Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_12-cv-02119/USCOURTS-azd-2_12-cv-02119-6/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:2201 Declaratory Judgment (Insurance)

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WO 

IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF ARIZONA 

Lexington Insurance Company,

Plaintiff, 

v. 

Scott Homes Multifamily, Inc. and 

Silverbell 290 Limited Partnership, 

Defendants. 

Silverbell 290 Limited Partnership, 

individually and as the assignee of Scott 

Homes Multifamily, Inc., 

Counterclaimants, 

v. 

Lexington Insurance Company, 

Counterdefendant. 

No. CV-12-02119-PHX-JAT

ORDER 

 Pending before the Court are Plaintiff’s Motion to Reopen Discovery (Doc. 310),1

Plaintiff’s Motion for Summary Judgment (Doc. 281), Defendants/Counterclaimants 

Silverbell 290 Limited Partnership and Scott Homes Multifamily, Inc.’s Motion for 

 

1

 Plaintiff’s motion violates Local Rule of Civil Procedure 7.2(e), which states that 

“[u]nless otherwise permitted by the Court, a motion including its supporting memorandum . . . may not exceed seventeen (17) pages, exclusive of attachments and any required statement of facts.” Plaintiff filed a separate motion and supporting memorandum totaling in excess of seventeen pages. Although, for the reasons that follow, the Court denies Plaintiff’s motion on its merits, the Court alternatively denies the motion as procedurally improper. 

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Summary Judgment/Summary Adjudication (Doc. 273), Plaintiff’s Motion for Violation 

of Rule 11 and for Sanctions (Doc. 298), and Plaintiff’s Notice of Errata and Motion for 

Leave to Replace Incorrectly-Filed Motion for Violation of Rule 11 (Doc. 303). The 

Court now rules on the motions. 

I. Background

 The Court incorporates its summary of the facts of this case from its ruling on 

Plaintiff Lexington Insurance Company (“Lexington”)’s first motion for summary 

judgment: 

Lexington filed this declaratory judgment action seeking a determination that it is not liable to pay Silverbell in satisfaction of a consent judgment Silverbell obtained in prior litigation against Lexington’s insured, Scott Homes 

Multifamily, Inc. (“Scott Homes”). 

 The basic facts giving rise to Lexington’s action are as follows. Silverbell contracted with Scott Homes for the 

construction of the Springs at Silverbell Apartments (the 

“Apartments”). At all relevant times, Scott Homes was 

insured under a primary general liability policy (the “Evanston Policy”) issued by Evanston Insurance Company (“Evanston”). Scott Homes was also insured under an excess 

liability policy issued by Lexington (the “Lexington Excess Policy”) that “followed form” to the Evanston policy. Additionally, Scott Homes was an additional named insured 

on some of its subcontractors’ primary policies. After the 

Apartments were built, Silverbell discovered construction 

defects in the Apartments. 

 Silverbell sued Scott Homes and its subcontractors for 

damages [(the “Underlying Lawsuit”)]. Scott Homes tendered 

its defense to Evanston, who defended subject to a reservation of rights. Lexington declined to defend Scott Homes, 

asserting that it had not been provided with documentation showing all underlying coverage had been exhausted. Silverbell, Scott Homes, and Evanston subsequently entered into a settlement agreement (the “Settlement Agreement”) in which (1) Silverbell and Scott Homes stipulated to a $6 million judgment against Scott Homes; (2) Evanston agreed to pay Silverbell its policy limit of $1 million in exchange for a release from further liability; (3) Silverbell agreed not to execute the judgment against Scott Homes; and (4) Scott 

Homes assigned to Silverbell all of Scott Homes’ rights for 

claims arising out of the Apartments against certain subcontractors, subcontractors’ insurers, primary insurers (other than Evanston), and excess insurers. 

 The Pima County Superior Court entered judgment for Silverbell and against Scott Homes in the amount of $6 

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million, as stipulated [(the “Stipulated Judgment”)]. The 

judgment stated that the $6 million amount was awarded for 

“claims related to and/or damages caused by work of” seven 

subcontractors who Scott Homes had hired to construct the 

Apartments and provided an itemized breakdown of the 

award per subcontractor. After entry of judgment, Lexington filed the present action for a declaration that it is not liable to 

Silverbell under the terms of its policy. 

Lexington Ins. Co. v. Scott Homes Multifamily, Inc., 2014 WL 231989, at *2 (D. Ariz. 

Jan. 22, 2014) (citations and footnotes omitted). 

 Lexington filed its first motion for summary judgment in June 2013 while 

discovery in this case was ongoing. (Doc. 53). The Court denied that motion, determining 

that the Lexington Excess Policy was excess to only the Evanston Policy and the 

Evanston Policy was exhausted in the payment of covered claims. (Doc. 159). 

II. Motion to Reopen Discovery

 The Court first rules on the motion to reopen discovery because, if granted, the 

Court would have to reset the dispositive motion deadline, deny as moot the pending 

cross-motions for summary judgment, and permit further discovery as well as the filing 

of new dispositive motions. Lexington moves to reopen discovery to compel Defendant 

Silverbell 290 Limited Partnership (“Silverbell”) to produce additional documents that 

Silverbell allegedly improperly refused to produce. 

A. Background 

 1. Discovery in this Case 

 Lexington’s First Amended Complaint (Doc. 270) alleges, among other claims, 

that the Settlement Agreement and the resulting Stipulated Judgment between Silverbell 

and Scott Homes are products of collusion because the two entities share common 

ownership. (Doc. 270 at 30). The Court’s Rule 16 Scheduling Order set a discovery 

deadline of February 7, 2014 for all claims. (Doc. 40). The Court later extended this 

deadline several times at the parties’ requests. See (Doc. 82) (extending discovery 

deadline to March 7, 2014); (Doc. 200) (extending deposition discovery only to March 

21, 2014); (Doc. 266) (extending deposition discovery to April 4, 2014 only for the 

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purpose of taking Lexington’s Rule 30(b)(6) deposition regarding certain topics). The 

Court also extended the dispositive motion deadline to May 16, 2014. (Doc. 266). 

During discovery, Lexington propounded to Silverbell a set of requests to produce 

documents. Specifically, Lexington requested: 

30. All Documents and Communications Concerning the Settlement. 

31. All Documents Concerning the dates on which You negotiated the Settlement and/or discussed settlement of the 

Underlying Lawsuit with Scott Homes and/or Evanston. 

(Doc. 204-1 at 9). 

 Lexington also requested from Scott Homes: 

40. All Communications Concerning the Settlement. 

41. All Documents Concerning the dates on which You negotiated the Settlement and/or discussed settlement of the 

Underlying Lawsuit with Silverbell and/or Evanston. 

(Id. at 20). 

 Silverbell objected to Lexington’s request #30 on the grounds that it was vague, 

ambiguous, and overbroad. (Id. at 26). Silverbell contended that the request did not 

specify the persons between whom the requested communications took place. It also 

disputed the relevance of the requested documents and asserted that Lexington’s request 

sought documents protected by “attorney-client privilege, the work product documents, a 

premature disclosure of expert opinions, and/or any other privilege or protection.” (Id. at 

27). Silverbell responded that, other than the documents previously produced in the 

Underlying Lawsuit, it would not produce “any documents responsive to Request No. 30 

at this time given the above referenced objections and the overbroad nature of this 

request.” (Id.) 

 Silverbell similarly objected to Lexington’s request #31, contending it was vague, 

ambiguous, and overbroad because it was unclear as to which documents Lexington 

referred. (Id.) Silverbell also disputed relevance and asserted that Lexington’s request 

sought documents protected by “attorney-client privilege, the work product documents, a 

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premature disclosure of expert opinions, and/or any other privilege or protection.” (Id.) 

Silverbell responded that, other than the documents previously produced in the 

Underlying Lawsuit, it would not produce “any documents responsive to Request No. 31 

at this time given the above referenced objections and the overbroad nature of this 

request.” (Id.)

2

 Lexington and Silverbell engaged in a meet-and-confer process both orally and in 

writing concerning Lexington’s requests for production and Silverbell’s position on the 

requests. (Doc. 314 ¶ 26). As part of this process, Lexington’s counsel wrote a letter to 

Silverbell’s counsel in which Lexington identified its request #30 to Silverbell and 

request #40 to Scott Homes as seeking all communications from anyone on behalf of 

Silverbell or Scott Homes with any third party concerning the Settlement Agreement 

between Silverbell and Scott Homes. (Doc. 321-1 at 4). Lexington identified these 

requests as including communications between the attorneys for Silverbell and Scott 

Homes and to any other party or attorney in the Underlying Lawsuit. (Id.) Lexington also 

identified its request #31 to Silverbell and request #41 to Scott Homes as similar to 

requests #30 and #40 “in that they seek communications between the parties during their 

negotiations of the settlement between Silverbell and Scott Homes.” (Id.) 

 Silverbell sent supplemental responses to Lexington’s requests #30 and #31 in 

which Silverbell objected that these requests called for the production of documents 

protected by mediation or settlement privileges. (Doc. 314-2 at 34-35).3

 Silverbell 

produced a privilege log identifying the documents it was withholding in response to 

Lexington’s request. (Id.) 

 Lexington then initiated a discovery dispute with the Court concerning, among 

other issues, whether communications leading up to executed settlement agreements are 

discoverable. See (Doc. 192). After the Court’s ruling on the scope of the mediation 

 

2

 Scott Homes responded to Lexington’s requests in a substantially identical manner to that of Silverbell. See (Doc. 204-1 at 35-36). Silverbell and Scott Homes share 

counsel in the present case. 

3

 Scott Homes answered similarly. See (Doc. 321-2 at 96). 

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privilege, (Doc. 239 at 5, 19-21), Silverbell produced additional documents, (Doc. 312-1 

at 122-229). 

 2. Discovery in the Underlying Lawsuit

 Scott Homes’ subcontractors, defendants in the Underlying Lawsuit, issued 

requests for production to Silverbell in which the subcontractors asked for, among other 

copies, copies of all communications involving Silverbell and Scott Homes’ counsel 

regarding the Settlement Agreement and the Stipulated Judgment against Scott Homes; 

all communications involving Evanston and its counsel regarding the settlement and 

assignment of Scott Homes’ rights to Silverbell; all communications involving Steven 

Robson (who owned interests in both Silverbell and Scott Homes), Scott Homes’ counsel, 

and Silverbell regarding the settlement and assignment of Scott Homes’ rights to 

Silverbell; and all communications regarding settlement negotiations and the allocation to 

Scott Homes’ subcontractors in the Stipulated Judgment. (Doc. 312-1 at 5). In response, 

Silverbell asserted attorney-client privilege and produced a privilege log for documents 

that Silverbell alleged were privileged (the “Privileged Documents”). (Id. at 92). 

The resulting discovery dispute was referred to a special master who, in June 

2014, issued a report and recommendation. (Id. at 1). The special master recommended a 

finding that Silverbell and Scott Homes had impliedly waived the attorney-client 

privilege with respect to the Privileged Documents by entering into the Settlement 

Agreement because Silverbell had to prove both that Scott Homes diligently defended the 

lawsuit and there was no collusion between Silverbell and Scott Homes in entering into 

the Settlement Agreement and Stipulated Judgment. (Id. at 5-6). The court adopted the 

special master’s recommendations and ordered the production of the Privileged 

Documents. (Id. at 69). 

 All but one of Scott Homes’ subcontractors settled with Silverbell prior to trial. 

The trial began on September 25, 2014, and Lexington attempted to attend the 

proceedings so that it could obtain copies of the communications listed in Silverbell’s 

privilege log, but the court sealed the proceedings and barred Lexington from the 

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courtroom. (Doc. 312 at 2-4). The court also sealed the transcripts. (Id. at 3-4). Lexington 

petitioned the Arizona Court of Appeals for a special action vacating the sealing of the 

courtroom. The trial settled after the first day and before the trial court had ruled on the 

admissibility of the attorney-client privileged communications. (Doc. 314 at 5). 

Lexington later amended its special action petition to request that the transcripts be 

unsealed; the Arizona Court of Appeals ultimately declined to exercise jurisdiction. 

 On October 15, 2014, Lexington filed its motion to reopen discovery with the 

Court. (Doc. 311). 

B. Legal Standard

 A motion to reopen discovery is a motion to modify the discovery deadline set in 

the Court’s scheduling order pursuant to Federal Rule of Civil Procedure (“Rule”) 16. See 

Bleek v. Supervalu, Inc., 95 F. Supp. 2d 1118, 1120 (D. Mont. 2000); see also Yeager v. 

Yeager, 2009 WL 1159175, at *2 (E.D. Cal. Apr. 29, 2009). Rule 16(b)(4) permits a 

scheduling order to be modified only upon a showing of good cause by the party seeking 

amendment. See Johnson v. Mammoth Recreations, Inc., 975 F.2d 604, 609 (9th Cir. 

