Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_08-cv-00546/USCOURTS-azd-2_08-cv-00546-2/pdf.json

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

1

 T.L. Dallas, Ltd. was once a defendant in this action, and the parties continue to list

it in the caption. The Court, however, dismissed T.L. Dallas, Ltd. as a party on March 23,

2009 (Dkt. # 33). Therefore, the Court orders that the caption be appropriately updated.

2

 Defendant’s request for oral argument is denied because the parties have had an

adequate opportunity to discuss the law and evidence and oral argument will not aid the

Court’s decision. See Lake at Las Vegas Investors Group, Inc. v. Pac. Malibu Dev., 933 F.2d

724, 729 (9th Cir. 1991).

WO

NOT FOR PUBLICATION

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Patricia Martin, on behalf of the Estate of

Vincent Martin, 

Plaintiff/Counterdefendant, 

vs.

Great Lakes Reinsurance (U.K.), P.L.C., a

foreign corporation, 

Defendant/Counterclaimant. 

)

)

)

)

)

)

)

)

)

)

)

)

)

)

No. CV-08-546-PHX-GMS

ORDER

Pending before the Court are Defendant Great Lakes Reinsurance (U.K.), P.L.C.’s

(“Underwriters”) Motion for Summary Judgment (Dkt. # 35) and Plaintiff’s Cross-Motion

for Partial Summary Judgment (Dkt. # 39).1

 For the following reasons, the Court denies

Plaintiff’s motion and grants Defendant’s motion in part and denies it in part.2

Case 2:08-cv-00546-GMS Document 42 Filed 01/06/10 Page 1 of 18
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

3

 Plaintiff repeatedly violates Arizona Local Rule of Civil Procedure 56.1(e), which

requires a party opposing a motion for summary judgment to “include citations to the specific

paragraph in the statement of facts that supports factual assertions made in the memoranda.”

To the extent the Court can easily identify support for Plaintiff’s factual assertions in both

its statement of facts and in the record, the Court will consider these assertions on the merits.

The Court, however, will not consider facts for which it cannot easily find support because

“‘judges are not like pigs, hunting for truffles buried in briefs.’” Independent Towers of

Wash. v. Washington, 350 F.3d 925, 929 (9th Cir. 2003) (citation omitted).

Both parties also make numerous objections to the opposing parties’ facts. The Court

has reviewed these objections, and, for the purposes of this Motion only, considers only those

facts which are relevant to the motion for summary judgment.

- 2 -

BACKGROUND3

On December 4, 2004, Vincent Martin submitted a renewal application to

Underwriters to insure the Rainbow, a ship that was docked in Tahiti. At the time, Vincent

Martin had not been to Tahiti for approximately nine months. Vincent Martin did not inform

Underwriters of this fact, although the renewal application never requested this information.

Underwriters accepted the renewal application and issued an insurance policy.

On June 21, 2005, which was a clear day with calm seas, the Rainbow was discovered

partially flooded and sunk while still tied to the dock. Over time, the water accumulated in

the bilge, the lowest compartment of a ship, the batteries lost power, and the bilge pumps

eventually stopped working.

Multiple times in the summer of 2005, the adjusting firm of Wager & Associates

(“Wager”) and Underwriters contacted Vincent Martin’s son, Chris Martin, and requested

a list of damages, photographs, and an explanation of the damage’s cause. Chris Martin did

not initially respond, but he stated that he was obtaining repair estimates. 

On August 3, 2005, one of Underwriters’ adjusters estimated that the Rainbow

suffered $8,000 in repair costs and found multiple instances of preexisting damage to the

Rainbow. On September 6, 2005, Chris Martin informed Underwriters that the damage was

caused by a municipal water hose that had been inexplicably connected to a holding tank on

the Rainbow. In addition to information about the cause of the flooding, Chris Martin

Case 2:08-cv-00546-GMS Document 42 Filed 01/06/10 Page 2 of 18
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

- 3 -

informed Underwriters that the Rainbow had additional damage that appeared to be caused

by rats and that he would forward the requested receipts for repair and maintenance.

Later that month, Underwriters and Wager requested additional information from

Chris Martin, who indicated that he would quickly respond. Plaintiff asserts that Chris

Martin responded by September 24, 2005, but Defendant contends the requested records

were not received until May 9, 2006. In any event, the records did not include any actual

invoices or receipts, but did include a two-page maintenance log, which Plaintiff contends

was the only way the Martins kept maintenance records. Underwriters and Wager made

subsequent requests for invoices to accompany the maintenance log, but Chris Martin did not

respond.

