Coverage Analysis
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  A two-prong test is applied in Arizona to determine whether injuries were expected or intended.  First, intent is measured by looking at the insured's subjective desire to cause harm.  An act, even though intentional, must be committed for the purpose of inflicting injury or harm.  Second, if the nature and circumstance of the insured's intentional act were such that harm was substantially certain to result, intent may be inferred as a matter of law.  If either test is met, coverage will be barred even if the insured did not expect or intend the specific injuries to result, nor may the insured argue that the injuries were more severe than he expected or intended.  Ohio Casualty Ins. Co. v. Henderson, 939 P.2d 1337 (Ariz. 1997).  

  Insurance is intended to provide coverage for risks that are beyond the control of the insured.  Transamerica Ins.  Group v.  Meere, 694 P.2d 181, 185 (Ariz.  1984).  Insurers are permitted to exclude coverage for intentional acts consistent with the public policy of barring parties from obtaining indemnity against losses resulting from their own willful wrongdoing.  Id.  at 186.  However, exclusions for intentional acts only apply if the harm was also intended.  Republic Ins.  Co.  v.  Feidler, 875 P.2d 187, 190 (Ariz.  App.  1994).  In such circumstances, there must be “either a subjective desire to cause some specific harm (intent) or substantial certainty (expectation) some significant harm would occur.”  The exclusion will not be deemed inapplicable merely because the resulting injury was more severe or different from what was intended.  Henderson, 939 P.2d at 1344 (Ariz.  1997).  Similarly, an insured’s claim that the injury was unintended or unexpected will be rejected if such contentions “fly in the face of all reason, common sense and experience.”  Id.

  Such claims must also result from an “accident.”  Thus, the Court of Appeals has ruled that an employer’s negligent failure to procure promised health insurance for an employee did not allege an "occurrence" because it was not the result of an "accident."  Kema Steel, Inc. v. Home Insurance Company, 736 P. 2nd 798, 800 (Ariz. App. 1986).  See also Baker v. Truck Insurance Exchange 1999 Ariz. App. LEXIS 124 (Ariz. App. July 8, 1999)(unpublished) (financial mismanagement by adoption agency not an "occurrence").  

  An intent to injure will be inferred as a matter of law in certain situations where "the nature and circumstances of the insured's intentional act were such that harm was substantially certain to result."  See, Ohio Casualty (accomplice to armed robbery);  Phoenix Control Systems, Inc. v. INA, 796 P.2d 463, 165 Ariz. 31 (1990); Continental Ins. Co. v. McDaniel, 772 P.2d 6 (Ariz. App. 1988)(sexual harassment); Transamerica Ins. Group v. Meere, 143 Ariz. 351, 694 P.2d 181 (1984); Twin City Fire Ins. Co. v. Doe, 163 Ariz. 388, 788 P.2d 121, 123 (App. 1989).   However, intent will not necessarily be inferred in cases where the molestation was carried out by a minor.  USAA v. DeValencia, 949 P.2d 525  (Ariz. App. 1997).

  An intent to injure may be inferred in cases where public policy dictates that result. Northern Ins. Co. v. Morgan, 918 P.2d 1051 (Ariz. App. 1995)(sexual harassment) and State Farm Fire & Casualty Co. v. Doe, 797 P.2d 718 (Ariz. App. 1990) (child molestation). 

  An insured convicted of voluntary manslaughter was estopped to deny that he had acted intentionally.  Cretens v. State Farm Fire and Casualty Company, 1999 WL 241091 (D. Ariz. March 1, 1999).

  Arizona courts have not allowed insureds to by-pass these principles by concocted theories of "negligent entrustment" or "negligent supervision."  Similarly, in Northern Ins. Co. v. Morgan, 918 P.2d 1051 (Ariz. App. 1995), the court refused to find a duty to defend based on "negligent harassment" claims, finding that this was a "transparent" effort to trigger coverage since one could not negligently harass.  
  It is sufficient that the insured have expected or intended to cause some injury; the insurer is not required to show that the insured actually expected or intended to cause the specific injury that ultimately resulted in cases where that injury proved to be more serious than the insured had intended. Continental Ins. Co. v. McDaniel, 772 P.2d 6 (Ariz. App. 1988)(consequences of sexual molestation were expected or intended despite insured's claim that he thought that victim would derive pleasure from his acts).  However, more than mere recklessness is required to bar coverage.  Phoenix Control Systems, Inc. v. INA, 796 P.2d 463 (Ariz. 1990).  

  The Arizona Court of Appeals has ruled that an insured did not intend to cause bodily injuries if he was so intoxicated to preclude the possibility of forming an intent to harm.  Republic Ins. Co. v. Feidler, A CA-CV 91-0504 (Ariz. App. December 28, 1993).

