Opinion
1 CA-CV 98-0446
Filed July 8, 1999
Appeal from the Superior Court of Maricopa County Cause Nos. CV 93-05847 and CV 94-12900.
The Honorable Michael J. O'Melia, Judge.
AFFIRMED
Dushoff McCall by Michael Riikola Phoenix and Stritmatter, Kessler, Whelan, Withey by Michael E. Withey Seattle, WA, Attorneys for Appellants/Cross-Appellees.
Lewis and Roca, L.L.P. by Susan M. Freeman, Craig Phillips, and George L. Paul, Phoenix and Hawley, Troxell, Ennis and Hawley by Kim Stanger Boise, ID, Attorneys for Appellees/Cross-Appellants.
OPINION
¶ 1 The primary issue on appeal is whether the negligent financial mismanagement of adoption agencies constitutes an "occurrence" under the insuring clause of the insureds' comprehensive general liability (CGL) insurance policies. The second issue is whether any question of fact remains about the insureds' reasonable expectations of coverage that would preclude summary judgment. We affirm the trial court's summary judgment in favor of the insurers on both issues.
¶ 2 The appellants-class plaintiffs (prospective parents) appeal from a declaratory judgment, by summary judgment, that their class action claims in the companion liability suit did not assert a covered "occurrence" under the provisions of the defendant adoption agencies' CGL policies with appellees Farmers Insurance Co. and Truck Insurance Exchange (insurers).
¶ 3 The insurers cross-appeal, raising issues regarding the enforceability of the stipulated judgment entered as a result of a Morris agreement between the prospective parents and the adoption agency defendants in the underlying liability class action.
¶ 4 Because we affirm the trial court's legal ruling that the prospective parents' class claims did not constitute an "occurrence," we need not reach any of the issues presented by the insurers on cross-appeal because they are moot.
BRIEF BACKGROUND
¶ 5 We discuss only those facts necessary to our resolution of the issues. On appeal from summary judgment, we view the facts in the light most favorable to the party against whom summary judgment was granted. Estate of Hernandez v. Flavio, 187 Ariz. 506, 509, 930 P.2d 1309, 1312 (1997).
¶ 6 In 1992, after the closure of several adoption agencies due to financial difficulties, a group of prospective adoptive parents who had contracted with those agencies brought a class action suit against the agencies, their principals, and their affiliated entities (collectively, the adoption agency defendants or the insureds). The complaint asserted claims of negligence based on an alleged breach of the standard of care by the adoption agency defendants in failing to fulfill their contractual obligations with the prospective parents either by placing adoptive children with them within the promised twelve to fifteen month period, or by refunding the fees the prospective parents had paid, ranging from $16,000 to $30,000. The complaint alleged bodily injury and emotional distress, and sought general damages, including pain and suffering and special economic and consequential damages, as well as attorneys' fees.
¶ 7 The insurers defended the adoption agency defendants under a reservation of rights in the class action liability suit. In that action, the prospective parents and the adoption agency defendants entered into a stipulated judgment, pursuant to a Morris agreement, for $40,000,000. The insurers intervened to challenge the reasonableness of the settlement, and, following a lengthy evidentiary hearing, the trial court reduced the settlement amount to $10,000,000.
¶ 8 The insurers also filed a declaratory judgment action, seeking to resolve coverage issues under the policies. After cross-motions for summary judgment, the trial court concluded that the claims asserted by the prospective parents in the liability class action were not covered under the applicable policies, and entered judgment in favor of the insurers.
¶ 9 After denial of the prospective parents' motion for new trial, these appeals followed.
DISCUSSION
1. Definition of "Occurrence"
¶ 10 Most of the insureds were covered by a Farmers Sentinel Super (2nd Edition) Policy, which provided for "Business Liability" under the following insuring clause:
We pay all sums for which you become legally obligated to pay as damages caused by bodily injury, property damage, or personal injury.
We pay for damages up to the Limit of Liability when caused by an occurrence arising out of the business operations conducted at the insured location.
Most of the policies at issue in the declaratory judgment action contained the following definition of "occurrence":
Occurrence — means an accident . . . which first takes place during the policy period and results in bodily injury . . . you neither expected nor intended. Occurrence also means an act or a series of acts of the same or similar nature which first takes place and becomes evident to both the insured and injured party during the policy period and results in personal injury.