After Vincent Martin’s death in December 2005, Chris Martin arranged for

Underwriters to provide an additional survey, which determined that $20,000 would repair

damage caused by the water intrusion. The second survey also found that the Martins did

not undertake all the measures that could have reduced damage, but the parties dispute the

extent to which the report stated that the ship was in an unsatisfactory condition prior to the

water intrusion. Later, Chris Martin forwarded two more repair estimates, one by Raiatea

Shipyard for $89,247.66, and another by Driscoll’s Shipyard for $49,962. In June 2006,

Underwriters offered a without-prejudice settlement of the claim for $39,970.85, an amount

determined by depreciating the Raietea Shipyard estimate, making deductions based on other

policy provisions, and subtracting the policy’s deductible. Underwriters told the Martins that

if they did not accept the $39,970.85 offer within seven days, then Underwriters would

withdraw the offer completely and assert a statute of limitations defense to bar any recovery.

Chris Martin next contacted Underwriters in April 2007, stating that the Rainbow had

been towed to Driscoll’s Shipyard in San Diego without getting Underwriters’ prior approval

for the move. In the same correspondence, Chris Martin attached a repair estimate from

Western Yacht Commissioning (“Western Yacht”) for $190,387. About a week later, Gene

Hillger, who performed adjustment work for Underwriters, emailed Underwriters and opined

that Western Yacht had a “good reputation” and was “competent to complete the repairs.”

Case 2:08-cv-00546-GMS Document 42 Filed 01/06/10 Page 3 of 18
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

- 4 -

This lawsuit ensued. Plaintiff alleges claims for breach of contract and bad faith and

seeks punitive damages.

LEGAL STANDARD

Summary judgment is appropriate if the evidence, viewed in the light most favorable

to the nonmoving party, shows “that there is no genuine issue as to any material fact and that

the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). Substantive

law determines which facts are material, and “[o]nly disputes over facts that might affect the

outcome of the suit under the governing law will properly preclude the entry of summary

judgment.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); see Jesinger v. Nev.

Fed. Credit Union, 24 F.3d 1127, 1130 (9th Cir. 1994). 

The moving party “bears the initial responsibility of informing the district court of the

basis for its motion, and identifying those portions of [the record] which it believes

demonstrate the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477

U.S. 317, 323 (1986). However, the moving party need not disprove matters on which the

opponent has the burden of proof at trial. Id. at 323. Then, the burden is on the nonmoving

party to establish a genuine issue of material fact. Id. at 322–23. The nonmoving party “may

not rest upon the mere allegations or denials of [the party’s] pleadings, but . . . must set forth

specific facts showing that there is a genuine issue for trial.” Fed. R. Civ. P. 56(e); see

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986). 

In addition, the dispute must be genuine, that is, the evidence must be “such that a

reasonable jury could return a verdict for the nonmoving party.” Anderson, 477 U.S. at 248.

Because “[c]redibility determinations, the weighing of the evidence, and the drawing of

legitimate inferences from the facts are jury functions, not those of a judge, . . . [t]he

evidence of the nonmovant is to be believed, and all justifiable inferences are to be drawn

in his favor” at the summary judgment stage. Id. at 255 (citing Adickes v. S.H. Kress & Co.,

398 U.S. 144, 158-59 (1970)); Harris v. Itzhaki, 183 F.3d 1043, 1051 (9th Cir. 1999) (“Issues

of credibility, including questions of intent, should be left to the jury.”) (citations omitted).

Case 2:08-cv-00546-GMS Document 42 Filed 01/06/10 Page 4 of 18
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

4

 Although typically “a federal court sitting in admiralty must apply federal maritime

choice-of-law rules[,]” Aqua-Marine Constructors, Inc. v. Banks, 110 F.3d 663, 670 (9th Cir.

1997), admiralty procedural law does not apply in this case because removal was based on

diversity jurisdiction. “In the case of dual bases of jurisdiction, a plaintiff is not entitled to

the procedural benefits which arise from admiralty jurisdiction absent some invocation [of]

admiralty.” Kulesza v. Scout Boats, Inc., 2000 WL 1201457 at *1 (E.D. Pa. Aug. 8, 2000)

(citing Bodden v. Osgood, 879 F.2d 184, 186 (5th Cir. 1989)).

- 5 -

DISCUSSION

I. Bad Faith

The parties dispute whether Arizona or New York law applies because that determines

whether Plaintiff may sue for bad faith. Arizona law provides a separate tort remedy for an

insured who believes that an insurer acted in bad faith. See Zilisch v. State Farm Mut. Auto

Ins. Co., 196 Ariz. 234, 237, 995 P.2d 276, 279 (2000) (“The tort of bad faith arises when

the insurer ‘intentionally denies, fails to process or pay a claim without a reasonable basis.’”)

(quoting Noble v. Nat’l Am. Life Ins. Co., 128 Ariz. 188, 190, 624 P.2d 866, 868 (1981)).

New York, however, does not recognize the tort of bad faith. Acquista v. N.Y. Life Ins. Co.,

730 N.Y.S.2d 272, 278 (N.Y. App. Div. 2001) (“We are unwilling to adopt the . . . tort cause

of action for ‘bad faith’ in the context of a first-party claim . . . .). 

The policy provides that where no applicable maritime law exists, the “insuring

agreement is subject to the substantive laws of the state of New York.” (Dkt. # 41, Ex. 3.)

Defendant argues that the choice-of-law provision bars the bad faith claim because New

York law does not recognize such a tort.

