Fortuity Required for Every Insurance Claim

Post 4848

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Industrial Park Center, LLC (“Plaintiff”) sued Great Northern Insurance Company (“Defendant”), its commercial property insurer. Both the insured and the insurer filed motions for summary judgment and, in Industrial Park Center LLC v. Great Northern Insurance Company, No. CV-22-01196-PHX-MTL, United States District Court, D. Arizona (July 26, 2024) the USDC resolved the dispute.

Contents

FACTUAL BACKGROUND

Plaintiff owns commercial property in Tempe, Arizona. Since 1990, Plaintiff leased a section of the building to Star Fisheries, which used the suites for wholesale distribution of seafood.

In 2010, Plaintiff discovered damage to the building’s concrete walls and stairs and retained MBJ to perform a structural investigation. MBJ inspected the building and filed a report and later a geotechnical engineer from Speedie and Associates also came out and wrote a report assessing the soil around and under the building. Plaintiff implemented repairs, including installing “weep holes,” repairing concrete tilt panels, stairs, and cracks in flooring, inspecting and repairing trench drains, and painting restored concrete. In its report, MBJ suggested that Plaintiff could install a waterproof floor coating, below-slab water barrier, or additional drain system, but Plaintiff did not do so.

Ten years later an engineering inspection found cracks and spalling on the eastern and southern walls, as well as damage to the exterior stairs. A year later, in January 2022, when Plaintiff was repairing stairs per RVA’s recommendation, it found that the bottoms of the tilt walls were crumbling and supporting rebar was rusted away to the extent that the structure of the entire building, not just the Star Fisheries, was compromised.

THE INSURANCE

Defendant provided insurance coverage of the building through an all-risk business insurance policy since 2008. Plaintiff filed a claim under its policy with Defendant in January 2022.

Defendant ultimately denied the claim under the “wear and tear” and “settling” exclusions.

Plaintiff sued alleging that by denying its insurance claim, Defendant breached the insurance policy contract and the covenant of good faith and fair dealing.

DISCUSSION

Defendant argued that Plaintiff has not demonstrated the damage was fortuitous. It argues that Plaintiff’s loss resulted from a known risk, that the damage would predictably occur because of the way Star Fisheries used the property.

Insurance policy interpretation is a matter of law for the Court to decide. Under Arizona law, courts give words in insurance policies their plain and ordinary meaning, examining the policy from the viewpoint of an individual untrained in law or business. Arizona courts apply “a rule of common sense” to the policy terms.

Under all-risks coverage, recovery is allowed for all fortuitous losses unless the policy contains a specific provision expressly excluding the particular loss from coverage. A fortuitous event is one that occurs by chance or accident and not by purposeful design. Nothing in the record suggested that Plaintiff intentionally caused the damage but based on the undisputed material facts Plaintiff’s loss was reasonably foreseeable and almost certain to occur.

MBJ recommended additional measures and the parties agreed that Plaintiff did not implement the recommendations. Most of the recommendations were to mitigate future moisture intrusion, not necessarily prevent it. The mitigation measures may have slowed down the progression of the damage, but it was not certain to prevent it. Based on the undisputed material facts Plaintiff’s loss was not fortuitous. As such, Defendant did not breach the insurance contract, and the Court granted Defendant’s motion as to the breach of contract claim.

Breach of the Covenant of Good Faith and Fair Dealing

An insurer breaches the implied covenant of good faith and fair dealing and acts in bad faith when it intentionally denies, fails to process or pay a claim without a reasonable basis. Viewing the facts in the light most favorable to Plaintiff, sufficient evidence does not exist to show that Defendant acted in bad faith.

The Court granted Defendant’s motion for summary judgment as to the breach of the covenant of good faith and fair dealing claim.

Fortuity is essential to all insurance policies. The plaintiff in this case knew that its structure had serious problems arising from the fish wholesaler’s use of water to clean off the concrete floors daily and that water intrusion and refrigeration caused a perma frost like situation that acted to destroy, slowly, the concrete base, rusted the rebar that strengthened the walls and floors, and worked towards the destruction of the entire building over a period of more than 12 years as the damage progressed daily. Since the loss was not fortuitous there could be no coverage. Since the denial of the claim was reasonable and fairly debatable the “bad faith” arguments also failed.

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