Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_05-cv-02670/USCOURTS-azd-2_05-cv-02670-3/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1330 Breach of Contract

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Mark H. Goldberg; Sherry R. Goldberg;

et al., 

Plaintiffs, 

vs.

Pacific Indemnity Company, a California

corporation; et al., 

Defendants. 

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No. CV 05-2670-PHX-JAT

ORDER

Pending before the Court are Defendant Federal Insurance Company’s (“Federal”)

Motion for Summary Judgment (Doc. #143) and Defendant Pacific Indemnity Company’s

(“Pacific”) Motion for Summary Judgment (Doc. #144). The Court now rules on the

motions.

I. FACTUAL BACKGROUND

In June of 2001, Mr. and Mrs. Goldberg purchased a 14,000 square foot home in

Paradise Valley, Arizona for $5.7 million “as is.” The Goldbergs did remodeling work on

the house shortly after its purchase. They moved into the house in May of 2002 and

continued their remodeling efforts.

Effective June 7, 2001, Pacific issued an insurance policy to the Goldbergs for their

new home. Defendant Pacific referred to the Goldbergs’ type of policy as the “Masterpiece

Policy.” The Masterpiece Policy provides coverage against, “all risk of physical loss to your

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house . . . , unless stated otherwise or an exclusion applies.” (DSOF ¶¶11-12, Doc. #146,

Attach. 1). The policy remained in effect at all relevant times.

In August 2002, the Goldbergs began to detect odors inside the house. Toward the

end of that year, someone told the Goldbergs that employees of the remodeling contractor

may have urinated in various locations inside the house. The Goldbergs then demanded that

the remodeling contractor take corrective action. The Goldbergs did not at that time contact

Pacific. The contractor’s insurer hired AIR Resources in January of 2003 to perform

remediation services. The Goldbergs claimed that urine odors remained after AIR

Resource’s remediation efforts.

 The Goldbergs notified Pacific of the alleged urine damage on or about July 16, 2003.

This notice came fourteen months after the Goldbergs first smelled odors in their house and

seven months after they made a claim against their contractor for remediation.

Notwithstanding a late notice provision in the Goldbergs’ insurance policy, Pacific accepted

the claim.

Federal adjusted the claim on behalf of Pacific. Federal sent an adjuster to the

Goldbergs’ home shortly after the Goldbergs notified Pacific of the loss. Federal retained

several consultants to investigate the Goldbergs’ claim: Don Woods, a certified industrial

hygienist, and his assistant, Deanna Corbett, another hygienist, both of Certified Health &

Safety Consulting; Adel Assaf and Robert Hutzel, industrial hygienists; Harry Parrish, a

construction specialist; Hayden Baldwin, a forensic light source specialist; and Dr. Cain, an

expert on the olfactory system. The Goldbergs also hired their own hygienic consultants.

During the course of the investigation, Pacific spent approximately $300,000 on remediation

work and paid the Goldbergs approximately $1,800,000 in Additional Living Expenses

(“ALE”), at the rate of $75,000 per month.

The Goldbergs claimed that urine odors permeated the house even after Federal’s

additional remediation work. The Goldbergs became convinced that further remediation

would not help and they wanted Pacific to raze and completely rebuild the house. Federal

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continued to investigate the reports of urine contamination, while also investigating other

potential sources for the reported odors.

Meanwhile, the Goldbergs sued their remodeling contractor and subcontractors in

state court. Pacific initially joined in the suit with the Goldbergs. When Pacific became

concerned that its litigation position and the Goldergs’ position were irreconcilable, Pacific

dropped out of the suit.

Ultimately, on January 20, 2005, after months of investigation by Federal, Defendants

advised the Goldbergs that Federal had completed the investigation of the urine claim and

that the investigation had not revealed any remaining physical evidence of urine

contamination. (PCSOF Exh. 4, Doc. #151). Pacific stated that it believed any urine

deposits from the contractors had been removed and remediated and/or had dissipated to the

point that the deposits could no longer be detected. Pacific further stated that any continuing

odors in the house could not reasonably be attributed to the alleged urine deposits. (Id.).

Pacific offered to pay for more construction and rebuild efforts, but refused to completely

raze and rebuild the house. (Id.).

The Goldbergs filed this breach of contract and bad faith action against Pacific and

its adjuster Federal (collectively, the “Defendants”) on July 29, 2005. At some point after

the Goldbergs filed suit, Federal, on behalf of Pacific, offered to purchase the house at a price

determined by an independent appraiser determining the purchase price. The Goldbergs

refused the offer.

