Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-3_12-cv-08124/USCOURTS-azd-3_12-cv-08124-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:2201 Declaratory Judgment (Insurance)

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

First Mercury Insurance Co., 

Plaintiff, 

v.

Cedar West Capital, L.L.C., et al., 

Defendants.

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CV 12-8124-PCT-PGR

ORDER

Before the Court are Defendant/Counter-claimant Cedar West Capital’s Rule

37(a)(3)(B) Motion to Compel Discovery Responses (Doc. 31) and Plaintiff/Counterdefendant First Mercury Insurance’s Motion to Bifurcate and Request for Stay of Discovery

and Disclosure on Insurance Bad Faith Claim (Doc. 33). For the reasons set forth herein, the

Court will deny bifurcation and grant the motion to compel.

On June 27, 2012, First Mercury filed an amended complaint for declaratory relief

against Cedar West and Shorts Shingle & Shake Service. (Doc. 6.) First Mercury seeks to

establish whether a stipulated judgment entered against its insured, Shorts Shingle, by Cedar

West is enforceable against First Mercury. 

On September 12, 2012, Cedar West filed an answer and counterclaims for breach of

contract, breach of duty of good faith and fair dealing, and negligence. (Doc. 11.) As

described below, Cedar West alleges that First Mercury failed to conduct an adequate

investigation and breached its contract by refusing to defend and/or indemnify Shorts Shingle.

(Id.; see Doc. 33)

Case 3:12-cv-08124-PGR Document 46 Filed 12/13/12 Page 1 of 6
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 Shorts Shingle was hired to lay a new roof over the building. (See Doc. 35 at 2.) The

installation of the new roof was faulty, with Shorts Shingle using one-inch nails instead of

three-inch screws and plates to attach the first layer. (Id.) The use of improper nails and the

moisture that entered the roof materials necessitated the removal and replacement of the roof.

(Id.)

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On October 9, 2012, First Mercury filed a motion to dismiss the counterclaims. (Doc.

18; see Doc. 30.) The Court granted the parties’ stipulation to stay briefing on the motion until

December 18. (Doc. 34.)

On November 16, 2012, Cedar West filed a motion to compel discovery responses.

(Doc. 31.) On November 19, First Mercury filed a motion to bifurcate the breach of contract

counterclaim from the bad faith counterclaim and for a stay of discovery with respect to the

latter. (Doc. 33.)

The parties filed their Joint Case Management Report on November 26. (Doc. 35.) The

Court held a scheduling conference on December 10, 2012.

Background

In April and May, 2010, Cedar West entered into two construction contracts with

Shorts Shingle to re-roof a commercial building. During a rainstorm on May 12, 2010, water

entered the roof. As a result of the water leakage, Cedar West sustained damages totaling

more than $290,000.1

At the time of the loss, Shorts Shingle was insured with a commercial general liability

policy issued by First Mercury. Cedar West and Shorts Shingle notified First Mercury of the

damages to Cedar West’s property. First Mercury denied the claim on July 9, 2010, citing the

policy’s exclusion of coverage for “property damage to your work”—i.e., the cost to repair

and replace Short’s Shingle’s own work. (See Doc. 18, Ex. 3.) First Mercury also cited the

policy’s “open-roof endorsement,” which states that the insured must provide appropriate

temporary waterproof covering to any open roofs. (Id.) Cedar West’s counterclaims rely on

the “products-completed operations hazard” exception to the “property damage” exclusion.

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(See Doc. 11 at 7, ¶¶ 7–9; Doc. 35 at 9–10.) Cedar West contends that the roof was

“substantially completed at the time of the damage.

On January 20, 2011, Cedar West filed a lawsuit against Shorts Shingle in state court.

Pursuant to Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (1969), the parties entered into

a stipulated judgment for $239,192, representing Cedar West’s actual losses.

In its motion to dismiss, First Mercury contends that it did not breach any obligation

to defend or indemnify Shorts Shingle in the lawsuit because it was never tendered or given

notice of the suit, as required by the policy and by Arizona law. (Doc. 18.) First Mercury also

contends that its denial of the claim was proper because the pre-suit information it received

indicated that the loss was not a covered claim. (Id. at 14.) Cedar West asserts that First

Mercury failed to investigate the possible application to the “products completed” exception.

(See Doc. 36 at 2.) 

Discussion

Rule 42(b) of the Federal Rules of Civil Procedure authorizes the court to order a

separate trial of any claim when separation is in the interest of judicial economy, will further

the parties’ convenience, or will prevent undue prejudice. The Court has broad discretion in

determining whether the requested bifurcation is appropriate. Hangarter v. Provident Life and

Accident Ins. Co., 373 F.3d 998, 1021 (9th Cir. 2004).

In its motion for bifurcation, First Mercury argues that the coverage issue should be

resolved first because Cedar West’s bad faith claim “simply will not lie if this claim is not

covered.” (Doc. 33 at 2.) First Mercury asserts that judicial economy and fairness are served

by bifurcation and a stay of discovery on Cedar West’s bad faith claim.