The parties agree that Arizona’s choice-of-law rules apply because “[i]n a diversity

case, the district court must apply the choice-of-law rules of the state in which it sits.”4

Abogados v. AT&T, Inc., 223 F.3d 932, 934 (9th Cir. 2000). Under Arizona law, a choice-oflaw provision is usually upheld, Landi v. Arkules, 172 Ariz. 126, 130, 835 P.2d 458, 462 (Ct.

App. 1992), but the Court first “must determine whether that choice is ‘valid and effective’

under Restatement § 187.” Swanson v. Image Bank, Inc., 206 Ariz. 264, 266, 77 P.3d 439,

Case 2:08-cv-00546-GMS Document 42 Filed 01/06/10 Page 5 of 18
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

- 6 -

441 (2003) (citing Restatement (Second) of Conflict of Laws § 187 (1971) (“Restatement”)).

A. The Choice-of-Law Clause Is Not Valid Under Restatement § 187(1).

A choice-of-law provision is effective if the “issue is one which the parties could have

resolved by an explicit provision in their agreement.” Cardon v. Cotton Lane Holdings, 173

Ariz. 203, 208, 841 P.2d 198, 203 (citing Restatement § 187(1)). In this case, the choice-oflaw provision is invalid to the extent it would bar a bad faith claim. The key “issue here is

whether parties may contractually waive [the bad faith] right or claim.” Swanson, 206 Ariz.

at 267, 77 P.3d at 442. As this District previously noted in this case, the Court must consider

“whether an Arizona insured may enter into a contract for security but not fairness—a

contract in which the insurer may ‘provide the promised protection with one hand while

destroying the very objects of the relationship with the other.’” Martin v. T.L. Dallas, Ltd.,

2008 WL 2705379 at *3 (D. Ariz. July 9, 2008) (quoting Rawlings v. Apodaca, 151 Ariz.

149, 155, 726 P.2d 565, 571 (1986)). Given that “Arizona courts recognize the implied

covenant of good faith and fair dealing in part because of ‘the vast inequities in bargaining

power’ between insurance companies and insureds[,]” this District held that “an insured,

absent adequate bargaining power or meaningful participation in the negotiation of the

insurance contract, may not waive a cause of action for insurer bad faith.” Id. (quoting

Norcia v. Equitable Life Assurance Soc’y of U.S., 80 F. Supp.2d 1047, 1048 (D. Ariz. 2000)

(citation omitted)); see also Rawlings, 151 Ariz. at 154, 726 P.2d at 570 (noting the

“disparity in bargaining power”); cf. Swanson, 206 Ariz. at 268, 77 P.3d at 443 (finding

parties to an employment contract could agree to waive a treble damages award for a badfaith withholding of wages because the parties had equal bargaining power and were

represented by counsel).

In its previous order, this District instructed the parties that it could not determine

whether the choice-of-law provision was valid because it was not yet clear what bargaining

power the parties had. Martin, 2008 WL 2705379 at *4. An issue of fact remains as to

whether Vincent Martin had adequate bargaining power. Although Don Spink, a broker,

negotiated the policy on the Martins’s behalf, Mr. Spink testified that he did not have the

Case 2:08-cv-00546-GMS Document 42 Filed 01/06/10 Page 6 of 18
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

5

 The parties do not appear to dispute that, under Restatement § 188, Arizona “would

be the state of the applicable law in the absence of an effective choice of law by the parties.”

Under Restatement § 188(1), “[t]he rights and duties of the parties with respect to an issue

in contract are determined by the local law of the state which, with respect to that issue, has

the most significant relationship to the transaction and the parties under the principles stated

in § 6.” Relevant choice-of-law factors listed under Restatement § 6 include: “(a) the needs

of the interstate and international systems, (b) the relevant policies of the forum, (c) the

relevant policies of other interested states and the relative interests of those states in the

determination of the particular issue, (d) the protection of justified expectations, (e) the basic

policies underlying the particular field of law, (f) certainty, predictability and uniformity of

result, and (g) ease in the determination and application of the law to be applied.” Moreover,

“[i]n the absence of an effective choice of law by the parties . . . the contacts to be taken into

account in applying the principles of § 6 to determine the law applicable to an issue include:

(a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of

performance, (d) the location of the subject matter of the contract, and (e) the domicile,

residence, nationality, place of incorporation and place of business of the parties.” In this

case, although New York has some connection to the Defendant foreign corporation, such

as an agent of service and a trust account, Arizona has the most significant relationship to the

- 7 -

power to negotiate the choice-of-law provision. Mr. Spink had successfully challenged a

choice-of-law provision at one point in his career, but that wasin another policy in a different

negotiation setting. Therefore, an issue of fact remains as to whether the choice-of-law

clause is valid under Restatement § 187(1).