In granting the insurers' motion for summary judgment in the declaratory judgment action, the trial court ruled:
The claims here — the result of financial mismanagement or negligent running of a business — are not an occurrence within the meaning of this CGL policy.
Thus, in its final consolidated judgment, the trial court concluded:
The Class' claims of negligence do not constitute an "occurrence" within the meaning of the policies. Farmers' policies therefore afford no coverage to Farmers' Insureds in relation to the claims made by the Class in the underlying class action suit.
¶ 11 On appeal, the prospective parents contend that the trial court erred as a matter of law in finding no coverage based on these facts. The interpretation of an insurance contract is a question of law, which we review de novo. Hudnell v. Allstate Ins. Co., 190 Ariz. 52, 53, 945 P.2d 363, 364 (App. 1997).
a. The Nature of the Claim
¶ 12 In their initial motions and at the hearings in the declaratory judgment action, the prospective parents argued that their complaint did not allege a breach of contract, nor did it assert a claim for adoption agency malpractice. Instead, the prospective parents characterized their claim as one for simple negligence, based on the following acts of James Medlock, as president, director, and treasurer of the adoption agencies:
The negligent acts assigned and proven against the insured in [the class action liability suit] were acts and omissions related to the breach of the legal duties owed to the parent class related to the negligent operation of the insured's business, including and particularly their financial assets.
These include the failure to segregate refund amounts from operating income, mishandling of the prospective adoptive parents' funds, the combined financial operations of all of the agencies and entities, the failure to correct the cash flow difficulties, the issuance of the "Medlock" letter promising newly signed prospective adoptive parents babies on a last-in, first-out basis, an adverse audit and regulatory action in Massachusetts, Medlock's lack of financial and business training, etc., all of which caused [an] eventual "run on the bank."
(Emphasis in original.) The prospective parents characterized these acts as "financial mismanagement," and the parties agreed that no intentional or negligent misrepresentations by Medlock were involved.
¶ 13 In their motion for new trial, however, the prospective parents argued that the insurers had "consistently mischaracterized the gravamen of the complaint" as "financial collapse of a business." They attached, for the first time, an expert "declaration" to identify the "basic factual events which caused the injuries to prospective parents." Based on that expert opinion, the prospective parents cited, as the "specific acts of negligence which fell below the standard of care of an adoption agency," the following:
the failure of James Medlock and the adoption agencies to fully understand and appreciate the different regulatory requirements of the State of Massachusetts (as opposed to the states of Arizona and Washington) in its requirement that the accounting for the Adoptions of New England meet generally accepted accounting principles.
the failure to use generally accepted accounting principles in Massachusetts where required (i.e., which required that refund amounts must be retained by the agencies and segregated into trust funds for eventual refunds).
Although the prospective parents acknowledged that "the specific negligent events occurred against the backdrop of the general operation of the business," they contended that it was only "these specific negligent events that proximately caused the injuries" to them, thereby constituting the "occurrences" under the policies.
¶ 14 As a preliminary matter, we disapprove of this change in the characterization of the facts and claim after more than six years of litigation. We also note that the prospective parents concede that the Massachusetts agency "was not made a party defendant to this action because it was not insured by Truck or Farmers." Furthermore, the expert affidavit attached in support of these allegations was improperly introduced in a motion for new trial after summary judgment had been entered. See generally Rule 56(e), Arizona Rules of Civil Procedure; Cella Barr Assocs., Inc. v. Cohen, 177 Ariz. 480, 487 n. 1, 868 P.2d 1063, 1070 n. 1 (App. 1994). Because this evidence was not properly before the trial court, we do not consider it on appeal, nor will we consider these same arguments in the appellate briefs. We therefore treat the claim against the adoption agency defendants as one for "negligent financial mismanagement."
b. The Burdens of Proof
¶ 15 The prospective parents bear the burden to establish coverage under the insuring clause, which requires an "occurrence." See Pacific Indem. Co. v. Kohlhase, 9 Ariz. App. 595, 597, 455 P.2d 277, 279 (1969). The insurers, on the other hand, bear the burden of establishing the applicability of any exclusionary provisions. Id. The prospective parents argue that the definition of "occurrence" within the policy must be considered an "exclusion," citing Smith v. Hughes Aircraft Corp., 783 F. Supp. 1222, 1235 (D. Ariz. 1991), aff'd in part, rev'd in part, 10 F.3d 1448 (9th Cir.), opinion amended and superseded, 22 F.3d 1432 (9th Cir. 1993) (interpreting a pollution exclusionary clause). We disagree that that premise applies here.
