Opinion
No. CV-18-04857-PHX-JJT
2020-02-13
TAPESTRY ON CENTRAL CONDOMINIUM ASSOCIATION, Plaintiff, v. LIBERTY INSURANCE UNDERWRITERS INCORPORATED, Defendant.
Christopher Alan LaVoy, Tiffany & Bosco Pa, Phoenix, AZ, for Plaintiff. Jasmina Richter, Sanders & Parks PC, Phoenix, AZ, Sabrina Haurin, Pro Hac Vice, Bailey Cavalieri LLC, Columbus, OH, for Defendant.
Christopher Alan LaVoy, Tiffany & Bosco Pa, Phoenix, AZ, for Plaintiff.
Jasmina Richter, Sanders & Parks PC, Phoenix, AZ, Sabrina Haurin, Pro Hac Vice, Bailey Cavalieri LLC, Columbus, OH, for Defendant.
ORDER
John J. Tuchi, United States District Judge
At issue is Defendant's Motion for Summary Judgment (Doc. 27, Def. Mot.), to which Plaintiff filed a Response (Doc. 36, Pl. Resp.) and Defendant filed a Reply (Doc. 39, Def. Reply); also at issue is Plaintiff's cross-Motion for Summary Judgment (Doc. 28, Pl. Mot.), to which Defendant filed a Response (Doc. 34, Def. Resp.) and Plaintiff filed a Reply (Doc. 42, Pl. Reply). The Court held oral argument on the Motions on January 30, 2020. The Court now grants in part and denies in part both Motions as described below.
I. BACKGROUND
Plaintiff is a condominium association for a condominium complex; Defendant is Plaintiff's insurance provider. This single-count breach of contract action is about whether Defendant had a duty to defend Plaintiff in an underlying action brought against Plaintiff (also referred throughout as "Tapestry") in 2014. That action (the "Underlying Action") was brought by Matthew Hodeaux Architect, PLLC ("Hodeaux") and his affiliated construction company, MBH Development, LLC ("MBH"), against Tapestry. (See Doc. 30 Ex. 5 ("Policy").) It involved disputes over the following three contracts the underlying parties had entered into:
1. Investigation Contract (Doc. 30 Ex. 2): This contract, dated August 4, 2009, was between Hodeaux and Tapestry. The purpose of the contract was for Hodeaux to "investigate and prepare a report documenting construction defects at the complex" that Tapestry needed "for settlement negotiations with the general contractor responsible for the construction defects." (Pl. Mot. at 2.)
2. Design-Build Contract (Doc. 30 Ex. 3): This contract was also between Hodeaux and Tapesty and was executed sometime in late 2009 or early 2010. According to Plaintiff, the contract "was for other services that Hodeaux was to provide besides the [above-referenced] report." (Pl. Mot. at 2.) The contract itself states that it "serves to expedite the resolution of the construction claims [Tapestry] has against others."
3. MBH Contract (Doc. 30 Ex. 4): This contract, entered into on April 15, 2010, was between MBH and Tapestry. Plaintiff characterizes the contract as one for "storefront repairs to the commercial units at the complex" caused by a microburst storm in 2008. (Pl. Mot. at 2–3; Doc. 31, Defendant's Statement of Facts ("DSOF") Ex. C ¶ 40.)
In the underlying action, filed February 11, 2014, Hodeaux and MBH alleged Tapestry breached all three contracts. Specifically, Hodeaux brought two counts for breach of contract for his contracts with Tapestry and one count for unjust enrichment; MBH brought one count for breach of contract relating to the MBH Contract and one count for unjust enrichment. (Doc. 30 Ex. 1 at 3–7.)
On June 12, 2014, Plaintiff tendered the Underlying Action to Defendant. (Def. Mot. at 6.) Over the next few months, Defendant investigated Plaintiff's claim and on September 17, 2014, sent Plaintiff a letter denying coverage and a defense on the grounds that the "Claim," as defined in the policy and below, was excluded from coverage because it involved a construction defect. (See DSOF Ex. R.)