B. The Choice-of-Law Clause Is Not Valid Under Restatement § 187(2).

Aside from Restatement § 187(1), the choice-of-law provision also is unenforceable

under Restatement § 187(2), which provides:

The law of the state chosen by the parties . . . will be applied . . . unless either

(a) the chosen state has no substantial relationship to the parties or the

transaction and there is no other reasonable basis for the parties’ choice, or 

(b) the application of the law of the chosen state would be contrary to a

fundamental policy of a state which has a materially greater interest than the

chosen state in the determination of the particular issue and which, under the

rule of § 188, would be the state of the applicable law in the absence of an

effective choice of law by the parties.

Cardon, 173 Ariz. at 208, 841 P.2d at 203. The Court need not decide Restatement

§187(2)(a) because Defendant does not contest that the choice-of-law clause fails under §

187(2)(b).5

 Plaintiff’s brief echoed this District’s prior order stating that “[t]he application

Case 2:08-cv-00546-GMS Document 42 Filed 01/06/10 Page 7 of 18
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

parties and the transaction. It appears that the Martins are from Arizona and the insurance

policy was issued to them while in Arizona. The Rainbow was docked in Tahiti, but the

Martins visited the Rainbow from Arizona. Arizona also has a strong policy connection

because it has an interest in regulating insurance contracts within the state and involving its

citizens. It also seems that, given that the parties do not dispute that Arizona law would

apply in the absence of a choice-of-law clause, that applying Arizona law would yield

predictable, expected, and fair results. Accordingly, the Court compares Arizona law with

New York law.

- 8 -

of New York law on insurance bad faith would be contrary to the fundamental policy of

Arizona, a state with a materially greater interest in this case than New York.” Martin, 2008

WL 2705379 at *3. Defendant has no response to the argument that forcing an Arizona

resident to waive his or her right to sue under the tort of bad faith would undercut the

doctrine’s purpose, allowing the insurer to “provide the promised protection with one hand

while destroying the very objects of the relationship with the other.” Id. at *3. “Arizona

courts have affirmatively created a cause of action to protect an insured from the

unreasonable actions of an insurer.” Id. If there is some reason that applying New York law

to bar the bad faith claim would not be contrary to Arizona’s fundamental policy, Defendant

has not raised it.

C. Summary Judgment Is Inappropriate With Respect to Plaintiff’s Bad

Faith Claim Under Arizona Law.

Because Arizona law applies to the bad faith claim, the Court considers whether

Plaintiff survives summary judgment under Arizona law. To establish bad faith on the part

of the insurer, “‘a plaintiff must show the absence of a reasonable basis for denying benefits

of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable

basis for denying the claim.’” Deese v. State Farm Mut. Auto. Ins. Co., 172 Ariz. 504,

506–07, 838 P.2d 1265, 1267–68 (1992) (quoting Noble v. Nat’l Life Ins. Co., 128 Ariz. 188,

190, 624 P.2d 866, 868 (1981)). On summary judgment, “[t]he appropriate inquiry is

whether there is sufficient evidence from which reasonable jurors could conclude that in the

investigation, evaluation, and processing of the claim, the insurer acted unreasonably and

Case 2:08-cv-00546-GMS Document 42 Filed 01/06/10 Page 8 of 18
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

6

 Plaintiff’s Response lists nine facts it purports are relevant to its bad faith claim. To

the extent the Court can discern how each fact is relevant and supported by the record, the

Court will consider it. The Court, however, will not consider facts that are unsupported or

wholly unexplained.

7

 For a discussion of the Rainbow’s seaworthiness and its effect on insurance

coverage, see infra Section II-B.

- 9 -

either knew or was conscious of the fact that its conduct was unreasonable.” Zilisch, 196

Ariz. at 238, 995 P.2d at 280. Therefore, a plaintiff must show both unreasonableness and

a mental state—knowledge or reckless disregard. Trus Joist Corp. v. Safeco Ins. Co. of Am.,

153 Ariz. 95, 104, 735 P.2d 125, 134 (1986). 

First, a reasonable jury could conclude that Underwriters lacked a reasonable basis

for denying benefits.6

 Underwriters did not inspect the Rainbow for six weeks; although the

parties dispute the reason for this delay, this could be construed as an unreasonably long time

to avoid inspection. Additionally, on April 18, 2007, Western Yacht submitted a repair

estimate of $190,387, which was more than the other estimates and more than Underwriters’

offer to settle for $39,970.85. A week later, Gene Hillger, who performed adjustment work

for Underwriters, suggested to Underwriters that Western Yacht’s estimate was reliable when

he stated in an email that Western Yacht had a “good reputation” and was “competent to

complete the repairs.” Even though other lower repair estimates existed, Mr. Hillger’s

statements about the Western Yacht estimate is evidence that a jury could consider in

assessing the reasonableness of Underwriters’ response to the Western Yacht estimate.

Defendant contends it had a reasonable belief that coverage did not exist, based on the

absence of maintenance records to rebut the presumption of unseaworthiness, which would

have barred coverage. As a preliminary matter, a reasonable jury could conclude both that

the ship was seaworthy, as discussed below,7

 and could likewise conclude that a belief to the

contrary was not fairly debatable. Moreover, even if policy coverage was fairly debatable,

“‘[f]air debatability’ is not automatically dispositive” because the bad faith tort “depends on

the reasonableness of [the insurer’s] conduct.” Rowland v. Great States Ins. Co., 199 Ariz.