 II. STANDARD

Summary judgment is appropriate when “the pleadings, depositions, answers to

interrogatories, and admissions on file, together with affidavits, if any, show that there is no

genuine issue as to any material fact and that the moving party is entitled to summary

judgment as a matter of law.” Fed. R. Civ. P. 56(c). Thus, summary judgment is mandated,

“...against a party who fails to make a showing sufficient to establish the existence of an

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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

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 nonmovant 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)). A dispute about a fact is “genuine” if the evidence is such that a reasonable jury

could return a verdict for the nonmoving 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 non-moving party. Ellison v. Robertson, 357 F.3d 1072, 1075 (9th Cir.

2004).

III. FEDERAL’S MOTION FOR SUMMARY JUDGMENT

Federal has moved for summary judgment on both of Plaintiffs’ claims. Federal

argues that it is not liable on the breach of contract claim because it was not a party to the

insurance agreement. Further, Federal argues that it is not liable on the bad faith claim

because, as the adjuster, it did not owe a separate duty of good faith to Plaintiffs. Finally,

Federal argues that even if it did owe a duty to Plaintiffs, it did not act in bad faith while

adjusting Plaintiffs’ claim.

Plaintiffs concede that Federal is not liable on the breach of contract claim because

Federal is not a party to the insuring agreement. (Plaintiffs’ Amended Response in

Opposition, p. 11 (Doc. #485)). But Plaintiffs argue that Federal owed them a separate duty

of good faith. Plaintiffs contend that both Pacific and Federal are liable for bad faith.

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In Meineke v. GAB Business Services, Inc., 991 P.2d 267 (Ariz. Ct. App. 1999), the

home insurance policy owners sued the private adjusters hired by the insurer to investigate

the policy owners’ fire loss claim. The Meineke plaintiffs sued for breach of contract, bad

faith, punitive damages, and negligence. 991 P.2d at 268. The court granted the adjusters’

motion for summary judgment on the breach of contract, bad faith, and punitive damages

claims because no contract existed between the plaintiffs and the adjusters. Id. The Plaintiffs

did not appeal from that ruling. Id. 

The court also granted summary judgment to the adjusters on the negligence claim

because the Court held that the adjusters did not owe a duty to the plaintiffs. The plaintiffs

appealed from that judgment. Id. On appeal, the court concluded that “the relationship

between adjuster and insured is sufficiently attenuated by the insurer’s control over the

adjuster to be an important factor that militates against imposing a further duty on the

adjuster to the insured.” Id. at 270. The court also stated that “[c]reating a separate duty

from the adjuster to the insured would thrust the adjuster into what could be an irreconcilable

conflict between such duty and the adjuster’s contractual duty to follow the instruction of its

client, the insurer.” Id. at 271.

Plaintiffs attempt, unsuccessfully, to distinguish or limit Meineke. Federal does not

owe any contractual duties to Plaintiffs because Federal is not a party to the insurance

agreement. Nor, per Meineke, did Federal owe Plaintiffs a separate tort duty in its adjustment

of the claim. See also Walter v. Simmons, 818 P.2d 214, 222 (Ariz. Ct. App. 1991) (“In this

case, [the adjuster] was dismissed from the bad faith claim because he owed no contractual

duty to act in good faith or deal fairly with [insured].”).

The Court finds that Federal did not owe any contractual duties or a separate duty in

tort to Plaintiffs. The Court therefore grants Federal’s Motion for Summary Judgment. This

ruling does not end the inquiry into Federal’s handling of the claim, however, because Pacific

remains liable for Federal’s actions. Id. at 223. 

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IV. PACIFIC’S MOTION FOR SUMMARY JUDGMENT

A. Bad Faith Claim

Pacific concedes that it remains liable on the bad faith claim for any tortious conduct

by Federal. (Pacific’s Motion for Summary Judgment, p. 1 n.1 (Doc. #144)). The Court

therefore must analyze Federal’s handling of the claim. If Plaintiffs have created a genuine

issue of material fact regarding Federal’s bad faith adjustment of the claim, then the Court

must deny Federal’s motion on the bad faith claim. 

Arizona courts acknowledge that, “in buying insurance an insured usually does not

seek to realize a commercial advantage but, instead, seeks protection and security from

economic catastrophe.” Rawlings v. Apodaca, 726 P.2d 565, 570 (Ariz. 1986) (internal

citations omitted). One of the benefits that flows from a first-party insurance contract, “is

the insured’s expectation that his insurance company will not wrongfully deprive him of the

very security for which he bargained or expose him to the catastrophe from which he sought

protection. Conduct by the insurer which does destroy the security or impair the protection

purchased breaches the implied covenant of good faith and fair dealing implied in the

contract.” Id. at 571. 

