Morgan v. American Family

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
JAY MORGAN, a minor child, by 
and through his special
conservator, James Clark; JAMES
CLARK, on behalf of himself and
on behalf of all surviving statutory
beneficiaries of Geri Morgan, No. 07-16278
deceased; H GRADY JONES; GERI
MORGAN; GERI MORGAN,  D.C. No.
CV-06-01136-JAT
Plaintiffs-Appellees,
ORDER
v.
AMERICAN FAMILY MUTUAL
INSURANCE COMPANY, a foreign
corporation,
Defendant-Appellant.

Appeal from the United States District Court
for the District of Arizona
James A. Teilborg, District Judge, Presiding
Argued and Submitted
February 11, 2009—San Francisco, California
Filed April 22, 2009
CERTIFICATION OF QUESTION OF STATE LAW
4655
4656 MORGAN v. AMERICAN FAMILY MUTUAL
Before: Ronald M. Gould, Jay S. Bybee, and
Timothy M. Tymkovich,* Circuit Judges.
Order;
Dissent by Judge Bybee
ORDER
This diversity case is on appeal from the United States Dis-
trict Court for the District of Arizona. The certified question
involves the interpretation and application of Arizona’s doc-
trine of reasonable expectations to insurance contracts.
Plaintiff Jay Morgan (Morgan) was a passenger in an auto-
mobile driven by his father, John Morgan, when John Morgan
caused a severe car accident. Morgan’s mother, Geri Morgan,
was also a passenger and was killed in the accident. Morgan’s
father was seriously injured and suffered permanent brain
damage.
Morgan filed a claim with American Family Mutual Insur-
ance Company under an umbrella personal liability insurance
policy, seeking reimbursement for damages stemming from
the wrongful death of his mother. American Family denied
the claim pursuant to the Policy’s “intra-insured suits” exclu-
sion, which bars recovery against family members for their
negligence. Morgan filed suit, seeking a declaration that the
intra-insured suits exclusion is invalid under Arizona law.
Morgan asserted that insurance policies must be construed to
further the reasonable expectations of the policyholder, and
no reasonable policyholder would believe that family mem-
bers are excluded from liability for their negligence.
*The Honorable Timothy M. Tymkovich, United States Circuit Judge
for the Tenth Circuit, sitting by designation.
MORGAN v. AMERICAN FAMILY MUTUAL 4657
The district court granted summary judgment in favor of
Morgan, though neither party presented evidence regarding
John Morgan’s expectations in acquiring the Policy. Ameri-
can Family now appeals.
Because the disposition of this appeal turns on an important
and unsettled question of Arizona law, we submit this request
to the Arizona Supreme Court to exercise its discretion to
accept the following certified question in accordance with
Arizona Supreme Court Rule 27 and Section 12-1861 of the
Arizona Revised Statutes:
Can Arizona’s doctrine of reasonable expectations
operate to void a named-insured exclusion in an
insurance policy (1) without evidence of the circum-
stances surrounding the acquisition and issuance of
the policy, and (2) where the exclusion is contained
among typical exclusions in the policy?
I. Background
The facts of this case are undisputed. Morgan’s parents,
John and Geri Morgan, purchased the Policy from American
Family and are listed as “named insureds” on the declarations
page. In the Policy, American Family agreed to “pay, up to
our limit, compensatory damages for which an insured
becomes legally liable for injury caused by an occurrence
covered by this policy.” The declarations page states that the
limit of liability under the Policy is one million dollars for
“each occurrence.” Including the declarations page, the
boilerplate “Insuring Agreement,” two endorsements, and a
“notice of information practices,” the Policy is eleven pages
long. The “Insuring Agreement” contains twenty-five alpha-
betically ordered exclusions; the intra-insured suits exclusion
is number ten.