  An insured that pled guilty to child molestation is estopped to claim coverage under a policy that contains an intentional acts exclusion.  K.B. v. State Farm Fire & Cas. Co., 189 Ariz. 263, 941 P.2d 1288 (Ct. App. 1997).  Similarly, where a jury convicted the insured of first degree murder and rejected his insanity defense, a tort claimant was precluded from arguing that the insured’s conduct was insane and therefore outside the scope of an exclusion for intentional acts.  Western Agricultural Ins.  Co.  v.  Brown, 1CA-CV 97-0464 (Ariz.  App.  November 10, 1998).  


  Although an insurer may limit its payment obligation to covered damages, it may not pro-rate its obligation to pay defense costs merely because some of the claims are not covered.  Western Casualty & Surety Co. v. International Spas of Arizona, Inc., 634 P.2d 3, 6 (Ariz. App. 1981).

  Where multiple insurers are involved, defense costs should be prorated among the insurers.  National Ind. Co. v. St. Paul Ins. Co., 250 Ariz. 492, 724 P.2d 578 (1985).

  A state trial court ruled in Nucor Corp. v. Hartford Accident & Indemnity Co., No. CV-97-08308 (Ariz. Super. September 29, 1997) that pollution claims that arose over a period of multiple years should be allocated on a "horizontal" basis. Accordingly, the court held that Nucor would not be entitled to recover against its excess policies until such time as all of the underlying primary insurance was first exhausted.  


  Arizona has an intermediate appellate court, separated into two divisions, and a state Supreme Court.

  Unfair claims handling by insurers is regulated under Ariz. Rev. Stat. Ann. § 20-461 (1956).  Unfair or deceptive consumer practices are proscribed by Ariz. Rev. Stat. Ann. § 44-1521 (1967 & Supp. 1984-85).

  An implied obligation of good faith was first recognized in the first party context in Noble v. Nat. Life Ins. Co., 128 Ariz. 188, 624 P.2d 866 (1981).  In Noble, the Arizona Supreme Court held that insurers could be sued for bad faith if they denied a claim without a reasonable basis and knew or recklessly disregarded the absence of a reasonable basis for disputing coverage.   Whether the insurer’s position was reasonable should be judged on an objective basis.   Accord, Sparks v. Republic National Life Ins. Co., 132 Ariz. 529, 67 P.2d 1127 (1982).  Merely because an insurer acts unreasonably does not establish bad faith, however.  Under Arizona law, an insured has the additional burden of showing that the insured's subject intent was more than "honest mistake, oversight or carelessness."  Trus Jois Corp. v. Safeco Ins. Co., 153 Ariz. 95, 735 P.2d 125, 134 (App. 1986).  In Lasma Corp. v. Monarch Ins. Co., 159 Ariz. 59, 726 P.2d 565 (1988) the Arizona Supreme Court further explained “the tort of bad faith only arises when an insurance company intentionally denies or fails to process or pay a claim without a reasonable basis for such action.”  The court added in Sparks that whether the insurer had a “fairly debatable” basis for denying a claim is normally an issue for the jury to decide.  However, a judge may appropriately resolve such questions where the facts in question are not in dispute.

  Under Arizona law, an insurer may be liable for a breach of  the implied covenant of good faith and fair dealing through its improper claims handling even if it is ultimately established that the claims are not covered.  Deese v.  St.  Farm Mutual Automobile Ins.  Co., 172 Ariz.  504, 509, 838 P.2d 1265 (1992).  Thus, a cause of action for bad faith for the insurer's mis-handling of its insured's defense has been found to exist even where, in fact, the insurer had no coverage obligation.  Lloyd v. State Farm Mut. Automobile Ins. Co., 1 CA-CV 91-0017 (Ariz. November 27, 1992) and Lloyd v. State Farm Mut. Automobile Ins. Co., No. 1 CA-CV 95-0140 (Ariz. App. October 1, 1996)(Lloyd II).  In Lloyd II, the Court of Appeals extended its earlier holding that an insurer can be sued for inadequately defending a case that it had gratuitously accepted, holding that the insurer's failure to properly defend could be considered in the context of its policy.  Similarly, an insured may prevail in a bad faith claim even in the absence of coverage.  Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986) and Deese v. State Farm,  172 Ariz. 504, 838 P.2d 1265 (1992). 

  An insurer’s coverage denial cannot be the subject of a claim for bad faith if the coverage position was “fairly debatable.”  Norcia v. Equitable Life Assurance Society of U.S., 2000 WL 133844 (D. Ariz. January 19, 2000).  On the other hand, a first party insurer is not absolved of improper claims handling merely because it ultimately pays what is owed under its policy.  In Zilsch v. State Farm Mutual Automobile Insurance Company, 995 P.2d 276 (Ariz. 2000), the Arizona Supreme Court ruled that State Farm may still be held liable for bad faith arising out of its conduct and investigation of the insured’s claim even if the amount owed was “fairly debatable.”  The Supreme Court took note of evidence that had been presented in the proceedings below that State Farm engaged “in a deliberate practice of underpaying claims nationwide” and set arbitrary claim payment goals for its claims personnel in order to reach a corporate goal of having the most profitable claims service in the insurance industry.

