Madison Alley Transportation & Logistics Incorporated v. Western Truck Insurance Company et al

Filing 87

ORDER granting in part and denying in part 73 Motion for Summary Judgment. Signed by Judge Susan M Brnovich on 7/10/2019. (TCA)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Madison Alley Transportation & Logistics
Incorporated,

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Plaintiff,

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No. CV-17-03038-PHX-SMB
ORDER

v.
Western Truck Insurance Company, et al.,
Defendants.

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At issue is Defendants Western Truck Insurance Company (“Western Truck”) and

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Robert Dion’s (“Mr. Dion”) (collectively, “Defendants”) Motion for Summary Judgment

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(Doc. 73, “Mot.”). Defendants also submitted a Statement of Facts. (Doc. 74, “DSOF”).

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Plaintiff Madison Alley Transportation and Logistics Inc. (“Madison Alley” or “Plaintiff”)

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submitted a Response to the Motion (Doc. 80, “Resp.”), along with a Separate Statement

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of Facts (Doc. 81, “PSOF”) and a Controverting Statement of Facts (Doc. 82, “CSOF”).

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Defendants submitted a Reply to Plaintiff’s Response. (Doc. 83, “Reply”). Plaintiff alleges

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Defendants did not properly broker insurance for its warehouse in Phoenix. Plaintiff alleges

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five claims: (1) Negligence/Insurance Producer Malpractice; (2) Breach of Contract; (3)

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Breach of the Covenant of Good Faith and Fair Dealing; (4) Negligent Training and

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Supervision; and (5) Reasonable Expectations. For the reasons that follow, the Court will

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grant summary judgment on the counts arising out of contract—counts one, three, and

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five—but deny summary judgment on the tort claims—counts one and four.

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I.

Background

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Plaintiff operates a business that stores and delivers goods for large retail merchants.

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(PSOF ¶ 2). Mindi Peters (“Ms. Peters”) has an ownership interest in Madison Alley, and

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Jeff Owen (“Mr. Owen”) runs the day-to-day operations. (PSOF ¶¶ 3–4). In June 2015,

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Plaintiff moved its warehouse operations from New York to Phoenix, Arizona. (PSOF ¶

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5). As part of the move, Plaintiff agreed to a lease for an 8,329 square foot warehouse for

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$5,247.27 per month. (PSOF ¶¶ 6–7). The lease required Plaintiff to obtain insurance for

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the property. (PSOF ¶ 8). The dispute that brings this case to the Court is whether

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Defendants procured insurance as requested by Plaintiff.

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In early June 2016, a sublessee of Plaintiff caused a flood in the warehouse. (PSOF

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¶¶ 76–78). The flood damaged Madison Alley’s business property along with Ms. Peters’

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and Mr. Owen’s personal property and stopped Madison Alley from operating for about

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five months. (PSOF ¶¶ 79, 81–85). For damages from the flood, Madison Alley entered

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into a settlement with its sublessee’s insurer for $456,000.

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Prior to the flood, Plaintiff contends Mr. Owen instructed Defendants to procure a

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policy that complied with the requirements of the lease. (PSOF ¶¶ 8–9). Among other

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things, the lease required $2.5 million in general liability coverage and insurance for “the

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loss of the full rental . . . for one year.” (DSOF ¶ 13; PSOF ¶¶ 8–11; CSOF ¶ 13).

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Defendants procured a policy with $3 million in general liability coverage and $20,000 in

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business income coverage. (DSOF ¶ 5). These coverage amounts represented annual limits,

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but Mr. Owen alleges he interpreted the $20,000 as weekly coverage based on a

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conversation he had with Mr. Dion. (PSOF ¶ 22). In that alleged conversation, Mr. Dion

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told Mr. Owen that business income insurance was calculated “by the week,” and Mr.

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Owen told Mr. Dion that Madison Alley generates at least $20,000 in revenue per week.

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(Id.).