1992). In the context of motions to reopen discovery, the Ninth Circuit Court of Appeals 

(“Court of Appeals”) has held that good cause requires the movant to show it “diligently 

pursued its previous discovery opportunities” and that allowing additional discovery will 

preclude summary judgment. See Cornwell v. Electra Cent. Credit Union, 439 F.3d 1018, 

1026 (9th Cir. 2006) (citing Panatronic USA v. AT&T Corp., 287 F.3d 840, 846 (9th Cir. 

2002)). 

The Court of Appeals has enumerated several factors that a court may consider in 

deciding whether to reopen discovery: “1) whether trial is imminent, 2) whether the 

request is opposed, 3) whether the non-moving party would be prejudiced, 4) whether the 

moving party was diligent in obtaining discovery within the guidelines established by the 

court, 5) the foreseeability of the need for additional discovery in light of the time 

allowed for discovery by the district court, and 6) the likelihood that the discovery will 

lead to relevant evidence.” U.S. ex rel. Schumer v. Hughes Aircraft Co., 63 F.3d 1512, 

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1526 (9th Cir. 1995), vacated on other grounds sub nom. Hughes Aircraft Co. v. U.S. ex 

rel. Schumer, 520 U.S. 939 (1997). “Whether to reopen discovery rests in the court’s 

sound discretion.” Bleek, 95 F. Supp. 2d at 1120 (citing U.S. ex rel. Schumer, 63 F.3d at 

1526). 

C. Analysis 

Before the Court turns to the merits of Lexington’s motion, it must first address 

whether Lexington requests relief under the appropriate Federal Rule of Civil Procedure. 

 1. Rule 56(d) 

 Although a motion to reopen discovery is a motion to modify the Rule 16 

scheduling order, Lexington instead cites Rule 56(d) as the basis for its motion. (Doc. 

310 at 2). Rule 56(d) permits a court to grant relief to a party opposing summary 

judgment on the basis that the nonmovant is unable to present facts necessary to its 

opposition: 

If a nonmovant shows by affidavit or declaration that, for 

specified reasons, it cannot present facts essential to justify its opposition, the court may: (1) defer considering the motion or deny it; (2) allow time to obtain affidavits or declarations or 

to take discovery; or (3) issue any other appropriate order. 

Fed. R. Civ. P. 56(d) (formerly numbered as 56(f)). 

Because a party may move for summary judgment while discovery is spending, 

Rule 56(d) “provides a device for litigants to avoid summary judgment when they have 

not had sufficient time to develop affirmative evidence.” United States v. Kitsap 

Physicians Serv., 314 F.3d 995, 1000 (9th Cir. 2002). The rule applies “where the 

nonmoving party has not had the opportunity to discover information that is essential to 

its opposition.” Metabolife Int’l, Inc. v. Wornick, 264 F.3d 832, 846 (9th Cir. 2001) 

(emphasis added) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 n.5 

(1986)). 

Rule 56(d) “is not meant to re-open discovery in general, to obtain information 

that is already in the party’s possession, or to merely support evidence that is already in 

the party’s possession.” Slama v. City of Madera, 2012 WL 1067198, at *2 (E.D. Cal. 

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Mar. 28, 2012); see also Dumas v. Bangi, 2014 WL 3844775, at *2 (E.D. Cal. Jan. 23, 

2014) (“Rule 56(d) does not reopen discovery; rather it forestalls ruling on a motion for 

summary judgment in cases where discovery is still open and provides the prospect of 

defeating summary judgment.”). 

 Thus, Lexington’s motion is improper under Rule 56(d), and the Court instead 

treats the motion as one under Rule 16. 

 2. Lexington’s Diligence

 Lexington argues the Court should reopen discovery to permit Lexington to 

discover evidence that could defeat Silverbell’s motion for summary judgment on 

Lexington’s claims of fraud and collusion because Lexington learned only after the close 

of discovery that Silverbell did not comply with Lexington’s requests for production. 

(Doc. 311 at 2, 10). Lexington has the burden of proving that it “diligently pursued its 

previous discovery opportunities.” Cornwell, 439 F.3d at 1026. 

 Lexington has not shown that it diligently pursued its previous discovery 

opportunities in this case. Because Lexington learned of the existence of the Privileged 

Documents after the cutoff of discovery in this case, Lexington knew that it could use 

these documents only if it filed a motion to reopen discovery. Yet Lexington waited four 

months from June to October before filing such a motion. During these four months, the 

parties fully briefed their dispositive motions. The Court can only infer from Lexington’s 

delay that Lexington sought to gain a tactical advantage from reading the fully-briefed 

cross-motions before it decided whether to pursue using the Privileged Documents. Such 

dilatory tactics are not diligence. 

Lexington attempts to show diligence by pointing to its efforts in the Underlying 

Lawsuit to obtain the Privileged Documents. (Doc. 311 at 7). It argues that it made 

diligent efforts because it “made every conceivable effort to obtain the evidence in the 

underlying action.” (Id. at 2). Lexington points to its September 2014 efforts to attend the 

trial in the Underlying Lawsuit to obtain information from the Privileged Documents and 

its filing of a petition for special action with the Arizona Court of Appeals. (Id. at 8-11). 

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Lexington reiterates that it, in essence, tried its hardest to obtain the information in the 

Underlying Lawsuit. (Id. at 11-13). 

Lexington confuses diligence in obtaining physical possession of documents with 

diligence in pursuing discovery. As Lexington’s motion demonstrates, a party can use the 

discovery process to request copies of documents not yet in the requesting party’s 

possession. Lexington did not have to seek copies of the Privileged Documents in the 

Underlying Lawsuit prior to filing a motion to reopen discovery. Thus, Lexington’s fourmonth attempt to obtain the Privileged Documents through the Underlying Lawsuit bears 

no relationship to Lexington’s pursuit of discovery opportunities in the present case. 

Lexington is not seeking to reopen discovery in the Underlying Lawsuit. Rather, it seeks 

to reopen discovery in this case. Thus, Lexington must demonstrate its diligence in 

pursuing discovery in this case. This it has failed to do. 

Accordingly, the Court will deny Lexington’s motion to reopen discovery. 

III. Motions for Summary Judgment 

 A. Summary Judgment Standard

 Summary judgment is appropriate when “the movant shows that there is no 

genuine dispute as to any material fact and the movant is entitled to judgment as a matter 

of law.” Fed. R. Civ. P. 56(a). “A party asserting that a fact cannot be or is genuinely 

disputed must support that assertion by . . . citing to particular parts of materials in the 

record, including depositions, documents, electronically stored information, affidavits, or 

declarations, stipulations . . . admissions, interrogatory answers, or other materials,” or by 

“showing that materials cited do not establish the absence or presence of a genuine 

dispute, or that an adverse party cannot produce admissible evidence to support the fact.” 

Id. 56(c)(1)(A), (B). Thus, summary judgment is mandated “against a party who fails to 

make a showing sufficient to establish the existence of an element essential to that party’s 

case, and on which that party will bear the burden of proof at trial.” Celotex Corp. v. 

Catrett, 477 U.S. 317, 322 (1986). 

 Initially, the movant bears the burden of pointing out to the Court the basis for the 

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motion and the elements of the causes of action upon which the non-movant will be 

unable to establish a genuine issue of material fact. Id. at 323. The burden then shifts to 

the non-movant to establish the existence of material fact. Id. The non-movant “must do 

more than simply show that there is some metaphysical doubt as to the material facts” by 

“com[ing] forward with ‘specific facts showing that there is a genuine issue for trial.’” 

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

Fed. R. Civ. P. 56(e) (1963) (amended 2010)). A dispute about a fact is “genuine” if the 

evidence is such that a reasonable jury could return a verdict for the non-moving party. 

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The non-movant’s bare 

assertions, standing alone, are insufficient to create a material issue of fact and defeat a 

motion for summary judgment. Id. at 247–48. However, in the summary judgment 

context, the Court construes all disputed facts in the light most favorable to the nonmoving party. Ellison v. Robertson, 357 F.3d 1072, 1075 (9th Cir. 2004). 

Finally, when multiple parties submit cross-motions for summary judgment, the 

Court considers each motion on its own merits but must consider all of the evidence 

presented in determining whether a genuine issue of material fact exists. Fair Hous. 

Council of Riverside Cnty., Inc. v. Riverside Two, 249 F.3d 1132, 1136 (9th Cir. 2001). 

B. Lexington’s Motion for Summary Judgment

 Lexington moves for summary judgment on its claim for a declaratory judgment 

that it is not liable to Silverbell under the terms of the Lexington Excess Policy as well as 

on Silverbell’s counterclaims for bad faith and punitive damages. (Doc. 281 at 2). As an 

initial matter, Silverbell correctly points out in its response to Lexington’s motion that 

Lexington’s motion exceeds the seventeen page limit prescribed by Local Rule of Civil 

Procedure (“Local Rule”) 7.2(e)(1). Subtracting the caption and certificate of service 

from Lexington’s motion, the Court finds the motion to be eighteen pages in length. 

Accordingly, the Court will not consider the eighteenth page of Lexington’s motion.4

 

4

 As the eighteenth page contains only a conclusion paragraph, this does not affect the Court’s consideration of the merits. 

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 1. Breach of the Lexington Excess Policy

 Lexington argues that Scott Homes breached several provisions of the Lexington 

Excess Policy when it entered into the Settlement Agreement and the law does not excuse 

these breaches. (Doc. 281 at 6). 

 a. Background

 The Lexington Excess Policy provides that it follows the conditions and 

limitations of the Evanston Policy: 

1. Following Form – It is agreed that this policy, except as herein stated, is subject to all conditions, agreements and limitations of and shall follow the underlying policy/ies in all 

respects . . . . 

(Doc. 270-1 at 8). Both policies contain cooperation clauses: 

[T]he first Named Insured and any other involved Insured

must: 

. . . 

c) cooperate with us in the investigation, settlement or defense of the claim or suit . . . . 

(Id. at 9) (Lexington Excess Policy). 

2. Duties In the Event of Occurrence, Offense, Claim or Suit. 

. . . 

c. You and any other involved Insured must: 

. . . 

(3) Cooperate with us in the investigation, settlement or defense of the claim or “suit” . . . . 

(Doc. 270-2 at 49) (Evanston Policy). 

 Scott Homes tendered its defense to Lexington on multiple occasions prior to the 

execution of the Settlement Agreement, beginning on November 18, 2011. (Doc. 282 ¶ 

13). Lexington acknowledged a tender but never formally responded to Scott Homes. 

(Doc. 10-4 at 2). On March 22, 2012, Silverbell advised Lexington of an upcoming 

mediation scheduled in the case and of Silverbell’s intent to make a four million dollar 

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settlement demand prior to the mediation; Silverbell noted its willingness to enter into a 

Damron agreement if Lexington declined to participate in settlement negotiations and 

invited Lexington to so participate. (Id. at 3). In addition to mediation on April 26, 2012, 

the parties held a second mediation on June 29, 2012, Lexington attended the latter. (Doc. 

282 ¶¶ 25, 27). 

 On July 2, 2012, Scott Homes advised Lexington by letter that Scott Homes, 

Silverbell, and Evanston were finalizing the Settlement Agreement and this would “result 

in the exhaustion of the underlying Evanston Primary Policy and trigger Lexington’s 

obligation defend [sic] Scott Homes . . . in this case.” (Id. at 6). Scott Homes asked for 

Lexington to notify Scott Homes in writing no later than July 13, 2012 as to whether 

Lexington would defend Scott Homes, and stated that Lexington’s failure to respond or to 

disclose its coverage position would result in Scott Homes proceeding to discuss a 

settlement with Silverbell that “incorporates a Damron agreement and assignment of 

rights against Lexington/Chartis.” (Id.) 

 On August 31, 2012, Lexington sent a letter to Scott Homes in which it 

acknowledged that there was a “potential for coverage” under the Lexington Excess 

Policy, subject to a reservation of rights, but in which it also stated that “[w]e currently 

have no information indicating that all applicable underlying limits are exhausted, and 

coverage under the Lexington Policy therefore is not implicated at this time.” (Doc. 283-

1 at 96). Lexington reiterated that the purpose of its letter was to advise Scott Homes of 

“potential coverage issues and to reserve all of Lexington’s rights and defenses under the 

Lexington Policy and at law, including the right to deny coverage, in the event that Scott 

Homes’ underlying insurers pay or are held liable to pay the full amount of their policies’ 

limits of liability.” (Id. at 97). Lexington also reiterated that until the underlying policies 

exhausted, it had no duty to defend Scott Homes. (Id.) 