¶ 16 In Smith, the district court relied upon the Arizona Supreme Court's rationale in Phoenix Control Systems, Inc. v. Insurance Co. of North America, 165 Ariz. 31, 34-35, 796 P.2d 463, 466-67 (1990), which dealt with an intentional act policy exclusion contained within the definition of "occurrence," not the insuring clause of the policy. Id. at 35, 796 P.2d at 467. See also Republic Ins. Co. v. Feidler, 193 Ariz. 8, 12, 969 P.2d 173, 177 (App. 1998) (issues framed in declaratory relief complaint were based solely on intentional act exclusion, with burden of proof on insurer; the "occurrence" argument raised on appeal, attempting to place burden on insured, was not mentioned in the trial court).
¶ 17 An insurance policy contains both an insuring clause defining the risks covered and exclusionary provisions that remove coverage for risks falling initially within the insuring clauses. Collin v. American Empire Ins. Co., 26 Cal.Rptr.2d 391, 398-99 (App. Dist. 2 1994). Whether the exclusionary provisions apply is a separate issue from whether coverage is afforded under the insuring clause; even if an exclusion is held inapplicable, the alleged negligence must nonetheless constitute an "occurrence" before coverage can be found. United States Fidelity Guar. Corp. v. Advance Roofing Supply Co., 163 Ariz. 476, 482, 788 P.2d 1227, 1233 (App. 1989). Therefore, the prospective parents have the burden to establish whether there has been an "occurrence" to bring their negligence claim within the coverage of the policy. Kohlhase, 9 Ariz. App. at 597, 455 P.2d at 279.
c. The Nature of an "Occurrence"
¶ 18 Several Arizona cases construing CGL insurance policies have interpreted the requirement of an "occurrence" in a standard CGL insuring clause. For example, an employer's negligent failure to procure promised health insurance for an employee has been found not to constitute an "occurrence" because it was "not an accident within the meaning of the policy." Kema Steel, Inc. v. Home Ins. Co., 153 Ariz. 315, 317, 736 P.2d 798, 800 (App. 1986). An order issued by the Department of Water Resources requiring the purchasers of land to cease and desist irrigation was not an "occurrence" under the sellers' insurance policy, even if the seller was negligent in informing the buyers of this status; the court found that the general principle that "any injury that results from ordinary negligence is accidental" did not resolve the issue. Western Cas. Sur. Co. v. Hays, 162 Ariz. 61, 63, 781 P.2d 38, 40 (App. 1989). This court has found that faulty workmanship by a roofer was not an "occurrence" under the roofer's CGL policy, even in the face of contrary authorities, because
[t]hese authorities disregard the fundamental nature of a comprehensive general liability policy of the type involved in this litigation, and ignore the policy requirement that an occurrence be an accident. If the policy is construed as protecting a contractor against mere faulty or defective workmanship, the insurer becomes a guarantor of the insured's performance of the contract, and the policy takes on the attributes of a performance bond.
Advance Roofing, 163 Ariz. at 479, 788 P.2d at 1230.