While the Policy was in effect, John Morgan negligently
caused a severe automobile accident. Morgan was a passenger
4658 MORGAN v. AMERICAN FAMILY MUTUAL
in the automobile, along with Geri Morgan and John and
Geri’s nephew, Garth Jones. Geri Morgan died as a result of
the accident. John Morgan suffered physical and mental inju-
ries, including brain damage, stroke, and paralysis. Morgan
and Garth Jones were also injured.
Morgan, on behalf of himself and Geri Morgan’s wrongful
death beneficiaries, presented a claim to American Family for
the wrongful death of Geri Morgan. American Family denied
the claim, asserting the Policy’s intra-insured suits exclusion
applied. The intra-insured suits exclusion states:
We will not cover personal injury to the named
insured or anyone within the meaning of part a or b
of the definition of insured.
Because Morgan’s claim is based on the wrongful death of
Geri Morgan, it is derivative of the injuries suffered by a
“named insured” and falls within the language of the intra-
insured suits exclusion.
After American Family denied his claim, Morgan filed a
complaint in Arizona Superior Court. The complaint sought
judgment declaring the Policy’s intra-insured suits exclusion
to be unenforceable under Arizona’s reasonable expectations
doctrine. American Family removed to the United States Dis-
trict Court for the District of Arizona, invoking federal diver-
sity jurisdiction.
The parties subsequently filed cross-motions for summary
judgment. After hearing oral argument on the cross-motions,
the district court issued an order granting summary judgment
in favor of Morgan. The order applied Arizona’s reasonable
expectations doctrine to invalidate the Policy’s intra-insured
suits exclusion, even though Morgan was unable to present
testimony from his injured parents regarding their reasonable
expectations of the Policy’s coverage because Geri Morgan
was deceased and John Morgan suffered severe cognitive def-
MORGAN v. AMERICAN FAMILY MUTUAL 4659
icits as a result of the accident. Due to the lack of testimonial
evidence, the district court relied on the form and content of
the policy alone as the factual basis for judgment in Morgan’s
favor. The court relied on State Farm Mutual Automobile
Insurance Co. v. Falness, 39 F.3d 966 (9th Cir. 1994), to
reach its conclusion.
II. Analysis
We have applied the Arizona reasonable expectations doc-
trine to invalidate a named-insured exclusion in similar cir-
cumstances to this case. Falness, 39 F.3d at 967-68. In
Falness, the named insureds under the policy, John and Anna
Hugg, were killed in an automobile collision, and Anna
Hugg’s estate sought to collect under the policy’s liability
provisions. Id. at 966. State Farm refused to pay the claim,
citing the named-insured exclusion, which stated, “[t]here is
no coverage . . . for any bodily injury to: . . . you.” Id. at 967.
“You” was defined in the policy as “the named insured or
named insureds.” Id.Prior to issuing our decision in Falness, we certified two
questions to the Arizona Supreme Court: (1) whether the
named-insured exclusion was facially invalid under Darner
Motor Sales, Inc. v. Universal Underwriters Insurance Co.,
682 P.2d 388 (Ariz. 1984), and (2) whether the doctrine of
reasonable expectations applied to the named-insured exclu-
sion. See Falness, 39 F.3d at 967; State Farm Mut. Auto Ins.
Co. v. Falness (Falness II), 872 P.2d 1233, 1234 (Ariz. 1994).
The Arizona Supreme Court answered that the named-insured
exclusion was not facially invalid under Darner, but could be
ruled invalid “under appropriate circumstances.” Falness II,
872 P.2d at 1234. The court then stated, “[a]n analysis of the
format and clarity of the policy, as well as the circumstances
surrounding its acquisition and issuance, is required to deter-
mine whether the exclusion falls outside the reasonable
expectations of the insureds.” Id. (emphasis added).
4660 MORGAN v. AMERICAN FAMILY MUTUAL
Because the Huggs were deceased, we could not “make the
specific factual inquiry suggested by the Arizona Supreme
Court.” Falness, 39 F.3d at 968. However, we found there
was “no meaningful distinction” between the named-insured
exclusion at issue and a household exclusion invalidated by
the Arizona Court of Appeals in State Farm Mutual Automo-
bile Insurance Co. v. Dimmer, 773 P.2d 1012 (Ariz. Ct. App.