 On September 12, 2012, Scott Homes sent a letter to Lexington advising that Scott 

Homes and Silverbell had agreed to enter into the Settlement Agreement and that “[t]his 

Agreement exhausts the applicable Evanston policy.” (Doc. 10-4 at 24). Counsel also 

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explained in this letter: 

The Agreement also assigns Scott Homes’ rights against Lexington, which at this point is in the form of a Damron

agreement, unless Lexington agrees to step in and defend the interests of Scott Homes. Given your significant involvement, and the involvement of counsel retained by Lexington, you are well aware that the trial in this case will begin on 

September 25, 2012 . . . . The Agreement provides for 

Lexington to avoid a Damron situation if it agrees to defend and indemnify Scott Homes. The agreement has been 

circulated for execution. We will provide an executed copy to you shortly. Please provide your position on or before 12:00 p.m., PST, Monday, September 24, 2012. 

(Id.) (emphasis removed). 

 The parties to the Settlement Agreement executed it on September 19, 2012. (Doc. 

270-4 at 2). The Settlement Agreement provides that Lexington had until October 1, 2012 

to reconsider its refusal to “unconditionally defend and/or indemnify” Scott Homes and 

that there would be no assignment of rights against Lexington if it agreed to 

unconditionally defend and indemnify Scott Homes. (Id. at 4). That same day, the court 

in the Underlying Lawsuit agreed to continue the trial so that Lexington and Scott 

Homes’ subcontractors could have time to review the Settlement Agreement and decide 

whether they would defend and indemnify Scott Homes. (Doc. 289-9 at 3; Doc. 289-10 at 

17; Doc. 289-11 at 13). Lexington received a copy of the executed Settlement Agreement 

on September 20, 2012. (Doc. 289-23 at 2). Because Lexington needed more time to 

review the Settlement Agreement, Scott Homes extended the deadline for Lexington to 

consider its position to October 9, 2012. (Doc. 289-12 at 2-3). On September 27, 2012, 

Scott Homes sent a letter to Lexington providing additional information that Lexington 

had previously requested. (Doc. 283-1 at 114). 

On October 5, 2012, Lexington wrote to Scott Homes and acknowledged receipt 

of Scott Homes’ past correspondence and the executed Settlement Agreement. (Doc. 289-

7 at 2-3). Lexington advised Scott Homes that Lexington believed not all underlying 

insurance to the Lexington Excess Policy was exhausted and that although Evanston had 

paid its policy limits, Lexington had not determined that Evanston’s payment was for the 

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payment of covered claims. (Id. at 3). Lexington stated that: 

Because the correspondence dated September 27, 2012 makes 

clear that not all underlying insurance has exhausted; the 

Settlement Agreement, provided as an attachment to the 

September 20, 2012 email, indicates that the amounts paid may not be in the payment of covered claims; and the 

correspondence dated October 2, 2012 does not contradict 

either conclusion, the Lexington Excess Policy is not 

presently implicated by the underlying lawsuit. Accordingly, Lexington has no present obligation to either defend or 

indemnify Scott Homes, and will not, therefore, agree to provide Scott Homes with an unconditional defense or 

indemnification in the underlying lawsuit. 

(Id. at 3-4). 

 On October 8, 2012, Lexington filed this action. On March 5, 2013, the court in 

the Underlying Lawsuit entered the Stipulated Judgment pursuant to the Settlement 

Agreement. (Doc. 289-5 at 4). 

 b. Legal Standard

 The Arizona Supreme Court has recognized exceptions to an insured’s contractual 

obligation to cooperate with its insurer when the “insurer has breached its duty to defend 

or to indemnify.” United Servs. Auto Ass’n v. Morris, 741 P.2d 246, 254 (Ariz. 1987) 

(Holohan, J., dissenting). The seminal case in this area is Damron v. Sledge, 460 P.2d 997 

(1969), in which the Arizona Supreme Court held that when an insurer refuses to defend 

and denies coverage, the insured may enter into a settlement agreement with the plaintiff 

“in which an insured defendant admits to liability and assigns to a plaintiff his or her 

rights against the liability insurer, including any cause of action for bad faith, in exchange 

for a promise by the plaintiff not to execute the judgment against the insured.” Safeway 

Ins. Co. v. Guerrero, 106 P.3d 1020, 1022 ¶ 1 n.1 (2005). When such a settlement 

agreement is entered into as a result of the insurer’s refusal to defend the insured, it is 

generally referred to as a Damron agreement. See id.

 Similar to Damron agreements are Morris agreements, which apply when an 

insurer defends its insured but only under a reservation of rights. In Morris, the Arizona 

Supreme Court extended the applicability of Damron agreements, holding that the 

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cooperation clause in an insurance contract prohibiting “settling without the insurer’s 

consent forbids an insured from settling only claims for which the insurer unconditionally 

assumes liability under the policy.” Morris, 741 P.2d at 252. “Thus, an insured being 

defended under a reservation of rights may enter into a Damron agreement without 

breaching the cooperation clause. “Such agreements must be made fairly, with notice to 

the insurer, and without fraud or collusion on the insurer.” Id.

Finally, Damron (and Morris) agreements “are not inherently collusive or 

fraudulent.” Ariz. Prop. & Cas. Ins. Guar. Fund v. Helme, 735 P.2d 451, 460 (Ariz. 

1987). 

 c. Analysis

 Lexington argues neither Damron nor Morris excuses Scott Homes from its 

obligation under the Lexington Excess Policy to cooperate with Lexington and Scott 

Homes failed to cooperate when it entered into the Settlement Agreement. (Doc. 281 at 

6). Silverbell contends Lexington breached its duty to defend Scott Homes. (Doc. 287 at 

14). 

 The parties do not dispute that under Arizona law, “[u]ntil a primary insurer offers 

its policy limit, the excess insurer does not have a duty to evaluate a settlement offer, to 

participate in the defense, or to act at all.” Twin City Fire Ins. Co. v. Burke, 63 P.3d 282, 

287 ¶ 18 (2003). Rather, they disagree as to when, if ever, Lexington’s duty to defend in 

the Underlying Lawsuit arose. Lexington contends its duty to defend arose only after 

Evanston paid its policy limits, and because this payment occurred on the same date as 

the execution of the Settlement Agreement, Lexington had no duty to defend prior to the 

execution of the Settlement Agreement. Lexington thus contends Damron is inapplicable 

and the Settlement Agreement is a breach of Scott Homes’ contractual obligation to 

cooperate with Lexington. Silverbell argues that Lexington had an opportunity to defend 

Scott Homes because the Settlement Agreement provided Lexington a notice period prior 

to the assignment of Scott Homes’ rights against Lexington and the entry of the 

Stipulated Judgment during which Lexington could elect to defend. (Doc. 287 at 14-15). 

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 Lexington’s argument fails because it conflates the execution of the Settlement 

Agreement with the operative acts necessary for an insured to breach its cooperation 

obligation with its insurer, namely the assignment of rights and the entry of a stipulated 

judgment. Assuming without deciding, in the light most favorable to Lexington, that 

Lexington’s duty to defend was triggered not upon Evanston offering its policy limits but 

only upon Evanston actually paying its policy limits, Lexington’s duty to defend arose at 

the latest upon the execution of the Settlement Agreement when Evanston paid its policy 

limits. 

The Settlement Agreement, however, gave Lexington a notice period (until 

October 1, 2012, and later extended to October 9, 2012) during which neither an 

assignment of rights nor the entry of a stipulated judgment would occur. The Settlement 

Agreement explicitly conditioned the assignment of Scott Homes’ rights and the entry of 

judgment against Scott Homes upon Lexington’s failure to assume the defense of Scott 

Homes following the expiration of this notice period. See (Doc. 270-4 at 4-5). Thus, 

during this notice period, Lexington could elect to defend Scott Homes, which would 

preclude any assignment and stipulated judgment; if Lexington chose to defend Scott 

Homes, Silverbell’s case against Scott Homes (and subcontractors) would have 

proceeded to trial. 

In Damron, the issue presented for the Arizona Supreme Court was “the validity 

of the prejudgment assignment,” not the validity of entering into an agreement for an 

subsequent assignment conditioned on the insurer’s refusal to defend. See Damron, 460 

P.2d at 999. The acts that, but for Damron, would constitute a breach of the insured’s 

obligation to cooperate are the assignment of the insured’s rights against the insurer and 

the entry of the stipulated judgment—not the execution of a settlement agreement. 

 During the notice period subsequent to the execution of the Settlement Agreement, 

Lexington had the duty to defend Scott Homes. Lexington also had notice of the 

Settlement Agreement and the Damron implications if it refused to defend. Thus, 

Damron applies. Nevertheless, Lexington argues that even during the notice period it had 

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no duty to defend Scott Homes because the Settlement Agreement required it to 

unconditionally defend Scott Homes and under Arizona law, an insured cannot condition 

an insurer’s right to defend upon the insurer’s waiver of its policy defenses. See (Doc. 

296 at 6). Lexington is correct that an “insured may not condition the insurer’s right to 

defend upon an agreement by the insurer to waive its right to later litigate the question of 

coverage.” McGough v. Ins. Co. of N. Am., 691 P.2d 738, 745 (Ariz. Ct. App. 1984). But 

McGough involved very different facts than those in the present case. 

In McGough, the excess insurer, upon learning the primary insurer was 

“considering paying its policy limits . . . and withdrawing from the defense of the suit,” 

wrote to the parties and stated it would assume the defense of the defendant “if and 

when” the primary insurer determined it no longer had such an obligation, including 

retaining the same attorney to “maintain a continuity” of the defense. Id. at 741. The 

defendants refused to allow the excess insurer to provide a defense unless the insurer 

dismissed a pending declaratory judgment action and acknowledged coverage, and 

simultaneously entered into a purported Damron agreement with the plaintiffs. Id. But 

here, Lexington never even offered to defend Scott Homes, either unconditionally or 

under a reservation of rights. To the contrary, Scott Homes repeatedly tendered its 

defense to Lexington and Lexington repeatedly refused to defend. Most significantly, 

Lexington asserted in its October 5, 2012 letter—written during the Settlement 

Agreement’s notice period and before any assignment of Scott Homes’ rights—that it had 

no duty to defend because the underlying insurance to the Lexington Excess Policy had 

not exhausted. 

Lexington attempts to spin a hypothetical into reality by asserting that the 

conditions placed on it in the Settlement Agreement violated Arizona law and thus 

precluded Lexington from having an opportunity to defend. (Doc. 296 at 6). 

Hypothetically, had Lexington agreed to defend Scott Homes under a reservation of 

rights and Scott Homes still subsequently assigned its rights to Silverbell and entered into 

the Stipulated Judgment, Lexington’s argument could have merit and on those facts the 

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Court would then have to determine whether Morris applied; if Morris did not apply, 

then McGough would protect Lexington. But the fact that the Settlement Agreement 

demanded that Lexington unconditionally defend Scott Homes did not prevent Lexington 

from defending under a reservation of rights. At the time of the Settlement Agreement’s 

execution, Lexington had a duty to defend Scott Homes. Lexington declined to defend 

Scott Homes, either unconditionally or under a reservation of rights. After Lexington had 

notice and an opportunity to defend Scott Homes, Scott Homes assigned its rights to 

Silverbell and entered into the Stipulated Judgment. Lexington, who throughout this 

litigation has brandished the terms of the Lexington Excess Policy, surely does not argue 

that a term in the Settlement Agreement, to which Lexington was not a party, supersedes 

its obligation to defend pursuant to the terms of the Lexington Excess Policy. Lexington’s 

argument that the Settlement Agreement prevented it from exercising its right to defend 

under a reservation of rights is not credible. 

Lexington additionally argues it had no duty to defend Scott Homes because the 

Settlement Agreement released the claims that could have triggered coverage under the 

Lexington Excess Policy, and therefore there was nothing against which to defend Scott 

Homes. (Doc. 281 at 9). Lexington’s factual understanding is in error. The Settlement 

Agreement did not release any claims against Scott Homes. The Settlement Agreement 

provides for Silverbell to covenant not to execute the Stipulated Judgment against Scott 

Homes. See (Doc. 270-4 at 6). Lexington’s argument fails. 

 Because the Settlement Agreement was a valid Damron agreement, Scott Homes 

did not breach the cooperation clause (nor the related clauses, such as the anti-assignment 

clause) of the Lexington Excess Policy.5

 2. Property Damage Caused by an Occurrence

 Lexington also argues Silverbell cannot establish coverage under the Lexington 

Excess Policy because Silverbell cannot show more than $1 million of covered property 

 

5

 Therefore, the Court need not address Lexington’s argument that the Settlement 

Agreement could not be a valid Morris agreement because Lexington never defended under a reservation of rights. See (Doc. 281 at 8-9). 

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damage caused by an occurrence within the definitions of the Lexington Excess Policy. 

