Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_14-cv-02001/USCOURTS-azd-2_14-cv-02001-0/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Breach of Contract

---

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

WO 

IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF ARIZONA

11333 Incorporated, 

Plaintiff, 

v. 

Certain Underwriters at Lloyd's, London, et 

al., 

Defendants.

No. CV-14-02001-PHX-NVW

ORDER 

 Before the Court is Defendants’ Motion to Dismiss First Amended Complaint 

(Doc. 32). For the reasons that follow, the Motion will be denied. 

I. FACTUAL ALLEGATIONS AND POLICY LANGUAGE 

 On May 15, 2003, Plaintiff 11333, Inc., f/k/a/ Investors Mortgage Holdings, Inc., 

became the “exclusive manager” of IMH Secured Loan Fund, LLC (“the Fund”). (Doc. 

23 at 2-3.) In that capacity, Plaintiff was responsible for servicing the Fund’s loans, 

managing, operating and developing the Fund’s properties, and purchasing liability and 

other insurance on those properties. (Id. at 3.) According to Plaintiff, it “had a fiduciary 

responsibility for the safekeeping and use of all of the Fund’s assets and funds.” (Id.) 

Plaintiff hired Defendant HUB International Insurance Services, Inc. (“HUB”) to assist in 

buying mortgage bankers/brokers insurance for Plaintiff. (Id. at 1-3.) HUB obtained a 

policy from Defendants Underwriters at Lloyd’s, London (“Underwriters”), which are 

“not an insurer, but a marketplace where various underwriters agree to underwrite 

Case 2:14-cv-02001-NVW Document 43 Filed 04/09/15 Page 1 of 13
- 2 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

portions of a particular risk.” (Doc. 34 at 4 n.1; Doc. 23 at 1, 3.) That initial policy, 

which had an effective date of May 23, 2007, was renewed on June 25, 2008, with a 

“Certificate Period” covering June 22, 2008, through June 22, 2009. (Doc. 23 at 3; Doc. 

33-1 at 5.) Under Insuring Agreement 11.1 of the renewed policy (“Policy”), 

Underwriters “undert[ook] and agree[d] to indemnify the Insured” for: 

 Insuring Agreement (11) – Mortgage Errors and Omissions 

 (11.1) Mortgagee Interest

 Loss to the Insured’s mortgagee interest in real property or to an Investor’s 

 interest in real property on whose behalf the Insured is servicing a 

 mortgage, which loss is discovered by the Insured during the Certificate 

 Period, provided that such loss is a direct result of an error or negligent 

 omission on the part of the Insured or its Designated Agent in failing to 

 obtain or maintain 

 (i) Fire and Extended Coverage insurance, or 

 (ii) Homeowner’s Insurance, or 

 (iii) Mortgage Redemption Life insurance, Accident and Health 

 insurance, or Accidental Death and Dismemberment insurance, or 

 (iv) Flood insurance covering real property located in special flood 

 hazard areas (where flood insurance has been made available under 

 the provisions of the National Flood Insurance Reform Act of 1994 

 and any amendments thereto) 

 if, by reason of such error or negligent omission, at the time of the loss 

 there is no such insurance in force or such insurance in force is inadequate 

 as to amount or such insurance in force fails to contain a mortgagee clause. 

 Mortgagee Interest is further extended to include ownership interest in real 

 property obtained through foreclosure or by receipt of deed in lieu of 

 foreclosure but in respect of (i), (ii) and (iv) above. 

(Doc. 33-1 at 17-18 (emphasis added).) Pursuant to Insuring Agreement 11.6(ii), 

Underwriters also undertook to indemnify Plaintiff for: 

 (11.6) Insurance Requirement Errors and Omissions 

 . . . 

