect. For this reason, dispute of a 23 material fact precludes the entry of summary judgment in Liberty’s favor on Tapestry’s 24 claims and Count III of its counterclaim. 25 4. A Covered “Loss” 26 As an alternative argument, Liberty posits that “[e]ven if the Court were to conclude 27 that none of the foregoing coverage defenses apply,” Tapestry cannot demonstrate that the 28 judgment in the Underlying Action constitutes a “Loss” under the Policy. (Doc. 46 at 19– 1 20.) A “Loss” is defined as “sums which the Insureds are legally obligated to pay solely as 2 a result of any Claim insured by this Policy, including damages, judgment, punitive or 3 exemplary damages, and the multiple portion of any multiplied damage award . . .” (Doc. 4 4 at 20 ¶ 23.14.) Liberty argues that although Tapestry “purports to seek coverage under 5 the Policy for the Judgment,” it never actually paid the judgment because it “later settled 6 the Underlying Action (and other matters) with TOC.” (Doc. 46 at 20.) Liberty seeks 7 summary judgment on Tapestry’s claims as well as on Count V of its counterclaim. (Id.) 8 Count V seeks a declaratory judgment that “there is no coverage for the Judgment entered 9 in the Underlying Action because Plaintiff has no legal obligation to pay the Judgment by 10 virtue of it having entered into the Underlying Settlement Agreement, which, upon 11 information and belief, has or will result in the Judgment being fully satisfied.” (Doc. 10 12 at 18 ¶ 59.) 13 Specifically, Liberty states that as part of the settlement agreement with TOC, 14 Tapestry “paid $3.9 million to purchase TOC’s commercial units and to obtain a release of 15 the Underlying Action and a release of a number of other matters.” (Id.) Because the 16 commercial units at issue were not appraised or valued at the time of the settlement, it 17 argues that Tapestry “cannot demonstrate what amount of the underlying settlement was 18 allocable to the purchase of the units”—and therefore cannot demonstrate that it paid a 19 “loss.” (Id.) 20 This argument is not convincing. First, although Liberty argues that Tapestry cannot 21 allocate the underlying judgment, Tapestry’s president testified in his deposition that 22 “everything above the judgment amount was attributable to the purchase of the commercial 23 units.” (Doc. 53-1 at 6.) Second, as Tapestry notes, the Policy is a “liability policy, not an 24 indemnity policy.” (Doc. 53 at 4.) See also Doc. 4 at 12 ¶ 1 (“The Insurer shall pay on 25 behalf of the Insureds all Loss which they shall become legally obligated to pay as a result 26 of a Claim. . .”); 7A Couch on Ins. § 103:5 (“An insurance policy is one of liability, rather 27 than indemnity, where it states that the insurer ‘will pay on behalf of the insured all sums 28 which the insured becomes legally obligated to pay as damages’ or any language similar 1 thereto.”). The “major substantive distinction between a liability policy and an indemnity 2 contract is that payment of a claim by the insured is a condition precedent to the insured’s 3 right to recover under the indemnity contract but not under the liability contract.” Id. at 4 § 103:4. See also INA Ins. Co. of N. Am. v. Valley Forge Ins. Co., 150 Ariz. 248, 253 (Ct. 5 App. 1986) (a liability provision “applies once liability for a cause of action is established; 6 the indemnitee is not required to make actual payment.”). Accordingly, Tapestry argues, 7 the judgment qualified as a “Loss”; Liberty breached the Policy when it refused to 8 indemnify Tapestry in December 2017, once the trial court’s judgment was entered. (Doc. 9 53 at 5.) The Court finds that these two arguments present a genuine dispute as to whether 10 the Underlying Action constituted a “Loss” under the Policy, thereby precluding summary 11 judgment. 