The insuring provision of the policy provides that Defendant "shall pay on behalf of [Tapestry] all Loss which [Tapestry] shall become legally obligated to pay as a result of a Claim first made during the Policy Period." (Policy ¶ 1.) The policy also provided that it "shall be the right and duty of [Defendant] to defend any Claim." (Policy ¶ 2.1.) Pursuant to the Claims Exclusions section, however, the "policy does not apply to any Claim made against [Tapestry] ... based upon, arising from, or in any way related to any Construction Defect." (Policy ¶ 4.11.) Finally, per the Loss Exclusions, Defendant "shall not be liable to pay any Loss in connection with any Claim" for any liability of Tapestry under any contract or agreement. However, the policy provides that the Loss Exclusions "shall not apply to [Defendant's] duty to defend." (Policy ¶5.2.)
The policy period was October 26, 2013 through October 26, 2014.
In summary, the policy provides that Defendant has the duty to defend a Claim brought against Tapestry—even if the Claim is for liability under a contract, to which Tapestry is not entitled to loss indemnification—so long as the Claim is not related to any Construction Defects.
A Claim is defined under the policy as:
(a) a written demand for monetary or non-monetary relief against [Tapestry];
(b) the commencement of a civil or criminal judicial proceeding or arbitration against [Tapestry];
(c) the commencement of a formal criminal, administrative or regulatory proceeding or investigation against [Tapestry]; or
including any appeal therefrom.
(Policy ¶ 23.3.) A Construction Defect is defined as "any actual or alleged defective, faulty or delayed construction or any other matter recognized as a construction defect under applicable common or statutory law[.]" (Policy ¶ 23.23.)
Defendant did not provide Tapestry a defense in the Underlying Action. Plaintiff later brought this action alleging Defendant's failure to provide a defense constituted a breach of its duty to defend and seeks the attorneys’ fees and costs Tapestry spent defending the Underlying Action. Presently before the Court are the parties’ cross-Motions for Summary Judgment.
II. LEGAL STANDARD
Under Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment is appropriate when: (1) the movant shows that there is no genuine dispute as to any material fact; and (2) after viewing the evidence most favorably to the non-moving party, the movant is entitled to prevail as a matter of law. Fed. R. Civ. P. 56 ; Celotex Corp. v. Catrett , 477 U.S. 317, 322–23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ; Eisenberg v. Ins. Co. of N. Am. , 815 F.2d 1285, 1288–89 (9th Cir. 1987). Under this standard, "[o]nly disputes over facts that might affect the outcome of the suit under governing [substantive] law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A "genuine issue" of material fact arises only "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id.
In considering a motion for summary judgment, the Court must regard as true the non-moving party's evidence, if it is supported by affidavits or other evidentiary material. Celotex , 477 U.S. at 324, 106 S.Ct. 2548 ; Eisenberg , 815 F.2d at 1289. However, the non-moving party may not merely rest on its pleadings; it must produce some significant probative evidence tending to contradict the moving party's allegations, thereby creating a material question of fact. Anderson , 477 U.S. at 256–57, 106 S.Ct. 2505 (holding that the plaintiff must present affirmative evidence in order to defeat a properly supported motion for summary judgment); First Nat'l Bank of Ariz. v. Cities Serv. Co. , 391 U.S. 253, 289, 88 S.Ct. 1575, 20 L.Ed.2d 569 (1968).
"A summary judgment motion cannot be defeated by relying solely on conclusory allegations unsupported by factual data." Taylor v. List , 880 F.2d 1040, 1045 (9th Cir. 1989). "Summary judgment must be entered ‘against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." United States v. Carter, 906 F.2d 1375, 1376 (9th Cir. 1990) (quoting Celotex , 477 U.S. at 322, 106 S.Ct. 2548 ).
III. ANALYSIS
A. Definition of Claim
The threshold issue the Court must address is whether the Underlying Action presented one "Claim" or multiple "Claims" under the policy's definition of that term. As noted above, the policy defines a Claim as:
(a) a written demand for monetary or non-monetary relief against [Tapestry];
(b) the commencement of a civil or criminal judicial proceeding or arbitration against [Tapestry];
(c) the commencement of a formal criminal, administrative or regulatory proceeding or investigation against [Tapestry]; or
including any appeal therefrom.