 (ii) Loss to the Insured’s Mortgagee interest or Owner interest, including 

 when acting as a mortgage servicing agent or in a legal fiduciary 

 capacity, in real property, which loss was discovered by the Insured 

 during the Certificate Period by reason of physical loss or damage to 

 said real property directly caused by those perils covered under Fire 

Case 2:14-cv-02001-NVW Document 43 Filed 04/09/15 Page 2 of 13
- 3 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

 and Extended Coverage Insurance or Flood Insurance in such 

 amount as is required to be insured by the mortgagor to comply with 

 the National Flood Insurance Reform Act of 1994 or any 

 amendments thereto, provided that such loss to the Insured’s 

 interest is a direct result of 

 (a) the non-existence or inadequacy as to amount of such 

 insurance[.] 

(Id. at 20 (emphasis added).) At oral argument, counsel for Plaintiff characterized 

Insuring Agreements 11.1 and 11.6(ii), both of which provide first-party coverage, as 

functionally identical for the purposes of this Motion. Counsel for Underwriters did not 

disagree with this assessment. 

Two further provisions of the Policy are relevant to this dispute. The first, 

contained in Condition 5-7, concerns notice to Underwriters: 

 (7) Notice/Proof – Legal Proceedings Against Underwriter 

 Condition applicable to Parts A and B of this Certificate 

 (i) At the earliest practicable moment, not to exceed 60 days, after 

 discovery of loss, the Insured shall give the Underwriters notice 

 thereof. 

 . . .

 (vii) Special Condition Applicable to 1 – INSURING AGREEMENTS 

 (11) (11.1): 

 It is agreed that, as a condition precedent to the rights to recover 

 under 1 – INSURING AGREEMENTS (11) (11.1), the Insured shall 

 give written notice of the discovery of the loss at the earliest 

 practicable moment and in no event later than sixty (60) days after 

 discovery. The written notice shall provide full particulars including 

 the identity of the person(s) responsible for the loss, the 

 circumstances surrounding the loss, the amount of the loss and any 

 other information which the Insured may so possess. 

 (viii) Special Condition Applicable to 1 – INSURING AGREEMENTS 

 (11)(11.2), (11.3), (11.4), (11.5), (11.6) and (12): 

 It is agreed that, as a condition precedent to its right to recover under 

 1 – INSURING AGREEMENTS (11)(11.2), (11.3), (11.4), (11.5), 

 (11.6) and (12) of this Certificate, the Insured shall give written 

 notice of any Claim made against the Insured at the earliest 

 practicable moment but in no event later than sixty (60) days 

 following the date such Claim is made. The written notice shall 

 provide full particulars including the identity of the persons bringing 

 the Claim, the identity of the person(s) responsible for the loss, the 

Case 2:14-cv-02001-NVW Document 43 Filed 04/09/15 Page 3 of 13
- 4 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

 circumstances surrounding the loss, the amount of the loss and any 

 other information which the Insured may so possess. 

 If during the Certificate Period the Insured becomes first aware of 

 any error or negligent omission under 1 – INSURING 

 AGREEMENTS (11)(11.1), (11.2), (11.3), (11.4), (11.5) or (11.6) 

 before any Claim is made against the Insured but which could be 

 reasonably anticipated to result in a Claim against the Insured, then 

 the Insured shall give written notice at the earliest practicable 

 moment but in no event later than sixty (60) days following the date 

 the Insured becomes first aware of such error or negligent 

 omission. . . . 

(Id. at 41-42.) The second relevant provision, Condition 5-7(iv) of the Policy, reads as 

follows: 

 Legal proceedings for the recovery of any loss hereunder shall not be brought 

 prior to the expiration of 60 days after the original proof of loss is filed with the 

 Underwriters or after the expiration of 24 months from the discovery of such loss. 

(Id. at 41.) 