Although insurers do not owe fiduciary duties to their insureds, they do owe them

some duties of a fiduciary nature; including, the duties of equal consideration, fairness, and

honesty. Zilisch v. State Farm Mut. Auto. Ins. Co., 995 P.2d 276, 279 (Ariz. 2000). Insurers

must play fairly with their insureds. Id. An insurer commits bad faith when it,

“‘intentionally denies, fails to process or pay a claim without a reasonable basis.’” Id.

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

But if an insurance claim is fairly debatable, the insurer cannot be liable for acting in

bad faith for denying a claim. Lasma Corp. v. Monarch Ins. Co. of Ohio, 764 P.2d 1118,

1122 (1988). The relevant inquiry regarding an insured’s handling of a claim, regardless of

whether the insurer eventually pays the claim, is whether, “there is sufficient evidence from

which reasonable jurors could conclude that in the investigation, evaluation, and processing

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Plaintiffs make other allegations in their Opposition, but those allegations are not

substantiated by record evidence. Rather than cite to specific statements of fact in its

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of the claim, the insurer acted unreasonably and either knew or was conscious of the fact that

its conduct was 

unreasonable.” Zilisch, 995 P.2d at 280 (emphasis added). Thus, a bad faith claim requires

proof of both objective and subjective unreasonableness.

Federal spent months and months and engaged numerous experts to investigate

Plaintiffs’ claim. Federal paid for remediation at the house and adopted a “when in doubt,

rip it out approach.” If Plaintiffs suspected certain building materials were contaminated,

then Federal removed them. Federal removed and replaced an entire room. Federal used

several methods to try to detect urine permeation, including sending samples to labs for

analysis. Federal paid Plaintiffs $75,000 a month in alternate living expenses while it

completed its investigation and repair work.

After many months of investigation, Federal determined that no objective proof of

remaining urine damage that would lead to the odor permeation described by Plaintiffs

existed. Nonetheless, Plaintiffs continued to report an overpowering odor of urine in the

house. Plaintiffs demanded that Federal raze and rebuild the house from the foundation up.

Federal rejected that demand, continued to investigate the urine damage claim, and attempted

to find other causes for bad odors in the house. Ultimately, Federal could not verify any

alternate causes for Plaintiffs’ reports of foul odors.

Plaintiffs sued Defendants for Pacific’s refusal to pay to raze and rebuild their home

or pay them stigma damages. Plaintiffs allege that Federal acted unreasonably in

investigating the claim and in refusing to comply with their raze and rebuild or stigma

damages demand. After Plaintiffs filed suit, Defendants offered to purchase the home at a

price determined by a neutral, third-party appraiser. Plaintiffs declined the offer. 

In their Amended Response in Opposition to Federal’s Motion for Summary Judgment

(Doc. #485), Plaintiffs offer the following as evidence of bad faith:1

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response memorandum, Plaintiffs invite the Court to peruse over four hundred statements of

fact to find an issue to present to the jury. “As supported by Plaintiffs’ CSOFs 1-428 and

Controverting Responses to Defendants joint Statement of Facts, a jury can conclude that,

contrary to Defendants’ assertions that they acted in good faith, they have . . . and engaged

in other unreasonable and outrageous conduct causing significant harm to the Goldbergs.”

(Doc. #485, p. 5). This sort of invitation violates Local Rule of Civil Procedure 56.1(3),

which reads, “Memoranda of law filed in support of or in opposition to a motion for

summary judgment, including reply memoranda, shall include citations to the specific

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

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! Federal did not use all the investigation methodologies proposed by one of its

consultants

! Emails from Louise Vallee, an industrial hygienist of Defendants, that recommended

that Defendants not use canines or gas chromatography to investigate the claim

because these methods would tip the claim in favor of the Goldbergs

! Federal ignored numerous subjective reports of urine odors in the house

! Federal unreasonably investigated other potential sources of the odors in the house

! Federal claimed that negative surface testing and air sample lab results established

that no objective evidence of urine odor sources existed, even though that was not

definitive proof; and

! A May 10, 2007 email from counsel to one of the state court defendants to counsel

for another state court defendant that read,

I spoke with Bobby Sullivan [counsel for Defendants]

yesterday. Now I understand why Paige wanted

deadlines as soon as possible. Bobby is noticing

depositions for all of their experts in the near future.

Bobby and the California firm are taking and defending

theses depositions. He is also noticing a number of fact

witnesses. All of the depositions have to be completed

before July 31, 2007. He is waiting to file his motions

for summary judgment until the deadline to file such

motions, which is August 1, 2007.

I think we should delay as much as possible. Also, we

should give plaintiffs the most meaningless deposition

designations and wait to drop the important ones later on

down the road.

