Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-3_03-cv-02222/USCOURTS-azd-3_03-cv-02222-0/pdf.json

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

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Guideone Insurance Company,

Plaintiff, 

vs.

St. Andrew’s Episcopal Church, et al., 

Defendants. 

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CV-03-2222-PCT-MHM

ORDER

Currently before the Court is Plaintiff’s Motion for summary judgment or in the

alternative for summary adjudication (Dkt.#83) and Defendants Corey and Keur’s Motion

for partial summary judgment. (Dkt. #90). After reviewing the pleadings and hearing

argument on March 3, 2006, the Court issues the following order. 

I. Procedural History

On February 20, 2004, Plaintiff Guideone Insurance Company ("Plaintiff or "Guideone")

filed its First Amended Complaint ("Complaint") in this action. (Dkt.#7). Specifically,

Plaintiff’s Complaint seeks a declaratory judgment that it is not obligated to provide

insurance coverage arising out of two comprehensive general liability policies. Plaintiff

named the following parties as Defendants in its Complaint: (1) St. Andrew’s Episcopal

Church; (2) St. Luke’s on the Hill, Diocese of the Western States of the Anglican Province

of Christ the King; (3) St. Luke’s Episcopal Church; (4) Anglican Diocese of the

Southwestern States; (5) Dioceses of the Blessed Sacrament; (6) David McMannes; (7)

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Madelyn McMannes; (8) Robert Eis; (9) Barbara Yokum; (10) David Debois; (11) Shirley

Debois; (12) Mary Shultzman; (13) Mary Blakely; (14) Mary Schwartz; (14) John W. Corey,

an individual and as the conservator of the estate of Dorothy Wilcox Smith, a protected

person, and as the personal representative of the Estate of Dorothy Wilcox Smith, deceased;

and (15) Mary Jane Keur, an individual, and as the surviving heir of Charles William

Shipley. 

Subsequent to filing the Complaint several events occurred eliminating several of the

parties from this action. First, on May 27, 2004, Defendant Anglican Diocese of the

Southwestern States and Plaintiff settled and the Court granted the parties stipulation to

dismiss (Dkt.#37). Second, on June 15, 2004, default judgment pursuant to Federal Rule of

Civil Procedure 55(a) was entered against Defendant David McMannes (Dkt.#43). Third,

on July 7, 2004, default judgment pursuant to Rule 55(a) was entered against Defendant

Dioceses of the Blessed Sacrament (Dkt.#58). Fourth, on July 15, 2004, Defendant St.

Andrews Episcopal Church and Plaintiff settled and the Court granted the parties stipulation

to dismiss (Dkt.#64). Lastly, although not dismissed from this action, the case has been

stayed as to Defendant Madelyn McMannes due to her filing bankruptcy. (Dkt.#81). 

On May 13, 2005, Plaintiff filed its Motion for summary judgment or in the alternative

motion for summary adjudication (Dkt.#83). Of the remaining Defendants, only Defendant

Mary Jane Keur ("Defendant Keur") filed a response. (Dkt#94). However, Defendants John

Corey ("Defendant Corey") and Defendant Keur filed their own motion for partial summary

judgment on May 13, 2005. (Dkt#90). On June 15, 2005, Defendants St. Luke’s on the Hill,

Diocese of the Western States of the Anglican Province of Christ the King and St. Luke’s

Episcopal Church joined in Defendants Corey and Keur’s motion for partial summary

judgment. (Dkt.#93). On July 7, 2005 Defendant Barbara Yokum joined in Defendant

Keur’s Response to Plaintiff’s Motion for summary judgment and in Defendant Corey and

Keur’s Motion for partial summary judgment. (Dkt#98). Defendants David Debois, Shirley

Debois, Mary Schultzman, Mary Blakely and Mary Schwartz have not responded to

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Plaintiff’s Motion for summary judgment and have not joined with Defendant Corey and

Keur’s Motion for partial summary judgment. 