  Vacating a contrary ruling from the Arizona Court of Appeals, the state Supreme Court ruled in State Farm Mutual Automobile Insurance Company v. Lee, No. CV-99-0407 (Ariz. December 13, 2000) that a class action of plaintiffs who contended that State Farm’s interpretation of its “anti-stacking” provisions was in bad faith were entitled to obtain coverage opinions and advice of counsel that State Farm had received from 15 outside law firms in connection with similar cases in Arizona.  The Supreme Court sustained a trial court’s determination that State Farm had waived the privileged nature of such communications by placing at issue its employees’ subjective understanding of the law.  Even though State Farm had not expressly set forth an “advice of counsel” defense, the court nonetheless found an implied waiver based upon the insurer’s contention that it had acted reasonably because of what it did to educate itself about the law, inasmuch as that investigation and knowledge about the law included information it obtained from its lawyers.

  An insurer must give equal consideration to its insured's interests in deciding whether to settle.  Hartford Accident & Indemnity Co. v. Aetna Casualty & Surety Co., 792 P.2d 749 (Ariz. 1990).  A primary insurer has a good faith obligation to settle a claim within policy limits and may be held liable in bad faith for giving greater consideration to its own interests than that of its policyholder.  Farmers Insurance Exchange v. Henderson, 313 P.2d 404 (Ariz. 1957).  An insurer may be liable for failure to settle within policy limits, notwithstanding the existence of any bona fide coverage dispute. State Farm Auto Ins. Co. v. Civil Employees Ins. Co., 509 P.2d 725, 733 (Ariz. App. 1973).  An insurer may be liable for failing to solicit an offer within limits, where warranted, even if the plaintiff never actually made such an offer.   Fulton v.  Woodford, 545 P.2d 979, 984 (Ariz. 1976).

  An insurer in a bad faith case is not required to turn over opinion letters that it obtained from coverage counsel where it has not explicitly asserted an “advice of counsel” defense.  The Arizona Court of Appeals ruled in State Farm Mutual Automobile Insurance Company v. Martin, 2 CA-SA 99-0022 (Ariz. App. August 19, 1999) that “an insurer’s denial of an insured’s allegations of bad faith, and its assertion that it acted in good faith and was objectively reasonable in interpreting its policy, a statute, and case law, without more, do not constitute the types of `affirmative act’ that give rise to an implied waiver of the attorney client privilege.”  The fact that counsel’s advice may have been relevant to whether the insurer’s subsequent claims handling conduct was reasonable was not itself a sufficient basis for finding waiver, nor was the court persuaded that State Farm had put the advice “at issue” by disclosing in its interrogatory answers that it had consulted with coverage counsel before adopting its coverage position.  More is required than a mere denial of bad faith or affirmative claim of good faith that constitute an implied waiver of the privilege.  The insurer must affirmatively assert some claim or defense, such as the reasonableness of its evaluation of the law, which necessarily includes the information received from counsel.   Justices Martone and McGregor dissented, arguing that State Farm did not waive the privileged character of these communications merely by the plaintiffs’ claims of bad faith.

  A claim for breach of this duty is a tort action, not a claim for breach of contract, and is therefore governed by a two year statute of limitations.  However, this limitation period does not run until the judgment becomes final. Taylor v. State Farm Mutual Automobile Ins. Co., 913 P.2d 1092 (Ariz. App. 1996).

  There is a dispute in Arizona with respect to whether statutory claims for unfair or deceptive practices may be pursued by private consumers.  Such a right was apparently recognized by the Arizona Supreme Court in  Sparks v. Republic National Life Ins. Co., 647 P.2d 1127 (Ariz. 1982).  However, a third-party tort claimant has no right to assert bad faith claims against the tortfeasor’s liability insurer. Ring v.  State Farm Mutual Automobile Insurance Company, 708 P.2nd 457 (Ariz.  App.  1985).   Further, the Arizona Unfair Claims Settlement Practices Act (Ariz. Rev. Stat. Ann. Section 20-461D) states that “nothing contained in this section is intended to provide a private right of action to or on behalf of any insured...It is, however, the specific intent of this section to provide solely an administrative remedy to the director for any violation of this section...” 

  The Arizona Court of Appeals ruled in Meineke v. GAB Business Services, Inc., 991 P.2d 267 (Ariz. App. 1999) that a policyholder had no right of action to sue an adjuster for bad faith.  The court ruled that the adjuster was the insurer’s agent and that any right of action existed against the Ins. Co. and that the adjuster owed no duty of care to the policyholder.
  A bad faith claim may be assigned to a third party.  Clearwater v. State Farm Mutual Automobile Ins. Co., 780 P.2d 423 (Ariz. App. 1989).  However, a claim for failure to settle is for the benefit of the insured, not a third party.  Cage v. Allstate Ins. Co., 614 P.2d 339 (Ariz. App. 1980).  