(Policy ¶ 23.3.)
Plaintiff's position is that, under subsection (a), the Underlying Action comprises two Claims: one written demand for monetary relief made by Hodeaux and one written demand for monetary relief by made MBH. Plaintiff focuses on the fact that the underlying action was initiated by two plaintiffs for, as Plaintiff sees it, unrelated claims stemming from distinct transactions. This Court agrees that "[h]ad Hodeaux and MBH filed separate suits, there is no question that two [Claims] would be presented." (Pl. Reply at 6.) That the underlying plaintiffs procedurally brought the distinct demands in one lawsuit does not transform them into a single Claim. Defendant argues only one Claim is at issue. Relying on subsection (b), Defendant contends the whole Underlying Action constitutes one Claim because a Claim is the "commencement of a civil ... judicial proceeding," and there was only one underlying judicial proceeding commenced against Tapestry. (Def. Resp. at 5–7.)
Plaintiff questioned at oral argument whether Hodeaux's and MBH's claims could even be properly brought as one action under the rules of joinder.
The interpretation of a contract is a question of law that begins with the proposition that, where a contract's language is "clear and unambiguous, it must be given effect as it is written." Hadley v. Sw. Props., Inc. , 116 Ariz. 503, 570 P.2d 190, 193 (1977). The mere fact that parties disagree about the meaning of a contract does not make it ambiguous. J.D. Land Co. v. Killian , 158 Ariz. 210, 762 P.2d 124, 212 (App. 1988). Here, neither party contends a term is ambiguous or disagrees about the meaning of a particular term. Rather, the parties disagree on which definition of the term Claim applies. The Court begins by analyzing those definitions.
The policy does not define a "written demand" as it is used in subsection (a), nor is the Court aware of a definition Arizona courts have prescribed it in this context. Black's Law Dictionary defines a "demand" as an "assertion of a legal right" or a "request for payment of a debt or amount due." Black's Law Dictionary (7th ed. 1999). A "legal demand" is "a lawful demand made by an authorized person." Id. Notably, the policy's definition of Claim does not use the more specific term "demand letter," which Black's defines as "a letter by which one party explains its legal position in a dispute and requests that the recipient take some action (such as paying money owed), or else risk being sued." Id. It thus appears a written demand can be broader and encompass more forms than the formal demand letter that definitionally precedes a lawsuit.
The Court takes the time here to note that the only Arizona case it found remotely addressing similar definitions of Claim is SP Syntax LLC v. Fed. Ins. Co. , 2016 WL 831532 (Ariz. Ct. App. Mar. 3, 2016). There, the court upheld the insurer's denial of coverage for the underlying action, finding an interrelated wrongful acts exclusion applied. In doing so, the court rejected the argument that the underlying action comprised multiple Claims and that the insurer should have provided coverage for the alleged wrongful acts within the action that did not constitute interrelated acts. "Simply put, [the underlying plaintiff] filed one civil proceeding, which constitutes one ‘Claim.’ " Id. at 11.
Although that single sentence appears favorable to Defendant's position, it must be read in context of the entire case, which has critical distinctions from the one at bar. First, the court there found that the party arguing for multiple Claims had admitted earlier in its complaint that the entire underlying action was a Claim under the policy, and was thus bound to its pleadings. Id. at 7. Second, that party never made the textual "written demand" argument Plaintiff makes here under subsection (a). See Brief of Petitioner-Appellant at 49, 2015 WL 582128. The court's opinion therefore did not consider whether different allegations made by different underlying plaintiffs could constitute separate "written demands for monetary relief" and, therefore, multiple Claims. The Court therefore finds SP Syntax of limited application here.