(Doc. 281 at 10). Silverbell argues that Lexington, as an insurer who failed to defend its 

insured, is not entitled to relitigate the issues of liability and damages and Lexington is 

obligated to pay the $6 million amount of the Stipulated Judgment to Silverbell. (Doc. 

287 at 17). 

 a. Whether Coverage is at Issue 

 The Arizona Supreme Court has recently squarely addressed this issue: 

In sum, consistent with our prior cases, we hold that when an 

injured party obtains a default judgment against an insured 

pursuant to a Damron or Morris agreement, that judgment will bind the insurer in a coverage case as to the existence and extent of the insured’s liability. With the limitation recognized in Morris and Wood, however, the judgment will not preclude the insurer from litigating its identified basis for contesting coverage, irrespective of any fault or damages assessed against the insured. 

Quihuis v. State Farm Mut. Auto. Ins. Co., 334 P.3d 719, 729-30 ¶ 38 (Ariz. 2014). 

 The court’s reference to a “limitation recognized in Morris and Wood” refers to 

the court’s statement earlier in its opinion that “we have adopted Restatement [(Second) 

of Judgments] § 58 with the limitation recognized in Morris—insurers generally are not 

precluded from litigating coverage issues.” Id. at 724-25 ¶ 15. In Morris, the court 

concluded that although the insurer could not litigate the fact or amount of liability, it 

could litigate whether there was coverage under the policy because insureds cannot 

“‘obtain coverage that the insured did not purchase’ simply by entering into a Damron or 

Morris agreement.” Id. at 724 ¶ 12 (quoting Morris, 741 P.2d at 253). In Wood, the 

Arizona Court of Appeals held that “issues subsumed in a Morris agreement and relating 

strictly to liability and damages rather than coverage ‘must be given the same binding, 

collateral estoppel effect as if the judgment in the underlying tort action had been entered 

after a fully litigated trial—subject only to a judicial determination that the settlement is 

reasonable and non-collusive.’” Assoc. Aviation Underwriters v. Wood, 98 P.3d 572, 587 

¶ 47 (Ariz. Ct. App. 2004); see also Quihuis, 334 P.3d at 724 ¶ 14 (discussing Wood). 

 The condition of Wood that the settlement must be reasonable and non-collusive is 

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the appropriate subject of inquiry after a court has determined that coverage exists. As the 

Arizona Supreme Court noted in Quihuis, “when an insurer refuses to defend . . . it does 

so ‘at its peril,’ and if a court later finds coverage, the insurer must pay the damages 

awarded in the default judgment (at least up to the policy limits) unless it can prove fraud 

or collusion.” Quihuis, 334 P.3d at 730 ¶ 39 (citation omitted) (quoting Parking 

Concepts, Inc. v. Tenney, 83 P.3d 19, 22 ¶ 15 n.3 (Ariz. 2004)). In Parking Concepts, the 

court noted that “in cases where the insurer has refused to defend and the parties enter 

into a Damron agreement, the insurer has no right to contest the stipulated damages on 

the basis of reasonableness, but rather may contest the settlement only for fraud or 

collusion.” 83 P.3d at 22 ¶ 15 n.3. Thus, when a Damron agreement is at issue and a 

court finds coverage under the policy, the insurer’s sole defense is that the settlement 

agreement was the product of fraud or collusion. 

Although the present case does not involve a Morris agreement, because a 

complete overview of the Damron/Morris law aids in understanding the issues, the Court 

notes (even if academically) that the inquiry following a finding of coverage differs 

slightly when a Morris, rather than Damron, agreement is involved. In such cases, 

“neither the fact nor amount of liability to the claimant is binding on the insurer unless 

the insured or claimant can show that the settlement was reasonable and prudent.” Id. at 

22 ¶ 15. This is because, as the court recognized in Morris, “an insured being defended 

under a reservation might settle for an inflated amount or capitulate to a frivolous case 

merely to escape exposure or further annoyance.” Morris, 741 P.2d at 253. “The test as to 

whether the settlement was reasonable and prudent is what a reasonably prudent person 

in the insureds’ position would have settled for on the merits of the claimant’s case.” Id.

at 254. The court in Morris thus concluded: 

. . . [The insurer] is free to litigate the facts of the coverage defense. If the insurer wins on the coverage issue, it is not liable for any part of the settlement. If it loses, it may or may not be bound by the amount of the judgment . . . . [The plaintiff] will have the burden of showing that the judgment was not fraudulent or collusive and was fair and reasonable 

under the circumstances. If [the plaintiff] cannot show that the entire amount of the stipulated judgment was reasonable, 

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he may recover only the portion that he proves was 

reasonable. If he is unable to prove the reasonableness of any 

portion of the judgment, [the insurer] will not be bound by the settlement. 

Id. (citation omitted). 

 The present case involves a Damron agreement. Accordingly, under Quihuis, 

Lexington is bound to the existence and extent of Scott Homes’ liability. However, 

Lexington may litigate coverage under the Lexington Excess Policy. If Silverbell proves 

coverage, Lexington will be liable to Silverbell for the Stipulated Judgment unless 

Lexington proves that the Settlement Agreement was the product of fraud or collusion. 

 b. Coverage

 Lexington asserts Silverbell cannot prove covered property damages in excess of 

$1 million, the amount needed to trigger coverage under the Lexington Excess Policy. 

Specifically, Lexington alleges Silverbell’s damages experts improperly include costs of 

repairing defective construction in concluding covered property damages exceed $1 

million. (Id. at 10-11). 

 The Lexington Excess Policy incorporates the Evanston Policy’s definitions of 

“occurrence” and “property damage.” See (Doc. 270-1 at 4). The Evanston Policy 

provides coverage for only “‘property damage’ [that] is caused by an ‘occurrence’ that 

takes place in the ‘coverage territory’” and “occurs during the policy period.” (Doc. 270-

2 at 42). The Evanston Policy defines “property damage” as: 

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be 

deemed to occur at the time of the physical injury that caused it; or 

b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the 

time of the “occurrence” that caused it. 

(Id. at 53). The Evanston Policy defines “occurrence” as “an accident, including 

continuous or repeated exposure to substantially the same general harmful conditions.”6

 

6

 Although the Lexington Excess Policy contains a slightly different definition of 

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(Id.) 

 Lexington argues that faulty workmanship (i.e. defective construction) does not 

constitute an “occurrence” within the definition of the Lexington Excess Policy. (Doc. 

281 at 10). Specifically, Lexington argues: 

Arizona courts have construed similar insuring language and held that faulty workmanship does not constitute an “occurrence” within the meaning of standard insurance policies, and the cost to repair faulty work does not constitute “property damage.” United States Fid. & Guar. Corp. v. Advance Roofing and Supply Corp., 163 Ariz. 476, 482, 788 

P.2d 1227, 1233 (App. 1989); Lennar Corp. v. Auto-Owners 

Ins. Co., 214 Ariz. 244, 262, 151 P.3d 538, 546 (App. 2007). 

(Doc. 281 at 10). There are two problems here. First, Lexington’s phrasing implies an 

unnatural narrowing of the issue in the present case. Silverbell does not claim Scott 

Homes suffered damages for faulty workmanship. Rather, Silverbell claims Scott Homes 

suffered damages for property damage resulting from faulty workmanship. Second, 

United States Fidelity & Guaranty Corporation reinforces the distinction between faulty 

workmanship and property damages caused by faulty workmanship; that case holds that 

“mere faulty workmanship, standing alone, cannot constitute an occurrence.” 788 P.2d at 

482 (emphasis added). As the Court has stated, this case does not involve “mere faulty 

workmanship.” As the Arizona Court of Appeals held in Lennar, faulty work that results 

in property damage is an occurrence, even if the damage is “a natural consequence of 

faulty construction.” 151 P.3d at 545 ¶ 20, 546 ¶ 24. 

Thus, on this point, Silverbell survives Lexington’s motion for summary judgment 

if Silverbell shows a genuine issue of material fact as to whether Scott Homes suffered 

damages exceeding $1 million for property damage caused by construction defects. 

Silverbell offers the deposition testimony of its expert witness Richard Avelar, who 

opines that Scott Homes suffered property and resultant damages to tangible property of 

$7.6 million in addition to loss of use damages of $1.7 million. (Doc. 289-19 at 42, 44). 

 “occurrence,” (Doc. 270-1 at 7), the Arizona Court of Appeals has held that these definitions are substantially identical. See Lennar Corp. v. Auto-Owners Ins. Co., 151 

P.3d 538, 544 ¶ 15 n.9 (Ariz. Ct. App. 2007). 

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Lexington argues that Avelar fails to distinguish between non-covered costs to 

repair faulty workmanship and covered resultant property damage.7

 (Doc. 281 at 11). 

Avelar admits that his $7.6 million figure does not distinguish between property damages 

and resultant damages, (Doc. 289-19 at 44), and it is not entirely clear how Avelar’s 

understanding of “property damage” and “resultant damage” meshes with the Lexington 

Excess Policy’s definition of “physical injury to tangible property,” (id. at 39-40). 

Additionally, Lexington’s expert testifies that Scott Homes suffered less than $1 million 

in covered property damage. (Doc. 289 ¶ 90). But in ruling on a motion for summary 

judgment the Court must construe the facts and all reasonable inferences in the light most 

favorable to the non-moving party. Anderson, 477 U.S. at 255. Avelar’s testimony that 

Scott Homes suffered $7.6 million in property and resultant damages as well as $1.7 

million in loss of use damages reasonably supports the inference that Scott Homes 

suffered more than $1 million in damages for “physical injury to tangible property,” as 

the Lexington Excess Policy requires. A genuine issue of material fact exists on this 

point, and Lexington is not entitled to summary judgment on the issue of coverage under 

the Lexington Excess Policy.8

3. Bad Faith

Lexington next argues it is entitled to summary judgment on Silverbell’s 

counterclaim for bad faith. (Doc. 281 at 13). 

 

7

 Lexington also argues that commercial general liability policies do not cover “get to costs,” or the cost of repairing undamaged property that must be destroyed to access and repair the damaged property. (Doc. 281 at 10). Lexington implies that Avelar failed to exclude these costs from his analysis. But Avelar testified that his figure of $9.3 million does not include “get to costs.” (Doc. 289-19 at 43). Lexington’s statement of the law is correct but inapplicable here. 

8

 Lexington contends in its motion that because the Evanston Policy and the Lexington Excess Policy provide coverage only for occurrences that take place during the policy period, it is entitled to summary judgment “with respect to that portion of the stipulated judgment that represents property damage that did not occur during the Lexington Excess Policy period.” (Doc. 281 at 13). Lexington offers no facts or analysis in support of this bare contention. Lexington does not discuss the dates of the policy period nor when the damage to the Apartments is alleged to have taken place. Without any such facts, Lexington’s argument fails. 

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 a. Legal Standard

“The tort of bad faith arises when the insurer ‘intentionally denies, fails to process 

or pay a claim without a reasonable basis.’” Zilisch v. State Farm Mut. Auto. Ins. Co., 

995 P.2d 276, 279-80 ¶ 20 (Ariz. 2000) (quoting Noble v. Nat’l Am. Life Ins. Co., 624 

P.2d 866, 868 (Ariz. 1981)). An insured alleging a bad faith claim against his insurer 

must show that “in the investigation, evaluation, and processing of the claim,” the insurer 

acted unreasonably and either knew or recklessly disregarded the fact that its conduct was 

unreasonable. Id. at 280 ¶ 22; Noble, 624 P.2d at 868. “The first prong of the test for bad 

faith is an objective test based on reasonableness. The second prong is a subjective test, 

requiring the plaintiff to show that the defendant insurance company committed 

consciously unreasonable conduct.” Milhone v. Allstate Ins. Co., 289 F. Supp. 2d 1089, 

1094 (D. Ariz. 2003) (citing Trus Joist Corp. v. Safeco Ins. Co., 735 P.2d 125, 134 (Ariz. 

Ct. App. 1986)). 

In Zilisch, the Arizona Supreme Court clarified that considerations such as 

whether the claim was fairly debatable are not the beginning and the end of the bad faith 

analysis. Zilisch, 995 P.2d at 280 ¶ 21. “[W]hile fair debatability is a necessary condition 

to avoid a claim of bad faith, it is not always a sufficient condition.” Id. at 280 ¶ 22. Nor 

does the fact that an insurer ultimately pays a claim preclude a finding of bad faith, if the 

insurer acted unreasonably in its processing of the claim. Id. at 279-80 ¶ 20 (“[I]f an 

insurer acts unreasonably in the manner in which it processes a claim, it will be held 

liable for bad faith ‘without regard to its ultimate merits.’” (citation omitted)). 

 b. Analysis

Lexington first argues that because it never had a duty to defend, it had no duty to 

investigate, evaluate or process Scott Homes’ claim, and therefore it could not have 

committed bad faith. (Doc. 281 at 14). This argument fails because, for the reasons 

previously stated, Lexington had a duty to defend Scott Homes upon the execution of the 

Settlement Agreement. 

