State Farm Fire & Cas. in. Co. v. Grabowski

• Decision Date: 30 January 2007
• Docket Number: No. 1 CA-CV 05-0494.,1 CA-CV 05-0494.
• Citation: 150 P.3d 275,214 Ariz. 188
• Parties: STATE FARM FIRE & CASUALTY INSURANCE COMPANY, an Illinois corporation, Plaintiff/Appellant, v. Barbara GRABOWSKI, individually and as a Personal Representative of the Estate of Victoria D. Hedge, Defendant/Appellee.
• Court: Arizona Court of Appeals

150 P.3d 275

214 Ariz. 188

STATE FARM FIRE & CASUALTY INSURANCE COMPANY, an Illinois corporation, Plaintiff/Appellant, v. Barbara GRABOWSKI, individually and as a Personal Representative of the Estate of Victoria D. Hedge, Defendant/Appellee.

No. 1 CA-CV 05-0494.

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

Redesignated and Amended by Order January 29, 2007.

January 30, 2007.

COPYRIGHT MATERIAL OMITTED

David M. Bell & Associates, PLLC By David M. Bell, Phoenix, Attorney for Plaintiff/Appellant.

Burch & Cracchiolo PA By Daryl Manhart, Phoenix, Attorneys for Defendant/Appellee.

OPINION

TIMMER, Presiding Judge.

¶ 1 State Farm Fire & Casualty Insurance Company appeals a jury verdict finding that Barbara Grabowski had met her burden to show that an insurance policy exclusionary clause violated the insured's reasonable expectations and therefore was unenforceable. State Farm contends the trial court improperly instructed the jury regarding the doctrine of reasonable expectations. For the reasons that follow, we agree and therefore reverse and remand this case for a new trial.

BACKGROUND

¶ 2 James Hedge III and his wife, Victoria, were killed in a single-vehicle automobile accident. State Farm insured the 1996 Ford Explorer in which the Hedges were riding under a basic vehicle liability policy with limits of $100,000/$300,000.¹ State Farm also insured the Hedges under an umbrella policy, which provided additional liability coverage of $2 million.

¶ 3 Barbara Grabowski, Victoria's mother and a statutory beneficiary, asserted a claim for Victoria's wrongful death against the Estate of James Hedge. State Farm denied coverage under the umbrella policy based upon an exclusion not contained in the basic policy and sought a declaration that the umbrella policy did not provide coverage for Grabowski's claim. Grabowski counterclaimed for a declaration that the umbrella policy provided coverage for her claim.²

¶ 4 The umbrella policy provided: "If you are legally obligated to pay damages for a loss, we will pay your net loss ...." The term loss was defined, in relevant part, as, "an accident ... which results in bodily injury ...." The policy defined bodily injury as:

physical injury, sickness, disease, emotional distress or mental injury to a person. This includes required care, loss of services and death resulting therefrom.

¶ 5 The umbrella policy contained sixteen exclusions from coverage, including Exclusion Ten, as amended by endorsement, which reads:

We will not provide insurance: .. .

10. for bodily injury or personal injury to the named insured, spouse, or anyone within the meaning of part a. or b. of the definition of insured ....

Insured was defined, in pertinent part, as (a) the named insured and (b) residents of the named insured's household who were also the named insured's relatives. James and Victoria Hedge were the named insureds.

¶ 6 State Farm and Grabowski filed cross-motions for summary judgment on the coverage issue. State Farm argued that the policy excluded coverage for damages suffered by any person if those damages arose from the bodily injury of a named insured. Grabowski countered that the exclusion did not operate to bar her claim for Victoria's wrongful death because Grabowski had suffered the injury, and she was not an excluded insured. The trial court granted summary judgment for Grabowski, ruling that the umbrella policy provided coverage, and that Exclusion Ten did not defeat that coverage because Grabowski was not a member of the insureds' household, and her injury was only indirectly the result of the injury to Victoria. We reversed the trial court's ruling on appeal, holding that the named insured exclusion, if enforceable, would preclude coverage of Grabowski's claim because it arose from Victoria's death and was excluded from coverage because Victoria was a named insured. State Farm Fire & Casualty Ins. Co. v. Grabowski, 1 CA-CV 02-0572 at ¶ 20 (Ariz. App. May 29, 2003).

¶ 7 Grabowski urged us to affirm the summary judgment on the alternative basis that Exclusion Ten could not be enforced as a matter of law under the reasonable expectations doctrine. We held that disputed issues of material fact precluded summary judgment on that issue and remanded the case with instructions to the trial court to enter partial summary judgment for State Farm unless the trier of fact determined that Exclusion Ten was unenforceable by virtue of the reasonable expectations doctrine. Id. at ¶¶ 34-35.