Indeed, a recent case involving similar definitions of Claim found that an individual cause of action in the underlying suit constituted a written demand and therefore a Claim. Zucker v. U.S. Specialty Ins. Co. , 2015 WL 11216710, at *8 (S.D. Fla. Feb. 12, 2015), aff'd 856 F.3d 1343 (11th Cir. 2017). There, a group of creditors sued the insureds, directors and officers of a bank, alleging four counts of breach of fiduciary duties and duty of care. The insurer denied coverage for the action citing the policy's prior acts exclusion, which excluded coverage for a Claim "arising out of, based upon or attributable to any Wrongful Act" committed prior to November 2008. The first three counts were based on wrongful conduct that occurred both before and after November 2008. Count four, however, was based solely on conduct that occurred after November 2008. The insurer, like Defendant here, argued the underlying action was a single Claim under the second definition of the policy, a "civil proceeding commenced by service of a complaint." The insureds argued count four was a separate Claim under the first definition, "any written demand for monetary or nonmonetary relief." Id. at 6–7.
The court agreed with the insured. Because the policy listed multiple things that could constitute a Claim, all of which were separated by "or," the policy allowed for several alternative—but not mutually exclusive—methods for triggering coverage under the policy. Id. at 8. One alternative for triggering coverage was through a written demand, "which in common usage might be, for example, a demand letter, but might also be a lawsuit or a single count or a group of counts in a single lawsuit or related lawsuits." Id. Consequently, the court held that count four was not barred from coverage simply because it was brought in the same suit as other counts that were excluded under the prior acts exclusion. Id.
The purpose of the different definitions of a Claim in the context of a claims-made policy is also instructive. As a California court explained, a " ‘Claim’ is defined in a way to indicate when notice of a third party's claim for damages has become certain enough to trigger the policy.... [The] language is concerned with temporal certainty of the ‘Claim’; it does not speak to its scope." Health Net, Inc. v. RLI Ins. Co. , 206 Cal. App. 4th 232, 261, 141 Cal.Rptr.3d 649 (2012). In other words, a claims-made policy generally insures only those claims first made during the effective policy period, as opposed to an occurrence-based policy that generally insures for liability stemming from events that occurred during the effective policy period. The various definitions are intended to outline the types of events that constitute a "Claim" for purposes of determining whether it was in fact first made during the policy period. They are not necessarily intended to define the scope of what a Claim is. Millennium Labs., Inc. v. Allied World Assurance Co. (U.S.), Inc. , 726 F. App'x 571, 574 (9th Cir. 2018). This purpose, as found by the Ninth Circuit, indicates that the definitions of Claim are not intended to be mutually exclusive.
This notion is further supported by the presence of the third definition of Claim in the policy at issue here, which overlaps with the second. Subsection (b) defines a Claim as "the commencement of a ... criminal judicial proceeding." Subsection (c), however, also defines it as a "commencement of a formal criminal ... proceeding or investigation." This is distinguishable from the policy in UBS Financial Services , a case Defendant relies on. See UBS Fin. Servs., Inc. of P.R. v. XL Specialty Ins. Co. , 929 F.3d 11, 23 (1st Cir. 2019). The parties in UBS made similar arguments to the parties here. However, there, the policy defined Claim as:
(1) any written notice received by an Insured that any person or entity intends to hold any Insured responsible for a Wrongful Act;
(2) any civil proceeding in a court of law or equity, or arbitration; or
(3) any criminal proceeding which is commenced by the return of an indictment.
Id.
The UBS court rejected the insured's argument that the portions of an underlying action that did not relate to an exclusion constituted separate "written notices" and therefore different Claims. It found that such a construction would render superfluous the second and third prongs. Id. However, no overlap between the three definitions existed there as it does here. Further, the phrase "intends to hold any Insured responsible," as found in the Claim definition of the UBS policy, implies that the written notice is one that comes before an official lawsuit. That temporal specificity is absent in the policy here. Thus, the court in UBS determined the three definitions occupied three discrete, non-overlapping spaces.
Here, the Court is persuaded by the reasoning in Zucker that the application of one definition of Claim does not foreclose application of another. Thus, while it is true that an entire judicial proceeding can constitute a Claim, it can also be true that written demands for monetary relief within a lawsuit can also be Claims. See also AT & T Corp. v. Faraday Capital Ltd. , 918 A.2d 1104, 1109 (Del. 2007) (holding, under similar definitions of Claim, individual causes of action within an underlying lawsuit can each be Claims because "the term ‘Claim’ means a demand for money damages or other relief, regardless of the form in which that demand is presented ") (emphasis added).