 In April 2006, the Fund made a loan to Avocet Oceanfront Villas, LP for 

development of a 146-acre property (“Property”) in Galveston County, Texas. (Doc. 23 

at 4.) Avocet’s insurance on the Property lapsed in December 2007, and on April 8, 

2008, the Fund foreclosed on the Property after Avocet defaulted on its loan. (Id.) As 

the Fund’s manager, Plaintiff assumed responsibility for managing and purchasing 

insurance for the Property, which is located in an area subject to the National Flood 

Insurance Reform Act of 1994. (Id.) Plaintiff failed to purchase fire and extended 

coverage insurance or flood insurance for the Property, and on September 13, 2008, the 

Property was badly damaged by Hurricane Ike. (Id.) Plaintiff became aware of the 

damage by March 2009—i.e., during the Policy’s Certificate Period—and asked HUB 

whether losses to the Property were covered by any of Plaintiff’s insurance policies. (Id.

at 4-5.) HUB informed Plaintiff that they were not. (Id. at 5.) 

 For the first time in its Response, Plaintiff alleges that in June 2010, “the Fund 

became a corporation and purchased Plaintiff as a wholly owned subsidiary.” (Doc. 34 at 

4.) Around the same time, the Fund purchased an omissions policy (“Fund Policy”) from 

a number of underwriters of Lloyd’s, London—“[s]ome, but not all, of [whom] 

Case 2:14-cv-02001-NVW Document 43 Filed 04/09/15 Page 4 of 13
- 5 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

underwrote Plaintiff’s policy”—that listed Plaintiff as an additional insured. (Id. & n.1.) 

Based on the Fund Policy, the Fund submitted a claim to its own underwriters, seeking 

compensation for Plaintiff’s failure to obtain insurance on the Property. (Id.) The Fund’s 

underwriters initially indicated to the Fund that the Fund Policy “potentially could afford 

coverage for this matter.” (Id.) But when payment was not forthcoming after two years, 

the Fund sued to recover on the Fund Policy. (Id.) The court—it is not clear from the 

Response in which court the action was brought—“ultimately granted summary judgment 

to the Fund’s underwriters on the ground that Plaintiff . . . discovered the loss before the 

policy period.” (Id. at 4-5.) 

 On December 20, 2013, Plaintiff notified Underwriters’ counsel in a separate 

action that it was seeking recovery under the Policy for its negligent failure to obtain the 

necessary insurance on the Property. (Doc. 23 at 6.) At counsel’s request, Plaintiff sent 

notice to Underwriters’ official London address on January 17, 2014; three months later, 

on March 28, 2014, Underwriters informed Plaintiff that they were denying coverage. 

(Id.) It is not clear under which Insuring Agreement Plaintiff filed its claim, but at oral 

argument Plaintiff’s counsel expressed his view that both 11.1 and 11.6(ii) provide 

coverage. 

 Plaintiff brought this action on September 10, 2014. (Doc. 1.) The First Amended 

Complaint, filed December 11, 2014, requests actual, consequential, statutory, incidental 

and punitive damages from Underwriters and HUB on eight causes of action, including 

breach of contract, breach of the duty of good faith and fair dealing, negligence, and 

professional negligence. (Doc. 23 at 7-11.) Pursuant to Rule 12(b)(6) of the Federal 

Rules of Civil Procedure, this Motion seeks dismissal of Plaintiff’s First Amended 

Complaint as to Underwriters on the grounds that (1) Plaintiff failed to provide 

Underwriters notice of its claim within sixty days of discovering its loss, as required by 

the Policy, and (2) Plaintiff did not file this action within the contractual two-year 

limitations period. 

Case 2:14-cv-02001-NVW Document 43 Filed 04/09/15 Page 5 of 13
- 6 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

II. LEGAL STANDARD 

 Dismissal for failure to state a claim upon which relief can be granted under Rule 

12(b)(6) can be based on “the lack of a cognizable legal theory” or “the absence of 

sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police 

Dep’t, 901 F.2d 696, 699 (9th Cir. 1990). A complaint need include “only enough facts 

to state a claim for relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 

550 U.S. 544, 570 (2007). On such a motion, all allegations of material fact are assumed 

to be true and are construed in the light most favorable to the non-moving party. Cousins 

v. Lockyer, 568 F.3d 1063, 1067 (9th Cir. 2009). To show that the plaintiff is entitled to 

relief, the complaint must permit the court to infer more than the mere possibility of 

misconduct. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). If the plaintiff’s pleadings fall 

short of this standard, dismissal is appropriate. 