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Plaintiff also believes Defendants failed to procure adequate insurance because they

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did not disclose material terms of the policy, including a coinsurance provision for business

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income coverage and a “business income agreed value clause.” (PSOF ¶¶ 11, 53–54). The

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business income agreed value clause required a financial worksheet to determine total

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exposure to the insured. (PSOF ¶¶ 54, 58). The landlord also required a business income

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worksheet that Mr. Owen forwarded to Mr. Dion, but Mr. Dion did not complete. (PSOF

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¶¶ 55–58). Furthermore, the $20,000 business income coverage would not cover a full

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year’s rental as required by the lease. (PSOF ¶ 9). Plaintiff also alleges it could not have

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learned of the policy’s deficiencies until after the accident, because Defendants sent a copy

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of the policy to the wrong address. (PSOF ¶¶ 62–63).

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Defendants argue that in the context of Plaintiff’s request for insurance, Plaintiff

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only instructed Mr. Dion to find the cheapest amount of business interruption coverage that

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would satisfy Madison Alley’s landlord and the policy clearly shows that Madison Alley

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was paying annual premiums for annual coverage limits. (DSOF ¶¶ 12, 14). In Defendants’

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view, the landlord let Madison Alley move into the warehouse, so they sufficiently

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performed to the standard of care. (DSOF ¶ 4). They also argue they have no obligation to

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advise insureds about the appropriateness of their coverage, (Mot. at 10), and Mr. Dion did

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not agree to fill out the financial worksheets nor could he have because he did not have the

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required expertise and Madison Alley had not be operating long enough to have the

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required information, (DSOF ¶¶ 27–28, 34–35).

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II.

Legal Standard

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Summary judgment is appropriate when “there is no genuine dispute as to any

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material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P.

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56(a). A material fact is any factual issue that might affect the outcome of the case under

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the governing substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

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A dispute about a fact is “genuine” if the evidence is such that a reasonable jury could

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return a verdict for the nonmoving party. Id. “A party asserting that a fact cannot be or is

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genuinely disputed must support the assertion by . . . citing to particular parts of materials

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in the record” or by “showing that materials cited do not establish the absence or presence

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of a genuine dispute, or that an adverse party cannot produce admissible evidence to

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support the fact.” Fed. R. Civ. P. 56(c)(1)(A), (B). The court need only consider the cited

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materials, but it may also consider any other materials in the record. Id. 56(c)(3). Summary

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judgment may also be entered “against a party who fails to make a showing sufficient to

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establish the existence of an element essential to that party’s case, and on which that party

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will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

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Initially, the movant bears the burden of demonstrating to the Court the basis for the

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motion and “identifying those portions of [the record] which it believes demonstrate the

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absence of a genuine issue of material fact.” Id. at 323. If the movant fails to carry its initial

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burden, the nonmovant need not produce anything. Nissan Fire & Marine Ins. Co. v. Fritz

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Cos., 210 F.3d 1099, 1102–03 (9th Cir. 2000). If the movant meets its initial responsibility,

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the burden then shifts to the nonmovant to establish the existence of a genuine issue of

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material fact. Id. at 1103. The nonmovant need not establish a material issue of fact

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conclusively in its favor, but it “must do more than simply show that there is some

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metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio

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Corp., 475 U.S. 574, 586 (1986). The nonmovant’s bare assertions, standing alone, are

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insufficient to create a material issue of fact and defeat a motion for summary judgment.

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Liberty Lobby, 477 U.S. at 247–48. “If the evidence is merely colorable, or is not

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significantly probative, summary judgment may be granted.” Id. at 249–50 (citations

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omitted). However, in the summary judgment context, the Court believes the nonmovant’s

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evidence, id. at 255, and construes all disputed facts in the light most favorable to the

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nonmoving party, Ellison v. Robertson, 357 F.3d 1072, 1075 (9th Cir. 2004). If “the

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evidence yields conflicting inferences [regarding material facts], summary judgment is

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improper, and the action must proceed to trial.” O’Connor v. Boeing N. Am., Inc., 311 F.3d

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1139, 1150 (9th Cir. 2002).