Treating the Underlying Action against Tapestry as two Claims makes particular sense under the facts of this case. The Underlying Action consisted of one plaintiff alleging breach of contract under two contracts, and another plaintiff alleging breach of contract under an entirely separate contract that arose under different circumstances and to fulfill a different purpose. , The Court finds on these facts that each underlying plaintiff made a distinct written demand, or "assertion of a legal right" or "request for payment of a debt or amount due," upon Tapestry. Accordingly, the Underlying Action comprised two Claims.
This fact pattern is distinguishable from Mylonas , a case Defendant relies on. See Westport Ins. Corp. v. Mylonas , 704 F. App'x 127 (3rd Cir. 2017). The court there found a "claim is not the underlying wrong or wrongs, but rather the demand for loss made upon the insured party." Because the underlying plaintiff only made one demand for redress in its complaint, the underlying suit constituted a single claim under the policy. However, the policy defined "claim" as "a demand made upon any insured for loss, ... including, but not limited to, service of suit[.]" Id. at 129. The policy therefore did not offer alternative definitions as it does here. Further, the court specifically said it would not address the situation of "a single lawsuit involving truly separate losses." Id. at 130 n.4. Here, the Court finds the two underlying plaintiffs brought two separate sets of loss.
Defendant itself does not appear to dispute Plaintiff's position that Hodeaux and MBH's claims arose from distinct transactions, but instead argues they are one Claim by virtue of being brought in one lawsuit. Defendant also argues that each underlying contract involved a construction defect, which the Court will address below. That argument, however, is not in conflict with the notion that the contracts themselves were unrelated.
B. Construction Defect
Having determined the Underlying Action presented two Claims, the Court must evaluate whether each Claim triggered a Claim Exclusion. An insured bears the burden of establishing coverage under a policy and the insurer bears the burden of establishing the applicability of an exclusion. Keggi v. Northbrook Prop. & Cas. Ins. Co. , 199 Ariz. 43, 13 P.3d 785, 788 (App. 2000).
The duty to defend arises at the "earliest stages of litigation." INA Ins. Co. of N. Am. v. Valley Forge Ins. Co. , 150 Ariz. 248, 722 P.2d 975, 982 (App. 1986). If a complaint alleges facts that may be within the policy coverage, the insurer is obligated to assume the defense. Kepner v. W. Fire Ins. Co. , 109 Ariz. 329, 509 P.2d 222, 224 (1973). But if further discovery reveals "uncontested facts ... that plainly take the case outside policy coverage," there is no duty to defend. Transamerica Ins. Grp. v. Meere , 143 Ariz. 351, 694 P.2d 181, 190 (1984). The insurer's denial or withdrawal of a defense must be based on the facts known at the time the denial or withdrawal is made. Kepner , 509 P.2d at 224.
However, under the unique terms of the policy here, Plaintiff may have no potential for indemnification yet still be entitled to a defense. (See Policy ¶ 5.2.) Thus, the proper question is whether Defendant was in possession of uncontested facts at the time it denied a defense that an exclusion plainly took the case outside of Defendant's duty to defend. More specifically—and because the Underlying Action comprised two Claims—was Defendant in possession of uncontested facts on September 17, 2014, that the Claims made against Tapestry were "based upon, arising from, or in any way related to any Construction Defect?" (Policy ¶ 4.11.)
The policy defines a Construction Defect as "any actual or alleged defective, faulty or delayed construction or any other matter recognized as a construction defect under applicable common or statutory law." (Policy ¶ 23.23.)
1. Hodeaux's Claim
It is undisputed that the Investigation Contract related to construction defects. The contract references construction deficiencies and Plaintiff admitted as much in multiple court documents. (E.g. , DSOF Ex. 5 ¶¶ 12–17; Ex. H at 5.) To get around the exclusion, Plaintiff argues that although the contract itself was related to construction defects, the Claim was not. Instead, the Claim was for non-payment, and the construction defects merely provided the "setting" for the Claim; thus, a causal nexus is missing between the Claim itself and the exclusion. (Pl. Mot. at 8–9.)