   The Arizona Supreme Court ruled that State Farm must produce coverage opinions that it received from outside counsel on the issue of whether insureds may stack auto claims because it waived the privileged nature of such communications by raising its claims adjusters’ subjective understanding of Arizona insurance law as defense to bad faith class action suit challenging its anti-stacking coverage position.  In State Farm Mutual Automobile Ins. Co. v. Lee, No. 99-0407 (Ariz. December 8, 2000), a divided Supreme Court ruled that even though State Farm had not explicitly raised "advice of counsel" as an affirmative defense to the plaintiffs' bad faith claims, it had impliedly waived the privilege by putting the documents at issue inasmuch as the subjective understanding of its employees necessarily included the legal advice that State Farm was receiving from outside counsel.  Several dissenting justices complained that the majority’s analysis would place insurers defending against bad faith suits in an impossible position.


  Pure emotional distress held not to be a "bodily injury" in Kema Steel, Inc. v. Home Ins. Co., 736 P.2d 798, 799 (Ariz. Ct. App. 1986).


  Insurer must prove prejudice.   Globe Indemnity Co. v. Blomfield, 115 Ariz. 562 P.2d 1372 (1977).  See also, Holt v. Utica Mut. Ins. Co., 759 P.2d 623, 627 (Ariz. 1988)(E&O policy).  In Holt, an en banc Supreme Court refused to infer prejudice from the fact that the insurer had been denied an opportunity to participate in the defense of the underlying action.  Rather, the court held that the insurer had an affirmative obligation to show that the insured's breach of the cooperation clause had caused it substantial prejudice.

  However, an insured that settles a claim or otherwise makes a "voluntary payment" without the knowledge or consent of the insurer forfeits its rights under the policy.  United Service Automobile Assn v. Morris, 154 Ariz. 113, 119, 741 P.2d 246, 252 (1987).

  An insurer's breach of the cooperation clause will be excused if it was occasioned by the insurer's own conduct.  State Farm v. Peaton, 168 Ariz. 184, 812 P.2d 1002, 1010 (App. 1990).


  Claimant has burden of showing that it is entitled to coverage.  Home Ins. Co. v. Keeley, 511 P.2d 214, 20 Ariz. App. 200 (1973)(auto-permissive user)


  Arizona courts follow the Restatement (Second) of Conflict of Laws in determining choice of law issues.  Landi v. Arkules, 835 P.2d 358 (Ariz. App. 1992); Burr v. Renewal Guaranty Corp., 105 Ariz. 549, 550, 468 P.2d 576, 577 (1970).  The courts will apply the law of the state chosen by the parties unless that law is contrary to the fundamental policy of a state with a greater material interest in the issue.  If the parties' choice of law will make the contract provision invalid, the court will assume a mistake and not apply the chosen law. 

  In Beckler v. State Farm Mutual Automobile Ins. Co., 1 CA-CV 97-0364 (Ariz. App. April 22, 1999), Division One declared that Arizona law should apply to an automobile accident involving a vehicle garaged in Arizona notwithstanding the fact that the claim arose under a policy issued to the driver’s parents in Nebraska.  In such circumstances, the court ruled that Arizona was the principal location of the insured risk under Section 193 of the Restatement since that is where the driver resided and the car was garaged.  

  A “law of the site” approach was adopted by a state trial court in a case involved hundreds of hazardous waste sites scattered around the country.  Despite the fact that the insured was headquartered in Minnesota, Judge Dann ruled in Honeywell, Inc.  v.  Aetna Casualty & Surety Co., Maricopa No.  CV-96-17582 (Ariz. Super.  November 10, 1998) that the states where the pollution had to be cleaned up had the most significant interest in the issue of coverage under a Restatement-type approach.


  An insurer must advise its insured of its right to retain independent counsel in cases where a conflict exists.  Failure to do so may result in the insurer being estopped to dispute coverage. Farmers Ins. Co. v. Vagnozzi, 138 Ariz. 443, 675 P.2d 703 (1983).

  Absent a conflict of interest between a policyholder and its liability insurer, the defense counsel retained by the insurer to represent the policyholder is deemed to have an attorney-client relationship with both and can be sued by the insurer is he commits malpractice in the defense of the insured.  On the other hand, the insurer may not refuse to pay counsel’s fees pending the resolution of its malpractice claim.  Paradigm Ins.  Co.  v.  The Langerman Law Offices, 2 P.3d 663 (Ariz.  App.  1999), appeal pending, No. CV 99-0412 (Ariz. 2000).


  Arizona courts have, to date, refused to adopt "efficient proximate cause" as a basis for creating coverage where a loss is contributed to by a non-excluded peril.  Schroeder v. State Farm Fire & Cas. Co., 770 F.Supp. 558, 561 (D Nev. 1991).