12 The Court is mindful of Liberty’s argument in its reply brief that the Underlying 13 Action judgment was not final until it became non-appealable. (Doc. 64 at 10–11.) The 14 Arizona cases it cites, though, did not arise in precisely this context. In Taylor v. State 15 Farm Mutual Automobile Insurance Co., the Arizona Supreme Court “h[e]ld that a third- 16 party bad faith failure-to-settle claim accrues at the time the underlying action becomes 17 final and non-appealable.” 185 Ariz. 174, 179 (1996). The present case is not a third-party 18 bad faith failure-to-settle case. Liberty also cited Smith v. Astrue, No. CV-11-2524-PHX- 19 DGC, 2013 WL 758024 (D. Ariz. Feb. 27, 2013), for the proposition that “[f]inal judgment 20 ‘means a judgment that is final and not appealable.’” Id. at *1 (citing 28 U.S.C. 21 § 2412(d)(1)(G)). That matter involved a motion for attorney’s fees pursuant to a Social 22 Security appeal, and directly quoted the Equal Access to Justice Act, 28 U.S.C. § 2412, 23 which is not relevant here. The Court need not resolve this particular dispute at this time, 24 though. Even if the underlying judgment became final when it was no longer appealable— 25 that is, at the time of TOC’s and Tapestry’s settlement—Tapestry has presented evidence 26 (including testimony from its president) that the settlement was comprised of the full 27 amount of the judgment plus the value of the relevant commercial units. (Doc. 53-1 at 6.) 28 Tapestry’s request for summary judgment on this basis is denied. 1 5. Bad Faith Claim 2 Liberty also argues that, in light of its foregoing arguments, Tapestry “cannot point 3 to any evidence demonstrating that Liberty either knew its conduct was unreasonable or 4 acted with reckless disregard.” (Doc. 46 at 21.) Therefore, Liberty argues, it is entitled to 5 summary judgment on Tapestry’s bad faith claim. As previously described, the Court 6 concludes that Liberty is not entitled to summary judgment on Tapestry’s claims at this 7 time. Further, as Tapestry notes—and as Liberty declined to reference—the Scheduling 8 Order in this case dictates that the case is being conducted in two phases.14 Discovery 9 during Phase One, the present phase, was “focused on issues related to coverage.” (Doc. 10 20 at 1–2.) Within ten days of the Court’s ruling on the parties’ dispositive motions, the 11 parties must “jointly notify the Court that the parties are ready for scheduling of Phase Two 12 Discovery,” which the parties identified as “coverage relating to bad-faith issues.” (Id. at 13 7; Doc. 17 at 6.) Given that a schedule has not even been set for conducting bad-faith- 14 related discovery, the Court has no difficulty in concluding that Liberty’s request for 15 summary judgment on Tapestry’s bad faith claim is premature. 16 6. Request for Additional Briefing 17 In the conclusion to its motion, Liberty requests that the Court “set a hearing and/or 18 receive additional briefing” to determine the amount of attorney’s fees to which it is 19 entitled pursuant to A.R.S. § 12-241.01 and the amount it entitled to recoup from Tapestry 20 pursuant to Counts I and VIII of its counterclaim. Based on the Court’s foregoing rulings, 21 this request is denied. 22 B. Tapestry’s Motion for Partial Summary Judgment (Docs. 47, 48) 23 In its own motion for partial summary judgment,15 Tapestry moves the Court to 24 14 The Scheduling Order was entered by Judge Humetewa before the case was transferred 25 to the undersigned Judge. 26 15 The Court notes that, aside from its title and the one-sentence conclusion, Tapestry’s 21- page memorandum in support of its motion never references the term “summary 27 judgment,” including its legal standard. (Doc. 48.) It requests that the relevant counts of 28 Liberty’s Counterclaim be “dismissed with prejudice.” (Doc. 47 at 1.) The Court interprets each argument as a partial motion for summary judgment, and urges Liberty to use better 1 enter summary judgment on its claim for breach of contract (Count I) and on Counts I–V, 2 VII, and VIII of Liberty’s counterclaim. (Doc. 47 at 2–4.) The parties’ respective 3 arguments track, in significant part, those in Liberty’s motion. Following the filing of 4 Tapestry’s motion, Liberty voluntarily dismissed Count VII of its counterclaim (as well as 5 Paragraph 44 of the same) without prejudice. (Doc. 60.) Accordingly, the Court addresses 6 Tapestry’s arguments regarding its own breach of contract claim, and Counts I–V and VIII 7 of Liberty’s counterclaim, in turn. 8 1. Alleged Application Misrepresentation 9 Tapestry first argues that Liberty cannot deny coverage or rescind the Policy based 10 on Tapestry’s alleged misrepresentation in the 2013 insurance application. (Doc. 48 at 6.) 