Plaintiff's argument is unavailing. It focuses only on the exclusion's "arising out of" language and ignores the "based upon" language or the low standard of "in any way related." See, e.g. , Landmark Am. Ins. Co. v. Navigators Ins. Co. , 354 F. Supp. 3d 1078, 1082 (N.D. Cal. 2018) (characterizing similar exclusionary language in an insurance contract as "extremely broad"); Sun Valley Ranch v. Robson , 231 Ariz. 287, 294 P.3d 125, 130 (App. 2012) (" ‘Relating to’ is broader than ‘arising from.’ "). Clearly, Hodeaux's Claim is "in any way" related to construction defects: the Investigation Contract, under which part of Hodeaux's Claim arose, existed only by virtue of the construction defects, and Hodeaux was hired to investigate and report on the construction defects.
That alone is enough to trigger the exclusion as to Hodeaux's Claim. But even evaluating the Design-Build Contract separately, the Court finds it was also related to construction defects. The contract declares Tapestry "is facing a number of design and construction defects" and seeks "design and construction services and coordination in dealing with all of the interrelated construction claims." (Doc. 30 Ex. 3.) Part of Hodeaux's services was to interface with "construction defects counsel" that Tapestry had retained. (Doc. 30 Ex. 3.) Tapestry also admitted that the "scope of work in the Design-Build Contract generally overlaps with the scope of work of the Investigation Contract. [Hodeaux] should not be paid twice for the same services." (DSOF Ex. C at 5.) In short, the Court readily finds Hodeaux's Claim relates to construction defects, as both of his underlying contracts with Tapestry relate to the same. 2. MBH's Claim
Plaintiff asserts MBH's Claim was related to amounts owed for conducting storefront repairs to commercial units of the complex that were damaged by a storm, not the result of construction defects. (Pl. Mot. at 7–8.) Defendant contends the contract was related to construction defects. (Def. Mot. at 14–15.)
Plaintiff points to the fact that nowhere in the Underlying Action's complaint does it mention construction defects with respect to MBH. (See Doc. 30 Ex. 1 ¶ 22–23, 47–48.) Nor does the MBH Contract reference construction defects. Rather, the scope of work was to "complete storefront repairs." (Doc. 30 Ex. 4.) In a lawsuit brought by Tapestry seeking an accounting from Hodeaux and MBH, Tapestry's complaint referred to a matter "separate from the construction defects issues"—the damage from the microburst storm. (DSOF Ex. C ¶ 40.) That suit was in 2012, demonstrating continuity of Plaintiff's position long before a defense was denied in the Underlying Action. Finally, Plaintiff submits an email from the attorney Defendant initially hired to represent Tapestry in the Underlying Action. That email, sent to Defendant's claim adjuster, stated "it appears that at least one of the contracts at issue (the MBH development contract) does not appear to relate to the construction defect issue." (Doc. 30 Ex. 8.) Five days later, Defendant withdrew its defense. (See DSOF Ex. R.)
This email is the subject of a hearsay dispute between the parties. The Court finds that it is not offered for the truth of the matter asserted therein, but rather as proof that Defendant had notice that its own attorney believed the contract was unrelated to a construction defect, thus triggering a duty to investigate further before withdrawing its defense.
Defendant contends the scope of work in the MBH Contract shows it was related to construction defects. Under Arizona law (incorporated into the policy), a construction defect is defined as a material deficiency in the design or construction of a "dwelling" that is the result of, inter alia , a "violation of construction codes." A.R.S. § 12-1361(4)(a). As part of the storefront repairs, MBH was to repair the doors to "meet current wind load requirement[s] ... per code" and include door hardware systems "compliant with ADA regulations and other code requirements." (Doc. 30 Ex. 4.) This, Defendant argues, fits the definition of construction defect under § 12-1361(4)(a). As Plaintiff notes, however, that statutory definition was added after Defendant denied a defense and thus could not have been relied on in doing so. See H.B. 2578, 51st Leg. 1st Sess. (Ariz. 2015). Further, merely requiring that repairs to storm-related damage be up to current code does not mean the repairs were to correct a material deficiency in construction.
