Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_12-cv-00711/USCOURTS-azd-2_12-cv-00711-1/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1441 Petition for Removal- Breach of Contract

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WO 

IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF ARIZONA 

Empire Talent-Modeling Agency, LLC; 

Maria (Marisa) Sclafani, 

Plaintiffs, 

v. 

Auto-Owners Insurance Company, 

Defendant.

No. CV-12-00711-PHX-DGC

ORDER 

 On February 15, 2013, Defendant Auto-Owners Insurance Company filed a 

motion for summary judgment. Doc. 57. Empire Talent-Modeling Agency, LLC, and 

Maria Sclafani (collectively “Plaintiffs”) filed a joint response on April 1, 2013. Doc. 62. 

On April 26, 2013, Defendant filed a reply. For the reasons that follow the Court will 

grant Defendant’s motion in part and deny it in part.1

I. Background. 

Plaintiff Empire Talent was insured by Defendant under Property Policy No. 47-

905-554-00 from January 1, 2010 to January 1, 2011. On March 16, 2010, Plaintiff 

Sclafani’s car was vandalized and two binders were stolen. Doc. 58 ¶¶ 3-4. Plaintiffs 

claim that the binders contained talent portfolios and written contracts of Plaintiffs’ 

clients. Id. Plaintiffs notified Defendant of the incident and a claim was initiated. Id. 

¶ 5. Because Plaintiffs believed the data was backed up on a hard drive, they did not 

 

1

 Defendant’s request for oral argument is denied because the parties have fully briefed the issues and oral argument will not aid the Court’s decision. Fed. R. Civ. P. 

78(b). 

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pursue the claim. Id. Thereafter, Defendant called Plaintiffs to inform them that 

Defendant needed documentation on the amount of the loss if it was to process the claim. 

Id. ¶ 7. Sclafani told Defendant that it cost approximately $800 to shoot the original 

photographs contained in the talent portfolios. Doc. 63 ¶ 8. Plaintiffs elected to not 

move forward with the claim at that time. Doc. 58 ¶ 12. 

 On September 1, 2010, Plaintiffs’ laptop computer and external hard drive 

simultaneously failed. Doc. 63 ¶ 13. The computer and hard drive contained digital 

copies of talent profiles, client data, and contact information. Doc. 58 ¶ 15. Defendant 

states that a claim was initiated on November 1, 2010 (id. ¶ 16), while Plaintiffs believe 

the claim was initiated on the same day as the loss, September 1 (Doc. 63 ¶ 16). 

 Plaintiffs bring three claims arising from the manner in which Defendant handled 

the claim adjustment process. Plaintiffs allege breach of the covenant of good faith and 

fair dealing, breach of contract, and intentional infliction of emotional distress. Plaintiffs 

also seek punitive damages. 

II. Legal Standard. 

 A party seeking summary judgment “bears the initial responsibility of informing 

the district court of the basis for its motion, and identifying those portions of [the record] 

which it believes demonstrate the absence of a genuine issue of material fact.” Celotex 

Corp. v. Catrett, 477 U.S. 317, 323 (1986). Summary judgment is appropriate if the 

evidence, viewed in the light most favorable to the nonmoving party, 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). Summary judgment is also appropriate 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, 477 U.S. at 322. Only disputes over facts that might affect the outcome 

of the suit will preclude the entry of summary judgment, and the disputed evidence must 

be “such that a reasonable jury could return a verdict for the nonmoving party.” 

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). 

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III. Analysis. 

 A. Standing. 

Defendant asserts that Plaintiff Sclafani is not a named insured on the business 

personal property section of the policy. Defendant argues that she therefore lacks 

standing under Arizona law to bring a bad faith action related to the policy. Doc. 57 at 8 

(citing Stratton v. Inspiration Consol. Copper Company, 683 P.2d 327 (Ariz. App. 

1984)). 