III. ANALYSIS

A. The Notice-Prejudice Rule Applies to This Coverage 

 The parties agree that Plaintiff discovered the damage to the Property within the 

Certificate Period (the policy period) and notified Underwriters of its claim beyond the 

Certificate Period and more than sixty days after discovering the loss. Nevertheless, 

Plaintiff contends that under governing Arizona insurance law, it is excused from the 

sixty-day notice requirement unless Underwriters were prejudiced by the delay. 

Underwriters respond that the Policy is a “claims-made” policy and therefore not subject 

to the “notice-prejudice” rule. Some background on Arizona insurance law is helpful. 

 Arizona law generally distinguishes between occurrence and claims-made 

insurance: 

An ‘occurrence’ policy of professional liability insurance covers an act or 

omission that occurs within the policy period, regardless of the date of 

discovery or the date the claim is made or asserted. This type of policy 

requires that notice be given to the insurer ‘within a specified time after the 

insured event.’ Because injuries from professional malpractice claims may 

not manifest themselves for years after the occurrence policy has expired, 

Case 2:14-cv-02001-NVW Document 43 Filed 04/09/15 Page 6 of 13
- 7 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

however, an exposure time, or a ‘tail,’ is created. A tail is the time lapse 

between the date of the negligent act or omission and the time when a claim 

is made. 

[O]ccurrence policies with a ‘tail’ that extends beyond the policy period are 

historically associated with certain difficulties. One problem with 

occurrence policies is that the insurer cannot calculate the premium for the 

risk with any certainty. The insurer must compute premiums for occurrence 

professional liability policies at current rates while claims must be resolved 

at market rates, sometimes long after the premiums have been paid. 

Another difficulty with occurrence policies is that when professional 

negligence continues over a period of time, and an insured changes from 

one occurrence carrier to another, uncertainty exists about which insurer 

will provide coverage. 

Thoracic Cardiovascular Assocs. v. St. Paul Fire & Marine Ins. Co., 181 Ariz. 449, 452, 

891 P.2d 916, 919 (Ct. App. 1994) (citations omitted). Given these difficulties, insurers 

have largely shifted to “claims-made” policies, which allow insurers to “underwrite a risk 

and calculate premiums with greater certainty.” Id. at 453, 891 P.2d at 920. 

The ‘claims made’ policy differs from an ‘occurrence’ policy in several 

important aspects. Because it triggers coverage, transmittal of the notice of 

the claim to the insurer is the most important aspect of the claims made 

policy. A claims made policy extends coverage if the negligent or omitted 

act is discovered and brought to the attention of the insurer within the 

policy term. The timing of the making of the claim in such policies stands 

in equal importance with the error or omission as the insured event. Notice 

to the insurer of a claim made against the insured is generally required to be 

given during the policy period or within a specified amount of time after 

the policy period. The essence, then, of a claims-made policy is notice to 

the carrier within the policy period. 

Id. (emphasis in original) (citations and internal quotation marks omitted). 

 One may sometimes obtain through claims-made insurance the same effective 

coverage available under occurrence policies, by renewing the claims-made policy over 

time. When one chooses to have no coverage for future occurrences or ceases doing 

business, so that no future acts could give rise to liability, one can often buy extended 

reporting coverage, even indefinite extended reporting. Over the long run, the difference 

between the two kinds of insurance is in the pricing and how long the insured must carry 

Case 2:14-cv-02001-NVW Document 43 Filed 04/09/15 Page 7 of 13
- 8 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

it. The insurer obtains additional premiums for extended coverage, priced as the insurer 

then sees fit. In occurrence policies, the insured pays the premium at the beginning and 

does not pay again for extended reporting coverage. In claims-made policies, the time for 

reporting the claim defines the risk the insurer undertakes for the premium for that 

period. That risk may be renewed and re-priced over time. 

