Lennar Corp.. v. Transamerica Ins. Co. (now Known As Tig Ins. Co.)

• Decision Date: 14 April 2011
• Docket Number: No. 1 CA–CV 10–0141.,1 CA–CV 10–0141.
• Citation: 606 Ariz. Adv. Rep. 21,227 Ariz. 42,251 P.3d 421
• Parties: LENNAR CORPORATION, a Delaware corporation; Lennar Communities Development, Inc., a Delaware corporation; Lennar Homes Of Arizona, Inc., an Arizona corporation, Counterclaimants/Appellants,v.TRANSAMERICA INSURANCE COMPANY (now known as TIG Insurance Company), and United States Fidelity & Guaranty Company, Counterdefendants/Appellees.Lennar Corporation, a Delaware corporation; Lennar Communities Development, Inc., a Delaware corporation; Lennar Homes of Arizona, Inc., an Arizona corporation, Third–Party Plaintiffs/ Crossclaimants/Appellants,v.United States Fire Insurance Company, Cross–Claim Defendant/Appellee.
• Court: Arizona Court of Appeals

227 Ariz. 42

251 P.3d 421

606 Ariz. Adv. Rep. 21

LENNAR CORPORATION, a Delaware corporation; Lennar Communities Development, Inc., a Delaware corporation; Lennar Homes Of Arizona, Inc., an Arizona corporation, Counterclaimants/Appellants,

v.TRANSAMERICA INSURANCE COMPANY (now known as TIG Insurance Company), and United States Fidelity & Guaranty Company, Counterdefendants/Appellees.Lennar Corporation, a Delaware corporation; Lennar Communities Development, Inc., a Delaware corporation; Lennar Homes of Arizona, Inc., an Arizona corporation, Third–Party Plaintiffs/ Crossclaimants/Appellants,

v.United States Fire Insurance Company, Cross–Claim Defendant/Appellee.

No. 1 CA–CV 10–0141.

Court of Appeals of Arizona, Division 1, Department B.

April 14, 2011.

Fennemore Craig, P.C. by Timothy Berg, John J. Balitis, Jr., Theresa Dwyer–Federhar, Phoenix, and Payne & Fears LLP by Scott S. Thomas, pro hac vice, J. Kelby Van Patten, pro hac vice, Irvine, CA, Attorneys for Counterclaimants, Crossclaimants, Third–Party Plaintiffs/Appellants.

Burke Panzarella Rich by Thomas P. Burke, II, Elizabeth L. Fleming, Phoenix, and Harrington, Foxx, Dubrow & Canter, LLP by Mark. W. Flory, pro hac vice, Michael C. Denlinger, pro hac vice, Los Angeles, CA, Attorneys for Counterdefendants/Appellees, TIG Insurance Co. and United States Fidelity & Guaranty Co.Broening, Oberg, Woods & Wilson, P.C. by Terrence P. Woods, Marilyn D. Cage, Phoenix, Attorneys for Cross–Claim Defendant/Appellee, United States Fire Insurance Co.

OPINION

JOHNSEN, Judge.

¶ 1 The insurers in this appeal argue we should affirm their summary judgment on the insured's claim for breach of the covenant of good faith and fair dealing because the insurers sought a declaratory judgment on coverage and obtained a ruling, later reversed, in their favor. We reverse because questions of material fact prevent summary judgment in the insurers' favor. We also hold that under the circumstances presented, an insurer that seeks a judicial interpretation of a disputed policy term may not ignore its claims-handling responsibilities while the declaratory judgment action proceeds.

FACTS AND PROCEDURAL HISTORY

¶ 2 The insureds in this case are a group of related companies, Lennar Corporation, Lennar Communities Development, Inc. and Lennar Homes of Arizona, Inc. (collectively “Lennar”). In the early 1990s, Lennar oversaw the development of 105 homes in a project in Glendale called Pinnacle Hill. Soon after homeowners moved in, they began to complain about construction problems. Lennar made some repairs, but the complaints continued. According to our record, all or nearly all of the homes required repairs. In September 1998, several homeowners filed suit and others threatened litigation.

¶ 3 In December 1998, Lennar tendered claims under commercial general liability policies issued to it by Transamerica Insurance Company (“TIG”), United States Fidelity & Guaranty Company (“USF & G”), United States Fire Insurance Company (“U.S. Fire”) and other insurers. In October 2000, TIG and USF & G filed a complaint seeking a declaratory judgment that they owed no duty to defend or indemnify Lennar. Lennar answered, counter-claimed and brought a cross-claim against U.S. Fire and other insurers, alleging breach of contract and breach of the duty of good faith and fair dealing.

¶ 4 In July 2003, the superior court granted summary judgment in favor of the insurers, dismissing all of Lennar's claims based on the court's conclusion that defects in the homes did not constitute an “occurrence” within the meaning of the policies.¹ This court reversed, holding the homeowners allegations of damage resulting from faulty construction were sufficient to allege an “occurrence” under the policies. Lennar Corp. v. Auto–Owners Ins. Co. (Lennar I), 214 Ariz. 255, 265, ¶ 33, 151 P.3d 538, 548 (App.2007).

¶ 5 About a year after our opinion issued, the insurers again moved for summary judgment on Lennar's bad-faith claim. Their motion rested solely on the proposition that, as a matter of law, the superior court's initial ruling in their favor on the occurrence issue established that the insurers had a reasonable basis for denying coverage. The superior court adopted the insurers' analysis and again entered summary judgment in their favor on the bad-faith claim.