 Plaintiffs argue that under an endorsement affixed to the policy, members and 

managers of a limited liability company can be considered an insured for purposes of 

duties related to the conduct of the business. Doc. 58-1 at 108. But as Defendant notes, 

the endorsement applies specifically to the “Businessowners Liability Coverage Form” 

and makes no mention of the “Businessowners Special Property Coverage” portion of the 

policy. Id; see also Doc. 58-1 at 5-25 (text of the Special Property Coverage). Plaintiff 

concedes that Defendant Empire is the named insured on the declarations page (Doc. 62 

at 7), and provides no other evidence that Defendant Sclafani is a named insured for the 

purposes of the property coverage. The Court finds that she lacks standing to bring suit 

for breach of the property coverage portion of the policy or for breach of the covenant of 

good faith and fair dealing implied in that portion of the policy. 

 B. Covenant of Good Faith and Fair Dealing. 

 Under Arizona law, the covenant of good faith and fair dealing applies particularly 

to insurance contracts. Rawlings v. Apodaca, 726 P.2d 565, 569-70 (Ariz. 1986) 

(“implicit in the contract and the relationship is the insurer’s obligation to play fairly with 

its insured.”). “The carrier has an obligation to immediately conduct an adequate 

investigation, act reasonably in evaluating the claim, and act promptly in paying a 

legitimate claim . . . It should not force an insured to go through needless adversarial 

hoops to achieve its rights under the policy.” Zilisch v. State Farm Mut. Auto. Ins. Co., 

995 P.2d 276, 280 (Ariz. 2000). Where the insurance company has a reasonable basis for 

denying or failing to process a claim, or where the claim is fairly debatable, a cause of 

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action for bad faith will not lie. Lasma Corp. v. Monarch Ins. Co. of Ohio, 764 P.2d 

1118, 1122 (Ariz. 1988). 

 Plaintiffs argue that the claim for the failed computer and hard drive was filed in 

September 2010 and no “actual communication or substantive investigation” commenced 

until April 2011. Doc. 62 at 9. They claim that this resulted from “Defendant 

intentionally assigning adjusters who were not trained or capable of handling the type of 

claims being presented.” Id. 

 Upon receipt of the claim, Defendant sent it to Mutual Boiler Re (“MBR”), one of 

Defendant’s reinsurance companies, on November 3, 2010. Doc. 58 ¶ 17. While not 

privy to any communication between Plaintiffs and MBR, Defendant claims that it 

consistently kept in contact with MBR and that MBR was slow to process the claim 

because Plaintiffs consistently failed to provide necessary information. Id ¶ 18 (citing 

Doc. 58-2 at 41-47). After the first several months, Defendant took over primary 

responsibility for adjustment of the claim. Defendant then contracted with a forensic 

analysis firm that picked up the hard drive on March 28, 2011. Doc. 58 ¶¶ 29-30. The 

firm issued a report on April 19, 2011, concluding that the data on the hard drive could 

not be recovered. Id. The day after Defendant received the report on the hard drive, it 

sent Plaintiffs a letter asking for additional information about the profiles that the hard 

drive contained. Doc. 58-3 at 10-11. Defendant claims that Plaintiffs never responded to 

the communication and have yet to provide this information. 

 Plaintiffs also complain that they did not receive payment for the laptop computer 

until June 2011, and for the hard drive and blank CD’s until March 2012. They argue 

that this delay was unreasonable. Defendant counters that it continued to work with 

Plaintiffs during the time from March 2011 through June 2011 to try to quantify the loss. 

Doc. 58 ¶¶ 24-26, 31-32, 34, 35, 37-38. Defendant claims that the only additional 

documentation it received from Plaintiffs was the sworn statement of loss which stated 

that the profiles consisted of 200-300 images of each client, that the actual value of the 

media loss was $249,800, but that the replacement costs for the same media was much 

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higher. Doc. 58-2 at 2. Attached to the sworn statement of loss were 350 client contacts 

which Plaintiffs claimed documented the loss. Id. Defendant forwarded the statement of 

loss and the contact information to the same forensic accounting firm that had analyzed 

the hard drive for the purpose of valuing the claim. Doc. 58 ¶ 43. The firm had further 

communications with Plaintiffs, eventually resulting in an email that listed the 

information it required from Plaintiffs. Doc. 58-3 at 25-27. The email asked Plaintiffs to 

confirm that they were “unwilling to disclose how much [they pay] the independent 

photographer” and to confirm that Plaintiffs claim “it would cost at least $800 per person 

to re-shoot and thus replace the lost images.” Id. Plaintiffs did not respond to the 