The only other evidence in the record that was available to Defendant at the time of the denial was a letter from its general counsel, who characterized the Underlying Action (not individual Claims) as dealing with "factually complex multi-year non-payment claims associated with multi-party construction defect claims." (DSOF Ex. M.) While Defendant was certainly entitled to consider this letter in its investigation, it simply cannot be said in light of the other evidence above that Defendant had uncontested facts that MBH's Claim was excluded.
The Court finds Defendant has met its burden to show that it owed no duty to defend Hodeaux's Claim at the time it withdrew its defense. However, Defendant has not satisfied this burden as to MBH's Claim. Accordingly, Defendant breached its duty under the policy to defend MBH's Claim.
C. Mixed-Action Rule
Having determined Defendant improperly denied a defense of MBH's Claim, the last issue the Court must resolve is the application, if any, of the mixed-action rule. The mixed-action rule stands for the proposition that when an underlying action against an insured contains allegations that bring at least some of the complaint within the policy's indemnity coverage, the insurer has a duty to defend the entire suit. W. Cas. & Sur. Co. v. Int'l Spas of Ariz., Inc. , 130 Ariz. 76, 634 P.2d 3, 6 (App. 1981). The justification for this prophylactic rule is that "it is impossible to determine the basis upon which the plaintiff will recover (if any) until the action is completed." Id.
Plaintiff argues that because the Underlying Action comprises two Claims, at least one of which triggers the duty to defend, the mixed-action rule applies to mandate a defense of the entire action. This is not what the mixed-action rule stands for. The rule deals with two layers of coverage, indemnity and defense, operating under a paradigm of "if some indemnity, all defense." This case, however, is stripped of the indemnity layer and, importantly, the parties would have known this from the inception of the Underlying Action. Both Claims alleged breach of contract, which is excluded from loss indemnification under the policy yet still entitled to a defense if a Claim exclusion does not apply. Defendant's duty is and always has pertained only to a defense. Thus, Plaintiff is attempting to convert the above paradigm into "if some defense, all defense." The Court presumes Plaintiff would not take the position that the mixed-action rule stands for "if some indemnity, all indemnity," such that, after the underlying action concludes, an insured owes loss indemnity on all claims—even those clearly excluded—simply because it owes indemnity on some. Yet that's precisely what Plaintiff is asking the Court to do here in the context of the duty to defend.
The Court is unaware of any court that has grappled with the precise issue of what to do when a duty to defend was owed on one Claim, not owed on another, no potential for loss indemnity ever existed as to either, and the underlying lawsuit has already been resolved. Without guidance, the Court turns to the contract between the parties and evaluates its plain meaning. Applying the mixed-action rule to require Defendant to retroactively pay defense costs for an entire action, including a Claim that was entitled to neither indemnity nor defense, would disregard the contractual Claim Exclusions and would result in unjust enrichment to Plaintiff. Defendant owes only the defense costs required under the policy: those for MBH's Claim.
Accordingly, the Court finds Defendant breached its duty to defend with respect to MBH's Claim. Plaintiff, to the best of its ability, shall submit to the Court documentation of only those defense costs.
The policy defines Defense Costs as "reasonable and necessary fees (including attorneys’ fees and experts’ fees) and expenses incurred in the defense of a Claim and cost of attachment or similar bonds, but shall not include the wages, salaries, benefits or expenses of any directors, officers or employees of [Tapestry]." (Policy ¶ 23.4.)
IT IS THEREFORE ORDERED granting in part and denying in part Defendant's Motion for Summary Judgment (Doc. 27) as detailed above.
IT IS FURTHER ORDERED granting in part and denying in part Plaintiff's Motion for Summary Judgment (Doc. 28) as detailed above. IT IS FURTHER ORDERED that Plaintiff has 21 days from the date this Order is filed to submit documentation of the attorney time spent defending only MBH's Claim in the Underlying Action. Defendant has 14 days from the date of Plaintiff's filing to respond, and Plaintiff has 14 days to reply.