11 Though it does not clearly state, the Court understands this to be a motion for summary 12 judgment on Counts I and VIII of Tapestry’s counterclaim. Tapestry does not argue that its 13 answer to question 6 was accurate. Rather, it argues that Liberty waived the ability to void 14 the Policy, which is effective and enforceable, that the argument is time-barred, that the 15 application is inadmissible, and that Liberty engaged in conduct incompatible with voiding 16 or rescinding the Policy.16 (Doc. 48 at 7–9.) 17 As the Court previously described, Tapestry’s signatory to the insurance application 18 either knew, or should have known, “of any act, error, omission, fact, or circumstance 19 which may give rise to a Claim which may fall within the scope of the proposed insurance.” 20 (Doc. 46-1 at 30.) Therefore, and also for the same reasons as discussed above, the Court 21 finds that genuine disputes of material fact preclude summary judgment in Tapestry’s favor 22 on Counts I and VIII of Tapestry’s counterclaim based on its insurance application. As that 23 part of Liberty’s motion is denied, so too it is with respect to Tapestry. 24 25 26 precision in the future. 16 Tapestry also argues that Liberty “cannot collaterally” attack a prior court judgment 27 involving the parties which contained an “implicit determination” that the Policy was 28 effective and enforceable, in reference to Tapestry v. Liberty, Case No. 2:18-cv-04857- PHX-JJT (D. Ariz.). The Court need not reach this argument. 1 2. Contract Liability Exclusion 2 Tapestry also argues that the contract liability exclusion, found in Section 5.2 of the 3 Policy, does not preclude coverage in this case. (Doc. 48 at 11.) As noted, Section 5.2 states 4 that Liberty “shall not be liable to pay any Loss in connection with any Claim for any actual 5 or alleged liability of any Insured under any contract or agreement, express or implied, 6 written or oral, . . .” (Id. at 10–11; Doc. 4 at 14 ¶ 5.2.) Tapestry does not argue that the 7 provision is substantively inapplicable. Rather, it argues that Liberty did not adequately 8 reserve its right to invoke the exclusion. The Court understands Tapestry to move for 9 summary judgment on Count II of Liberty’s Counterclaim. (Doc. 10 at 17.) 10 As the Court previously described, the parties have presented a genuine issue of 11 material fact as to whether Liberty “properly communicated” its reservation of right to 12 invoke the contract liability exclusion, as required under Arizona law. See United Servs. 13 Auto. Ass’n, 154 Ariz. at 116. The finder of fact shall determine whether Liberty’s assertion 14 in its March 2014 letter that it “expressly reserves all rights and defenses under the Policy” 15 adequately informed Tapestry of the possibility that Liberty would later deny coverage 16 based on the contract liability exclusion. (Doc. 46-2 at 106.) For the same reasons as above, 17 Tapestry is not entitled to summary judgment. And, as above, the Court need not reach 18 Liberty’s additional arguments, including that it is not required to show prejudice, and that 19 even if it were, proof of prejudice exists.17 (Doc. 48 at 11–15.) 