requests for additional information, but instead insisted that the “media loss claim be 

settled without further interference[.]” Doc. 58-3 at 29. Plaintiffs refused to provide any 

documentation of the potential cost to reshoot the lost photos or hire photographers for 

that purpose. Plaintiffs failed to provide the names or addresses of any photographers 

they used in the past or intended to use in the future, and provided no quotes from 

photographers regarding the cost of replacement photographs. Doc. 58 at 10-11.2

 Plaintiffs claim that the requests for additional information were in bad faith 

because they had already informed Defendant that the requested information did not 

exist. They also complained that one of the accountants assigned to the claim by the third 

party forensic firm was a model for a competing agency and had a conflict of interest. 

Doc. 63 ¶ 59. Finally, they claim that Defendant was not forthcoming about its coverage 

position. 

 The parties dispute several details of the claim adjustment process, but the overall 

timeline is largely undisputed. While there was some delay in the processing of the 

 

2

 Plaintiffs claimed that each client portfolio cost $800 to produce. Ms. Sclafani 

testified in her deposition, however, that her clients would pay $800 to set up a photo shoot and develop a portfolio, but that she would negotiate with photographers and pay them less than $800. Doc. 58-2 at 12. Although some photographers demanded $800, she was often successful in paying less. Id. Plaintiffs’ $800 replacement claim is obviously problematic because it often cost less to obtain the photographs. Moreover, Plaintiff Sclafani testified in her deposition that she had made no attempt to contact any of the clients whose portfolios were lost. Id. at 11. 

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claim, Defendants have produced call records, emails, and letters showing that the delay 

was primarily attributable to Plaintiffs’ failure to provide necessary information, and that 

Plaintiff Sclafani was consistently apprised of the status of her claim. See e.g., Doc. 58-2 

at 15-20, 43-57, 59, 61, 63; Doc 58-3 at 2-3, 23, 31-32, 41-42. 

 The only other evidence Plaintiffs produce is the opinion of an insurance expert 

that the delay was improper. Doc. 63-9 at 54. But the same expert testified that if he 

were presented with a claim like Plaintiffs’, he would seek much of the same information 

that Defendant requested to ascertain the cost of replacement. Id. at 32-37, 44-49. 

 Plaintiffs do not dispute that additional details about the cost of reproducing the 

portfolios were never provided, but argue that they could not produce information that no 

longer existed. Even if some of the requested information was not available, however, it 

is not reasonable to expect Defendant to promptly pay $249,800 without any information 

beyond a stack of heavily redacted client contacts and Plaintiff’s word that each portfolio 

cost $800 to produce. Furthermore, Plaintiffs have pointed to no evidence that the 

forensic accountants assigned to this case had a conflict of interest, and, to the extent they 

did, Defendant reassigned the claim when Plaintiff complained about the potential 

conflict. Doc. 58 ¶¶ 59-60. 

 Defendant’s attempts to acquire information necessary to process the claim were 

reasonable. Plaintiff did not provide that information, and the delay in paying the claim 

was the result. Although the question of reasonableness is often reserved for the jury, 

Arizona courts have held in insurance cases that “there are times when the issue of bad 

faith is not a question appropriate for determination by the jury.” Aetna Cas. & Sur. Co. 

v. Superior Court In & For Cnty. Of Maricopa, 778 P.2d 1333, 1336 (Ct. App. 1989). 

This is such a case. Plaintiffs have failed to present evidence from which a reasonable 

jury could find that Defendant engaged in unreasonable delay. Anderson, 477 U.S. at 

248. The Court will grant summary judgment on Plaintiffs’ bad faith claim. 

 C. Breach of Contract. 

Plaintiffs claim that Defendant breached the insurance contract by not paying for 

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the loss of the client portfolios stored on the laptop computer and external hard drive. 

Defendant contends that Plaintiffs can obtain replacement value coverage for the 

portfolios only if they actually replace the portfolios, something they have not done. To 

evaluate this claim, a description of the insurance policy is required. 

 The policy is long – 130 pages – and difficult to understand. Doc. 58-1 at 1-130. 