Case 2:08-cv-00546-GMS Document 42 Filed 01/06/10 Page 9 of 18
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

- 10 -

577, 585, 20 P.3d 1158, 1166 (Ct. App. 2001); see also Zilisch, 196 Ariz. at 237, 995 P.2d

at 279 (“[I]n defending a fairly debatable claim, an insurer must exercise reasonable care and

good faith.”). Given at least some facts suggesting Defendant’s delay, refusal to offer higher

settlement amounts, and purported threats to deny all coverage, a reasonable jury could

conclude that Underwriters did not exercise reasonable care and good faith in processing

Martin’s claim.

In addition to unreasonableness, Plaintiff has presented facts showing that

Underwriters acted either knowingly or with reckless disregard. For example, a jury could

conclude that Underwriters knew a reputable estimate of over $190,000 existed, yet

consciously disregarded the estimate. Furthermore, Underwriters told the Martins that they

had to accept the $39,970.85 offer of settlement within seven days or else Underwriters

would withdraw the offer completely and assert a statute-of-limitations defense to bar all

recovery. A reasonable jury could infer that this was an unreasonably low offer and that

Underwriters attempted to threaten the Martins into accepting the offer by stating that they

would otherwise seek to have the entire claim dismissed. Defendant submits evidence that

their adjusters believed everything they were doing was reasonable, but this fact might be

rebutted by Underwriters’ knowledge of higher repair estimates, denial of the claim, and

purported threat to withdraw all coverage. 

II. Breach of Contract

The parties agree that federal admiralty law applies to the breach of contract claim

because it is based on a marine insurance policy. See Stanley T. Scott & Co., Inc. v. Makah

Dev. Corp., 496 F.2d 525, 526 (9th Cir. 1974) (noting that “[a] marine insurance policy is

a ‘maritime contract[]’” and that claims based on it “‘arise[] out of a maritime contract,’ and

[are] thus within admiralty jurisdiction”); see also Ghotra by Ghotra v. Bandila Shipping,

Inc., 113 F.3d 1050, 1054–55 (9th Cir. 1997) (holding that regardless of whether a case is

filed under diversity or admiralty jurisdiction, the “same substantive law pertains to the

[maritime] claim regardless of the forum”).

Case 2:08-cv-00546-GMS Document 42 Filed 01/06/10 Page 10 of 18
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

8 The parties dispute whether a hose caused the flooding, with neither side offering

sufficient evidence to resolve the issue upon summary judgment. For purposes of this

Motion only, the Court considers this a dispute over the facts and over what reasonable

inferences a jury might draw from the facts; the Court therefore examines the facts in the

light most favorable to the Plaintiff. 

- 11 -

A. A Reasonable Jury Could Conclude That the Loss Was Covered as an

Accidental or Fortuitous Loss.

The parties agree the insurance policy provides coverage only for “accidental physical

loss,” (Dkt. # 41), and that the policy is “construed as covering all losses that are

‘fortuitous.’” See Goodman v.Fireman’sFund Ins.Co., 600 F.2d 1040, 1042 (4thCir. 1979).

Therefore, the insurance policy does not cover losses that “result[] from . . . ordinary wear

and tear[] or from the intentional misconduct of the insured.” Id. The Plaintiff has the burden

of proving that the policy covers the alleged loss. See Ingersoll Mill. Mach. Co. v. M/V

Bodena, 829 F.2d 293, 307 (2d Cir. 1987) (discussing how “[a]n insured satisfies its burden

of proving that its loss . . . was fortuitous”).

Both parties move for summary judgment regarding whether the loss was accidental.

Plaintiff contends the loss was accidental because some unknown person connected a water

hose to the Rainbow, which caused the flooding.8 In contrast, Defendant contends that the

Rainbow was inevitably going to sink from something like hose water because it was not

maintained when the Martins were away from the Rainbow for fifteen months. Specifically,

Defendant contends the bilge pumps lost power because the electric system failed, meaning

the pumps could not displace the hose water fast enough. Neither party, however, has

presented sufficient evidence for the Court to determine whether the loss was accidental.

Defendant offers no evidence that Plaintiff intentionally caused damage to the Rainbow, and

it is unclear whether the loss was caused entirely by wear and tear. A reasonable jury could

infer that a hose filled the Rainbow with water, ultimately flooding and damaging the ship

in an uncontrollable manner. If so, a reasonable jury could further find that a hose filling the

ship was accidental, and Defendant cites no authority holding that insurance coverage is

Case 2:08-cv-00546-GMS Document 42 Filed 01/06/10 Page 11 of 18
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

9

 The Court also denies Plaintiff’s Motion as untimely. The deadline for dispositive

motions was August 7, 2009 (Dkt. # 22), and Plaintiff filed its Motion along with its

Response on September 21, 2009 (Dkt. # 39).