¶ 19 In other jurisdictions, "occurrence," similarly defined as "accident," has been construed to refer to an unintended act rather than just an unintended injury. See Collin, 26 Cal.Rptr.2d at 403 ("The overwhelming weight of California authority holds that the term `accident' refers to the nature of the act giving rise to liability, not to the insured's intent to cause harm"). The focus is "exclusively on the insured's intent to perform the act which gives rise to liability, not on the insured's state of mind;" thus, "conscious and deliberate acts of the insured are never an `accident,' irrespective whether the insured intends for harm to result from those actions." Id. at 403-04. For example, an employer's intentional decision to fire an employee, resulting in a wrongful discharge suit in tort, is not an "occurrence" under the insuring clause of an "office package policy" merely because the employer did not expect or intend the harm suffered by the employee. See Commercial Union Ins. Co. v. Superior Court, 242 Cal.Rptr. 454, 457 (App. Dist. 1 1987) (erroneous to apply the term "accident" to the consequences of the act rather than to the happening of the act itself). Nor is a city inspector's negligence in his intended exercise of discretion, although mistaken or erroneous and not intended to cause harm, an "accident" that would constitute an occurrence within the coverage of a CGL policy. See City of Jasper v. Employers Ins. of Wausau, 987 F.2d 453, 457 (7th Cir. 1993) (no duty to indemnify "from what is essentially the exercise of deliberative prerogatives;" applying Indiana law); City of Wilmington v. Pigott, 307 S.E.2d 857, 859 (N.C.App. 1983) ("[i]t was certainly intended . . . that [the city inspector] would exercise his discretion to make these sorts of decisions as he saw fit," even though negligently); see also Red Ball Leasing, Inc. v. Hartford Accident Indem. Co., 915 F.2d 306, 311 (7th Cir. 1990) ("A volitional act does not become an accident simply because the insured's negligence prompted the act").
¶ 20 Similarly, several courts have concluded that a claim that the insured negligently conducted business is not an "accident" that would constitute an "occurrence" so as to provide coverage under a CGL policy. See Chicago Title Trust Co. v. Hartford Fire Ins. Co., 424 F. Supp. 830, 835 (N.D. Ill. 1976) (allegations of "mere negligent business conduct" not an "occurrence" triggering duty to defend); Northwest Airlines v. Hughes Air Corp., 702 P.2d 1192, 1198 (Wash. 1985) (insurance against party's own negligence will be enforced only if risk is clearly and specifically undertaken by the insurer); Parkset Plumbing Heating Corp. v. Reliance Ins. Co., 448 N.Y.S.2d 739, 740 (App. Dept. 2 1982) (mere use of word "negligent" in complaint for careless performance of plumbing work cannot create coverage when parties clearly did not intend general liability policies "to operate as performance bonds").
¶ 21 The prospective parents attempt to distinguish the above cases on the basis that they all involved negligent acts that would be considered within the normal business pursuits of the insureds and thus would be considered as excluded malpractice-type or business pursuit claims under the CGL policies. They assert that here the negligent financial management of the business was not a function of the adoption agency services or any other professional services the insureds provided to the prospective parents. We find this to be nothing more than a semantic distinction created by artful pleading. The "business pursuits" in which the adoption agencies were engaged certainly included the handling of the prospective parents' funds, and the discretion to make deliberate financial decisions was clearly within the scope of Medlock's authority. Assuming that Medlock's financial mismanagement of the agencies was negligent rather than fraudulent, it nonetheless was based on deliberate and intentional — not "accidental" — adoption agency business decisions. As such, Medlock's negligent financial mismanagement did not constitute an "occurrence" that would result in coverage under the insuring clause of the CGL policies, regardless of the fact that he intended no harm to the prospective parents.
¶ 22 Even if the decisions of federal district courts were binding on this court, we would find either distinguishable or unpersuasive the two cases cited by the prospective parents in which contrary interpretations were reached: Fireman's Fund Insurance Co. v. National Bank for Cooperatives, 849 F. Supp. 1347 (N.D. Cal. 1994) and Westfield Insurance Co. v. TWT, Inc., 723 F. Supp. 492 (N.D. Cal. 1989). In Fireman's Fund, the California district court rejected the contention that "negligent supervision" was not an "occurrence" because it consisted of negligent as well as intentional conduct. 849 F. Supp. at 1368. In Westfield, the same district court concluded that "negligent supervision" could possibly constitute an "occurrence" under the policy because some of the allegations against the defendants involved negligence rather than fraud. 723 F. Supp. at 494. As we have pointed out, the commission of "negligence," standing alone, does not determine whether an "occurrence," defined as an "accident," existed to establish coverage. See Hays, 162 Ariz. at 63, 781 P.2d at 40 (the statement that "any injury that results from ordinary negligence is accidental" does not resolve the issue whether there was an "occurrence" by an "accident").
d. Applicability of Ohio Casualty Insurance Co. v. Henderson
¶ 23 In their motion for new trial and on appeal, the prospective parents rely primarily on a recent Arizona Supreme Court case, which was not available at the time the trial court decided the summary judgment motions, to support their position that Medlock's negligent financial mismanagement constituted an "occurrence." See Ohio Casualty Ins. Co. v. Henderson, 189 Ariz. 184, 939 P.2d 1337 (1997). They argue that the supreme court's interpretation of the "expected or intended" injury exclusion under the liability section of a homeowner's insurance policy establishes that Medlock's negligence was an "occurrence" because Medlock did not subjectively intend to cause both the negligent act and the resulting injury to the prospective parents. See id. at 189, 939 P.2d at 1342 (exclusion would apply only "when the insured acted with an intent to harm and with substantial certainty that some significant injury would result, even if the exact injury that occurred was not intended").