  The U.S. Court of Appeals for the Ninth Circuit has ruled in Holbrook Unified School District v. California Ins. Co., 942 F.2d 791 (9th Cir. 1991)(Unpublished) that the insurer's promise to pay "damages" only extends to the satisfaction of compensatory awards and does not extend to costs incurred in responding to claims for injunctive relief or equitable remedies.


  Costs are automatically awarded to the prevailing party.  A.R.S. §12-341.  However, a trial court has discretion as to whether to award attorney's fees to the prevailing party in a claim arising out of a contract A.R.S. § 12-341.01(A).  This has also been construed to extend to bad faith claims based on an insurance policy.

  Fees may also be awarded to an insurer who prevails against such a claim.  See, Nationwide Mutual Ins. Co. v. Graillo, 573 P.2d 80 (Ariz. App. 1977) and Whitson v. Western Agric. Ins. Co., 1 CA-CV 93-0043 (Ariz. App. March 14, 1995)(insurer who prevailed on insured's bad faith claim for punitive damages awarded fees even though insured prevailed on claim for breach of contract).

  Attorneys fees are recoverable in an action for bad faith. Filasky v. Preferred Risk Mutual Ins. Co., 734 P.2d 76 (Ariz. 1987).  

  Federal courts are increasingly refusing to exercise diversity jurisdiction over insurance disputes involving issues of state law where parallel state claims are pending. American National Fire Ins. Co. v. Harris Trust Bank of Arizona, No. CIV 94-0961 (D. Ariz. March 8, 1996).


   --Claims Manuals

   --Drafting History

   --Other Policyholder Claims

   --Reinsurance Information

  A Special Discovery Master recommended in Inspiration Consolidated Copper Company v. The American Insurance Company, Maricopa No. CV 98-00530 (Ariz. Super. March 28, 2001) that the London Market defendants were not required to disclose the names of individual “names” or reinsurer information to the plaintiff.



  Under Arizona law, if a complaint appears to allege a covered set of facts, the court may look to the actual facts to determine if the claim, in fact, falls outside the policy coverage. Western Cas. & Sur. Co. v. Hays, 162 Ariz. 61, 781 P.2d 38 (App. 1989).   Kepner v. Western Fire Ins. Co., 109 Ariz. 329, 509 P.2d 222 (1973) and Granite State Ins. Co. v. Henshall, 573 P.2d 506 (Ariz. App. 1977).  In USF&G v. Advance Roofing & Supply Co., 163 Ariz. 476, 788 P.2d 1227 (App. 1989), rev. denied (Ariz. 1989), the Arizona Court of Appeals held that an insurer could not rely exclusively on the allegations of a complaint in denying coverage if its insured came forward with extrinsic facts establishing a covered claims.  In such instances, the court found that the insurer had a duty to conduct its own investigation to see whether coverage should be afforded.  

  Generally, an insurer's duty to defend does not arise until a claim for coverage is tendered to it.  Manny v. Estate of Anderson, 574 P.2d 36 (Ariz. App. 1977).  Thus, the Arizona Court of Appeals declared in Litton Systems, Inc. v. Shaw's Sales & Services, Ltd., 579 P.2d 48, 52 (Ariz. App. 1978) that the insured must make “an unequivocable certain and explicit demand to undertake the defense.”  Litton Systems, Inc. v. Shaw’s Sales and Service, 579 P.2d 48, 52 (Ariz. App. 1978).  

  An insurer may not extinguish its defense obligation by merely tendering its limits.  However, in Continental Cas. Co. v. Farmers Ins. Co. of Arizona, 883 P.2d 473 (Ariz. App. 1994), the Arizona Court of Appeals ruled that an insurer that tendered its policy limit in return for a covenant by the plaintiff not to execute against the policyholder had no further obligation to pay defense costs, rejecting the excess insurers' equitable contribution claim.

  An insurer that is defending a claim under a reservation of rights may not refuse to pay a settlement negotiated by its insured on the basis that the policyholder was not legally liable for the claims.  Smith v. Tucson Airport Authority, 2 CA CV 93-0204 (Ariz. App. February 18, 1994).

  Arguments that governmental clean up claims were not a "suit" were dismissed as "nonsense" in Harris Trust Bank of Arizona v. Liberty Mutual Ins. Co., Maricopa No. CV 94-09093 (Ariz. Super. May 13, 1996)("it is quite clear that the term "law suit" includes administrative proceedings such as those investigations by the Arizona Department of Environmental Quality where the resulting findings of liability and assessment of costs and attorneys fees is equally as binding as those in a court of law").


  Arizona has rejected the majority rule with respect to the doctrine of waiver and estoppel and ruled in Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 682 P.2d 388 (Ariz. 1984) that estoppel might be used as a basis for broadening coverage.  In Darner, the court ruled that the insured could raise estoppel to establish coverage despite exclusions or other limitations in the boiler plate language of a policy where the insured's agent had represented that coverage would be available that was greater than what was actually afforded under the written terms of the contract.  Further, the court ruled that the fact that the insured had not read the policy "word for word" was not, in and of itself, an absolute basis for barring a claim of estoppel.

