Unreported / Non-Citable
Background
Industrial Park Center LLC, doing business as Mainspring Capital Group, sought coverage under an all-risk property policy issued by Great Northern Insurance Company for damage to a commercial building. After Great Northern denied the claim, Mainspring sued for breach of contract and insurer bad faith, and the case was removed to federal court based on diversity of citizenship. Great Northern's initial denial relied in part on the wear-and-tear and settling exclusions, and on reconsideration it again cited the wear-and-tear exclusion.
The district court granted summary judgment to Great Northern on both claims and denied Mainspring's own summary judgment motion on the contract claim. It applied the objective reasonable-foreseeability test from the Ninth Circuit's decision in Ingenco Holdings, LLC v. Ace American Insurance Co., which predicted Washington law. It concluded the loss was not fortuitous because it was reasonably foreseeable and almost certain to occur, given the tenant's longstanding business practices and Mainspring's failure to implement measures to prevent water damage. Having found no fortuity, it never decided whether any policy exclusion applied. It also awarded attorney's fees to Great Northern as the successful party under Arizona Revised Statutes section 12-341.01.
The Ninth Circuit certified the fortuity question to the Arizona Supreme Court, which held that a fortuitous loss is one that, so far as the parties are aware, depends on chance. A loss is non-fortuitous only when the insured knew, at the time coverage attached, that the loss-causing event had already occurred, was in progress, or was certain to occur because no material contingency remained. That court described the test as subjective, focused on the insured's knowledge at the time of contracting, and rejected Ingenco's objective approach.
The Court’s Holding
In an unpublished memorandum, the panel vacated the summary judgment for Great Northern on the contract claim and the denial of Mainspring's cross-motion, because the district court had applied a fortuity standard the Arizona Supreme Court rejected. The panel did not decide whether the loss was fortuitous or who should prevail. It remanded for further proceedings consistent with the Arizona Supreme Court's definition.
On the policy exclusions, the panel declined to rule. Under Arizona law, once the insured establishes a prima facie case by showing fortuity, the burden shifts to the insurer to show the loss falls within an exclusion. Because it would be premature to consider the wear-and-tear and settling exclusions before fortuity is determined, the panel left the district court to decide in the first instance whether they apply.
The panel also vacated summary judgment on the bad faith claim. Arizona law generally treats an insurer's belief that a claim was fairly debatable as a question of fact, and fair debatability is necessary but not always sufficient to avoid bad faith liability. Because the district court's work on remand may require it to consider whether Great Northern acted reasonably in invoking the exclusions, which may in turn affect the bad faith analysis, the earlier ruling could not stand. Finally, because Great Northern may no longer be the successful party, the panel vacated the fee award and remanded for the district court to decide in the first instance whether fees remain warranted.
Key Takeaways
- Under the Arizona Supreme Court's answer to the certified question, fortuity turns on what the insured actually knew when coverage attached, not on what a reasonable person could have foreseen.
- A loss is non-fortuitous only if the insured knew the loss-causing event had already occurred, was in progress, or was certain to occur because no material contingency remained.
- Summary judgments that rest on the Ingenco foreseeability test are vulnerable in Arizona all-risk cases, because the Arizona Supreme Court rejected that test.
- The remand leaves open fortuity, the wear-and-tear and settling exclusions, bad faith, and attorney's fees, so Mainspring has not yet established coverage.
- Once the insured shows a fortuitous loss, the insurer carries the burden of proving that a policy exclusion applies.
Why It Matters
The memorandum is unpublished and not precedent except as provided by Ninth Circuit Rule 36-3, so its weight lies in the Arizona Supreme Court's authoritative answer on fortuity, which the panel simply applies. That answer displaces objective foreseeability analysis in Arizona all-risk cases and focuses on the insured's knowledge when coverage attached. This standard is likely to make non-fortuity harder for insurers to establish at summary judgment, though the panel did not apply it to these facts.
For these parties, the practical effect is a reset. The district court must reconsider coverage, any exclusions, the bad faith claim, and fees, and nothing in the disposition forecloses a ruling for either side on remand.