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When asked why Federal decided not to use dogs, Rick Soleau testified:

Because we became convinced that the dogs, use of a dog would

not be an objective measurement of urine odors because dogs

can smell one person’s urine versus another’s, they can be

trained to detect a difference or identity of a particular

individual’s urine. But to be able to detect the presence of urine

or not, we didn’t believe in the end after analysis that a dog

could do that anymore than he could determine the presence of

a human being or not. 

(DSOF 140).

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The Court will address these contentions in order. First, Federal used all but one of

the investigative protocols that its expert recommended. After research by more than one

person, Federal determined that dogs, the one recommended protocol not used, would not

elicit reliable, objective evidence of aged urine from an unspecified individual (DSOF 139-

141).2

 Plaintiffs’ own hygienist, David Rueckert, testified that he did not recommend or

support the use of canines to locate urine sources within the house. (DSOF 142). If even

Plaintiffs’ expert did not think dogs should be used, then how could Federal’s decision not

to use dogs be characterized as unreasonable? 

Second, Plaintiffs have read some words into Ms. Vallee’s emails that were not there.

Ms. Vallee never stated that the use of dogs or gas chromatography would tip the claims “in

favor of the Goldbergs.” Instead, with regard to the use of canines for investigation, Ms.

Vallee wrote, “I think the dog is redundant and will also tip the claim.” (Plaintiffs’ Exhibit

28). Regarding the use of gas chromatography, Ms. Vallee wrote, “There are no real

standards or cutoff numbers for urine odor threshold. It is likely that some very low levels

could be found based on history, which alone does not substantiate the odor claim, yet will

document presence which may tip the scales position wise in a legal action.” (Plaintiffs’

Exhibit 118). In her uncontradicted testimony, Ms. Vallee explained that she did not mean

that the tests would tip the scales in favor of the Goldbergs, but meant that she wanted only

objective information for the investigation. She did not want unreliable information that

could cause controversy to develop on either side. (D Supp. SOF ¶¶23-24).

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As the Court stated earlier, Plaintiffs’ own expert, David Rueckert agreed that dogs

would not help to investigate Plaintiffs’ claim. Mr. Rueckert testified:

I know that dogs can be trained to track a lot of things. It’s my

understanding that the dogs would be keyed into a specific

protein. So if you’re going to have them track urine odor within

the Goldberg residence, you’d have to have a sample of the

original urine in that contaminated site for them to track that

specific protein. . . . So I’m not sure that it would actually be

germane for the Goldberg residence. I don’t think that we have

that kind of control over who urinated.

(Defendants’ Exh. 7, p.583). Mr. Rueckert’s testimony confirms Mr. Soleau’s explanation

for why Federal ultimately did not use canines to investigate the claim. 

Similarly, Plaintiffs’ experts testified that gas chromatography would not lead to a

conclusive or reliable determination regarding the alleged existence of urine contamination.

Mr. Rueckert testified that gas chromatography “was not appropriate for this type of

molecule set up. I did extensive research looking for laboratories that do [gas

chromatography]. And they laughed like you wouldn’t believe that I wanted to have them

do testing for urine.” (Defendants’ Exh. 7, pp. 584-85). Fred Regnier, Plaintiffs’ chemistry

expert, testified gas chromatography, while theoretically able to identify potential byproducts

of degraded urine, would not differentiate between byproducts from urine and byproducts

from a number of other alternative sources. (Defendants’ Exhibit 63, pp. 119, 226, 127, 194-

99, and 235). Again, how can Plaintiffs contend that Federal somehow acted unreasonably

in failing to use gas chromatography when Plaintiffs’ own experts doubted the reliability of

such a test?

Third, Federal claims it considered the subjective complaints submitted by the

Goldbergs, even though at the time the Goldbergs sent them, some of the reports were weeks

old. The fact that Federal did not send someone over to the house immediately after Misti

Van Emst either talked with or left a message for Ms. Mangold saying the house had urine

odors does not tend to prove Federal ignored the complaints. In fact, the evidence

demonstrates that Federal did take the complaints seriously. Federal made its expert Don

Woods available on a 24 hour basis if the Plaintiffs noticed an odor in the house. Further,

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after complaints that the smells worsened in wet weather, Federal recreated humid conditions

in the house to try to confirm the existence of contamination.

Ironically, Plaintiffs’ fourth allegation tends to disprove their third allegation. When

Plaintiffs continued to complain about the odors in the house and continued to demand that

Defendants raze and rebuild the home even though Federal had discovered no objective

evidence of continued urine contamination, Federal attempted to find other potential sources

for the odors. Federal’s continued attempts to find a source for the reported odors

demonstrate that it did not ignore Plaintiffs’ complaints. 