¶ 8 After remand, the trial court held a trial on the issue of reasonable expectations. State Farm requested that the trial court instruct the jury based on Revised Arizona Jury Instruction Contract 25 ("RAJI 25"):

When someone signs an agreement and has reason to know that what that person is signing is a standardized, form agreement which is regularly used in that kind of transaction, he or she is bound by its terms regardless of whether he or she actually read or understood those terms. There is an exception to the rule I just stated. If you find that State Farm had reason to believe that the Hedges would not have signed the standardized agreement if the Hedges had known that a particular term was there, and if you find that the Hedges were in fact unaware that the particular term was there, that term is not part of the agreement and the Hedges are not bound by it.

¶ 9 Grabowski objected, arguing that the reasonable expectations doctrine would preclude enforcement of Exclusion Ten if the jury found any of three specific factual circumstances existed, and offered her own instruction. The trial court gave the jury Grabowski's proffered instruction:

The reasonable expectations doctrine will prevent the named "insured/household resident exclusion" in the umbrella or excess policy (the "PLUP") from being enforced only if you find from the evidence that Defendant, Barbara Grabowski has proved one or more of the following circumstances:

1. The insured did not receive full and adequate notice of the exclusion in question, and the exclusion is either unusual or unexpected, or one that emasculates apparent coverage; or

2. Some activity which can be reasonably attributed to the insurer would create an objective impression of coverage in the mind of a reasonable insured; or

3. Some activity which can be reasonably attributable to the insurer induced the Hedges reasonably to believe that they had coverage, even though such coverage otherwise would be excluded by the named "insured/household resident exclusion".

If you find that Defendant, Barbara Grabowski has met her burden of proof and that the "insured/household resident exclusion" must be enforced and your verdict must be for State Farm Fire & Casualty Insurance Co.

¶ 10 The jury returned a verdict in favor of Grabowski, finding that the doctrine of reasonable expectations prevented enforcement of Exclusion Ten. The jury also answered a special interrogatory posed by the trial court, stating that a reasonable consumer under the facts and circumstances of this case would not have purchased the umbrella policy if he or she had known it contained Exclusion Ten. After the trial court entered judgment on the jury's verdict, this timely appeal followed.³

DISCUSSION⁴

¶ 11 State Farm argues that the trial court's jury instruction regarding the doctrine of reasonable expectations was a prejudicial misstatement of the law because it (1) did not tell the jury that Exclusion Ten is presumptively valid and enforceable and (2) did not state that Exclusion Ten would apply only if State Farm knew that the Hedges would not have agreed to the exclusion if they had known it was included in the umbrella policy. State Farm further contends that the trial court erred by refusing to give State Farm's proffered instruction on this issue.

¶ 12 As an initial matter, Grabowski argues that State Farm failed to preserve this issue for appeal because State Farm did not move for a new trial. Because State Farm's argument concerns the legality of the challenged instruction, rather than whether evidence supported the instruction, and State Farm objected to the instruction at trial, it may properly raise this issue on appeal even in the absence of a motion for new trial. Lewis v. S. Pac. Co., 105 Ariz. 582, 583, 469 P.2d 67, 68 (1970) (stating a party need not move for new trial in order to preserve appellate review of the legality of the instructions given by the trial court).

¶ 13 We review jury instructions as a whole to determine whether the jury was properly guided in its deliberations. Pima County v. Gonzalez, 193 Ariz. 18, 20, ¶ 7, 969 P.2d 183, 185 (App.1998). An instruction will warrant reversal only if it was both harmful to the complaining party and directly contrary to the rule of law. AMERCO v. Shoen, 184 Ariz. 150, 159-60, 907 P.2d 536, 545-46 (App.1995) (finding no error in instructions that, viewed as a whole, gave jury proper rules to be applied and did not suggest conclusion contrary to law). We will not overturn a jury verdict on the basis of an improper instruction unless there is substantial doubt regarding whether the jury was properly guided in its deliberations. Barnes v. Outlaw, 188 Ariz. 401, 405, 937 P.2d 323, 327 (App.1996), aff'd in part and rev'd in part on other grounds, 192 Ariz. 283, 964 P.2d 484 (1998).

¶ 14 The reasonable expectations doctrine relieves an insured from "certain clauses of an agreement which he did not negotiate, probably did not read, and probably would not have understood had he read them." Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 140 Ariz. 383, 394, 682 P.2d 388, 399 (1984); Restatement (Second) of Contracts ("Restatement") § 211 (1981). This doctrine, however, requires more than the insured's "fervent hope" that coverage exists, and therefore only applies under certain limited circumstances. Darner, 140 Ariz. at 390, 682 P.2d at 395.

¶ 15 The Arizona Supreme Court first articulated...