- 12 -

barred if a loss is only partially accidental. On the other hand, a reasonable jury might find

that a hose did not cause the flooding, but that the lack of maintenance actually caused of the

damage. The Court thus denies summary judgment on this issue.9

B. A Reasonable Jury Could Conclude That the Rainbow Was Seaworthy.

The parties agree that, under the policy, Plaintiff cannot recover if the Rainbow was

unseaworthy at the time it was damaged. “[W]hen a vessel sinks in calm waters a

presumption of unseaworthiness arises.” Underwriters at Lloyd’s v. Labarca, 260 F.3d 3, 8

(1st Cir. 2001). The insured has the burden to rebut this presumption by producing evidence

that the vessel “sank for some reason other than the alleged unseaworthy condition.” Id.

Here, the Rainbow sank while docked on a calm day, so a presumption of unseaworthiness

arises. Defendant further supports this presumption by arguing that the Martins’s fifteenmonth absence from Tahiti prevented regular maintenance that left the Rainbow in an

unseaworthy condition.

Plaintiff, however, has submitted evidence to create an issue of fact. This is not the

normal situation of a vessel suddenly sinking in calm water. Rather, a unique situation may

have occurred—a hose filled the bilge with water, causing damage. Moreover, when the

Rainbow was last surveyed in 2003, it was deemed seaworthy and in “good condition.” This

was less than two years before the damage occurred, and Defendant concedes it normally

requires an inspection of seaworthiness only every three years. Contrary to Defendant’s

assertion, the fact that the Rainbow was seaworthy less than three years prior to the damage

is relevant to its seaworthy condition on the date of the loss. Hence, a reasonable jury could

find that the Rainbow “sank for some reason other than [any] alleged unseaworthy

condition.” Labarca, 260 F.3d at 8.

Case 2:08-cv-00546-GMS Document 42 Filed 01/06/10 Page 12 of 18
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

- 13 -

C. A reasonable jury could find the doctrine of uberrimae fidei inapplicable.

“The doctrine of uberrimae fidei requires a marine insurance applicant ‘even if not

asked, to reveal every fact within his/her knowledge that is material to the risk.’” Cigna

Prop. & Cas. Ins. Co. v. Polaris Pictures Corp., 159 F.3d 412, 418 n. 1 (9th Cir. 1998)

(quoting Certain Underwriters at Lloyd’s v. Montford, 42 F.3d 219, 222 (9th Cir. 1995)).

“‘An insurer may rescind an insurance contract if it can show either intentional

misrepresentation of a fact, regardless of materiality, or nondisclosure of a fact material to

the risk, regardless of intent.” Certain Underwriters at Lloyd’s v. Inlet Fisheries, Inc., 518

F.3d 645, 655 (9th Cir. 2008) (quoting Cigna, 159 F.3d at 420). Defendant does not contend

that Plaintiff intentionally made any misrepresentation, so Defendant can void the policy

under this doctrine only if Plaintiff made a material nondisclosure. “A [non]disclosed fact

is material if it would have affected the insurer’s decision to insure at all or at a particular

premium.” Id. at 655 (quoting N.Y. Mar. & Gen. Ins. Co. v. Tradeline, 266 F.3d 112, 123 (2d

Cir. 2001)).

Defendant argues that Plaintiff improperly responded to a question on the policy

application, which asked, “Do you have a caretaker who has access or ability to operate the

boat in your absences? If yes provide resume and details.” (Dkt. # 35 Ex. 7.) Vincent Martin

responded that no such caretaker existed. After the loss, however, Plaintiff stated that

Constance Tuhiva acted as the boat’s caretaker after the Martins permanently left Tahiti.

This argument is insufficient to grant summary judgment because Defendant has not properly

“inform[ed] the district court of the basis for its motion” or “demonstrate[d] the absence of

a genuine issue of material fact.” Celotex, 477 U.S. at 322. Even if the Martins did not

disclose that Ms. Tuhiva was caring for the Rainbow, this nondisclosure is not necessarily

material because it may not “affect[] the insurer’s decision to insure,” Inlet Fisheries, 518

F.3d at 655 (internal quotations omitted). If Underwriters issued the insurance policy

thinking the Rainbow had no caretaker at all, it is unclear how the actual presence of a

caretaker is material. Although “[t]he fact that the insurer has demanded answers to specific

questions in an application for insurance is . . . usually sufficient to establish materiality[,]”

Case 2:08-cv-00546-GMS Document 42 Filed 01/06/10 Page 13 of 18
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

10 Defendant’s only argument regarding these latter three allegations is that Plaintiff

did not cite evidence to controvert Defendant’s arguments. Defendant’s one sentence in its

motion, however, was already insufficient to inform the Court of the basis for summary

judgment.