 The two kinds of policies also differ in the defenses an insurer may raise. With 

respect to occurrence policies, “an insurance company is not relieved of its contractual 

liability because of the insured’s failure to give notice unless it can show that it has been 

prejudiced thereby.” Lindus v. N. Ins. Co., 103 Ariz. 160, 164, 438 P.2d 311, 315 (1968). 

“Insurance policies are invariably prepared by the insurer,” the Arizona Supreme Court 

has explained, “and are therefore construed most strongly against it, and especially so 

when an alleged forfeiture for failure on the part of the insured to perform a condition 

subsequent is concerned.” Watson v. Ocean Accident & Guar. Corp., 28 Ariz. 573, 579, 

238 P. 338, 340 (1925). Requiring the insurer to show prejudice is appropriate because 

“the failure to make proof in the time required thereby merely postpones the time of 

bringing suit.” Id. For occurrence policies, “the burden of proving prejudice is on the 

insurance company.” Lindus, 103 Ariz. at 164, 438 P.2d at 315. The notice-prejudice 

rule applies to occurrence policies even when those policies contain “express policy 

provision[s] providing a specific penalty for failure to give such notice.” Md. Cas. Co. v. 

Clements, 15 Ariz. App. 216, 222, 487 P.2d 437, 443 (Ct. App. 1971). 

 But the notice-prejudice dispensation for late notice does not apply in claims-made 

insurance because the role of notice to the insurer is fundamentally different in the two 

types of policies: 

If a court were to allow an extension of reporting time after the end of the 

policy period, such is tantamount to an extension of coverage to the insured 

gratis, something for which the insurer has not bargained. This extension 

of coverage, by the court, so very different from a mere condition of the 

policy, in effect rewrites the contract between the two parties. This we 

cannot and will not do. 

Case 2:14-cv-02001-NVW Document 43 Filed 04/09/15 Page 8 of 13
- 9 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

Sletten v. St. Paul Fire & Marine Ins. Co., 161 Ariz. 595, 597, 780 P.2d 428, 430 (Ct. 

App. 1989) (quoting Gulf Ins. Co. v. Dolan, Fertig & Curtis, 433 So. 2d 512, 515-16 

(Fla. 1983)) (italics in Sletten and Dolan). The effect of this extension of coverage, the 

Sletten court explained, “would be to convert claims-made policies into occurrence 

policies. In the absence of actual prejudice from late reporting, which also defeats 

coverage under an occurrence policy, all negligence during the policy period would be 

covered.” Id.; accord Thoracic, 181 Ariz. at 454-55, 891 P.2d at 921-22. 

 Plaintiff’s Policy is not an occurrence policy, as it does not extend coverage to all 

acts or omissions that occur during the policy period. But neither is it a claims-made 

policy. “Notice to the insurer of a claim made against the insured” defines a claims-made 

policy and the risk an insurer undertakes. Thoracic, 181 Ariz. at 453, 891 P.2d at 920. 

Coverage under the Policy turns on discovery within the policy period of a loss to real 

property for which Plaintiff negligently failed to obtain insurance, not on when Plaintiff’s 

loss is reported to the insurer. The risk is limited by when the insured discovered the 

loss—which is similar to, but not exactly the same as, limiting the risk to what is reported 

to the insurer within the policy period. Like a claims-made policy, the Policy has a 

defining, strict measure of coverage, which cannot be extended by lack of prejudice. But 

the measure is discovery, not reporting, and that measure was satisfied here. 

If one wanted a label for this kind of policy, it is hard to think of a better word 

than “discovery” policy. Unfortunately, some cases, including Arizona cases, have 

already applied that label to a different kind of policy, a subset of claims-made policies.1

 

 

1

 The Sletten court labeled “persuasive” the following statement about some claims-made policies from the Florida Supreme Court’s Dolan opinion: “Coverage depends on the claim being made and reported to the insurer during the policy period. Claims-made or discovery policies are essentially reporting policies.” 161 Ariz. at 597, 780 P.2d at 430 (emphasis in Dolan and Sletten). “In a discovery policy,” the Court of Appeals has explained, “the coverage is effective if the negligent or omitted act is discovered and brought to the attention of the insurance company during the period of the policy, no matter when the act occurred.” Mission Ins. Co. v. Nethers, 119 Ariz. 405, 

407, 581 P.2d 250, 252 (Ct. App. 1978) (emphasis added) (citing Samuel N. Zarpas, Inc. 

v. Morrow, 215 F. Supp. 887 (D.N.J. 1963)). Whatever those courts mean by this usage, the category plainly requires reporting the claim, not just discovering it, within the policy period. So this Policy is not a “discovery” policy within that usage.