Although the language is reasonably accessible, tracking through the many and scattered 

provisions and how they relate to each other is challenging, and took the Court several 

hours of tabbing, highlighting, re-reading, and discussing. The Court will address the 

relevant terms of the policy and the parties’ arguments about those terms together. 

 The parties disagree on which policy definitions apply to Plaintiffs’ laptop and 

hard drive, and what coverage limitations are imposed by the portfolios that were stored 

on them. Defendant claims that the storage unit within the laptop and the external hard 

drive constitute “media” within the meaning of the policy. Despite Plaintiff’s assertion to 

the contrary, the Court finds that the internal and external hard drives clearly constitute 

“media” within the meaning of the policy: “[e]lectronic data processing, recording or 

storage media such as films, tapes, discs, drums or cells” (Doc. 58-1 at 16), and 

“materials on which information is recorded such as film, magnetic tape, paper tape, 

disks, drums, and cards” (Doc. 58-1 at 82). The words “such as” in these definitions 

suggest that the subsequently listed items are examples, not an exhaustive list, and a hard 

drive undoubtedly constitutes “[e]lectronic data processing, recording or storage media” 

and “material on which information is recorded.” The lost portfolio data also constitutes 

“media” under the policy because “‘[m]edia’ includes computer software and 

reproduction of data contained on covered media.” Id. 

 In identifying the limitations on payments for lost media, Defendant focuses on 

the Electronic Equipment endorsement found 72 pages into the policy. Doc. 58-1 at 72. 

Section 1(a)(2)(b) of this endorsement concerns “media,” and states that “[w]e will pay 

for your costs to research, replace or restore information on ‘media’ which has incurred 

direct physical loss or damage by a Covered Cause of Loss.” Id. The “Limit of 

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Insurance” section of the endorsement further provides that “[w]e shall pay no more for 

‘media’ than the lesser of the following: (1) The actual cost to repair, replace or 

reproduce the ‘media’; (2) If the ‘media’ is not repaired, replaced or reproduced, the 

value of blank ‘media’ of the same type; or (3) The Limit of Insurance shown in the 

Declarations for ‘media’.” Id. at 75. Because Plaintiffs have never replaced the lost 

portfolios, Defendant contends that it is obligated under these provisions to pay only for 

the value of blank media – for a replacement laptop and hard drive – not for the cost of 

recreating the portfolios. The Court agrees that the language of the policy, once carefully 

studied, appears to require such a result. 

 In addition to Plaintiffs’ argument that the laptop, hard drive, and portfolios do not 

constitute “media” – an argument which the Court finds wholly unconvincing – Plaintiffs 

claim that there is an alternative way for them to recover the value of the lost portfolios. 

They point to the original “Loss Payment” provision on page 16 of the policy and note 

that it permits an insured to recover either replacement value or the “actual cash value” of 

the lost property. Doc. 58-1 at 16. They note that an actual cash value recovery does not 

require that the insured replace the lost property as does the replacement value method of 

recovery. See id. at 17. As a result, they claim that they can obtain the actual cash value 

of the lost portfolios without having to actually replace them.3

 Although this reading of the words in the “Loss Payment” section of the policy 

appears to be correct, that section does not apply to Plaintiffs’ claim because it is 

 

3

 Defendant argues that Plaintiffs cannot claim actual cash value because their own 

expert testified in deposition that valuation of media cannot be anything other than replacement cost. See Doc. 63-9 at 29-30. In context, the expert appears to have testified that there would be no difference between the actual cash value of media and the 

replacement cost of media because media (such as the portfolios stored on the hard drive) 

do not depreciate. See id. at 30 ("Actual cash value is cost to replace it less any deduction for depreciation, that's the definition of actual cash value."). Even if this is 

true, the policy contains different provisions for actual cash value and replacement value, only one of which requires that the insured actually replace the lost property. If Plaintiffs had the option to proceed under the actual cash value provision, the policy would not require them to replace the lost portfolios. This is true even if the final valuation number 

would be the same as replacement value. The provisions of the policy, not the final valuation numbers they produce, govern whether or not Plaintiffs are required to replace the lost media. 