1988). Falness, 39 F.3d at 968. Indeed, as we noted, “[t]he
Dimmers had purchased substantially the same form of policy
from State Farm as the Huggs did.” Id. at 967. We therefore
adopted the reasoning of Dimmer and invalidated the State
Farm named-insured exclusion. Id. at 968.
Here, we cannot analyze “the circumstances surrounding
[the Policy’s] acquisition and issuance” because the policy-
holders cannot provide testimony. See Falness II, 872 P.2d at
1234. We also do not have the benefit of a decision by an Ari-
zona court construing “substantially the same form of policy,”
as we did in Falness. See 39 F.3d at 968.
Furthermore, various cases from the Arizona Supreme
Court and Arizona Court of Appeals suggest the reasonable
expectations doctrine does not apply unless there is some evi-
dence that the insurance company had reason to believe the
insureds expected coverage. See Darner, 682 P.2d at 396-97(the doctrine of reasonable expectations applies when “the
[insurer] has reason to believe that the [insured] would not
have accepted the agreement if he had known that the agree-
ment contained the particular term” (quoting Restatement
(Second) of Contracts § 211 cmt. f (1981) (emphasis added)));
see also Phila. Indem. Ins. Co. v. Barerra, 21 P.3d 395, 404
(Ariz. 2001) (an insured reasonably believed he would be
covered by an insurance policy when driving under the influ-
ence in part because the car rental company who sold the
insurance rented him a car knowing he had been in a DUI-
related accident two weeks before); Averett v. Farmers Ins.
Co. of Ariz., 869 P.2d 505, 508 (Ariz. 1994) (the insured was
particularly concerned about coverage for his family because
MORGAN v. AMERICAN FAMILY MUTUAL 4661
his wife had health problems, and the insurance agent alleg-
edly knew of these health problems); Do v. Farmers Ins. Co.
of Ariz., 828 P.2d 1254, 1257-58 (Ariz. Ct. App. 1991) (the
insured’s expectations that his children were covered under a
policy were “not unreasonable” because an insurance agent
told the insured his family would be covered up to the poli-
cy’s limits); State Farm Fire & Cas. Co. v. Powers, 786 P.2d
1064, 1067 (Ariz. Ct. App. 1989) (though the insured testified
she thought she was covered, “[t]here was no evidence that
the insurance company had reason to believe that [the
insureds] would not have accepted the insurance policy if they
had known of the exclusion”); cf. Shade v. U.S. Fid. & Guar.
Co., 801 P.2d 441, 443 (Ariz. Ct. App. 1990) (“The record is
devoid of any evidence supporting the [plaintiffs’] theory of
reasonable expectation.”).
Because the Arizona Supreme Court has held that named-
insured exclusions are not “facially invalid,” Falness II, 872
P.2d at 1234, we are reluctant to apply the reasonable expec-
tations doctrine in this case without any evidence allowing us
“to determine whether, and to what extent, there was a meet-
ing of the minds between the contracting parties” with regard
to the intra-insured suits exclusion at issue. Id. (quoting Aver-
ett, 869 P.2d at 508). To do so would in effect adopt a per se
rule against the exclusion, a position the Arizona courts have
declined to adopt. See Averett, 869 P.2d at 507.