Next, Lexington argues that it never denied coverage to Scott Homes and therefore 

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acted reasonably in investigating, evaluating, and processing Scott Homes’ claim. (Id. at 

15). But an insurer’s refusal to defend its insured can give rise to a bad faith claim. See 

Quihuis, 334 P.3d at 730 ¶ 40. Therefore, even if it were true that Lexington never denied 

coverage, Silverbell can still prove bad faith if it shows Lexington’s refusal to defend was 

unreasonable. 

Finally, Lexington argues that at the time of the events in the Underlying Lawsuit, 

its interpretation of the Lexington Excess Policy as being excess to both the Evanston 

Policy and to the subcontractors’ policies was reasonable and fairly debatable. (Id. at 15-

16). Because Lexington’s October 5, 2012 refusal to defend Scott Homes was founded 

upon Lexington’s belief that not all underlying insurance to the Lexington Excess Policy 

had exhausted, Lexington essentially argues that as a matter of law it did not commit bad 

faith by refusing to defend Scott Homes. 

Silverbell contends the opposite; specifically, that there can be no question as to 

the unreasonableness of Lexington’s interpretation of the Lexington Excess Policy 

because the Court’s ruling on Lexington’s first motion for summary judgment declared 

that Lexington’s interpretation was unreasonable and contradicted the Lexington Excess 

Policy’s plain language. (Doc. 287 at 20); see also (Doc. 273 at 17). However, the 

Court’s prior ruling necessarily commented only upon the arguments that Lexington 

advanced in its motion for summary judgment and its reply in support of its motion. 

Lexington’s arguments in those two filings advocated an interpretation of the Lexington 

Excess Policy that was unreasonable because it would contradict the policy’s plain 

language. See (Doc. 159 at 12). But Silverbell offers no authority for the proposition that 

Lexington’s position in the present lawsuit can support, post-hoc, Silverbell’s bad faith 

counterclaim. 

Although Silverbell is correct that an insurer has a continuing duty of good faith 

during litigation, (Doc. 287 at 12), its reliance upon Lennar Corp. v. Transamerica 

Insurance Co., 256 P.3d 635 (Ariz. Ct. App. 2011) is misplaced because that case holds 

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handling responsibilities pending resolution of the coverage issue.” 256 P.3d at 245 ¶ 24. 

Thus, Lennar stands for the common-sense proposition that the insurer must continue to 

handle the insured’s claim in good faith even if coverage litigation has commenced; it 

does not speak on the topic of conduct in coverage litigation. 

Furthermore, Tucson Airport Authority v. Certain Underwriters at Lloyds, 

London, 918 P.2d 1063 (Ariz. Ct. App. 1996) holds that the litigation privilege does not 

bar the admissibility of an insurer’s course of conduct during coverage litigation when 

the course of conduct is merely evidence of “a course of wrongful and tortious conduct.” 

918 P.2d at 1066 (emphasis added). There are two critical limitations in the holding of 

Tucson Airport Authority. First, there the coverage litigation and the bad faith litigation 

were separate cases, and so Tucson Airport Authority does not hold that an insurer’s 

course of conduct in particular litigation can support a bad faith claim made in the same 

litigation. See id. Second, the Arizona Court of Appeals explicitly distinguished between 

a bad faith claim “based squarely on a privileged communication, such as an action for 

defamation, and one based upon an underlying course of conduct evidenced by the 

communication.” Id. The court restricted its holding to bad faith claims using the 

“insurers’ actions and communications during the coverage actions” as evidence showing 

a course of wrongful conduct constituting bad faith, and noted that the litigation privilege 

would bar bad faith claims arising out of a particular communication or pleading in a 

coverage action. Id.

Consequently, Silverbell has not identified any controlling authorities that permit 

Lexington’s communications or filings in the present case to be used as evidentiary 

support for Silverbell’s bad faith claims. In the absence of such authorities, the Court at 

this time declines Silverbell’s invitation to treat the Court’s ruling on Lexington’s first 

motion for summary judgment as determinative of Lexington’s bad faith. 

Returning to Lexington’s arguments, Lexington contends that at the time it 

declined to defend Scott Homes, it was fairly debatable whether the definition of 

“Underlying Insurance” in the Lexington Excess Policy included the subcontractors’ 

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insurance policies because no case law had interpreted the provisions of the Lexington 

Excess Policy.9

 (Doc. 281 at 16-17). Ordinarily, an insurer’s “belief in fair debatability is 

a question of fact to be determined by the jury.” Zilisch, 995 P.2d at 279-80 ¶ 20 (citation 

and internal quotation marks omitted). Although the existence of case law interpreting the 

definition of “Underlying Insurance” in the Lexington Excess Policy would tend to make 

the question of the definition of “Underlying Insurance” not fairly debatable, the inverse 

is not necessarily true. For example, an insurer can interpret its policy in a manner 

contrary to the policy’s plain language; even in the absence of controlling case law, a 

reasonable jury could find this to be both unreasonable and consciously known by the 

insurer to be unreasonable, thus establishing bad faith. 

Silverbell survives summary judgment on its bad faith claim because it has 

demonstrated a genuine issue of material fact. Silverbell offers the deposition testimony 

of Jodi Mintz, Lexington’s assistant vice-president responsible for supervising the claims 

handling of the Silverbell and Scott Homes matter. (Doc. 289-22 at 4, 8). Mintz testifies 

that she has read the Court’s ruling on Lexington’s first motion for summary judgment 

but Lexington “respectfully disagree[s]” and has not reconsidered its position. (Id. at 36-

37). Mintz’s testimony could reasonably support a finding of bad faith against Lexington. 

See Lennar, 256 P.3d at 245 ¶ 24 (insurer has a continuing duty of good faith in handling 

claims after the initiation of coverage litigation). 

Accordingly, Lexington has not shown it is entitled to summary judgment on 

Silverbell’s bad faith claim. Rather, there exists an issue of fact for the jury as to whether 

in the investigation, evaluation, and processing of Scott Homes’ claim, Lexington acted 

unreasonably and either knew or was conscious of the fact that its conduct was 

unreasonable. 

 

9

 Lexington also argues that under Tobel v. Travelers Insurance Co., 988 P.2d 148 

(Ariz. Ct. App. 1999) there can be no bad faith claim if the insurance claim was “fairly debatable.” (Doc. 296 at 10). Although the Arizona Court of Appeals so held in Tobel, 988 P.2d at 156 ¶ 45, the Arizona Supreme Court held to the contrary one year later in Zilisch. 995 P.2d at 280 ¶¶ 21-22 (“But, as we have held, while fair debatability is a necessary condition to avoid a claim of bad faith, it is not always a sufficient condition.”). 

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4. Punitive Damages 

 Lexington contends it is entitled to summary judgment on Silverbell’s 

counterclaim against Lexington for punitive damages because there is no evidence that 

Lexington acted with evil motives in handling Scott Homes’ claim. (Doc. 281 at 18). 

 Although an award of punitive damages is available in claims for insurance bad 

faith, it is available only in “those cases in which the defendant’s wrongful conduct was 

guided by evil motives.” Rawlings, 726 P.2d at 578. The insured must prove that the 

insurer’s “evil hand was guided by an evil mind,” which may exist when the insurer 

intended to injure the insured or when the insurer “consciously pursued a course of 

conduct knowing that it created a substantial risk of significant harm to others.” Id. The 

insurer’s conduct must have been “aggravated, outrageous, malicious or fraudulent.” Id. 

“Indifference to facts or failure to investigate are sufficient to establish the tort of bad 

faith but may not raise to the level required by the punitive damage rule.” Id.

 Silverbell fails to show the existence of a genuine issue of material fact as to 

whether Lexington’s wrongful conduct was guided by evil motives. Silverbell states that 

it “has proffered facts that evidence Lexington’s evil hand unjustifiably damaged the 

objectives sought to be reached by the insurance contract and that Lexington’s actions 

were, and continue to be, guided by an evil mind.” (Doc. 287 at 21). But Silverbell does 

not identify these facts, and in the Court’s review of Silverbell’s entire response to 

Lexington’s motion for summary judgment, there are no references to facts supporting an 

award of punitive damages. Accordingly, Lexington is entitled to summary judgment on 

the issue of punitive damages. 

C. Silverbell’s Motion for Summary Judgment

 Silverbell moves for summary judgment in its favor on counts I, II, XI, and XVI of 

Lexington’s First Amended Complaint as well as summary judgment on Silverbell’s 

counterclaim for bad faith. (Doc. 273). Silverbell also asks the Court to declare that 

certain facts in this case are undisputed. (Id.) 

 1. Exhaustion of the Lexington Excess Policy

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 Silverbell requests summary judgment on Count I of Lexington’s First Amended 

Complaint, in which Lexington seeks a declaration that the Lexington Excess Policy is 

not currently implicated and Lexington owes no duty to defend Scott Homes. (Doc. 273 

at 7; Doc. 270 at 19). In the Court’s prior ruling on Lexington’s first motion for summary 

judgment, the Court concluded that the Evanston Policy is the only underlying policy to 

the Lexington Excess Policy, and the Lexington Excess Policy is therefore excess to only 

the Evanston Policy. (Doc. 159 at 12). The Court incorporates by reference its reasoning 

from that ruling and reaffirms this conclusion. 

 a. Definition of “Loss”

Lexington admits that the Lexington Excess Policy is excess to the Evanston 

Policy but argues the Lexington Excess Policy does not pay losses after only the 

Evanston Policy is exhausted. (Doc. 291 at 5). Lexington contends that the exhaustion of 

the Evanston Policy is not sufficient to trigger Lexington’s obligation to pay “loss” under 

the Lexington Excess Policy. (Doc. 291 at 5). 

 The coverage section of the Lexington Excess Policy provides, in relevant part: 

We will pay on behalf of the Insured that portion of the loss

which the Insured will become legally obligated to pay as compensatory damages (excluding all fines, penalties, punitive or exemplary damages) by reason of exhaustion of 

all applicable underlying limits, whether collectible or not, as 

specified in Section II of the Declarations . . . . 

(Doc. 270-1 at 4). The Lexington Excess Policy defines “loss” as: 

The word loss means the sum paid in settlement of losses for 

which the Insured is liable after making deductions for all recoveries, salvages and other insurance (other than 

recoveries under the policy of the underlying insurance), 

whether recoverable or not, and shall include all expenses and 

costs. 

(Id. at 7). 

 Lexington contends that this definition of “loss” defines the scope of Lexington’s 

coverage because it is incorporated into the coverage section of the Lexington Excess 

Policy and Silverbell has not demonstrated Lexington would have an obligation to pay 

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“loss” after deducting Silverbell’s other recoveries and other insurance. (Doc. 291 at 6). 

Silverbell contends that this definition does not affect coverage but rather applies only to 

sums paid in settlement between the insured and the insurer. (Doc. 295 at 3). The 

interpretation of an insurance policy is a question of law, and a court must construe the 

policy to “effectuate the parties’ intent.” Liberty Ins. Underwriters, Inc. v. Weitz Co., 158 

P.3d 209, 212 ¶¶ 7-8 (Ariz. Ct. App. 2007). 

 The Lexington Excess Policy’s plain language provides for coverage when Scott 

Homes becomes legally obligated to pay a portion of a loss as compensatory damages by 

reason of the exhaustion of the Evanston Policy. This loss is then limited to the “sum paid 

in settlement of losses for which [Lexington] is liable after making deductions for all 

recoveries, salvages, and other insurance . . . . (Doc. 270-1 at 7). According to this plain 

language, this limitation appropriately adjusts downward the scope of the insurer’s 

coverage obligation as an excess insurer if the insured is able to recover some of its losses 

from another source. Lexington is obligated to pay for covered losses to its insured upon 

the exhaustion of the underlying policy, but Lexington is never obligated to pay for 

covered losses that have already been paid by another source. 

 Silverbell contends the definition of “loss” in the Lexington Excess Policy does 

not bear upon coverage but merely provides an accounting for payments between the 

insurer and insured when a settlement is paid. (Doc. 295 at 3). But the Lexington Excess 

Policy uses the defined term “loss” in describing the obligations of an insured to third 

parties to pay compensatory damages. In context, it states: “. . . that portion of the loss

which the Insured will become legally obligated to pay as compensatory damages . . . .” 

(Doc. 270-1 at 4). It is clear from this use of the term that “loss” refers to losses as 

between the insured and third parties, not a settlement of payments between the insured 

and the insurer. 