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superseded by the Electronic Equipment endorsement. In bold and at the top, the 

endorsement states: “THIS ENDORSEMENT CHANGES THE POLICY, PLEASE 

READ IT CAREFULLY.” Id. at 72 (emphasis in original). The endorsement then states 

that it “modifies” the “BUSINESS SPECIAL PROPERTY COVERAGE FORM,” which 

is where the “Loss Payment” provision relied on by Plaintiffs is found. The endorsement 

provides, as noted above, that lost “media” will be covered only to the extent it is actually 

replaced by the insured, or to the extent of blank media replacement value. Id. at 72, 74. 

Thus, Defendant appears to be correct in asserting that Plaintiffs can recover the 

replacement value of the portfolios only if they have actually replaced them. Otherwise, 

Plaintiffs are limited to the value of blank computer media. 

 Although the Court would be inclined for these reasons to grant summary 

judgment to Defendant on the breach of contract claim, Plaintiffs also invoke Arizona’s 

reasonable expectations doctrine. That doctrine holds that “Arizona courts will not 

enforce even unambiguous boilerplate terms in standardized insurance contracts in a 

limited variety of situations.” Gordinier v. Aetna Cas. & Sur. Co., 742 P.2d 277, 283 

(Ariz. 1987) (emphasis in original). Boilerplate terms are not enforced when a 

reasonably intelligent consumer is unable to understand them, when the insured did not 

receive full and adequate notice of an apparent emasculation of coverage, or where some 

activity reasonably attributable to the insurer creates an objective impression of coverage. 

Id. Given the length and complexity of this policy, the Court has serious doubts about 

whether a reasonably intelligent consumer could understand the precise limits on 

insurance for lost data. More importantly, however, Plaintiffs have presented evidence 

that Defendant’s sales agent told Ms. Sclafani that loss of her portfolios would be 

covered regardless of whether she actually replaced the portfolios. See Doc. 63-1 at 38; 

Doc. 63-2 at 7. Defendant does not dispute that the individual who allegedly made these 

statements was its agent. Doc. 67, ¶ 82. It argues instead that any testimony by Ms. 

Sclafani about what the agent said would be inadmissible hearsay. Id. This is incorrect 

for two reasons. First, statements by Defendant’s agent made in the course of his 

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employment would not constitute hearsay. Fed. R. Evid. 801(d)(2)(D). Second, the 

statements likely would be admitted not for the truth of the matter asserted, but for their 

effect on Ms. Sclafani in inducing a reasonable expectation that the portfolios would be 

covered even if not actually replaced. 

 The Court concludes that Plaintiffs’ evidence creates a material question of fact as 

to whether coverage is available for the lost portfolios under the reasonable expectations 

doctrine. The Court therefore will deny summary judgment on Plaintiff Empire’s claim 

for breach of contract. 

 D. Intentional Infliction of Emotional Distress. 

To prevail on a claim for intentional infliction of emotional distress under Arizona 

law a Plaintiff must show: 

[F]irst, the conduct by the defendant must be “extreme” and “outrageous”; second, the defendant must either intend to 

cause emotional distress or recklessly disregard the near 

certainty that such distress will result from his conduct; and 

third, severe emotional distress must indeed occur as a result 

of defendant's conduct. 

Citizen Publ'g Co. v. Miller, 115 P.3d 107, 110 (Ariz. 2005) (citing Ford v. Revlon, Inc., 

734 P.2d 580, 585 (Ariz. 1987)). 

 The Court has already found that there is insufficient evidence from which a 

reasonable jury could conclude that Defendant’s handling of the claim was unreasonable. 

Plaintiffs similarly fall short of providing sufficient evidence to reasonably conclude that 

Defendant’s conduct was “extreme” or “outrageous.” Accordingly, the Court will grant 

Defendant’s motion for summary judgment on the intentional infliction of emotional 

distress claim. 

 E. Punitive Damages. 

 Because Plaintiffs’ tort claims have not survived summary judgment, the request 

for punitive damages must also be denied. 

 IT IS ORDERED 

1. Defendant’s motion for summary judgment (Doc. 57) is granted with 

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respect to all claims by Plaintiff Sclafani and with respect to Plaintiff Empire’s claims for 

breach of the covenant of good faith and fair dealing and punitive damages. The motion 

is denied with respect to Empire’s claim for breach of contract. 

2. The Court will set a final pretrial conference by separate order. 

 Dated this 24th day of May, 2013. 

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