Plaintiffs seem to suggest that Federal undertook these measures even though it knew

that no alternate source for the odors existed. Why would Federal use its own money to pay

for testing that it thought was pointless? Federal had legitimate reason to believe that some

other source for the odors might exist. Federal had reports of green algae on top of mud in

the main air duct beneath the Goldbergs’ residence, and numerous people had reported sewer

gas in the house. Rather than demonstrating unreasonableness, Federal’s investigation into

alternative sources of the bad odors evidences its effort to responsibly conduct a full and

thorough investigation of the insurance claim. 

Fifth, Plaintiffs claim Federal unreasonably relied on its surface and air quality tests

to determine that urine contamination, to the extent it ever existed, no longer existed after

Federal’s remediation attempts. Plaintiffs argue that Federal could not rely on those test

results because humans can smell urine odors at a threshold lower than tests can detect.

Federal structured its investigation of the claim based on the reports submitted by Plaintiffs.

The Goldbergs submitted numerous reports of inhabitants and visitors to the house having

severe physical reactions to the odors, which Federal took at face value. The experts in the

case agree that the huge concentration of degraded urine molecules needed to cause a

physical reaction in a person would be detectable with the testing methods used by Federal.

Federal’s reliance on the tests under these circumstances is understandable. 

Plaintiffs have not produced any post-remediation test results indicating urine

contamination in the home. Are Plaintiffs suggesting that a reasonable insurer would have

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razed and rebuilt from the ground up a 14,000 square foot home based solely on subjective

complaints without any objective proof of remaining urine contamination, even after

extensive testing? If so, Plaintiffs’ own claims handling expert would disagree. Mr.

Corridan testified that reports of odors alone would not require Defendants to accede to

Plaintiffs’ raze and rebuild demand. (Defendants’ Exh. 31 at pp. 89-91). 

Finally, Plaintiffs’ allegation regarding the email from counsel for defendants in the

state court action is suspect. The email is not relevant to this case. The email was not carbon

copied to counsel here. Nor, as Plaintiffs suggest, does the email in any way implicate

defense counsel in this case in a wrongful scheme with defense counsel in the state case.

The Goldbergs presented Pacific with a unique claim. Neither party has cited a case

from any Court in the country, federal or state, involving urine contamination so severe that

it required the razing and rebuilding of an entire house – let alone a 14,000 square foot house.

In addition to being unique, Plaintiffs’ claim was untimely. The Goldbergs did not present

the claim to Pacific until fourteen months after they first began smelling urine in the house

and seven months after the Goldbergs made a claim against their contractor for remediation.

Nonetheless, Defendants engaged in an extensive and expensive investigation of the claim.

Federal assigned qualified and increasingly senior claims adjusters to the claim,

including, eventually, a Senior Vice President (Eric Krantz). Federal hired many technical

consultants to investigate the claim; including: Don Woods, a certified industrial hygienist,

and his assistant, Deanna Corbett; Adel Assaf and Robert Hutzel, industrial hygienists; Harry

Parrish, a construction specialist; Hayden Baldwin, a forensic light source specialist; and Dr.

Cain, an expert on the olfactory system and smells. Plaintiffs do not dispute that Federal

retained qualified consultants.

Federal performed approximately $300,000 of remediation work at the house. It

adopted an “if in doubt, rip it out” approach. Under this approach, Federal agreed to tear out

and replace anything that the Goldbergs thought might be urine contaminated. It authorized

the remediation of areas that already had been removed and rebuilt. Federal also removed

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Plaintiffs sent samples to the same lab. Plaintiffs’ earlier samples had one weak

positive on building materials and another positive from a liquid sample, which came from

a bottle that undisputedly was never deposited into the house.

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massive amounts of drywall and wood studs, which required extensive opening of wall

cavities. It even removed an entire room of the house.

During Federal’s remediation and repair work at the house, Federal paid for the

Goldbergs to relocate and gave them $ 75,000 a month in additional living expenses. The

$75,000 a month did not include the $1000 a month that Federal paid for drapery storage or

the money Federal paid for an apartment for the Goldbergs’ daughter. Even Plaintiffs’

experts agreed that this payment of additional living expenses was one of the most generous

packages they had ever encountered.

Federal considered, developed, and used a variety of methods to investigate whether

the house was contaminated by urine. Federal tailored its investigation to address the

Plaintiffs’ reports of numerous physical reactions to the malodors in the house. Federal

conducted physical testing, including air- and wipe-sampling. It sent the samples to

Serological Laboratories for analysis. Of the over 100 samples sent by Federal to the lab,

none tested positive for urine, other than two samples intentionally spiked as controls.3

 

Federal hired one of the nation’s foremost experts in forensic light source

examinations, Hayden Baldwin, to conduct a multi-day investigation of the home. Mr.

Baldwin covered virtually every inch of the attic and living space. He determined that the

stains identified by Mr. Rueckert as potential urine stains likely were not the product of

urine.