 Accordingly, the definition of “loss” in the Lexington Excess Policy affects the 

scope of coverage. The Lexington Excess Policy covers “physical injury to tangible 

property” (as well as loss of use of tangible property) in excess of $1 million. If Silverbell 

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otherwise proves coverage under the Lexington Excess Policy, to collect the full $5 

million against Lexington, Silverbell must show that it did not receive payments from 

other sources for those sources’ liability under the Stipulated Judgment (other than the 

payment from Evanston, which reduces the $6 million amount of the Stipulated Judgment 

to $5 million).10

 b. Course of Dealing 

 In addition to Lexington’s argument concerning “loss,” Lexington also argues that 

Lexington and Scott Homes’ course of dealing shows that the parties did not intend the 

Lexington Excess Policy to be excess to only the Evanston Policy, and therefore the 

Lexington Excess Policy is not exhausted simply because the Evanston Policy is 

exhausted. (Doc. 291 at 6). Course of dealing evidence is extrinsic evidence, AROK 

Constr. Co. v. Ind. Constr. Servs., 848 P.2d 870, 877 (Ariz. Ct. App. 1993), which may 

be admitted “to determine the meaning intended by the parties” if the court finds “that the 

contract language is ‘reasonably susceptible’ to the interpretation asserted by its 

proponent,” Taylor v. State Farm Mut. Auto. Ins. Co., 854 P.2d 1138, 1140 (Ariz. 1993). 

 Lexington argues the parties intended, as evidenced by their contractual 

arrangements for the prior year 2001-02, to have the Lexington Excess Policy sit as 

excess to policies more than one layer “down” in coverage. (Doc. 291 at 6-7). Lexington 

points out that for 2001-02, Lexington issued an excess policy that was excess to an 

umbrella policy that in turn was excess to an Evanston policy. (Id.) Thus, Lexington 

contends, because Scott Homes agreed in a separate lawsuit concerning 2001-02 that the 

2001-02 Evanston-issued policy had to exhaust before Lexington’s 2001-02 excess policy 

was implicated, the parties intended in general for Lexington’s excess policies to sit as 

 

10 For example, if Silverbell received a payment from one of Scott Homes’ subcontractor’s insurers that covered all but $500,000 of Scott Homes’ total liability to Silverbell, then the Lexington Excess Policy does not provide coverage. Similarly, if Silverbell received a payment from one of Scott Homes’ subcontractor’s insurers for $1 

million, and no other payments, Lexington’s liability would be $4 million. 

Practically speaking, if Silverbell offers competent testimony that no such payments exist, Lexington will need to show affirmative evidence of their existence. 

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excess to several layers of policies. (Id. at 7). Lexington’s argument insinuates that the 

Court’s interpretation of the Lexington Excess Policy as sitting as excess to only the 

Evanston Policy somehow destroys the relationships among the various layers of 

insurance protecting Scott Homes. This is not the case. 

The relationship between the Evanston Policy and the subcontractors’ policies, to 

which the Evanston Policy purports to be excess, (Doc. 270-2 at 50), is not destroyed 

merely because the Lexington Excess Policy is excess only to the Evanston Policy. 

Evanston, as a commercial insurer, is not in the business of donating money to its 

insureds. Thus, one expects Evanston to pay its policy limits only upon Evanston’s 

commercially reasonable belief that any policies to which the Evanston Policy sits as 

excess are either exhausted or are uncollectible. If Evanston determines that the Evanston 

Policy has exhausted in the payment of covered claims, then presumably all insurance 

layers below the Lexington Excess Policy are exhausted. There is no prejudice to 

Lexington in such a scenario. 

 Lexington further attempts to impart misleading inferences by pointing to its 

underwriting process in which it inquired as to the limits of liability that Scott Homes 

required its subcontractors to carry and whether Scott Homes required its subcontractors 

to name Scott Homes as an additional insured on their policies. (Doc. 291 at 7-8). 

Lexington poses the question: “If the parties expected and intended for the Lexington 

Excess Policy to provide coverage only in excess of the Evanston Policy, . . . then there 

would have been no need to ask these questions.” (Id. at 8). Lexington further alleges that 

the Court’s conclusions have compelled Lexington to provide coverage for a risk that it 

never intended to insure. (Id.) 

 But Lexington’s underwriting investigation actually supports the Court’s 

interpretation. An insurance policy can be appropriately priced only when the insurer 

accurately estimates the risk to the insured. Lexington’s risk as an excess insurer depends 

upon the probability of the Evanston Policy exhausting. The probability of the Evanston 

Policy exhausting depends upon whether Scott Homes is able to collect on any policies of 

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its subcontractors, because the Evanston Policy is excess to those policies. Thus, 

Lexington’s inquiry appears designed to accurately calculate the proper premium for the 

Lexington Excess Policy as excess to only the Evanston Policy. 

Moreover, Lexington had to have known from the start of its underwriting process 

that because the Lexington Excess Policy is excess to only the Evanston Policy, Evanston 

had the sole power to determine whether the subcontractors’ policies were collectible and 

whether to pay the limits on the Evanston Policy. This was a known risk, and Lexington 

accepted this risk because Evanston presumably does not pay its policy limits when other 

collectible insurance is available. 

 c. Evanston’s Coverage Decision 

Lexington additionally argues the Evanston Policy is not exhausted in the payment 

of covered claims because Evanston’s payment of its policy limits and the declaration of 

Evanston’s claims examiner are insufficient evidence to establish that Evanston paid for 

covered property damage. (Id. at 9). Lexington raised, and the Court rejected, this same 

ill-founded argument in its first motion for summary judgment. The Court stated: 

Although Lexington is bound by the terms of the Evanston 

Policy because the Lexington Excess Policy incorporates those terms, Lexington is not bound by Evanston’s coverage decision. See Shy v. Ins. Co. of the State of Penn., 528 F. 

App’x 752, 754 (9th Cir. 2013). But similarly, Lexington may 

not attempt to relitigate Evanston’s coverage decision. See 

Edward E. Gillen Co. v. Ins. Co. of the State of Penn., 2011 

WL 1694431, at *4 (E.D. Wis. May 3, 2011) . . . . The Evanston Policy has exhausted by Evanston’s payment of covered claims. 

(Doc. 159 at 14). Lexington selectively cites the Court’s ruling for the proposition that an 

excess insurer is not bound by the primary insurer’s coverage decision. (Doc. 291 at 9). 

Lexington ignores, however, the corresponding proposition that the excess insurer may 

not relitigate the primary insurer’s coverage decision. For the reasons the Court expressed 

in its prior ruling, the Court reaffirms that the Evanston Policy has exhausted by 

Evanston’s payment of its $1 million policy limit for covered claims. 

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 d. The Evanston Policy’s “Cross-Suits” Exclusion

 Lexington next contends the Evanston Policy contains a “cross-suits” exclusion to 

coverage that applies in this case. (Id.) Because the Lexington Excess Policy follows 

form to the Evanston Policy, any applicable exclusion could preclude coverage under the 

Lexington Excess Policy even though the Evanston Policy is exhausted. The Evanston 

Policy provides: 

It is agreed that this Insurance does not apply to any liability of one insured for “bodily injury” or “property damage” to 

the property or person of another insured. 

(Doc. 270-2 at 45). Schedule A of the Evanston Policy lists the named insureds under the 

policy. This list spans three pages; the tops of the second and third pages have a heading 

identifying them as continuations of the named insured list. (Id. at 8-10). The page 

following the end of the named insured list has no heading and reads: 

Any subsidiaries, Affiliated, Controlled or Associated 

Companies, Trust, Association or Partnership as now or may hereafter exist; for the account of whom it may concern, the interest of the insured in any partnership or joint venture, if not otherwise insured; any and partnership or joint venture interests of which the Insured is a participant to the extent the 

Insured is required to insure such interests, as the respective interest may appear. 

(Id. at 11). 

 Lexington urges that Silverbell is a named insured under the Evanston Policy 

because Timberline Village Corp. (a general partner of Silverbell) and three Robson 

family members are named insureds “‘affiliated’ with and ‘controlled’ by” Silverbell. 

(Doc. 291 at 11). This argument is frivolous. The fact that Scott Homes and Silverbell 

have some shared ownership interests does not equate their corporate forms and does not 

make Silverbell a named insured under the Evanston Policy. The Evanston Policy 

provides that members of an insured partnership are insureds “only with respect to the 

conduct of your business.” (Doc. 270-2 at 47). Silverbell did not conduct business for 

Scott Homes. The Court rejects Lexington’s argument. 

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 e. Subcontractors’ Certificates of Insurance 

 Finally, Silverbell asks the Court to determine that Scott Homes complied with the 

provision in the Evanston Policy requiring Scott Homes to obtain certificates of insurance 

from all subcontractors. (Doc. 273 at 8). Because the Evanston Policy provides coverage 

for property damage arising out of the acts of a subcontractor only if Scott Homes 

obtained certificates of insurance from the subcontractor, failure to comply with this 

provision excludes from coverage the loss caused by that subcontractor.11 (Doc. 270-2 at 

19). Although Silverbell now offers the declaration of Steven Robson that Scott Homes 

obtained all relevant certificates, Lexington aptly points out that Robson does not 

establish an adequate foundation for his testimony. 

Robson declares that “[b]ased upon information and my belief,” Scott Homes’ 

requirements that each subcontractor provide a certificate of insurance “were followed by 

the subcontractors that worked on [the Apartments].” (Doc. 277 at 2). But Robson’s 

“information” and “belief” does not establish Robson’s personal knowledge that Scott 

Homes obtained the certificates. Indeed, Robson also testifies in the same declaration that 

he played “no meaningful role” in the construction of the Apartments, he had no role in 

the hiring of subcontractors, and was an “absentee owner.” (Id. at 3). Thus, Silverbell has 

not established a foundation for admitting Robson’s testimony concerning the obtaining 

of certificates. See Fed. R. Evid. 602. A grant of summary judgment cannot be based 

upon inadmissible evidence. Quanta Indem. Co. v. Amberwood Dev. Inc., 2014 WL 

1246144, at *2 (D. Ariz. Mar. 26, 2014). At trial, if Silverbell seeks to use a particular 

subcontractor’s faulty work causing property damage to prove that Scott Homes was 

liable for more than $1 million in covered property damage, Silverbell must introduce 

testimony from witnesses with personal knowledge of Scott Homes’ operations to prove 

 

11 As the Court noted in its ruling on Lexington’s first motion for summary judgment, Silverbell has to date not produced the certificate of insurance for Gypsum Floor Masters, Inc. from July 1, 2002 to July 1, 2003. (Doc. 159 at 16 n.10). Of course, 

producing a copy of the certificate is not the same as Scott Homes having obtained certificates at the time of the subcontractors performing their work, the latter being the requirements of the Evanston Policy. 

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that Scott Homes obtained that subcontractor’s certificate of insurance. Silverbell also 

must prove, as the Evanston Policy requires, that these certificates of insurance provided 

evidence of the four requirements enumerated in the Evanston Policy (notably, limits of 

liability and coverage). See (Doc. 270-2 at 19). 

 2. Lexington’s Duty to Defend

 Silverbell asks the Court to determine that four facts are undisputed: (1) the 

exhaustion of the Evanston Policy triggered Lexington’s duty to defend Scott Homes in 

the Underlying Lawsuit; (2) Lexington failed to defend Scott Homes after being provided 

with notice and opportunity to do so; (3) on October 5, 2012, Lexington declined to 

defend Scott Homes on the basis that not all underlying insurance to the Lexington 

Excess Policy had exhausted and Evanston’s payment of its policy limits may not have 

been payment for covered claims; and (4) Lexington’s failure to defend Scott Homes 

after the exhaustion of the Evanston Policy was a material breach of the Lexington 

Excess Policy. (Doc. 273 at 3-4, 9-10, 14). 

 Silverbell is entitled to summary adjudication on all four facts. For the reasons the 

Court stated in its discussion of Lexington’s present motion for summary judgment, the 

Court concludes that the execution of the Settlement Agreement and Evanston’s payment 

of its policy limits triggered Lexington’s duty to defend Scott Homes in the Underlying 

Lawsuit. Lexington’s duty to defend arose no later than September 19, 2012. Lexington 

had the notice and opportunity to defend Scott Homes but failed to do so. Lexington’s 

October 5, 2012 letter clearly refused to defend Scott Homes. That letter stated that 

Lexington believed not all insurance underlying to the Lexington Excess Policy had 

exhausted and that Lexington believed Evanston’s payment of its policy limits may not 

have been payment for covered claims. Because Lexington had the duty to defend Scott 

Homes and refused to do so, this refusal was a material breach of the Lexington Excess 

Policy. See (Doc. 270-1 at 4). 

3. Terms of the Lexington Excess Policy

Silverbell also asks that the Court determine that three other facts concerning the 

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Lexington Excess Policy are undisputed: (1) The Lexington Excess Policy applies to 

“property damage” if the “property damage” is caused by an “occurrence” that takes 

place in the “coverage territory” and the ”property damage” occurs during the policy 

period; (2) the Lexington Excess Policy defines “property damage” as physical injury to 

tangible property and loss of use of that property; and (3) the Lexington Excess Policy 

provides coverage “for ‘property damage’ to ‘your work’ arising out of it or any part of it 

and included in the ‘products completed operations hazard’ when the damaged work or 

the work out of which the damage arises was performed on Scott Homes’ behalf by 

subcontractors.” (Id. at 4). 