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III.

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1. Plaintiff’s Contract Claims

Analysis

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Defendants assert, and the Court agrees, that they cannot be liable for breach of

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contract (Count 2), breach of the covenant of good faith and fair dealing (Count 3), or

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reasonable expectations (Count 5) because there is no contract between Defendants and

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Plaintiff. Further, if there is a contract, the claim still sounds in tort rather than contract

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because Defendants were hired to provide professional services. At oral argument, Plaintiff

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said the contract was partially verbal and partially written, but admitted the contract claims

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were brought as an “alternative theory.” Plaintiff specifically points to a June 9, 2015, letter

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sent by Defendants that promised “[i]nsurance marketing services, administration of

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policies, support services to you regarding this insurance, and other risk management

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consultation.” (PSOF ¶ 25) (emphasis added by Plaintiff). The Court agrees with

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Defendants.

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A contract requires “an offer, an acceptance, consideration, and sufficient

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specification of terms so that obligations involved can be ascertained.” K-Line Builders,

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Inc. v. First Federal Sav. & Loan Ass’n, 677 P.2d 1317, 1320 (Ariz. Ct. App. 1983). Even

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viewing the facts in the light most favorable to Plaintiff, the Court is unable to ascertain

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specific terms in order to determine the obligations involved. For example, the letter

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Plaintiff points to was an insurance quote. It may have promised risk management

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consultation by Western Truck, but not with enough specificity that the Court can ascertain

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the obligations involved. Plaintiff does not even allege Mr. Owen asked Mr. Dion for a

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specific amount or gave an acceptable range of business income coverage that he wanted

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or needed. Instead, he merely alleges that “[n]either Mr. Owen nor any other representative

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of [Madison Alley] told Mr. Dion that [Madison Alley] wanted $20,000 for [business

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income].” (PSOF ¶ 48). Again, this allegation does not provide the Court with enough

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information to ascertain the obligations involved in an alleged contract.

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Additionally, the Court is persuaded by the Defendants that to the extent there was

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a contract, the dispute still “arises out of tort” because it would have been a contract for

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professional services. When a contractual relationship gives “rise to a duty to perform in

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accordance with a certain standard of care, this legally imposed duty exists separate and

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apart from the contract giving rise to the duty.” Lewin v. Miller Wagner & Co., Ltd., 725

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P.2d 736, 743 (Ariz. Ct. App. 1986). In Arizona, insurance brokers have a legally imposed

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duty to perform with a certain standard of care: “An insurance agent owes a duty to the

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insured to exercise reasonable care, skill and diligence in carrying out the agent’s duties in

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procuring insurance.” Darner Motor Sales, Inc. v. Univ. Underwriters Ins. Co., 682 P.2d

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388, 402 (Ariz. 1984) (quoting Quality Furniture v. Hay, 595 P.2d 1066, 1068

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(Haw. 1979)). Failing to comply with this standard of care is “a breach of the legal duty

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imposed and is not an action ‘arising out of contract’ under A.R.S. § 12-341.01(A).” Lewin,

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725 P.2d at 743.

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Here, Defendants acted as an insurance broker for Plaintiff. This gave rise to a duty

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to perform to a certain standard of care. Breaching that standard of care is an action that

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sounds in tort, not contract. Therefore, Defendants cannot be liable for breach of contract

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or the implied covenant of good faith and fair dealing.

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Additionally, the doctrine of reasonable expectations is not applicable here. Plaintiff

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brought a claim under “reasonable expectations,” but such a cause of action does not exist.