Federal also attempted to recreate the conditions that the Goldbergs claimed caused

the worst odors. Federal elevated the level of humidity in the house and/or the temperature.

Despite these efforts, Federal could not verify the reported odors.

Federal’s efforts extended to bringing odor panels to the house to provide objective

feedback on any odors in the house. These panels could not verify the claim. Federal did

not stop there. It sent physical samples of allegedly contaminated materials to a remote entity

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that used objective odor panels of screened individuals with good olfactory systems. Again,

the odor panels’ results were not consistent with the Goldbergs’ claim of continued urine

odors. 

When its lengthy and varied investigation did not verify the presence of urine

contamination, Federal tried to find other possible sources for the reported odors. It tested

for sewer gas, plumbing leaks, underground air-return conditions, elevated slab moisture, and

mold. None of these tests revealed a potential source of the extreme odors reported by

Plaintiffs.

Ultimately, after considering the Goldbergs’ reports of severe, physical-reactioninducing urine odors throughout the house, contrasted with the lack of any objective evidence

of post-remediation urine contamination, Defendants refused Plaintiffs’ raze and rebuild

demand. Plaintiffs subsequently filed this suit. Even after Plaintiffs filed this case, Federal

offered to open up additional walls to verify that urine did not exist behind them. Federal

asked Plaintiffs to identify a sampling of locations and the protocol, then Defendants would

open the walls in those areas. Plaintiffs did not respond to this offer. Finally, in an attempt

to settle the claim, Federal, on behalf of Pacific, offered to purchase the house at a price

determined by an independent appraisal process. The Goldbergs refused this offer.

If an insurance claim is fairly debatable, the insurer cannot be liable for acting in bad

faith for denying the claim. Lasma Corp., 764 P.2d at 1122. While sometimes an issue of

fact, at other times, the issue of fair debatability is not a question appropriate for

determination by the jury. Golden Rule Ins. Co. v. Montgomery, 435 F.Supp.2d 980, 995 (D.

Ariz. 2006); Lake Havasu Comty. Hosp., 687 P.2d 371, 381 (Ariz. Ct. App. 1984)(overruled

on other grounds by Barmat v. John and Jane Doe Partners A-D, 747 P.2d 1218, 1223 (Ariz.

1987)). The evidence in this case leaves no conclusion but that the Goldbergs’ raze and

rebuild claim was fairly debatable. Federal conducted a lengthy and thorough investigation

of the claim, but did not uncover any objective proof of continued urine permeation after

Federal’s remediation and rebuild efforts. The Goldbergs have offered no such objective

proof. Nor have the Goldbergs cited to any case in which a court awarded a raze and rebuild

Case 2:05-cv-02670-JAT Document 625 Filed 02/21/08 Page 14 of 20
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4

The only claim for which punitive damages are available is the bad faith claim.

Plaintiffs cannot recover punitive damages on a breach of contract theory.

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remedy for degraded urine permeation. No reasonable juror could find that the Goldberg’s

entitlement to their requested remedy, above and beyond the over $1.8 million worth of

benefits paid under the policy, was not at least “fairly debatable.” 

To hold an insurer liable for bad faith for its investigation of a claim, regardless of

whether the insurer ultimately paid or denied the claim, a jury must find both: 1) that the

insurer acted unreasonably in investigating, evaluating, and processing the claim and 2) that

the insurer knew or was conscious of the fact that its conduct was unreasonable. Zilisch, 995

P.2d at 280. Given the extensive and expensive nature of Federal’s investigation of the

claim, its payment of extremely generous benefits to the Goldbergs ($1.8 million dollars),

and its efforts to settle the claim, a jury would be extremely hard pressed to find that Federal

acted unreasonably in investigating the Goldbergs’ claim. What is even more clear, however,

is that no reasonable juror could find that Federal knowingly acted in an unreasonable

manner. 

Plaintiffs obviously disagree with the ultimate conclusion of Federal’s investigation.

But Plaintiffs’ disappointment with Federal’s refusal to raze and rebuild their home does not

mean that Federal acted unreasonably in adjusting the claim or in its ultimate refusal to

comply with the raze and rebuild demand. The Court will grant summary judgment to

Pacific on Plaintiffs’ bad faith claim and claim for punitive damages.4

B. Breach of Contract Claim

Pacific offers three defenses to Plaintiffs’ breach of contract claim: late notice of

claim; Plaintiffs’ bad faith/failure to cooperate; and no stigma damages available under the

contract.

1. Late Notice

Pacific argues that by waiting multiple months to report the odor problem, the

Plaintiffs violated their contractual obligation to immediately report the alleged loss and to

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prevent the house from further damage. Pacific maintains that Plaintiffs’ failure to timely

notify prejudiced Pacific because, in the intervening months, Air Resources took actions that

made further investigation of the claim difficult.