Case 2:14-cv-02001-NVW Document 43 Filed 04/09/15 Page 9 of 13
- 10 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

To try now to reclaim that label for policies like Plaintiff’s would only add to the 

confusion caused by courts that use “discovery policy” to require something more than 

discovery during the policy period. But arbitrary labels do not matter in the law. The 

Policy defines its risk by when the insured discovers the loss, not by when he reports it. 

Discovery by the insured, not notice to the insurer, is the event that cannot be extended 

beyond the policy period, regardless of lack of prejudice. Underwriters’ effort to label 

this a claims-made policy, and thereby bar consideration of prejudice, strains the 

language of the Policy. 

Other portions of the Policy confirm that the coverage in Insuring Agreements 

11.1 and 11.6(ii) is not claims-made. The Professional Indemnity section, which the 

parties struck out, limited coverage to claims “first made against the Insured or Insured 

Person during the Certificate Period or an Extended Reporting Period and reported to 

Underwriters within the time period specified by the Certificate.” (Doc. 33-1 at 22.) 

This is typical claims-made language. The text of the Professional Indemnity provision 

shows that Underwriters knew how to write claims-made insurance when they wanted to. 

But Insuring Agreements 11.1 and 11.6(ii) conspicuously left out any reference to 

reporting the claim within the Certificate Period. 

The requirement that Plaintiff provide notice at the earliest practicable moment, 

and in no event later than sixty days after discovery, does not measure the risk 

Underwriters assumed in the Insuring Agreements, as reporting requirements in claimsmade policies do. Rather, like reporting requirements in occurrence policies, the sixtyday rule is meant to assist in processing claims. This purpose is evident from the rule’s 

placement among other promises in aid of processing, such as Conditions 5-7(ii) and 5-

7(iii), which relate to furnishing proper proof of loss. (See id. at 41.) Indeed, in addition 

to mandating notice within sixty days, Conditions 5-7(vii) and 5-7(viii) also describe the 

information that any notice of loss must contain. Breach of such promises without harm 

to the insurer does not justify denying coverage. See Clements, 15 Ariz. App. at 222, 487 

P.2d at 443 (holding that “the alleged untimely filing by plaintiffs of the proofs of loss 

Case 2:14-cv-02001-NVW Document 43 Filed 04/09/15 Page 10 of 13
- 11 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

does not operate to release [the insurer] from liability under its policy” absent “evidence 

that the failure to make a timely showing of loss was prejudicial to the insurer”). The 

description of sixty-day notice as a “condition precedent” does not alter this conclusion. 

See Lindus, 103 Ariz. at 164-65, 438 P.2d at 315-16 (applying notice-prejudice rule 

where “notice [was] made an express condition precedent to liability under the policies”). 

 The language of the Policy is clear enough, and it does not write claims-made 

insurance or otherwise exclude the notice-prejudice rule. This is so even without 

recourse to the rule of ambiguity in insurance policies. But if the Policy were ambiguous, 

Plaintiff would prevail under that rule as well. When a provision in an insurance contract 

“appears ambiguous, we interpret it by looking to legislative goals, social policy, and the 

transaction as a whole. We construe the clause against the insurer, however, if ambiguity 

remains after we apply those interpretive guides.” Wilshire Ins. Co. v. S.A., 224 Ariz. 97, 

99, 227 P.3d 504, 506 (Ct. App. 2010) (citation and internal quotation marks omitted). 