¶ 24 We disagree that Ohio Casualty requires us to apply these elements of intent to the meaning of "occurrence" within the insuring clause of these CGL policies. First, Ohio Casualty dealt with an exclusionary clause, not an insuring clause. The standard "occurrence" insuring clause is a broader limitation on coverage than is an exclusion for intentional injury. American Guar. Liab. Ins. Co. v. Vista Med. Supply, 699 F. Supp. 787, 790 (N.D. Cal. 1988). Second, the interpretation of "expected and intended" in the policy at issue in Ohio Casualty referred to the nature of the injury, not the occurrence that triggers coverage. The requirement that the triggering acts be an "accident," and thus not intended, is separate from the additional requirement that the injury must also be "neither expected or intended;" thus, the second requirement "does not change the meaning of accident or remove the requirement that any injury or damage be accidentally caused. It merely explains that expected or intended injuries or damages are not `accidents' within the meaning of the policy." Commercial Union, 196 Cal.App.3d at 1209. Therefore, the interpretation of the "expected and intended" injury exclusion in Ohio Casualty did not change the meaning of either "accident" or "occurrence" within the insuring clause of a CGL policy under Arizona law.
¶ 25 The intent and effect of the Ohio Casualty analysis, in our opinion, is to remove any implicit requirement of "unforeseeability" from the "expected or intended" injury exclusion in liability policies. Thus, injuries resulting from negligent acts, which by their very definition require foreseeable harm under tort analysis, would not automatically be excluded from coverage under the guise of an "expected or intended" injury exclusion. It would not be inconsistent, for example, for the prospective parents to take the position in the liability action that their injuries were foreseeable harm caused by the negligent acts, and yet to take the position in the declaratory judgment action that their injuries were not "intended or expected" under the exclusionary provisions of the policies. After Ohio Casualty, the "expected or intended" injury exclusion applies only if the insured intended both to do the act and to cause some kind of injury, although it need not necessarily have intended the injury that resulted. 189 Ariz. at 190, 939 P.2d at 1343. This prevents average consumers from being unexpectedly denied coverage for "negligent acts producing unintended but quite foreseeable injuries." Id. at 189, 939 P.2d at 1342.
¶ 26 The prospective parents argue that this court recently applied the Ohio Casualty reasoning by implication to the "occurrence" requirement. See K.B. v. State Farm Fire Cas. Co., 189 Ariz. 263, 941 P.2d 1288 (App. 1997). That case, however, applied Ohio Casualty only to an intentional acts exclusion, and clearly stated that, because the insured was excluded from coverage on that basis, "we need not reach State Farm's argument that there is no coverage because there was no `occurrence,' as defined in the policy." Id. at 268 n. 10, 941 P.2d at 1293 n. 10. Our citation to Ohio Casualty in a footnote was merely as a reference "explaining policy's evolution from `accident' coverage to `occurrence' coverage, both with intentional injury exclusions." Id. Nothing in either Ohio Casualty or K.B. compels a contrary result in this case. See also Republic Ins. Co. v. Feidler, 193 Ariz. 8, 12, 969 P.2d 173, 177 (App. 1998) (applying Ohio Casualty to an intentional acts exclusion after noting that the "accident or occurrence" insuring clause argument raised on appeal was not raised in the declaratory judgment pleadings).
¶ 27 By removing the "foreseeability" element from the intentional injury exclusion, the Ohio Casualty court assured that negligent actions of insureds, which necessarily include foreseeable harm, would not automatically be excluded from liability coverage as intentional or expected. Our resolution is not inconsistent with that purpose. By holding that a claim of negligent financial mismanagement of adoption agencies is not an "occurrence" or "accident" within the meaning of the insuring clause, we prevent general comprehensive liability policies from being unfairly expanded to provide coverage of implicit malpractice, errors and omissions, or breach of contract claims that were not contemplated by either the scope of the policy or the small amount of the premium paid by the insureds.