- 14 -

Freeman v. Allstate Life Ins. Co., 253 F.3d 533, 536 (9th Cir. 2001) (internal quotations

omitted) (emphasis added), it does not follow that an omission is necessarily material if the

Martins responded to the question in a way that suggested that Underwriters thought it was

taking on an higher insurance risk than it actually was. See Inlet Fisheries, 518 F.3d at 655

(holding that a fact is material only if it would have affected the insurer’s decision to insure

at all or to insure at a particular premium). There is an issue of fact because the Martins’s

response to the application question suggested that Underwriters believed it was insuring a

ship without a caretaker, and therefore it is not clear that this nondisclosure would have

materially affected Underwriters’ decision to insure or to insure at a particular level.

In addition, in one sentence, Defendant’s motion alleges five other instances of

material omissions: “(1) failure to provide the documents requested by Underwriters; (2)

failure to inform Underwriters that Vincent Martin was sick and no longer able to attend the

Vessel; (3) failure to provide the dockage agreement; (4) transport of the Vessel to the United

States without the permission of Underwriters; and (5) failure to present Dave Fleck at the

Vessel.” (Dkt. # 35 at 11.) This sentence does not explain how these allegations are material

misrepresentations or omissions, and Defendant makes no concerted effort to extrapolate on

any of the latter three incidents in its Reply.10 As to the first assertion, that the Martins failed

to provide repair and maintenance documents, Defendant insinuates that this is material

because maintenance and repairs are relevant to the ship’s condition. However, “[t]he duty

[of uberrimae fidei] attaches at the time of effecting the insurance . . . for the effect of a

concealment in avoiding the policy is to be determined not by its eventual relation to the

nature of the risk, but with reference to its immediate influence on the judgment of the

underwriter.” Gulfstream Cargo, Ltd. v. Reliance Ins. Co., 409 F.2d 974, 981 (5th Cir. 1969)

(internal quotations omitted). Underwriters requested these records for the first time after

Case 2:08-cv-00546-GMS Document 42 Filed 01/06/10 Page 14 of 18
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

- 15 -

the Rainbow had already sunk, and a reasonable jury could find that these records would not

have affected Underwriters’ initial risk assessment when issuing the policy. Similarly,

Underwriters requested Vincent Martin’s health status after the Rainbow was damaged, but

nothing in the initial policy required any immediate or continuing disclosure of his health

status. Defendant cites no case, and the Court is not aware of one, applying the doctrine of

uberrimae fidei to a duty of continuing affirmative disclosure of one’s health status on a

marine insurance policy. Even though Vincent Martin was one of the insured individuals and

primary operators, a reasonable jury could find that his health status was not material to

whether Underwriters initially would have issued the same insurance policy. Accordingly,

the Court rejects Defendant’s argument based on uberrimae fidei.

D. A Reasonable Jury Could Find That the Martins Did Not Breach the

Cooperation Clause.

Defendant next argues that the policy’s cooperation clause bars Plaintiff’s claims.

First, as discussed above, the policy includes a choice-of-law clause stating that where no

applicable maritime law exists, the “insuring agreement is subject to the substantive laws of

the state of New York.” (Dkt. # 41, Ex. 3.) Although elsewhere in its brief, Defendant insists

upon the enforcement of this choice-of-law clause, Defendant briefs its cooperation clause

argument under Arizona law. Defendant thus has provided the Court no reason why

summary judgment is appropriate on this issue under New York law.

However, even if Arizona substantive law applies, Defendant’s argument still fails.

Under Arizona law, “an insured’s breach of policy conditions, including the cooperation

clause, might be a defense to an action on the policy.” Holt v. Utica Mut. Ins. Co., 157 Ariz.

477, 481, 759 P.2d 623, 627 (1988). “[T]o constitute a valid defense, the breach must be

material, violating a provision reasonably necessary for the protection of the insurer, and it

must substantially prejudice the insurer.” Id., 759 P.2d at 627. “[W]hether an insurer has

suffered substantial prejudice . . . is generally a factual question[,]” and “[i]t is the insurer’s

burden to show actual prejudice before it can avoid liability under the insurance policy.” Id.,

759 P.2d at 627. Moreover, it is not the case that “prejudice automatically follows from the

Case 2:08-cv-00546-GMS Document 42 Filed 01/06/10 Page 15 of 18
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

11 Defendant contends that Plaintiff should have taken more depositions if it wanted

to deny these factual allegations. Defendant, however, has not presented any evidence or

explanation beyond mere conclusions. No contrasting deposition testimony is necessary to

defeat a motion for summary judgment based only on legal conclusions. See Celotex, 477

U.S. at 322 (requiring the moving party to “inform[] the district court of the basis for its

motion[] and identify[] those portions of [the record] which it believes demonstrate the

absence of a genuine issue of material fact”).

- 16 -

denial of an opportunity to defend against a claim[,]” especially if the insurer has at least

some opportunity to build a defense. Id. at 484, 759 P.2d at 630 (internal quotations omitted).