Plaintiffs’ insurance agreement with Pacific contains a notice clause that reads,

“Notification. You must immediately notify us or your agent of your loss.” Such

notification clauses are enforceable, but the insurance company cannot refuse to pay a claim

for failure to notify unless the insurer can show that it has been prejudiced thereby. Lindus

v. N. Ins. Co. of New York, 438 P.2d 311, 315 (Ariz. 1968). The insurance company has the

burden of proving prejudice. Id. Further, even where prejudice may exist, the insurer can

waive the notification requirement. Zuckerman v. Transamerica Ins. Co., 650 P.2d 441, 444

(Ariz. 1982).

Pacific has made some showing of prejudice from Plaintiffs’ failure to promptly notify

it of the alleged loss. Air Resources performed remediation services on the house before

Pacific knew of the claim. Air Resources removed allegedly contaminated insulation and did

not preserve it. Air Resource’s actions reportedly caused dust and insulation to travel from

the attic into the wall cavities, thereby spreading the purported contamination and odors

throughout the entire house. According to Pacific, Plaintiffs’ delay in reporting the problem

allowed any possible urine in the house to degrade, making it more difficult to detect.

Pacific concedes that whether it has suffered prejudiced from Plaintiffs’ failure to

immediately notify it of the problem would normally be a fact question. Pacific argues,

however, that the facts of this case leave no room for doubt. The Court does not necessarily

agree that Pacific was prejudiced as a matter of law. But the Court need not decide the issue

because the Court finds that Pacific waived the notification requirement.

Waiver is a “‘voluntary and intentional relinquishment of a known right . . . .’”

Services Holding Co. v. Transamerica Occidental Life Ins. Co., 883 P.2d 435, 443

(1994)(quoting Waughn v. Lennard, 211 P.2d 806, 812 (Ariz. 1949)). Proof of waiver

requires a clear showing of an intent to waive a right, but waiver may be inferred from

conduct. Id. Defendants knew that Plaintiffs had failed to immediately notify them of

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Plaintiffs’ alleged loss. Nonetheless, Defendants paid over a million dollars of benefits to

Plaintiffs under the policy. Federal even touts this payment of benefits despite late notice as

evidence of Federal’s good faith adjustment.

Pacific argues that, pursuant to A.R.S. §20-1130, an insurer’s decision to investigate

a claim despite late notice of the claim does not waive the defense of lack of notification. The

section cited by Pacific reads:

Administration of claim against insurer not deemed waiver of

defense

Without limitation of any right or defense of an insurer

otherwise, none of the following acts by or on behalf of an

insurer shall be deemed to constitute a waiver of any provision

of a policy or of any defense of the insurer thereunder: 

. . . 3. Investigating any loss or claim under any policy or

engaging in negotiations looking toward a possible settlement of

any such loss or claim. 

 A.R.S. §20-1130.

The Arizona statute addresses non-waiver of a defense for simply investigating a claim, but

it says nothing about paying benefits on a claim.

Defendants paid for remediation at Plaintiffs’ home. Defendants further paid over a

million dollars to Plaintiffs under the policy in ALE benefits. Defendants have highlighted

their investigation and payment of benefits on the claim as evidence of good faith. Under

these circumstances, the Court finds that Pacific waived any defense regarding the late notice

of the claim.

2. Failure to Cooperate

The discussion above applies equally to Pacific’s failure to cooperate defense.

Pacific, by its own admission, is not advocating some sort of an insured bad faith tort theory.

Nor has Pacific counterclaimed for breach of contract. Instead, Pacific argues that Plaintiffs

had a contractual obligation to cooperate with Defendants, which they failed to do; and, as

a result, Pacific should not be liable on the insurance claim. First, the Court cannot find as

a matter of law that Plaintiffs failed to cooperate with Defendants during the investigation

of the claim. Second, as with the late notice claim, Pacific has waived the failure to

cooperate defense by paying out more than a million dollars on Plaintiffs’ claim.

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3. Stigma Damages

Plaintiffs’ Policy’s Insuring Agreement provides the basic grant of coverage. The

Policy insures against “all risk of physical loss to the insured’s house unless stated otherwise

or an exclusion applies.” (DSOF ¶¶11-14, Doc. #146). The first page of the Coverage

Summary of the Policy provides, “Your policy provides coverage against physical loss if

your home or its contents are damaged, destroyed, or lost. The kinds of losses that are

covered and any special limits that apply, are explained in detail in the policy.” (Id.).