 Underwriters will have an opportunity after discovery to show that they were 

prejudiced by Plaintiff’s late notice. For now, however, Plaintiff’s First Amended 

Complaint states a claim upon which relief can be granted. 

B. The 24-Month Contractual Limitations Period Is Also Subject to the 

 Prejudice Rule for Lateness 

Underwriters argue this action is untimely under Condition 7(iv) of the Policy, 

which prohibits bringing legal proceedings to recover a loss “after the expiration of 24 

months from the discovery of such loss.” Underwriters ground this contention in Arizona 

Revised Statutes § 20-1115(A)(3), which prohibits policy terms: 

Limiting the time within which an action may be brought to a period of less 

than two years from the time the cause of action accrues in connection with 

all insurances other than property and marine and transportation insurances. 

In property and marine and transportation policies such time shall be one 

year from the date of occurrence of the event resulting in the loss except 

that an insurer may extend such limitation beyond one year in its policy 

provisions. 

Case 2:14-cv-02001-NVW Document 43 Filed 04/09/15 Page 11 of 13
- 12 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

The coverage for loss “to the Insured’s mortgagee interest in real property or to an 

Investor’s interest in real property on whose behalf the Insured is servicing a mortgage” 

may be a “property policy” within the meaning of § 20-1115(A)(3). See Adams v. N. Ins. 

Co., 16 Ariz. App. 337, 339, 493 P.2d 504, 506 (Ct. App. 1972) (holding that plaintiff’s 

policy was a “property policy” where her “complaint allege[d] that she ha[d] ‘sustained a 

property loss’” and she was “suing under the property loss portion of the policy”). 

Although the Policy also insures for other kinds of losses as well, a “policy purporting to 

be entire may be divisible and severable where it covers several different kinds of risks.” 

Id. (citation omitted). Therefore, Plaintiff’s action may be governed by the second, not 

the first, sentence of § 20-1115(A)(3), and the limitations period may run “from the date 

of occurrence of the event resulting in the loss,” rather than from the date on which 

Plaintiff’s causes of action accrued. 

Either way, a contractually agreed limitations period permitted by § 20-

1115(A)(3) is not absolute. An “insurer may be estopped from raising a defense based 

upon such an adhesive clause where the enforcement of the clause would work an unjust 

forfeiture. The key factor in the determination of this issue is the question of whether the 

insurer has shown prejudice by reason of the delay in filing suit.” Zuckerman v. 

Transamerica Ins. Co., 133 Ariz. 139, 146, 650 P.2d 441, 448 (1982). Often in the 

modern insurance industry, a policy’s “limitation clause, notice of loss clause, proof of 

loss clause, together with the cooperation clause, are all adhesive in nature and are the 

result of neither choice nor negotiation.” Id. Where these “conditions do no more than 

provide a trap for the unwary, the insurer will be estopped to raise them. We thereby 

grant the consumer his reasonable expectation that coverage will not be defeated by the 

existence of provisions which were not negotiated and in the ordinary case are unknown 

to the insured.” Id. But this principle is “applicable only to those situations in which the 

terms and conditions of the policy have not been truly negotiated by the parties. In those 

insurance agreements in which the parties have bargained or had the opportunity to 

Case 2:14-cv-02001-NVW Document 43 Filed 04/09/15 Page 12 of 13
- 13 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

bargain for the entire contract, ordinary rules of contractual construction should continue 

to be applied.” Id. 

 Underwriters’ limitations defense therefore turns on the extent to which the Policy 

was negotiated at arms’ length and whether Underwriters would suffer prejudice from the 

late claim. These matters do not appear on the face of the First Amended Complaint. 

They cannot prevent the First Amended Complaint from stating a claim upon which relief 

can be granted. 

 IT IS THEREFORE ORDERED that Defendants’ Motion to Dismiss First 

Amended Complaint (Doc. 32) is denied. 

 Dated this 9th day of April, 2015. 

Case 2:14-cv-02001-NVW Document 43 Filed 04/09/15 Page 13 of 13