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Rather, it is a rule of construction. See Crawford v. Ranger Ins. Co., 653 F.2d 1248, 1251

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(9th Cir. 1981); Frutiger v. USAA Gen. Indem. Co., No. CV18-00547-PHX-JJT, 2019 WL

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2232524, at *3 (D. Ariz. May 23, 2019). The reasonable expectations doctrine provides for

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relief “from certain standardized clauses of agreements which had not been negotiated,

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providing they were clauses which, ‘because of the nature of the enterprise, customers will

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not be expected to read and over which they have no real power of negotiation.’” Gordinier

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v. Aetna Cas. & Sur. Co., 742 P.2d 277, 283 (Ariz. 1987) (quoting Darner, 682 P.2d at

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399). Courts use the doctrine to “refuse enforcement even to unambiguous boilerplate

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terms.” Id. The term at issue here—the business income cap—is not an unnegotiated

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boilerplate term. Therefore, the doctrine of reasonable expectations does not provide relief.

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Accordingly, the Court will grant summary judgment on the breach of contract claim

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(Count 2), the breach of the covenant of good faith and fair dealing claim (Count 3), and

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reasonable expectations (Count 5).

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2. Plaintiff’s Negligence Claims

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To establish a negligence claim, Plaintiff must prove: (1) Defendants had a duty to

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conform to a certain stand of care; (2) they breached that standard of care; (3) the breach

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caused an injury to Plaintiff; and (4) Plaintiff has actual damages. Gipson v. Kasey, 150

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P.3d 228, 230 (Ariz. 2007). A duty exists when a relationship between parties is “such that

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the defendant was under an obligation to use some care to avoid or prevent injury to the

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plaintiff.” Markowitz v. Ariz. Parks Bd., 706 P.2d 364, 367 (Ariz. 1985). The Arizona

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Supreme Court has recognized that an insurance broker has a duty to an insured to “exercise

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reasonable care, skill and diligence in carrying out the agent’s duties in procuring

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insurance.” Darner, 682 P.2d at 402 (quoting Quality Furniture, 595 P.2d at 1068).

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Insurance agents have a responsibility “to exercise that degree of care ordinarily to be

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expected from others in their profession.” Id. at 403; see BNCCORP, Inc. v. HUB Int’l Ltd.,

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400 P.3d 157, 165 (Ariz. Ct. App. 2017) (“BNCCORP II”) (“[T]he default rule in Arizona

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is that a broker who agrees to obtain insurance for a client owes a duty to the client to

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exercise reasonable care, skill and diligence in so doing.”) (internal quotation marks

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omitted); accord Fink v. Brown & Brown Program Ins. Serv. Inc., No. CV-17-03869-PHX-

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DLR, 2018 WL 1744999, at *2 (D. Ariz. Apr. 11, 2018).

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Defendants argue that this duty does not include an obligation to advise insureds

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about the adequacy or appropriateness of the insurance coverage they purchase. They rely

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on BNCCORP II for this argument. In their view, the Arizona Court of Appeals held as a

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matter of law that insurance agents do not have a duty to identify clients’ needs and advise

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them appropriately because it is clients’ responsibility to determine appropriate coverage

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and advise the agent of their needs. Somewhat confusingly, Defendants rely on the trial

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court order in BNCCORP and not the Arizona Court of Appeals opinion. Compare

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BNCCORP, Inc. v. HUB Int’l Ltd., No. CV 2012-014329, 2015 Ariz. Super. LEXIS 660,

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at *20 (Ariz. Super. Ct. June 30, 2015) (“BNCCORP I”) with BNCCORP II, 400 P.3d 157.

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The court of appeals opinion, however, makes clear that a duty exists between an insurance

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broker and a client, and the question before them was the appropriate standard of care, and

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not whether a broker has a duty to an insured. BNCCORP II, 400 P.3d at 165; see also

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Fink, 2018 WL 174499, at *3.