Cedar West, opposing bifurcation, notes that in Arizona breach of contract is not

required for a claim of bad faith. (Doc. 36 at 5.) In Deese v. State Farm Mutual Automobile

Ins. Co., 172 Ariz. 504, 509, 838 P.2d 1265, 1270 (1992), the Arizona Supreme Court held

that the breach of an express covenant is not a necessary prerequisite to an action for bad

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faith, and therefore, “a plaintiff may simultaneously bring an action both for breach of

contract and for bad faith, and need not prevail on the contract claim in order to prevail on the

bad faith claim, provided plaintiff proves a breach of the implied covenant of good faith and

fair dealing.” See Lloyd v. State Farm Mut. Auto. Ins. Co., 189 Ariz. 369, 943 P.2d 729, 737

(App. 1996) (“It has consistently been held that an insurer can be held liable for bad faith even

when it does not violate any express provision of the insurance contract.”). One of the ways

an insurer may commit bad faith is in processing or evaluating a claim in an unreasonable

manner. See Bass v. Farm Bureau Financial Services, No. CV–12–00393–PHX–PGR, 2012

WL 3585206, at *2 (D.Ariz. August 20, 2012 ) (citing James River Ins. Co. v. Hebert Schenk,

P.C., 523 F.3d 915, 923 (9th Cir. 2008). 

First Mercury replies that where a claim of bad faith is based on a “final judicial

determination that there was no coverage” forecloses liability for a claim of bad faith.

Manterola v. Farmers Ins. Exchange, 200 Ariz. 572, 579, 30 P.3d 639, 646 (App. 2001). In

Manterola the court emphasized that “[a]lthough the pertinent Arizona decisions clearly have

rejected the notion that a contractual breach or even policy coverage is a necessary element

of all bad faith claims, none of the cases suggests that a carrier may be held liable for bad faith

denial of coverage in the face of a final judicial determination that there was no coverage.”

Id.

Furthermore, according to First Mercury, bifurcation is appropriate because coverage

is a prerequisite for Cedar West’s bad faith failure-to-investigate claim. (Doc. 42 at 4.) First

Mercury asserts that an inadequate investigation constitutes bad faith only where additional

investigation would have led to facts establishing coverage. (Id. (citing Aetna Cas. and Sur.

Co. v. Superior Court In and For County of Maricopa, 161 Ariz. 437, 440, 778 P.2d 1333,

1336 (App. 1989)). 

Having considered the parties’ arguments, the Court concludes that First Mercury has

not met its burden of establishing that bifurcation is warranted. It is not clear, given the cases

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 First Mercury argues that it will be prejudiced by the simultaneous litigation of the

contract and bad faith because attorney-client communications may be discoverable in the

latter. (Doc. 33 at 6.) This conclusory assertion of prejudice is not sufficient to warrant

bifurcation. See Fiserv Solutions, Inc. v. Westchester Fire Ins. Co., No. 11-C-0603, 2012 WL

2120513 (E.D.Wis. June 11, 2012); Wolkosky v. 21st Century Centennial Ins. Co., No. 2:10-

cv-439, 2010 WL 2788676 (S.D.Ohio July 14, 2010).

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cited above, that the question of coverage is dispositive of or separable from the allegations

of bad faith. See, e.g., Lloyd, 189 Ariz. at 377, 943 P.2d at 737 (“The covenant of good faith

and fair dealing can be breached even if the policy does not provide coverage.”). This is not

a case where the bad faith claim is based “solely on a carrier’s denial of coverage.”

Manterola, 200 Ariz. at 579, 30 P.3d at 646. Cedar West alleges that First Mercury

unreasonably investigated and evaluated the claim. Evidence concerning the reasonableness

of the investigation implicates both the coverage question and the issue of bad faith. 

In addition, whether or not a ruling on coverage is ultimately dispositive of the bad

faith claim, the Court finds that bifurcation of trials will not promote convenience or judicial

economy. As Cedar West notes, courts have denied bifurcation of discovery even after

granting bifurcating of issues for trial. See Drennan v. Maryland Cas. Co., 366 F.Supp.2d

1002, 1007–08 (D.Nev. 2005); Cook v. United Service Auto. Ass’n., 169 F.R.D. 359, 362

(D.Nev. 1996). 

In Drennan, the court bifurcated the breach of insurance claim from the bad faith

claim, but found that bifurcation of discovery was not warranted. 366 F.Supp.2d at 1008. The

court concluded that joint discovery was more convenient and furthered judicial economy,

reasoning that “[w]ith joint discovery, the parties will be better informed with regard to

settlement efforts. Moreover, any discovery disputes likely will pertain to both causes of

action.”Id.; see Cook, 169 F.R.D. at 362. 

The Court finds this analysis persuasive. Because efficiency and convenience will be

better served by proceeding with discovery on all issues, bifurcation of the matter for trial

does not further the purposes of Rule 42(b).2

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Cedar West’s motion to compel sought an order directing First Mercury to respond to

its written non-uniform interrogatories. (Doc. 31.) First Mercury objected to the discovery

pending a ruling on its motion to bifurcate. (Doc. 37.) Having denied First Mercury’s motion

to bifurcate, the Court will grant Cedar West’s motion to compel.

Accordingly,

IT IS HEREBY ORDERED denying First Mercury’s motion to bifurcate and stay

discovery (Doc. 33).

IT IS FURTHER ORDERED granting Cedar West’s motion to compel (Doc. 31). 

DATED this 13th day of December, 2012.

Case 3:12-cv-08124-PGR Document 46 Filed 12/13/12 Page 6 of 6