In this case, the policy requires an insured to “[c]ooperate with [Underwriters] in the

investigation, defense or settlement of any loss and agree to be examined under oath if

[Underwriters] so request[s]” and to “[c]omply with any reasonable request made of [the

insured], with regard to the loss.” (Dkt. # 41 Ex. 3.) Defendant alleges three incidents of a

breach of this clause, but the parties dispute whether any of these alleged breaches

substantially prejudiced Underwriters.

First, Defendant contends that the Martins never produced maintenance or repair

records, substantially prejudicing Underwriters’ investigation of the Rainbow’s condition.

Defendant has not produced sufficient evidence or explanation that would require a

reasonable jury to find substantial prejudice. Both Defendant’s motion and the cited section

of its statement of facts state only that “Plaintiff’s failure to produce these records

substantially prejudiced Underwriters’ investigation into the condition of the Vessel.” (Dkt.

## 35, 41 Ex. 3.) The statement of facts cites only one piece of evidence, Doug Wager’s

declaration, which also concludes only that “[t]he failure to receive [the documents]

substantially prejudiced [the] investigation.” (Dkt. # 35, Ex. 8.) Although the Court could

speculate reasons why this nondisclosure might prejudice an investigation, it will not do so

when Defendant has offered no factual explanation for why substantial prejudice occurred.11

Second, Defendant contends that Plaintiff did not provide Underwriters with

information regarding Vincent Martin’s health status. Again, Defendant does not explain

how this caused substantial prejudice. The statement of facts and two affidavits state only

Case 2:08-cv-00546-GMS Document 42 Filed 01/06/10 Page 16 of 18
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

- 17 -

that “[t]he failure to respond to these inquiries substantially prejudiced [the] investigation.”

(Dkt. ## 35, Exs. 8, 10; 41, Ex. 3.) These conclusory statements are insufficient to grant

summary judgment.

Third, Defendant contends Chris Martin engaged in “disruptive conduct” that

“prevented Underwriters from fully investigating the claim.” These actions include failing

to provide information and making “outrageous allegations” that Underwriters secretly

recorded phone conversations. Again, Defendant has not explained how a phone call

substantially prejudiced Underwriters, other than to provide more conclusory statements.

The Court will not speculate as to what effect Chris Martin’s actions had. 

III. Plaintiffs May Allege Punitive Damages.

Punitive damages “are recoverable in bad faith tort actions when, and only when, the

facts establish that defendant’s conduct was aggravated, outrageous, malicious or

fraudulent[,]” Rawlings v. Apodaca, 151 Ariz. at 163, 726 P.2d at 579, and when the plaintiff

can establish these facts by clear and convincing evidence[,]” Linthicum v. Nationwide Life

Ins. Co., 150 Ariz. 326, 332, 723 P.2d 675, 681 (1986). This standard requires “‘something

more’ than conduct necessary to establish the tort.” Filasky v. Preferred Risk Mut. Ins. Co.,

152 Ariz. 591, 598, 734 P.2d 76, 83 (1987). “To obtain tort damages . . . plaintiff must prove

only that defendant failed to ascertain the true facts and thus acted without or indifferent to

the reasonable basis required for denying the claim[,]” and “[t]o obtain punitive damages,

plaintiff must also show that . . . [the defendant] was guided by an evil mind which either

consciously sought to damage the insured or acted intentionally, knowing that its conduct

was likely to cause unjustified, significant damage to the insured. Id.

In this case, a reasonable jury could conclude that Underwriters went beyond normal

bad faith, intentionally acting in a way it knew was likely to cause unjustified and significant

damage to the Martins. Even if Underwriters believed the loss was not covered due to the

lack of an accident, unseaworthiness, the lack of disclosures, or the lack of cooperation, it

was not so clear that denial of coverage was justified. Based on present facts, a reasonable

jury could conclue that Underwriters wrongfully denied coverage and/or threatened to

Case 2:08-cv-00546-GMS Document 42 Filed 01/06/10 Page 17 of 18
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

- 18 -

withdraw their settlement offer of around $39,000, even though Underwriters was aware of

Western Yacht’s estimate of over $190,000—an estimate that one of Underwriters’ adjusters

indicated could be reliable. Moreover, Underwriters’ $39,000 offer could be construed as

an attempt to strong-arm the Martins into accepting a low-ball amount. Specifically, by

threatening to deny coverage completely and to seek a statute-of-limitations defense unless

the Martins quickly accepted the offer, a reasonable jury could find Underwriters

intentionally put undue pressure on the Martins that would cause substantial loss. These

actions in combination could be construed as beyond normal bad faith such that punitive

damages are available.

IT IS THEREFORE ORDERED that Defendant’s Motion for Summary Judgment

(Dkt. # 35) is DENIED.

IT IS FURTHER ORDERED that Plaintiff’s Motion for Summary Judgment (Dkt.

# 39) is DENIED.

IT IS FURTHER ORDERED directing the Clerk of the Court to delete T.L. Dallas,

Ltd. from the caption and the parties are directed to use the caption referenced in this Order

on all future pleadings.

DATED this 5th day of January, 2010.

Case 2:08-cv-00546-GMS Document 42 Filed 01/06/10 Page 18 of 18