Lexington acknowledges these facts concerning the Lexington Excess Policy’s 

language are undisputed, although it quotes the exact policy language rather than 

agreeing with Silverbell’s paraphrasing of it. (Doc. 291 at 2 n.1). Because Silverbell’s 

“facts” consist solely of the Lexington Excess Policy and Evanston Policy’s plain 

language, and Lexington does not dispute this language, the Court need not (and declines 

to) make any determinations at this time. The Evanston Policy and the Lexington Excess 

Policy speak for themselves. 

4. The Stipulated Judgment

Silverbell moves for partial summary judgment on Count XVI of Lexington’s First 

Amended Complaint. (Doc. 273 at 13). Specifically, Silverbell requests summary 

judgment on the issue of the reasonableness of the Stipulated Judgment; Silverbell asks 

the Court to determine as a matter of law that the Stipulated Judgment is for “property 

damage and attorneys’ fees for claims related to and/or damages caused by the work of 

[Scott Homes’] subcontractors” and it is “a legal obligation of Scott Homes to pay to 

[Silverbell] the sum of $6 million for property damage and attorneys’ fees.” (Doc. 273 at 

13). 

In response, Lexington contends the Stipulated Judgment does not bind Lexington 

because Lexington was never a party to the Settlement Agreement. The Court has already 

addressed this argument in its analysis of Lexington’s present motion for summary 

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judgment, and for the reasons stated therein, concludes that Lexington is bound as to the 

existence and extent of Scott Homes’ liability. See Quihuis, 334 P.3d at 729-30 ¶ 38. 

Similarly, Lexington is incorrect in contending it may contest the reasonableness of the 

Stipulated Judgment. See id. at 730 ¶ 39. Moreover, Lexington is incorrect that the 

Stipulated Judgment is not a legal obligation of Scott Homes. See (Doc. 291 at 14 n.14). 

As the Court explained in analyzing Lexington’s present motion for summary judgment, 

Silverbell’s covenant to not execute against Scott Homes did not release Scott Homes 

from its obligations. 

Finally, Lexington argues that Silverbell has not established that the Stipulated 

Judgment is exclusively for claims and attorneys’ fees caused by Scott Homes’ 

subcontractors. (Id. at 14-15). For the reasons already stated, the Stipulated Judgment is 

binding upon Lexington as to the existence of Scott Homes’ liability to Silverbell; to the 

extent Lexington is arguing the claims addressed in the Stipulated Judgment are not 

covered under the Lexington Excess Policy, this argument is appropriately made at trial 

when Lexington may litigate coverage. 

For these reasons, Silverbell is entitled to partial summary judgment on Count 

XVI of Lexington’s First Amended Complaint with respect to the reasonableness of the 

Stipulated Judgment. 

5. Fraud or Collusion

Silverbell separately moves for partial summary judgment on Count XVI of 

Lexington’s First Amended Complaint with respect to whether the Stipulated Judgment is 

the product of fraud or collusion. (Doc. 273 at 13). Silverbell offers, among other 

evidence, the declaration of Steven Robson, president and sole shareholder of Scott 

Homes. (Doc. 277). Robson testifies that he played no role in the hiring of Scott Homes’ 

subcontractors and that he played no role in the negotiation of the Settlement Agreement 

other than to execute the Settlement Agreement. (Id. at 3). Robson also testifies he had no 

role in negotiating the Stipulated Judgment. (Id.) 

Lexington vigorously asserts that the Settlement Agreement and Stipulated 

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Judgment are products of fraud and collusion between Silverbell and Scott Homes. (Doc. 

291 at 14-16). However, Lexington’s sole evidence on the issue of fraud and collusion is 

evidence of shared ownership interests between the two entities. 

Steven Robson has been the sole owner and operator of Scott Homes since 2001. 

(Doc. 293-2 at 17). Prior to 2009, Robson also had a 50% ownership interest in 

Silverbell, consisting of a 49% ownership interest as a limited partner in Silverbell and a 

1% ownership interest through Timberline Village Corporation, Silverbell’s general 

partner. (Id. at 49). Robson is the sole owner of Timberline Village Corporation. (Id. at 

22-23). Prior to 2009, three other family members related to Robson held the remaining 

50% ownership interest in Silverbell. (Id. at 24, 49). 

In 2009, investors purchased an ownership interest in Silverbell; Robson’s 

ownership interest declined to approximately 39%, and Summers Windsor Court LLC 

then owned approximately 19%. (Id. at 64, 95). Silver Bell Investors, LLC owned 

approximately 2%, and the owners of Silver Bell Investors, LLC are Peter Hollingshead 

and Thomas Cologna. (Id. at 95). 

Finally, as of 2013, Silverbell’s ownership consisted of Silver Bell Investors, LLC 

at approximately 11%; Robson at approximately 44% (including 1% for Timberline 

Village Corporation); and Robson’s family members at approximately 44%. (Id. at 85). 

As an owner of both Silverbell and Scott Homes, Robson had an attorney-client 

relationship with counsel for both entities during the Underlying Lawsuit. (Doc. 293-3 at 

13-14). Robson also possessed substantive information relating to the defense of Scott 

Homes and relating to the prosecution of Silverbell’s claims. (Id. at 17). When Silverbell 

held conference calls with its counsel, Robson would usually be on those calls. (Id. at 

110). 

Lexington contends that the Settlement Agreement was negotiated in “back office 

dealings” while Lexington was kept “completely in the dark.” (Doc. 291 at 16). In the 

section of this Order discussing the Settlement Agreement’s status as a valid Damron

agreement, the Court has detailed the extensive notice and opportunity provided to 

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Lexington, and the Court will not repeat those details here. Aside from this 

mischaracterization of the evidence, Lexington offers only the shared ownership interests 

of Silverbell and Scott Homes as a basis for the Court to find a genuine issue of material 

fact as to whether the Settlement Agreement and Stipulated Judgment are products of 

fraud or collusion. 

To survive summary judgment, the evidence must be “such that a reasonable jury 

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

asks the Court to conclude that the mere fact of shared ownership between Silverbell and 

Scott Homes—without more—is an adequate basis for a jury’s finding of fraud or 

collusion. But there is nothing inherently fraudulent in a real estate developer having an 

equity stake in both a real estate project and a construction business, and for those two 

entities to contract with each other. Lexington does not assert, nor could it credibly do so, 

that Silverbell and Scott Homes fraudulently entered into other contracts, such as the 

original construction contract for Scott Homes to build the Apartments. Furthermore, it is 

neither surprising nor material to this case that Robson had information relating to both 

Silverbell and Scott Homes and was on conference calls; one expects a person having an 

ownership interest in a company to keep informed as to events affecting the company’s 

operations. 

Because Lexington’s sole evidence of fraud or collusion is the shared ownership 

of Silverbell and Scott Homes, if the Court declined to grant summary judgment on this 

issue in favor of Silverbell, the Court would necessarily have to conclude that shared 

ownership, standing alone, is a sufficient basis to support a reasonable jury’s finding of 

fraud or collusion in the execution of a Damron agreement. Such a conclusion would bar 

any entities having mutual owners from ever entering into a Damron agreement. Damron

and its progeny hold precisely the opposite; Damron agreements are not per se fraudulent 

or collusive. Lexington’s position would turn Arizona law on its head. 

If Lexington had shown actual evidence of fraud or collusion, it would defeat 

Silverbell’s motion for summary judgment. Because Lexington offers as evidence only 

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the shared ownership interests of Silverbell and Scott Homes as well as Robson’s 

participation in the management of the companies, Lexington fails to show the existence 

of a genuine issue of material fact as to whether the Settlement Agreement and Stipulated 

Judgment are fraudulent or collusive. Accordingly, Silverbell is entitled to partial 

summary judgment on this issue. 

6. Bad Faith

Silverbell moves for summary judgment on its counterclaim against Lexington for 

Lexington’s breach of the covenant of good faith and fair dealing. (Doc. 273 at 16-17). 

The Court has already stated the applicable legal standard for an insurance bad faith 

claim in its analysis, supra, of Lexington’s present motion for summary judgment. There, 

the Court concludes that a genuine issue of material fact exists as to whether Lexington’s 

claim handling constitutes bad faith. Silverbell now asks the Court to go a step further 

and declare that it has proved bad faith as a matter of law. (Doc. 273 at 16). 

Silverbell relies heavily upon the Court’s prior determination that Lexington’s 

interpretation of the Lexington Excess Policy in this litigation is unreasonable. See (id. at 

17). For the reasons stated earlier in this Order, Silverbell has not shown that Lexington’s 

filings in this lawsuit are evidence of the unreasonableness of Lexington’s positions 

outside of this lawsuit.12 Thus, the Court declines to grant summary judgment in favor of 

Silverbell on its bad faith counterclaim. 

IV. Motion for Sanctions and Motion for Leave to Replace the Motion for 

Sanctions

 On August 13, 2014, Lexington filed a motion for sanctions titled “Plaintiff’s 

Motion for Violation of Rule 11 and for Sanctions” (Doc. 298). Lexington sought 

sanctions against Silverbell and Scott Homes for alleged factual misrepresentations to the 

Court concerning a requested continuance in the Underlying Lawsuit. (Doc. 298 at 2-3). 

Twelve days later, Lexington filed a notice of errata and a motion for leave to file a new 

 

12 The Court is not commenting upon the reasonableness or unreasonableness of 

Lexington’s positions taken outside of the present lawsuit. 

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Rule 11 motion, captioned as “Plaintiff’s Notice of Errata and Motion for Leave to 

Replace Incorrectly-Filed Motion for Violation of Rule 11.” In this latter filing, 

Lexington asserts that it inadvertently filed an outdated version of its Rule 11 motion and 

it intended to file a version containing additional allegations of misrepresentations by 

Silverbell and Scott Homes. (Doc. 303 at 5). 

 Because Lexington’s filed Rule 11 motion is fully briefed, the Court will address 

its merits before deciding whether to permit Lexington to file the corrected version. 

A. Rule 11 Legal Standard

 The “central purpose of Rule 11 is to deter baseless filings in district court” by 

requiring attorneys to certify that “they have conducted a reasonable inquiry and have 

determined that any papers filed with the court are well grounded in fact, legally tenable, 

and ‘not interposed for any improper purpose.’” Cooter & Gell v. Hartmarx Corp., 496 

U.S. 384, 393 (1990). Rule 11 provides that by presenting a motion to the Court, the 

person signing the motion “certifies that to the best of the person’s knowledge, 

information, and belief, formed after an inquiry reasonable under the circumstances: . . . 

(3) the factual contentions have evidentiary support or, if specifically so identified, will 

likely have evidentiary support after a reasonable opportunity for further investigation or 

discovery.” Fed. R. Civ. P. 11(b). 

 Rule 11’s factual inquiry requirement is satisfied if there is “any factual basis for 

[an] allegation.” Brubaker v. City of Richmond, 943 F.2d 1363, 1377 (4th Cir. 1991). 

Even weak circumstantial evidence insufficient to withstand summary judgment is 

sufficient to establish a factual basis sufficient to withstand Rule 11. Cal. Architectual 

Bldg. Prods., Inc. v. Franciscan Ceramics, Inc., 818 F.2d 1466, 1472 (9th Cir. 1987); see 

also Lucas v. Duncan, 574 F.3d 772, 777 (D.C. Cir. 2009). 

B. Analysis

Lexington’s basis for sanctions is the following paragraph from Defendants and 

Counterclaimant’s Response to Plaintiff’s Motion for Summary Judgment (Doc. 287): 

Lexington represented to this Court that once it had an 

executed copy of the Settlement Agreement there was no 

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need to defend or indemnify Scott Homes. Lexington makes this representation with specific knowledge of the fact that upon receipt of the Settlement Agreement and proof of Evanston’s exhaustion, it sought a continuation of the September 25, 2012 trial date to consider its defense 

obligations to Scott Homes in the pending defect trial. (SOF ¶ 52); 

(Doc. 287 at 12:9-14) (emphasis added).13 Lexington contends this paragraph 

misrepresents that Lexington requested a continuance of the trial date in the Underlying 

Lawsuit. (Doc. 298 at 2-3). As evidence of this misrepresentation, Lexington cites the 

transcript of a September 19, 2012 hearing before the court in the Underlying Lawsuit in 

which Mr. Meisenhelder, current counsel for Silverbell, asked for a continuance of the 

trial date: “So at this point in time we would request a continuance of the trial date.” 