20 That said, Tapestry also argues that the merits of the contract liability exclusion do 21 not apply for the additional reason that it “had a pre-existing, non-contractual, common 22 law duty to treat TOC fairly.” (Doc. 48 at 16.) See also Tierra Ranchos Homeowners Ass’n 23 v. Kitchukov, 216 Ariz. 195, 201 ¶ 25 (Ct. App. 2007) (recognizing a duty to treat members 24 of a common-interest community association “fairly”). It asserts that it is “undisputed” that 25 the contract liability exclusion would not have applied, had TOC sued Tapestry for breach 26 of this common-law duty in the Underlying Action, rather than for breach of contract and 27 28 17 As discussed below, for this reason, the Court will deny Tapestry’s motion to certify a question of law to the Arizona Supreme Court. (Doc. 54.) 1 breach of the implied covenant of good faith and fair dealing. (Id.) It further states, without 2 citation, that “[c]overage should not turn on the fortuity of whether the plaintiff elects to 3 proceed under a tort or contract theory.” (Id.) The Court is not persuaded by this novel 4 argument. TOC prevailed on its claims of breach of contract and breach of the implied 5 covenant of good faith and fair dealing against Tapestry. Tapestry cannot now speculate 6 about what would have happened if TOC had sued it on another ground, whether in addition 7 to or to the exclusion of the claims actually asserted. The fact that this separate cause of 8 action theoretically exists, and could have been invoked in the Underlying Action, does not 9 render the contract liability exclusion inapplicable. Tapestry’s motion for summary 10 judgment on Count II of Liberty’s counterclaim is denied. 11 3. Construction Defect Exclusion 12 Tapestry also argues that Liberty cannot meet its burden of proof on the construction 13 defect exclusion (Count III of its counterclaim). As noted, Section 4.11 of Policy states that 14 it “does not apply to any Claim made against any Insured . . . based upon, arising from, or 15 in any way related to any Construction Defect,” which is separately defined. (Doc. 4 at 12– 16 14 ¶ 4.11.) Tapestry notes that under Arizona law, the “insurer bears the burden to establish 17 the applicability of any exclusion.” (Doc. 48 at 17) (citing Keggi, 199 Ariz. at 46 ¶ 13). As 18 in its response to Liberty’s motion for summary judgment, Tapestry asserts that TOC 19 “alleged a multitude of wrongs” and it is “impossible to know what conduct the jury had 20 in mind because a general verdict form was used.” (Id. at 17.) 21 Liberty emphasizes in response that courts apply a “broad meaning” to exclusions, 22 like the one in Section 4.11, containing language such as “based upon, arising from, or in 23 any way related to.” (Doc. 57 at 19) (citing Amerisure Mut. Ins. Co. v. Houston Cas. Co., 24 No. CV-17-02269-PHX-DGC, 2019 WL 1014843, at *7 (D. Ariz. Mar. 4, 2019)). The 25 Court agrees that the language in the construction defect exclusion is broad. Nonetheless, 26 as previously described, it is not necessarily the case that the jury’s verdict was “in any 27 way related to” construction defects. As with Liberty’s motion, Tapestry’s motion for 28 summary judgment on Count III of Liberty’s counterclaim is denied. 1 4. Claim Falls Within the Policy Period 2 Tapestry also argues that the Underlying Action is a covered “Claim” as defined in 3 the Policy because it commenced within the policy period. A “Claim” is defined as a 4 “written demand for monetary or non-monetary relief against an Insured” or “the 5 commencement of a civil or criminal judicial proceeding or arbitration against an Insured.” 6 (Doc. 4. at 18 ¶ 23.3.) The insurance policy was effective from October 26, 2013 to October 7 24, 2014. (Doc. 4 at 11.) Tapestry states that because the Underlying Action was 8 commenced on January 24, 2014, it constitutes a coverable “Claim” under the policy. The 9 Court understands this to be a motion for summary judgment on Count IV of Liberty’s 10 counterclaim, which requests a declaration that “there is no coverage for the Judgment 11 entered in the Underlying Action because the Underlying Action arises from the same 12 Wrongful Acts or Interrelated Wrongful Acts as the Demand and, as such, constitutes a 13 single Claim that was first made prior to the Policy Period.” (Doc. 10 at 18 ¶ 56.) 