¶ 28 Based on the above, we conclude that the trial court properly granted summary judgment on the basis that Medlock's negligent financial mismanagement of the adoption agencies did not constitute an "occurrence" within the insuring clause of the CGL policies.
e. Other Issues Argued on Summary Judgment
¶ 29 Although the parties have devoted a substantial portion of their briefs to thorough arguments regarding interpretations of various policy exclusions that were raised in the cross-motions for summary judgment, we need not address those issues. We note that the trial court did not rely on those contentions in granting summary judgment on the coverage issue, and our above disposition of the "occurrence" issue makes consideration of those other issues unnecessary. See, e.g., Advance Roofing, 163 Ariz. at 480, 799 P.2d at 1231.
2. Reasonable Expectations as a Bar to Summary Judgment
¶ 30 The prospective parents alternatively argued to the trial court that, even if the definition of "occurrence" excludes coverage as a matter of law, Medlock was not given adequate notice of that limited definition, which would "emasculate" the apparent coverage of the policy, thereby defeating his "reasonable expectations" of coverage. See generally Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 140 Ariz. 383, 682 P.2d 388 (1984). In their motion for new trial, they also argued that the reasonable expectations doctrine should have precluded summary judgment in this case, regardless of the trial court's conclusion that there was no coverage.
¶ 31 We note that the trial court did not explicitly address this issue, either in its consolidated judgment or in the order denying the motion for a new trial. However, we find implicit in the summary judgment in the insurers' favor a ruling that the reasonable expectations doctrine did not apply in this case to estop the insurers from denying coverage. See Harris v. Purcell, 193 Ariz. 409, 412 n. 8, 973 P.2d 1166, 1169 n. 8 (1998) (even though trial court did not rule explicitly on all motions, it was implicit in dismissal order that trial court intended to terminate litigation).
¶ 32 However, even if the trial court overlooked the issue, we would address it in any event. As an alternative theory of recovery raised in a motion for summary judgment, the reasonable expectations issue should have been decided under the standards set forth in Orme School v. Reeves, 166 Ariz. 301, 309, 802 P.2d 1000, 1008 (1990). We would review such a ruling, if one were made, de novo, based on the record made in the trial court. Phoenix Baptist Hosp. Med. Ctr., Inc. v. Aiken, 179 Ariz. 289, 292, 877 P.2d 1345, 1348 (App. 1994); United Bank v. Allyn, 167 Ariz. 191, 195, 805 P.2d 1012, 1016 (App. 1990). For that reason, and for purposes of judicial economy and to prevent piecemeal litigation, we would address this issue on appeal rather than remanding it for the trial court's consideration, even though the reasonable expectations issue was not decided in the trial court's order. See Bothell v. Two Point Acres, Inc., 192 Ariz. 313, 316, 965 P.2d 47, 50 (App. 1998) (to "avoid piecemeal litigation . . . we may direct entry of summary judgment if they are entitled to that as a matter of law and there are no genuine issues of material fact precluding it"); State Farm Mut. Auto. Ins. Co. v. Peaton, 168 Ariz. 184, 194, 812 P.2d 1002, 1012 (App. 1990) ("because this case is already properly before us we can determine whether there are any disputed issues of material fact").
¶ 33 Arizona law recognizes that the reasonable expectations of coverage of an insured may estop an insurer from denying coverage under the terms of the policy. Id. at 392, 682 P.2d at 397 (adopting Restatement (Second) of Contracts § 211). However, this doctrine is limited "by something more than the fervent hopes usually engendered by loss. . . . The expectations to be realized are those that `have been induced by the making of a promise.'" Id. at 390, 682 P.2d at 395.
¶ 34 After Darner, the supreme court clarified the scope of the reasonable expectations doctrine by limiting it to the following situations:
(1) Where the contract terms, although not ambiguous to the court, cannot be understood by the reasonably intelligent consumer who might check on his or her rights, the court will interpret them in light of the objective, reasonable expectations of the average insured. . . .
(2) Where the insured did not receive full and adequate notice of the term in question, and the provision is either unusual or unexpected, or one that emasculates apparent coverage. . . .