  However, the insured must still prove prejudice in order to recover on a claim of estoppel. Sellers v. Allstate Ins. Co.,555 P.2d 1113, 1117 (Ariz. 1976) and Gentile v. Anesthesiologists Professional Assur. Assoc., 1995 U.S. App. LEXIS 31272 (9th Cir. August 2, 1995).

  A claim of waiver will not be sustained where the insurer's conduct does not evidence any intent to waive a coverage defense.  D.M.A.F.B. Federal Credit Union v. Employers Mut. Ins. Co. of Wausau, 396 P.2d 20, 23 (Ariz. 1965), cited in Gentile, supra.

  If an insurer assumes the defense of an action with knowledge of a ground of forfeiture or non-coverage under the policy and fails to communicate these coverage concerns to the insured by way of a non-waiver agreement or reservation of rights letter, it is thereafter precluded from raising this coverage defense.  Farmers Ins. Co. v. Vagnozzi, 138 Ariz. 443, 675 P.2d 703 (1983), USAA v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987) and Manzanita Park, Inc. v. Ins. Co., 857 F.2d 549 (9th Cir. 1988) and Anderson v. Martinez, 158 Ariz. 358, 762 P.2d 645 (App. 1988).


  A theory of "horizontal exhaustion" was adopted by a federal district court in reliance on the 9th Circuit's ruling in Iolab.  Smith v. Hughes Aircraft, No. CIV-88-406 (D. Ariz. October 7, 1996).

  Arizona Court of Appeals ruled in Arizona Joint Underwriting Plan v. Glacier General Assur. Co., 129 Ariz. 351, 631 P.2d 133, 136 (1981) that excess insurers have no obligation to share defense costs with primary carriers even if the loss is ultimately settled for more than the primary limits.  However, the court has since ruled that defense costs should be allocated between a primary and excess insurer in proportion to the amount that was paid to settle the underlying claims, rather than on the basis of their respective limits of liability.

  The Arizona Supreme Court ruled in Twin City Fire Ins. Co. v. Superior Court, 792 P.2d 758 (Ariz. 1990) that excess insurers can maintain an action against a primary insurer on a theory of equitable subrogation but that no direct duty exists between the two.


 The state Court of Appeals has ruled that the State of Arizona may sue the state Guaranty Fund for refusing to pay under an insolvent Mission policy issued to the state transportation agency.   In State of Arizona v. Arizona Property & Casualty Ins.  Guaranty Fund, 1-CA-CV 97-0488 (Ariz.App.  August 27, 1998), Division One rejected the Fund’s claim that the State was not a “citizen” or “resident” of Arizona as required under the enabling statute.


  Court of Appeals ruled in Western Cas. & Sur. Co. v. Hays, 162 Ariz. 61, 781 P.2d 38 (App. Ct. 1989), that an order directing the insured to halt further land irrigation was not an "occurrence" where the order had been the subject of hearings for years prior to the issuance of the policies at issue.  


  Arizona courts have used the "cause" test for determining whether diverse elements of damage involved a single "occurrence."  Arizona Property & Cas. v. Helne, 153 Ariz. 129, 725 P.2d 451 (1987) (related malpractice of two doctors involved one "occurrence").


  Where “other insurance” clauses are mutually repugnant, they will be ignored and the loss pro rated between the insurers.  State Farm Mutual Auto Insurance v. Bogart, 717 P.2d 449, 453 (Ariz. 1986)(escape clause v. excess clause).  On the other hand, where one policy contains a pro rata clause and the other an excess clause, the clauses are not mutually repugnant and will be relied upon in determining the priority of payment of the policies.  Dairyland Mutual Insurance Company v. Andersen, 433 P.2d 963 (Ariz. 1967) and Allstate Insurance Company v. Great American Insurance Companies, 1CA-CV 99-0374 (Ariz. App. March 7, 2000).

  The Arizona Court of Appeals ruled in Allstate Insurance Company v. Great American Insurance Companies, 1CA-CV 99-0374 (Ariz. App. March 7, 2000) that a “pro rata” other insurance clause in Allstate’s boat owner’s policy could be reconciled with an “excess” clause in Great American’s homeowner’s policy and were not “mutually repugnant.”  


  Although the Arizona Court of Appeals ruled in TNT Beltway Transportation, Inc. v. Truck Ins. Exchange, 1 CA CV 92-0128 (Ariz. App. August 30, 1994) that a gradual leakage of gasoline over an eighteen month period is not "sudden," the opinion was depublished in early 1996 by order of the Arizona Supreme Court.  Earlier, the exclusion was also upheld in Smith v. Hughes Aircraft, 783 F.Supp. 1222 (D. Ariz. 1991), aff'd in part, rev'd in part, 10 F.3d 1448 (9th Cir. 1993)(on-going disposal activity is not "sudden").  See also Harris Trust Bank of Arizona v. Liberty Mut. Ins. Co., Maricopa No. CV 94-09093 (Ariz. Super. May 13, 1996).