¶ 6 Lennar timely appealed. Now, more than 15 years after its customers began complaining about defects in their homes, Lennar has settled with all of the homeowners and with all but three of its insurers. We have jurisdiction of the appeal pursuant to Article 6, Section 9, of the Arizona Constitution and Arizona Revised Statutes (“A.R.S.”) section 12–2101(B) (2003).

DISCUSSION

A. Standard of Review.

¶ 7 Summary judgment is appropriate when the pleadings, depositions, answers to interrogatories, affidavits and admissions on file show there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Ariz. R. Civ. P. 56(c). We review a grant of summary judgment de novo, considering the evidence and all reasonable inferences in the light most favorable to the non-moving party. Andrews v. Blake, 205 Ariz. 236, 240, ¶ 12, 69 P.3d 7, 11 (2003).

B. An Insurer's Covenant of Good Faith and Fair Dealing.

¶ 8 In every insurance contract is an implied covenant of good faith and fair dealing, the breach of which is a tort. Deese v. State Farm Mut. Auto. Ins. Co., 172 Ariz. 504, 506, 838 P.2d 1265, 1267 (1992). The covenant of good faith and fair dealing requires an insurer “to play fairly with its insured.” Zilisch v. State Farm Mut. Auto. Ins. Co., 196 Ariz. 234, 237, ¶ 20, 995 P.2d 276, 279 (2000) (quoting Rawlings v. Apodaca, 151 Ariz. 149, 154, 726 P.2d 565, 570 (1986)). The insurer owes the insured “some duties of a fiduciary nature,” including “[e]qual consideration, fairness and honesty.” Zilisch, 196 Ariz. at 237, ¶ 20, 995 P.2d at 279 (quoting Rawlings, 151 Ariz. at 155, 726 P.2d at 571).

¶ 9 Our supreme court in Zilisch described some of the obligations the duty of good faith imposes on an insurer:

The carrier has an obligation to immediately conduct an adequate investigation, act reasonably in evaluating the claim, and act promptly in paying a legitimate claim. It should do nothing that jeopardizes the insured's security under the policy. It should not force an insured to go through needless adversarial hoops to achieve its rights under the policy. It cannot lowball claims or delay claims hoping that the insured will settle for less. Equal consideration of the insured requires more than that.

Zilisch, 196 Ariz. at 238, ¶ 21, 995 P.2d at 280.² When there is a coverage question, an insurance company breaches its duty of good faith and fair dealing if it “intentionally denies, fails to process or pay a claim without a reasonable basis.” Id. at 237, ¶ 20, 995 P.2d at 279 (quoting Noble v. Nat'l Am. Life Ins. Co., 128 Ariz. 188, 190, 624 P.2d 866, 868 (1981)). While an insurer may challenge a claim that is fairly debatable, “its belief in fair debatability ‘is a question of fact to be determined by the jury.’ ” Zilisch, 196 Ariz. at 237, ¶ 20, 995 P.2d at 279 (quoting Sparks v. Republic Nat'l Life Ins. Co., 132 Ariz. 529, 539, 647 P.2d 1127, 1137 (1982)).

C. The Doctrine of Law of the Case Does Not Require Reversal of the Summary Judgment.

¶ 10 Our opinion in Lennar I for the most part focused on the meaning of the term “occurrence” in the Lennar policies. After holding that damages resulting from alleged construction defects could constitute an occurrence, we reversed entry of judgment in favor of the insurers on the contract claims and remanded for further proceedings. 214 Ariz. at 270, ¶ 62, 151 P.3d at 553.

¶ 11 Only one paragraph of our 62–paragraph decision addressed Lennar's bad-faith claim:

Although the trial court granted summary judgment as to the insurers on both Lennar's breach of contract and bad faith claims, it offered no explanation as to the reasons underlying its judgments. We presume that, consistent with the insurers' arguments below, it found that if there was no duty to indemnify or defend, the insurers could not have acted in bad faith in refusing to indemnify or defend. Because we reverse the trial court's summary judgment in favor of the insurers on the breach of contract claim, in the absence of an independent basis to sustain the trial court's summary judgment on the bad faith claim, we similarly reverse that summary judgment.

Id. at ¶ 59 (footnote omitted). Lennar argues this appeal is governed by our holding that because there was no “independent basis to sustain” dismissal of the bad-faith claim, the insurers were not entitled to summary judgment on that claim. Lennar contends that ruling constitutes the law of the case in this appeal.

¶ 12 The doctrine of law of the case “is generally held to be a rule of policy and not one of law.” Dancing Sunshines Lounge v. Indus. Comm'n of Ariz., 149 Ariz. 480, 482, 720 P.2d 81, 83 (1986). It provides that once an appellate court has decided a legal issue, that decision is the law of that case in subsequent superior court proceedings and the decision will not be reconsidered in a second appeal, provided the facts, issues and evidence are substantially the same as those upon which the first decision rested. State v. Bocharski, 218 Ariz. 476, 489, ¶ 60, 189 P.3d 403, 416 (2008); Kadish v. Ariz. State Land Dep't, 177 Ariz. 322, 327, 868 P.2d 335, 340 (App.1993). The doctrine is not absolute; it “does not have the same conclusive effect as the doctrine of res judicata.” Id. “[I]t should not be strictly applied when it would result in a manifestly unjust decision.” Dancing Sunshines Lounge, 149 Ariz. at 482, 720 P.2d at 83.³

¶ 13 In Lennar I we reversed summary judgment on Lennar's bad-faith claim because we presumed the superior court had ruled based solely on its conclusion that the insurers had no duty to indemnify or defend Lennar. Lennar I, 214 Ariz....