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“Questions as to the applicable standard of care are for the trier of fact.” Id. The

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standard of care in these types of cases is not universal, but “an applicable standard should

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be determined on a case-by-case basis, and is an evidentiary determination that may require

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proof in the form of expert testimony at trial.” Id. In BNCCORP II, the Court of Appeals

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affirmed the trial court’s finding that the broker “had the duty to exercise the degree of

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care, skill, and diligence normally exercised by similarly situated insurance brokers having

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the information provided to [broker] by [insured], advising about coverage, and taking into

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account [insured’s] directions, including the request to match expiring coverages.” Id. at

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165. The panel determined the trial court’s finding, made in the context of a bench trial,

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adequately complied with Darner’s default rule that an insurance agent owes a duty to

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exercise reasonable care, skill, and diligence in procuring insurance coverage and took into

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account Darner’s directive to set the applicable standard of care on a case-by-case basis.

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Id. at 166; see Darner, 682 P.2d at 402–03; see also Fink, 2018 WL 1744999, at *3 (“In

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BNCCORP [II], the appeals court credited the trial court’s factual finding . . . that the

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applicable standard of care did not require the insurance agent to ‘inform [insureds] about

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optional coverage that might be available’”) (quoting BNCCORP II, 400 P.3d at 166).

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Contrary to Defendants’ contention, BNCCORP II does not stand for the proposition that

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that brokers never have an obligation to advise insureds about the adequacy or

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appropriateness of their coverage. Instead, it reiterated that the applicable standard of care

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is for the trier of fact to decide.

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Defendants’ urging the Court to consider the “context” of how Plaintiff requested

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insurance is also unpersuasive. Indeed, it is the context of Plaintiff’s request that is exactly

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what the parties are disputing. Plaintiff alleges Mr. Owen told Mr. Dion he wanted

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insurance that complied with the warehouse lease agreement. Mr. Owen sent Mr. Dion the

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lease and other documents and claims Mr. Dion informed him that business income

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coverage is calculated by the week. Defendants argue Plaintiff merely directed them to

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procure coverage that allowed Madison Alley to move into the warehouse, and that

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Madison Alley should have realized they were underinsured because the policy was clear.

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Both parties support their contentions with admissible evidence. Therefore, the Court finds

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there is a genuine dispute as to the material facts and the court will deny Defendants’

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motion concerning the negligence claim (Count 1).

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Additionally, Defendants’ only argument as to why Plaintiff’s negligent hiring,

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training and supervision claim (Count 4) fails is because an employer cannot be found

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liable under that claim unless its employee committed a tort. (Mot. at 11). Because the

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Court finds a material dispute of fact as to the underlying tort claim, the Court will also

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deny Defendant’s motion for summary judgment regarding Plaintiff’s negligent hiring,

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training, and supervision claim.

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3. Damages

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Defendants further request this Court to limit the amount of damages to “the lesser

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of actual damages and the amount the jury determines Mr. Dion should have procured” and

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“that those total damages then be offset by the $456,000 settlement between Fully Loaded

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and Madison Alley.” (Mot. at 16) (emphasis in original). The Court finds this request

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premature and will deny it without prejudice. Because the Court concludes that that the

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negligence claims should go to a jury, the issue of whether to limit damages will depend

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on the jury’s determinations as to whether Defendants are liable in the first place.

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Defendants may renew their request at more appropriate point of this proceeding.

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IV.

Conclusion

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Material issues of fact exist concerning whether Defendants breached the applicable

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standard of care. Plaintiff’s contract claims should be dismissed because the wrong alleged

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does not arise out of contract and Plaintiff’s alleged contract lacks specificity. Accordingly,

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IT IS ORDERED granting in part and denying in part Defendants’ Motion for

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Summary Judgment (Doc. 73):

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1. Defendants’ Motion for Summary Judgment is GRANTED IN PART. It is

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granted as to the Breach of Contract claim (Count 2), the Breach of the Covenant

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of Good Faith and Fair Dealing claim (Count 3), and Reasonable Expectations

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(Count 5);

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2. Defendants’ Motion for Summary Judgment is DENIED IN PART. It is denied

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as to the Negligence/Insurance Producer Malpractice claim (Count 1) and the

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Negligent Training and Supervision claim (Count 4).

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3. Defendants’ request to limit and offset damages is DENIED without prejudice.

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Dated this 10th day of July, 2019.

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