14 Liberty does not address this argument in its response. As a result, it can be “deemed 15 to have conceded” this argument. Maxwell v. McLane Pac., Inc., No. CV 17-550 PA 16 (ASX), 2017 WL 8186758, at *9 (C.D. Cal. Oct. 19, 2017); PageMasters, Inc. v. Autodesk, 17 Inc., 2009 WL 825810, at *10 (D. Ariz. March 30, 2009) (construing plaintiff’s lack of 18 response to defendant’s argument as a concession of the validity of defendant's argument 19 on the merits). The Court grants summary judgment to Tapestry on Count IV of Liberty’s 20 Counterclaim. 21 5. The “Loss” Requirement 22 Tapestry also argues, briefly, that the “Loss” requirement in the Policy is satisfied 23 because the underlying judgment “falls squarely within [the] definition of Loss, as does the 24 settlement amount paid to resolve the Judgment when Liberty refused to indemnify.” (Doc. 25 48 at 21–22.) The Court understands this to be a motion for summary judgment on Count 26 V of Liberty’s Counterclaim, which seeks a declaratory judgment that no coverage exists 27 because Tapestry has no legal obligation to pay the Judgment by virtue of it having entered 28 into the Underlying Settlement Agreement.” (Doc. 10 at 18 ¶ 59.) For the same reasons as 1 discussed above, the Court denies Tapestry’s motion for summary judgment on this claim. 2 A genuine dispute of material fact exists as to whether Tapestry suffered a “Loss” under 3 the Policy in light of the subsequent appeal and settlement of the Underlying Action. 4 Tapestry’s motion on Count V of Liberty’s counterclaim is denied. 5 6. Policy Limit Payment 6 Tapestry asserts, in a brief paragraph, that it should be paid the $1 million policy 7 limit. (Doc. 48 at 22.) For the foregoing reasons, triable issues of fact exist with respect to 8 various Policy exclusion. These disputes preclude the entry of summary judgment on 9 Tapestry’s breach of contract claim. Accordingly, Tapestry’s request for payment is denied 10 at this time.18 11 IV. MOTION TO CERTIFY QUESTION 12 Tapestry has also filed a motion for an order certifying the following question of 13 law to the Arizona Supreme Court: 14 Does an insurer’s failure, when undertaking defense of an 15 action, to specifically reserve its right to deny coverage based on an exclusion that it has actual or constructive knowledge of 16 result in loss of such ground for denial, without need for the 17 insured to show prejudice, as provided in § 15 of the RESTATEMENT OF LIABILITY INSURANCE (2019) (the 18 “RESTATEMENT”)? In other words, should Arizona adopt 19 § 15 of the RESTATEMENT? 20 (Doc. 54 at 1.) Under Arizona law, the Arizona Supreme Court may: 21 answer questions of law certified to it by . . . a United States 22 district court . . . when requested by the certifying court if there 23 are involved in any proceedings before the certifying court questions of law of this state which may be determinative of 24 the cause then pending in the certifying court and as to which 25 it appears to the certifying court there is no controlling precedent in the decisions of the supreme court and the 26 18 Tapestry also argues that Count VII of Liberty’s Counterclaim, for fraudulent 27 inducement (Doc. 10 at 19), should be dismissed with prejudice. As previously noted, 28 Liberty has since voluntarily dismissed Count VII without prejudice. (Doc. 60.) As such, the Court does not address that argument at this time. 1 intermediate appellate courts of this state. 2 A.R.S. § 12-1861. 3 The focus of the question proposed by Tapestry is on whether a showing of prejudice 4 is required to find that an insurer has failed to specifically reserve its right to deny coverage. 5 Tapestry points to allegedly conflicting cases applying Arizona law. Compare, e.g., Hagen 6 v. U.S. Fidelity & Guaranty Insurance Co., 138 Ariz. 521, 526–27 (Ct. App. 1983) 7 (providing a waiver test of “[h]as the insurer failed to make a reasonable effort to advise 8 its insured of its disclaimer of all obligations under the policy?” without reference to 9 prejudice), with Penn Amer. Ins. Co., 220 Ariz. at 13 ¶ 32 (requiring prejudice). 