(3) Where some activity which can be reasonably attributed to the insurer would create an objective impression of coverage in the mind of a reasonable insured. . . .
(4) Where some activity reasonably attributable to the insurer has induced a particular insured reasonably to believe that he has coverage, although such coverage is expressly and unambiguously denied by the policy. . . .
Gordinier v. Aetna Cas. Sur. Co., 154 Ariz. 266, 273, 742 P.2d 277, 284 (1987).
¶ 35 The prospective parents provided the following testimony to assert Medlock's reasonable expectation of coverage:
At no time did anyone from Farmers Insurance or Truck Insurance Exchange, including Mr.
Banks and Mr. Patello, ever inform me that the financial operations of our business were not covered. . . . I further had the reasonable expectation in the event we are negligent in our business operations, including in our financial operations, which caused the prospective adoptive parents to lose the chance to adopt a child, that there would be coverage under the insurance policies.
This statement proclaims only a subjective expectation of coverage, which is insufficient. Darner, 140 Ariz. at 390, 682 P.2d at 395.
¶ 36 The prospective parents also assert that Farmers' own agent admitted that financial operations were covered, establishing that Medlock's expectation of coverage for financial mismanagement was objectively reasonable. However, as the insurers point out, that "admission" was qualified by the Farmers' agent's statement that such coverage would be "subject to the terms and conditions of the policy."
¶ 37 In response, the insurers point out other deposition testimony that establishes that the insureds could not have a reasonable expectation of coverage under these policies, based on the knowledge of Michael Sullivan, the former founder, president, and treasurer of the agencies, who was a 50% owner with Medlock, and who was the person responsible for procuring the insurance policies in question until 1991. Sullivan testified that he knew when he purchased the policies that they provided only limited coverage:
[W]e were paying minimal premiums for insurance that had in no way reflected anything more than what I call a business homeowner's policy, slip and fall thing if you come into somebody's office if the office burns down or your computers are stolen, that was the type of coverage we purchased.
. . . .
[W]e didn't have any liability insurance that involved the risks in adoption . . .
Q: The question I asked you was, did you think that the insurance covered something other than risks that arose out of your business? Do you think it covered something else?
A: Yes.
Q: What did it cover?
A: Slip and fall.
. . . .
Q: Did you think that you bought policies that specifically excluded the activities of the business in terms of placing adoptive children without —
A: Absolutely.
¶ 38 According to both Sullivan's and Medlock's testimonies, they discussed the "gap" in their insurance coverage that resulted because they did not have errors and omissions or professional malpractice liability insurance regarding adoption services; they tried to purchase insurance to fill that gap, and it was either too expensive or unavailable, so they proceeded without it.
¶ 39 Additionally, we note that other courts have recognized, based on similar insuring provisions requiring an "occurrence," that it simply is not objectively reasonable for an insured to believe that a CGL policy would include coverage of claims by third parties for emotional distress caused by financial mismanagement of the insured's business that resulted in economic loss. See e.g., Walker v. Truck Ins. Exch., 900 P.2d 619, 638 (Cal. 1995).
¶ 40 The prospective parents have not established a question of material fact about the reasonable expectations of the insureds on this record. They alleged no conduct or representations by the insurers or their agents that would lead the insureds to reasonably believe they were covered for negligent financial mismanagement of the business. See Continental Ins. Co. v. McDaniel, 160 Ariz. 183, 186, 772 P.2d 6, 9 (App. 1988) (no misrepresentation of coverage by insurer). They have not contended that the insuring requirement of an "occurrence" reasonably emasculates coverage or is unusual, unexpected, or ambiguous, and have presented no other evidence that would preclude summary judgment on this basis by creating a factual issue for trial. See Gordinier, 154 Ariz. at 273, 742 P.2d at 284. We therefore conclude the trial court's summary judgment in favor of the insurers was not precluded on this basis as a matter of law.
CONCLUSION
¶ 41 For the foregoing reasons, we affirm the judgment of the trial court granting summary judgment in favor of the insurers. No request for attorneys' fees has been made; therefore, the parties shall bear their own fees on appeal.
__________________________________ EDWARD C. VOSS, Judge
CONCURRING:
__________________________________ JON W. THOMPSON, Presiding Judge Department A