 The possibility that Arizona courts may refuse to give effect to the exclusion has been made more palpable by the April 2000 ruling of the Arizona Court of Appeals in Maricopa County v. Arizona Property & Casualty Insurance Guaranty Fund, No. 2 CA CV 98-0076 (Ariz. App. April 27, 2000).  Whereas the trial court entered summary judgment for insurers on the basis that gradual pollution was not “sudden,” The Court of Appeals ruled that the trial court erred in refusing to consider extrinsic evidence concerning the alleged drafting history and regulatory approval of the exclusion.   Contrary to the insurers’ arguments, the court ruled that “sudden and accidental” was reasonably susceptible of different interpretations, as evidenced by the fact that at least 25 state courts and many federal courts had adopted conflicting interpretations of this language.  The court therefore found that the proposed interpretive documents were relevant notwithstanding the fact that they did not purport to constitute a representation to the insured or by any of the insurers in the case.  The court ruled that traditional principles of contract interpretation were not always applicable in the insurance context and, furthermore, that statements made by the IRB could be imputed to the insurers on whose behalf these materials were promulgated.  The fact that the insured was unaware of and did not rely on the interpretive materials when it purchased these policies did not, in the court’s view, render the materials irrelevant or unworthy of consideration.  The court therefore rejected the Ninth Circuit’s opinion in Hughes Aircraft as being unreflective of Arizona law.  The issue was therefore remanded to the trial court for a preliminary evaluation and ruling with respect to the relevance of such materials.

  A U.S. District Court in Arizona initially ruled in Nucor Corp. v. Aetna Casualty & Surety Co., No. 93-0617 (D. Ariz. August 19, 1994), reversed on other grounds, 110 F.3d 69 (9th Cir. 1997)(Unpublished--full text at 1997 U.S. App. LEXIS 6155), that pollution occurring over a period of years was excluded in the absence of any evidence of abrupt or inadvertent release.  However, this order was vacated by order of the Ninth Circuit on March 28, 1997.  The court held that its recent rulings in Hungerford and Karussos made clear that a federal court should not retain jurisdiction over a DJ concerning issues of state law where related proceedings are pending in state court.  Further, the Court of Appeals refused to find that this was harmless error, noting that "a majority of state courts have reached a result contrary to that of the district court."  

  Although the Arizona Supreme Court has yet to construe the “sudden and accidental” exception to the pollution exclusion, it has suggested in unrelated opinions that “sudden” is meant to have a temporal context in its common usage.  Thus, in Salt River Project II, 143 Ariz. at 377-78, the Arizona Supreme Court discussed the application of the economic loss rule to tort claims involving dangerous products noting that  “a product may pose an unreasonable danger to its user, even though no sudden accident has occurred where, for example, it emits a toxic substance or its harmful effects manifest themselves only after a period of many years.”
  The Arizona Court of Appeals has ruled that absolute pollution exclusions are limited to “traditional environmental pollution.”  In Keggi v. Northbrook Property & Cas. Ins. Co., 13 P.3d 785 (Ariz. App. 2000), the Court of Appeals ruled that a trial court had erred in barring coverage for personal injuries suffered by a woman who drank water contaminated with e. coli from a fountain at the insured’s golf resort.  Division One declared that the exclusion is not intended to preclude coverage for contamination resulting from “bacteria” and that even if such an interpretation was reasonable, the exclusion, taken as a whole, “should not be interpreted to preclude coverage for bacterial contamination absent any evidence that the actual contamination arose from traditional environmental pollution.”


  In Aetna Cas. & Surety Co. v. Haugen, No. CV 89-00814-RGS (D. Az. 1990), aff'd, 963 F.2d 378 (9th Cir. 1992)(Table), the Circuit Court held that the cost of repairing defective drainage installation by insured was not an "occurrence" or "property damage."  

  Under pre-1973 policies, a reduction in property value resulting from the incorporation or installation of a defective product furnished by the insured constitutes "property damage"  whether or not it results in physical damage to the structure as a whole. Aetna Cas. & Sur. Co. v. PPG Industries, Inc., 554 F.Supp. 290 (D. Ariz. 1983)(installation of polyurethane foam as an insulating materials reduced their value since it posed a threat to the safety of building occupants

  Pure economic losses, such as loss of good will, injury to reputation, lost profits and investment opportunities were not covered absent some preliminary proof of an actual injury to tangible property.  McCollum v. Ins. Co. of North America, 132 Ariz. 129, 644 P.2d 283 (1982).


  The Supreme Court of Arizona has held that punitive damages may be covered under a general liability policy in Price v. Hartford Acc. & Ind. Co., 108 Ariz. 485, 502 P.2d 522 (1972).