As a second matter, the Arizona Supreme Court advises us
to consider the “format and clarity” of insurance policies in
considering the doctrine of reasonable expectations. But the
intra-insured exclusion in the Morgans’ Policy is not exceed-
ingly complex or submerged in legalese beyond the ability of
an ordinary consumer, and there is no basis here to conclude
that it was more complex or unclear than any other exclusion
in the Policy. See Restatement (Second) of Contracts, § 211
cmt. f (doctrine of reasonable expectations applies to terms
that are “bizarre and oppressive” or undermine the dominant
purpose of the contract). And State Farm Fire & Insurance
4662 MORGAN v. AMERICAN FAMILY MUTUAL
Co. v. Grabowski, 150 P.3d 275, 282 (Ariz. App. 2007), indi-
cates that Arizona’s intermediate court understands this
inquiry might be a fact question for the jury in the absence of
evidence that the insurance company had reason to believe the
policyholder would not have agreed to the exclusion. Perhaps
this inquiry is a question of law for the court absent evidence
as to the parties’ expectations or beliefs, see Falness, 39 F.3d
at 968, but precedent from Arizona courts is not explicit on
this point.
In sum, given that the Policy differs from those considered
in the Arizona cases cited above, we would benefit from guid-
ance as to how insurance policies should be evaluated under
Arizona law, where:
(1) no evidence exists regarding the policyholder’s expec-
tations or the insurance company’s beliefs, and
(2) the language and placement of the named-insured
exclusion among other policy exclusions does not suggest a
reasonable policyholder would have declined the policy.
III. Certification of the Question to the Arizona
Supreme Court
This court therefore concludes that certification of the ques-
tion presented will further the interests of comity and federal-
ism by giving the Arizona Supreme Court the opportunity to
answer the question presented in the first instance, should it
elect to do so. This court recognizes the discretion of the Ari-
zona Supreme Court to reformulate the question posed herein.
See Torres v. Goodyear Tire & Rubber Co., 786 P.2d 939,
941 n.1 (Ariz. 1990).
In compliance with Arizona Supreme Court Rule
27(a)(3)(C), the court provides the following information
regarding the names and addresses of counsel of record:
MORGAN v. AMERICAN FAMILY MUTUAL 4663
On behalf of American Family Mutual Insurance Com-
pany:
Lynn M. Allen
Allen & Lewis, PLC
4835 E. Cactus Road, Suite 340
Scottsdale, Arizona 85254
(602) 443-0402
On behalf of Jay Morgan:
Ronald Ozer and Herbert L. Ely
Ely, Bettini, Ulman & Rosenblatt
3200 N. Central Avenue, Suite 1930
Phoenix, Arizona 85012
(602) 230-2144
The Clerk of this court shall transmit a copy of this certifi-
cation order to counsel for all parties. The Clerk shall also for-
ward, under the Ninth Circuit’s official seal, the original and
six copies of this certification order to the Arizona Supreme
Court.
This appeal is ordered ABATED pending resolution of the
certified question.
Judge Gould, Presiding Circuit Judge
United States Court of Appeals for the
Ninth Circuit
BYBEE, Circuit Judge, dissenting:
Fifteen years ago we certified a nearly identical question to
the Arizona Supreme Court. See State Farm Mut. Auto. Ins.
4664 MORGAN v. AMERICAN FAMILY MUTUAL
Co. v. Falness, 39 F.3d 966, 967 (9th Cir. 1994). We received
an answer and we then issued an opinion in Falness. Id.; State
Farm Mut. Auto. Ins. Co. v. Falness, 872 P.2d 1233, 1234
(Ariz. 1994). Falness is not in question in Arizona courts.
Indeed, the Arizona Supreme Court has cited our Falness
decision with approval. See Philadelphia Indem. Ins. Co. v.
Barerra, 21 P.3d 395, 404 (Ariz. 2001) (en banc).
Here, the majority has certified nearly the same question
again to the Arizona Supreme Court. There really isn’t much
doubt how this case must be resolved after Falness. Rather,
we are certifying because we doubt the wisdom of Arizona’s
application of its rule. In effect, we are inviting Arizona to
revisit the reasonable expectations doctrine as applied to the
named insured exclusion. I have my own doubts about the
wisdom of the rule and its operation in Arizona, but I still
don’t think there is any lack of “controlling precedent in the
decisions of the [Arizona S]upreme [C]ourt and intermediate
appellate courts” to justify our order. See ARIZ. REV. STAT.
§ 12-1861. I respectfully dissent.
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