(Doc. 297-3 at 43:4-5). Lexington also offers the declaration of Ms. Hedberg, 

Lexington’s counsel present at the hearing, who declares that she did not request a 

continuance from the Court and never asked Silverbell, Scott Homes, or their counsel for 

a continuance of the trial date in the Underlying Lawsuit. (Doc. 300 at 2). 

Lexington misinterprets Silverbell’s statement because Silverbell never stated that 

Lexington’s request for a continuance occurred at the hearing or even before the court. 

As Silverbell correctly points out, most litigation occurs outside the courtroom. 

Silverbell’s statement clearly implies that Lexington requested a continuance, but clearly 

does not imply that Lexington requested a continuance before the court in the Underlying 

Lawsuit. Silverbell suggests that Lexington made its request through either the mediator 

or Scott Homes’ insurance defense counsel, Mr. Righi. (Doc. 301 at 7). On this point 

alone, Lexington cannot meet its burden of proving Silverbell’s statement had no 

evidentiary support. 

Moreover, although Ms. Hedberg now authors a declaration in support of 

Lexington’s Rule 11 motion stating that she never asked Silverbell, Scott Homes, or their 

 

13 This paragraph is based upon paragraph 52 of Silverbell’s supplemental statement of facts, which contains the same language that “Lexington sought a continuation.” See (Doc. 288 at 41). 

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counsel for a continuance, three pieces of evidence support Silverbell’s statement. Jodi 

Mintz, Lexington’s assistant vice-president responsible for supervising the claims 

handling of the Silverbell and Scott Homes matter, testified at her deposition that Ms. 

Hedberg had requested Mr. Righi ask the court for a continuance: 

Q. On September 19th, there was a superior court hearing 

in Arizona, and Kelly Hedberg on behalf of the Renaud firm 

was present in the courtroom on Lexington’s behalf. 

 Are you aware of that? 

A. I am aware that Kelly was present at a hearing in September of 2012. 

Q. And she had communicated at Lexington’s request that 

Mr. Righi ask the court to continue the time for the trial and 

the time for Lexington to consider whether or not they were going to defend the case. 

 Do you know that to be true? 

A. I do know that is true based on an e-mail that I read 

contained in the claim file. 

(Doc. 302-3 at 6-7). 

 Second, Sharon Wills, Lexington’s claims handler for the Silverbell and Scott 

Homes matter, testified at her deposition: 

Q. Okay. And Lexington had had Kelly Hedberg of Mr. Mesaro’s office go to court and, through Mr. Righi, inform the court that Lexington was still considering what it wanted to do and that Lexington wanted more time to respond? 

A. I think so, yes. 

(Doc. 302-4 at 3). 

 Third, Jodi Mintz testified in a later deposition in her capacity as Lexington’s Rule 

30(b)(6) deponent: 

Q. BY MR. ELLIOTT: Lexington was aware, because 

they sent her, Kelly Hedberg to the Arizona Superior Court 

on September 19th, 2012, to request through Mr. Righi that Lexington be given additional time to respond to the question of whether or not they were going to defend Scott, true? 

MS. RIBEIRO: Object to form. 

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THE WITNESS: Lexington is aware that Kelly attended a 

hearing and that Kelly requested additional time for Lexington to defend Scott unconditionally without a reservation of rights. 

(Doc. 302-5 at 4). 

 These three deposition transcripts are clear evidence supporting Silverbell’s 

factual contentions. Nevertheless, Lexington claims the questioning in each deposition 

was improper and falsely suggested that Lexington had requested a continuance, and thus 

this deposition testimony is unreliable. (Doc. 305 at 4). Essentially, Lexington now seeks 

to impeach its own employees’ testimony. But the transcripts unequivocally show that the 

deponents were not misled; each affirmatively testified that Lexington asked for a 

continuance. 

 It is of no consequence that Ms. Hedberg now testifies that Lexington never asked 

for a continuance. Rule 11 does not require factual contentions to be ultimately proved to 

be true. Rather, Rule 11 requires only some evidentiary support for a factual contention. 

Here, ample evidentiary support existed for Silverbell’s statement that Lexington 

requested a continuance. Accordingly, Silverbell did not violate Rule 11.14

C. Motion for Leave to Replace the Motion for Sanctions

 Lexington asks the Court for leave to replace its Rule 11 motion with a revised 

version. (Doc. 303). The Federal Rules of Civil Procedure do not limit the number of 

Rule 11 motions that a party may file. Rather, Rule 11 applies to all motions, and thus a 

party who files a Rule 11 motion is subject to Rule 11’s certification requirements for 

that motion. See Fed. R. Civ. P. 11 Advisory Committee Notes to the 1993 Amendments 

(“. . . [T]he filing of a motion for sanctions is itself subject to the requirement of the rule 

and can lead to sanctions.”).

The Court sees no grounds at present for restricting Lexington’s filing of Rule 11 

motions. The Court will deny Lexington’s motion but Lexington may choose to file a 

 

14 Because the Court concludes Lexington’s motion fails on the merits, it need not 

address Silverbell’s argument that Lexington violated Rule 11(c)(2) by failing to properly serve the motion. 

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new Rule 11 motion on the additional issues that it intended to address in its original 

motion. 

D. Attorneys’ Fees

 Silverbell and Scott Homes ask the Court to sanction Lexington for filing a 

groundless Rule 11 motion. (Doc. 301 at 7-8). Rule 11(c) provides that “[i]f warranted, 

the court may award to the prevailing party the reasonable expenses, including attorney’s 

fees, incurred for the motion.” Fed. R. Civ. P. 11(c)(2); see also Fed. R. Civ. P. 11 

Advisory Committee Notes to the 1993 Amendments (“. . . [T]he court may award to the 

person who prevails on a motion under Rule 11—whether the movant or the target of the 

motion—reasonable expenses, including attorney’s fees, incurred in presenting or 

opposing the motion.”). This provision is not “designed as a fee-shifting provision or to 

compensate the opposing party,” but rather to “deter sanctionable conduct.” Truesdell v. 

S. Cal. Permanente Med. Grp., 209 F.R.D. 169, 175 (C.D. Cal. 2002). In determining 

whether and to what extent to impose sanctions, including an award of attorneys’ fees, a 

court must “embrace the overriding purpose of deterrence and mold its sanctions in each 

case so as to best implement that policy.” In re Yagman, 796 F.2d 1165, 1184 (9th Cir. 

1986). 

 An award of reasonable expenses to Defendants is appropriate. A motion for Rule 

11 sanctions is not to be taken lightly. In filing the motion, Lexington certified that it was 

not being filed for an improper purpose, such as to harass or needlessly increase the cost 

of litigation. See Fed. R. Civ. P. 11(b)(1). Lexington also certified that its factual 

contentions, namely its allegations that Silverbell misrepresented the facts, had 

evidentiary support. See Fed. R. Civ. P. 11(b)(2). But Lexington’s factual contentions are 

facially deficient because Silverbell’s factual representations are not what Lexington 

purports them to be. Nor is Lexington’s misinterpretation inadvertent. In Lexington’s 

reply in support of its Rule 11 motion, after Silverbell cited the pieces of evidence 

supporting its statement, Lexington not only reiterated its misrepresentation claim but 

accused Silverbell’s counsel of making additional misrepresentations in Silverbell’s 

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response to Lexington’s motion. (Doc. 305 at 2). 

 Moreover, the Court is convinced that awarding Defendants its reasonable 

expenses incurred in connection with Lexington’s motion is necessary to deter Lexington 

from future sanctionable conduct. Lexington’s counsel has a history of failing to comply 

with the rules governing practice in the District of Arizona. For example, Lexington 

misquoted the Settlement Agreement in a manner tending to cause the reader to draw an 

inference directly contrary to the meaning of the quoted language. The Court noted that at 

least one other court found substantially equivalent conduct to be sanctionable under Rule 

11 and admonished Lexington. See (Doc. 159 at 13 n.7). Additionally, Lexington’s 

second motion for summary judgment, Lexington’s response to Silverbell’s motion to 

summary judgment, and Lexington’s reply in support of its motion for summary 

judgment violate Local Rule 7.2(e), even after the Court excludes the caption page and 

the certificate of service from the page counts. Finally, Lexington’s Rule 11 motion is not 

only frivolous on its merits but also procedurally: Lexington could have used its reply to 

adequately address the issue. 

 For all of these reasons, the Court will award Defendants their reasonable 

expenses, including attorneys’ fees, incurred in connection with Lexington’s Rule 11 

motion. Any award will be against Lexington’s counsel. Furthermore, the Court notes 

that the attorneys who have signed the aforementioned filings are admitted pro hac vice

to the District of Arizona. “[O]ut-of-district counsel’s appearance pro hac vice is not a 

right but a privilege, especially in a civil case.” Kaufman v. Jesser, 2012 WL 4478807, at 

*2 (D. Ariz. Sept. 28, 2012). “Attorneys admitted to practice pro hac vice must comply 

with the Rules of Practice of the United States District Court for the District of Arizona.” 

LRCiv 83.1(b)(2). If Lexington’s counsel persists in its present course of conduct, the 

Court may have cause in the future to consider revoking pro hac vice status. Counsel is 

warned accordingly. 

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V. Summary

1. Issues for Trial 

In summary, the following issues remain for trial. First, there is the issue of 

coverage. Silverbell must prove at trial that Scott Homes suffered more than $1 million in 

“property damage” as that term is defined in the Evanston Policy (and incorporated in the 

Lexington Excess Policy). To the extent that Silverbell seeks to meet this burden by 

showing property damage caused by a subcontractor of Scott Homes, Silverbell must 

prove that Scott Homes obtained that particular subcontractor’s certificate of insurance 

and the certificate provided evidence of the four requirements enumerated in the 

Evanston Policy. 

If Silverbell proves more than $1 million in covered property damage, then it has 

proved coverage under the Lexington Excess Policy. Although a finding of coverage will 

render Lexington liable to Silverbell for the outstanding amount of the Stipulated 

Judgment ($5 million), Silverbell must also show that it did not receive payments from 

sources other than Evanston for the claims upon which the Stipulated Judgment is based; 

to the extent any such other payments exist, they will reduce Lexington’s liability under 

the Stipulated Judgment accordingly. 

 Second, there is the issue of bad faith. Silverbell must prove at trial that in the 

investigation, evaluation, and processing of Scott Homes’ claim, Lexington acted 

unreasonably and either knew or was conscious of the fact that its conduct was 

unreasonable. Silverbell must also prove that Lexington’s bad faith caused damages. 

2. Counts

 With respect to Lexington’s First Amended Complaint: Silverbell is entitled to 

judgment on Count I. Counts II, III, IV, V, VI, VII, VIII, IX, X, and XI are coverage 

issues to be litigated at trial. Silverbell is entitled to judgment on Count XII for the 

reasons discussed in this Order about the “cross-suits” exclusion to the Lexington Excess 

Policy. Silverbell is entitled to judgment on Counts XIII, XIV, and XV because the Court 

has determined that Scott Homes did not breach its cooperation obligation to Lexington. 

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Silverbell is entitled to judgment on Count XVI because there is no genuine issue of 

material fact. 

 With respect to Silverbell’s counterclaims: Count I (duty to defend and coverage) 

remains an issue for trial because although Silverbell has established Lexington’s duty to 

defend as a matter of law, the remaining portion of Count I concerns coverage and 

coverage is an issue for trial. Count II (bad faith) is an issue for trial, but Silverbell is not 

entitled to punitive damages. 

VI. Conclusion

For the foregoing reasons, 

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IT IS ORDERED that Plaintiff’s Motion to Reopen Discovery (Doc. 310) is 

denied. 

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

(Doc. 281) is granted in part and denied in part. 

IT IS FURTHER ORDERED that Defendants/Counterclaimants Silverbell 290 

Limited Partnership and Scott Homes Multifamily, Inc.’s Motion for Summary 

Judgment/Summary Adjudication (Doc. 273) is granted in part and denied in part. 

IT IS FURTHER ORDERED that Plaintiff’s Motion for Violation of Rule 11 

and for Sanctions (Doc. 298) is denied. 

IT IS FURTHER ORDERED that Plaintiff’s Notice of Errata and Motion for 

Leave to Replace Incorrectly-Filed Motion for Violation of Rule 11 (Doc. 303) is denied. 

IT IS FURTHER ORDERED that, within fourteen days from the date of this 

Order, Defendants may move for an award of reasonable expenses, including attorneys’ 

fees, incurred in connection with Plaintiff’s Motion for Violation of Rule 11 and for 

Sanctions (Doc. 298) and Plaintiff’s Notice of Errata and Motion for Leave to Replace 

Incorrectly-Filed Motion for Violation of Rule 11 (Doc. 303). Any motion must comply 

with Local Rule of Civil Procedure 54.2. 

 Dated this 23rd day of February, 2015. 

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