10 The Court declines to certify this question to the Arizona Supreme Court. A.R.S. 11 § 12-1861 requires that that the question “may be determinative” of the pending cause. See 12 Chaparro v. Ryan, No. CV-19-00650-PHX-DWL-MHB, 2019 WL 3361244, at *3 (D. 13 Ariz. July 25, 2019) (recognizing same). As described herein, a genuine dispute of material 14 fact exists as to whether Tapestry properly communicated its reservation of rights. The 15 Court has accordingly denied the parties’ motions for partial summary judgment based on 16 the contract liability exclusion (Section 5.2 of the underlying insurance policy). Therefore, 17 resolution of the question presented would not be determinative of the present action. As 18 such, Tapestry’s motion to certify a question to the Arizona Supreme Court is denied. 19 V. MOTIONS TO SEAL 20 Lastly, Liberty has filed two motions for leave to file under seal. (Docs. 58, 62.) The 21 Court addresses them in turn. 22 A. Liberty’s Amended Motion (Doc. 58) 23 Liberty previously moved to seal the 2017 Settlement Agreement and Release 24 entered into between the parties; its motion for summary judgment, which “discusses the 25 terms of the Settlement Agreement”; and “any other documents filed in connection with 26 summary-judgment briefing that discusses the terms of the Settlement Agreement.” (Id. at 27 2.) It argued that sealing was appropriate because the Settlement Agreement “contains a 28 clause requiring the parties to keep the terms of the agreement confidential.” (Doc. 42 at 1 2.) The Court denied that request without prejudice, noting the public’s general right to 2 access judicial records and documents, as well as courts’ previous findings that an 3 agreement to keep a settlement agreement confidential does not, in itself, show a 4 compelling reason to justify sealing. It permitted Liberty to “file another motion to seal 5 that identifies, with specificity and compelling reasons, those portions of the Motion for 6 Summary Judgment and Settlement Agreement that contain sealable material.” (Doc. 52 at 7 4.) 8 Liberty has since filed an amended motion for leave to file under seal, which, as 9 before, requests that its 2017 Settlement Agreement and Release with Tapestry, its own 10 summary judgment motion, and “any other documents filed in connection with summary- 11 judgment briefing that discuss the terms of the settlement agreement” be sealed. (Doc. 58 12 at 2.) Tapestry opposes the motion, though it indicated that it would agree to a redaction of 13 the settlement amount, “which is the only arguably sensitive information.” (Doc. 66 at 4.) 14 As Liberty notes, a motion to seal documents attached to a dispositive motion is 15 governed by the “compelling reasons” standard. Pintos v. Pacific Creditors Ass’n, 605 F.3d 16 665, 678 (9th Cir. 2010). The Court must “balance[] the competing interests of the public 17 and the party who seeks to keep certain judicial records secret.” Kamakana v. City & Cnty. 18 of Honolulu, 447 F.3d 1172, 1179 (9th Cir. 2006) (quotations omitted). If a court decides 19 to seal certain judicial records after considering these interests, “it must base its decision 20 on a compelling reason and articulate the factual basis for its ruling, without relying on 21 hypothesis or conjecture.” Id. (quotations omitted). Generally, “compelling reasons 22 sufficient to outweigh the public’s interest in disclosure and justify sealing court records 23 exist when such court files might have become a vehicle for improper purposes, such as 24 the use of records to gratify private spite, promote public scandal, circulate libelous 25 statements, or release trade secrets.” Id. (quotations omitted). 