  "Reasonable expectations" doctrine adopted in Darner Motor Sales v. Universal Underwriters, 682 P.2d 388, 394 (Ariz. 1984).  However, the doctrine only applies where policy was an adhesion contract over which insured had no bargaining power.  Zuckerman v. Transamerica Ins. Co., 133 Ariz. 139 (1982).   Later, in Gordinier v. Aetna Cas. & Sur. Co., 742 P.2d 277, 283-84 (Ariz. 1987), the Supreme Court stated that the doctrine would apply if (1) if a policy term, although unambiguous to The court, could not be understood by a reasonably intelligent consumer; (2) where the insured was unaware of an unexpected term in the policy that defeats coverage; or (3) where some action of the insurer created an objectively reasonable expectation of coverage in the mind of the policyholder. Aetna C& S v. Haugen,  963 F.2d 378 (9th Cir. 1992).  However, proof of such factors requires more than a "fervent hope usually generated by loss."  Haugen, citing Millar v. State Farm, 804 P.2d 822, 826 (Ariz. App. 1990). 

  Although ambiguity may be inferred where a policy term is susceptible of two reasonable interpretations or has been accorded conflicting meanings by the courts, Arizona courts will not automatically adopt the meaning more favorable to the insured.  Rather, the policy meaning will be interpreted in accordance with the policy language, public policy and the intent underlying the insurance transaction, including the reasonable expectations of the insured.  State Farm Mut. Auto Ins. Co. v. Wilson, 782 P.2d 727 (Ariz. 1989); TNT Beltway Transportation, Inc. v. Truck Ins. Exchange, 1 CA CV 92-0128 (Ariz. App. August 30, 1994).

 The Court of Appeals has ruled that drafting history materials are admissible to establish the meaning of insurance contracts.  In Maricopa County v. Arizona Property & Casualty Insurance Guaranty Fund, No. 2 CA CV 98-0076 (Ariz. App. April 27, 2000), Division II Court of Appeals ruled that the trial court erred in refusing to consider extrinsic evidence concerning the alleged drafting history and regulatory approval of the “sudden and accidental”-type pollution exclusions.  Although the trial court had ruled that “sudden” has the unambiguous meaning of abrupt or quick, the Court of Appeals took note of submissions that the Insurance Rating Bureau (IRB) sent to various state regulators, including the Arizona Director of Insurance, which might have led to a contrary conclusion.  Further, the Court of Appeals found that the trial court had erred in relying on California cases, such as Hughes Aircraft, asCalifornia uses a different standard of evidence as to when extrinsic evidence may be considered.  On remand from the Arizona Court of Appeals, the trial court granted partial summary judgment to the insurers finding that the County was aware that the disposal of its waste materials in the Hassayampa Landfill would present a risk of pollution.  The court also granted the insurer’s motion to strike the regulatory history and other documents that the insured had presented in support of its motion for summary judgment based upon a regulatory estoppel argument.  These rulings are now pending in the Arizona Court of Appeals (No. CA-CV 98-0076).  The insured’s petition for immediate review by the Arizona Supreme Court was denied by the Supreme Court on December 5, 2000.  

  Reformation requires more than a unilateral mistake or misunderstanding by the insured.  Gentile v. Anesthesiologists Professional Assur. Assoc., 1995 U.S. App. LEXIS 31272 (9th Cir. August 2, 1995) and Isaak v. Massachusetts Ind. Life Ins. Co., 623 P.2d 11, 14 (Ariz. 1981).


  None yet adopted.


  Arizona follows the majority rule that coverage is triggered when the claimant sustains actual damage and not when the act or omission that caused such damage was committed.  Outdoor World v. Continental Cas. Co., 122 Ariz. 292, 594 P.2d 546 (1979)(no coverage where negligent installation of steering device during policy period resulted in accident after expiration of policy) and Aetna Cas. & Sur. v. Haugen, 963 F.2d 378 (9th Cir. 1992)(no coverage where construction work occurred during policy period but home was not completed until afterwards).

      Arizona has not yet had occasion to adopt a "trigger" for toxic tort or latent injury claims.  Such cases as have been decided have focused on the date of actual injury.  In University Mechanical Contractors of Arizona, Inc. v. Puritan Ins. Co., 150 Ariz. 299, 723 P.2d 658 (1986), the court required coverage for the cost of replacing a plumbing system installed by the insured which had begun to leak during the policy period, even though the full extent of harm was not apparently realized until after the policy expired.  By contrast, a federal court had earlier held in Aetna Cas. & Surety Co. v. PPG Industries, Inc., 554 F.Supp. 290 (D. Ariz. 1983) that damages arising from the necessity of removing defective foam insulation products installed by the insured would arise in the policy in which property damage was discovered.  See also, State of Arizona v. Glens Falls Ins. Co., 125 Ariz. 328, 609 P.2d 598 (Ariz. 1980)(damages arising from investor malpractice did not trigger coverage until a year in which claimants actually suffered harm).

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