Pacific argues that the plain, unambiguous language of the insuring provision clearly

limits coverage to physical loss to the home; that the Policy does not cover economic loss,

such as the stigma damages Plaintiffs seek. Plaintiffs argue that the Court must consider

more than the language of the insuring clause. Plaintiffs contend that they purchased such

a deluxe, broad coverage Policy, that all damages to the house, purely economic or physical,

are covered. Plaintiffs maintain that the Policy covers any loss of value to the home

associated with the stigma caused by the urine contamination.

Plaintiffs urge the Court to look beyond the Policy language in interpreting the

coverage provision and to consider extrinsic evidence. Plaintiffs cite Taylor v. State Farm

Mut. Auto. Ins. Co., 854 P.2d 1134, 1138-39 (Ariz. 1993) for the proposition that the Court

can consider extrinsic evidence without first determining if the language in dispute is

ambiguous. The Taylor court stated:

[T]he ambiguity determination distracts the court from its

primary objective-to enforce the contract as intended by the

parties. Consequently, although relevant, contract ambiguity is

not the only linchpin of a court's decision to admit parol

evidence. The better rule is that the judge first considers the

offered evidence and, if he or she finds that the contract

language is “reasonably susceptible” to the interpretation

asserted by its proponent, the evidence is admissible to

determine the meaning intended by the parties. See

RESTATEMENT § 215 cmt. b; see also Pacific Gas & Elec. Co.

v. G.W. Thomas Dray. & Rigging Co., 69 Cal.2d 33, 69

Cal.Rptr. 561, 564, 566, 567-68, 442 P.2d 641, 644, 645-46

(1968); cf. Melson, 135 Ariz. at 121, 659 P.2d at 1266 (“A

contract should be read in light of the parties' intentions as

reflected by their language and in view of all the

circumstances.”). The meaning that appears plain and

unambiguous on the first reading of a document may not appear

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nearly so plain once the judge considers the evidence. In such a

case, the parol evidence rule is not violated because the evidence

is not being offered to contradict or vary the meaning of the

agreement. To the contrary, it is being offered to explain what

the parties truly may have intended. We believe that this rule

embodies the concepts endorsed by Corbin and adopted by this

court ten years ago in Melson. Other courts more recently have

expressed approval of the position taken by Corbin and the

Restatement (Second) of Contracts. See, e.g., C.R. Anthony Co.

v. Loretto Mall Partners, 817 P.2d 238, 241-44 & n. 3

(N.M.1991); Isbrandtsen v. North Branch Corp., 150 Vt. 575,

556 A.2d 81, 83-85 (1988); Berg v. Hudesman, 115 Wash.2d

657, 801 P.2d 222, 227-30 (1990); see also 3 CORBIN § 542, at

105-112 (Supp.1992) (citing cases).

854 P.2d at 1140 - 1141.

Even considering the extrinsic evidence put forth by Plaintiffs –Pacific’s insurance

manuals, testimony of Pacific’s representatives, and expert testimony, the Court agrees with

Pacific. The plain language of the provision in question and the remainder of the Policy

clearly limit coverage to physical loss to the home. Neither the testimony highlighted by

Plaintiffs nor Defendants’ insurance manuals modify that meaning. Purely economic loss,

like stigma damages, does not fall under the meaning of “physical loss.” 

The Court therefore holds that Plaintiffs’ Policy does not provide coverage for any

loss in market value of the house caused by stigma damages. But this holding does not

mandate summary judgment in Pacific’s favor on the contract claim. Plaintiffs have asked

for damages for the physical loss to the home caused by urine contamination. This claim for

damages qualifies as a physical loss. Plaintiffs can proceed on this claim for damages, but

cannot recover “stigma” damages. 

Although the Court has held that Federal did not act in bad faith in adjusting the claim

and refusing to raze and rebuild Plaintiffs’ home, the Court cannot find as a matter of law

that Pacific did not breach the insurance agreement by refusing to raze and rebuild the house.

Whether Pacific breached the insurance agreement by failing to raze and rebuild the home

remains an issue of fact for the jury. Plaintiffs can pursue their breach of contract theory, but

can recover damages only for any physical loss to the home.

Accordingly,

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IT IS ORDERED GRANTING Defendant Federal Insurance Company’s Motion for

Summary Judgment (Doc. #143). 

IT IS FURTHER ORDERED GRANTING IN PART AND DENYING IN PART

Defendant Pacific Indemnity Company’s Motion for Summary Judgment (Doc. #144). The

Court grants summary judgment to Pacific on the bad faith claim, Count II of Plaintiffs’

Complaint. The Court further grants summary judgment to Pacific on the stigma damages

issue of the breach of contract claim, but denies summary judgment as to all remaining issues

of Count I. 

DATED this 20th day of February, 2008.

 

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