26 Liberty first invokes the clause requiring the parties to keep the terms of the 27 agreement confidential. As the Court has already rejected this argument (Doc. 52), it does 28 not reevaluate it here. Liberty next argues that the settlement agreement contains “specific 1 financial terms” that the parties agreed to keep confidential, including the settlement 2 amount and the “billing rates of legal personnel who worked on the Settlement Agreement 3 and its underlying issues.” (Doc. 58 at 3.) It notes that this information is not necessary to 4 resolution of its motion for summary judgment, and that disclosure of billing rates “could 5 impact the competitive standing” of the attorneys.19 (Id.) The Court is not persuaded that 6 Liberty has demonstrated what “specific prejudice or harm will result” if the documents 7 are not sealed, and the Court is precluded from hypothesizing or assuming that a 8 compelling reason exists. See Kamakana, 447 F.3d at 1179. These are not compelling bases 9 for granting the motion. 10 Liberty also argues that the settlement agreement was signed by other individuals 11 who are not parties to the present action. The Court finds that Liberty has not adequately 12 demonstrated—or even argued—that prejudice or harm will result to these individuals. 13 Further, in other cases sealing non-parties’ information, courts have permitted redaction 14 while noting the “relatively small, specific portion of their personnel files that outweighs 15 the public’s right of access” and because a party had made a “good faith effort to carefully 16 redact these exhibits.” TriQuint Semiconductor, Inc. v. Avago Techs. Ltd., No. CV 09- 17 1531-PHX-JAT, 2011 WL 4947343, at **3–4 (D. Ariz. Oct. 18, 2011). Here, in 18 comparison, Liberty seeks to seal the entire settlement agreement and all of the summary 19 judgment briefing. It has not demonstrated that compelling reasons justify such a result. 20 Liberty’s amended motion for leave to file under seal is denied. 21 B. Liberty’s Second Motion (Doc. 62) 22 Liberty has also moved to file under seal a 2018 Settlement Agreement and Release 23 that it entered into with Tapestry in connection with other then-pending lawsuits (a 24 different settlement agreement than previously discussed), its reply in support of its motion 25 for summary judgment, and “any other documents that reference the terms” of the 2018 26 settlement agreement. (Doc. 62 at 1.) This motion largely tracks the prior motion. It argues 27 28 19 The Court notes that attorneys routinely submit billing rates to courts in connection with motions for attorney’s fees, for example. 1 || that the agreement contains a clause requiring it to be kept confidential and monetary terms || that the parties “agreed to keep confidential.” (/d. at 3.) For the same reasons as above, the 3 || Court is not persuaded by these arguments.”° Liberty’s second motion for leave to file under 4|| seal is also denied. 5|| VI. CONCLUSION 6 Accordingly, 7 IT IS ORDERED denying Defendant/Counterclaimant’s Motion for Summary 8 || Judgment (Doc. 46). 9 IT IS FURTHER ORDERED granting in part and denying in part || Plaintiff/Counter-defendant’s Motion for Partial Summary Judgment (Doc. 47). The |} motion is granted as to Count IV of Liberty’s Counterclaim. It is denied in all other respects. 13 IT IS FURTHER ORDERED denying Plaintiff/Counter-defendant’s Motion to Certify Question to Arizona Supreme Court. (Doc. 54.) 15 IT IS FURTHER ORDERED denying Defendant/Counterclaimant’s Amended 16|| Motion for Leave to File Under Seal (Doc. 58.) 17 IT IS FURTHER ORDERED denying Defendant/Counterclaimant’s Second || Motion for Leave to File Under Seal (Doc. 62). 19 IT IS FINALLY ORDERED that, pursuant to the Scheduling Order in this case, 20 || the parties shall jointly file a second Joint Case Management Report addressing Phase Two Discovery, as identified therein, within ten (10) days of the date of this Order. 22 Dated this 29th day of March, 2021. 23 Wichad T. gibuade Michael T. Liburdi 26 United States District Judge 27 7° Liberty also notes that its reply brief references the 2017 Settlement Agreement previously discussed. For the same reasons as above, this is not a compelling reason to seal. -31-