II. Factual Background

(1) The Policies At Issue

From June 14, 1994 through June 14, 1995, Guideone provided comprehensive general

liability coverage, Policy number 1142-010 ("Policy A"), to the named insured of "St. Luke’s

on the Hill, Diocese of the Western States, Province of Christ the King." (Plaintiff’s

Statement of Facts ("SOF") ¶1, Defendants Corey and Keur’s Statement of Facts ("DSOF")

SOF ¶2). From February 1, 1995 through February 1, 2003, Guideone provided

comprehensive general liability coverage, Policy number 1147-134 ("Policy B") to the named

insured of "St. Luke’s on the Hill, Diocese of the Western States, Province of Christ the

King." (SOF ¶ 14, DSOF ¶’s3,4). 

(2) The Underlying Complaint

On September 26, 2002, Defendant Corey as conservator and personal representative of

the estate of Dorothy Wilcox Smith ("Ms. Smith") and Defendant Keur as the surviving heir

of Charles William Shipley ("Mr. Shipley") filed their first amended complaint ("underlying

complaint") in Yavapai Superior Court, CV 2002-0433. (SOF ¶ 35 and DSOF ¶ 5). Named

as defendants in the underlying complaint are: (1) Reverend David McMannes; (2) Madelyn

McMannes; (3) St. Andrew’s Episcopal Church; (4) St. Luke’s Episcopal Church; (5)

Diocese of the Western States of the Anglican Province of Christ the King; (6) St. Luke’s

(Independent) Episcopal Church; (7) Anglican Diocese of the Southwestern States; (8)

Dioceses of the Blessed Sacrament (9) Vestry Members; (10) Robert Eis; (11) Barbara

Yokum; (12) David DuBois; (13) Shirley DuBois; (14) Mary Schultzman; (15) Mary

Blakely; and (16) Mary Schwartz. (SOF ¶35, DSOF¶5). The underlying complaint arises

out of the alleged misconduct by Reverend David McMannes in taking advantage of

vulnerable adults, Ms. Smith and Mr. Shipley. (SOF ¶’s36-54, DSOF ¶’s 5,6).

With respect to Ms. Smith, the underlying complaint relates that in 1985, Reverend

McMannes, while serving as the rector at St. Andrews church in Sedona, Arizona, developed

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a relationship with Ms. Smith and in September of 1986, took advantage of her in her

vulnerable elderly state by bribing her to sell her home, the "Shotgun property," to Reverend

McMannes at an unreasonably discounted price and negotiated an unreasonable compromise

of the terms of an already unconscionable promissory note governing the sale of Ms. Smith’s

home. (SOF ¶’s 37-40). The underlying complaint also alleges that Reverend McMannes

was terminated from St. Andrews in 1988 and relocated to St. Luke’s but continued his

relationship with Ms. Smith. In late 1993 early 1994, Revered McMannes, with the aid of

his attorney, renegotiated the terms of the promissory note with Ms. Smith, reducing the

principal amount from $150,000 to $57,000. (SOF ¶'s 41- 43). Lastly, the underlying

complaint relates that in June of 1995, counsel retained by Ms. Smith questioned the terms

of the promissory note, but Reverend McMannes was able to convince Ms. Smith to fire her

attorney. (SOF ¶44). In November 1997, Defendant Corey was appointed as conservator

of Ms. Smith’s estate and discovered discrepancies in her account. (SOF ¶53). Ms. Smith

passed away on November 9, 2001. (SOF ¶54). 

The underlying complaint further alleges that in the early 1990's, Reverend McMannes

developed a relationship with Mr. Shipley, who was suffering from the early stages of

Alzheimer’s disease. (SOF ¶45). In the fall of 1996, Reverend McMannes convinced Mr.

Shipley to place Reverend McMannes on Mr. Shipley’s bank accounts and caused Mr.

Shipley to redraft his Last Will and Testament to establish a number of trusts which placed

Revered McMannes in control. (SOF ¶46). On September 24, 2006, Reverend McMannes

made a telephone transfer of $1,314.00 from Mr. Shipley’s bank account to his own account.

(SOF ¶47). After Mr. Shipley passed away on November 25, 1996, Revered McMannes took

control of Mr. Shipley’s assets including his jeep as well as sold some of Mr. Shipley’s

property and obtained the benefit. (SOF ¶48-49). On January 7, 1997 and June 6, 1997,

Reverend McMannes transferred funds from Mr. Shipley’s accounts to a St. Luke’s account,

transferred the money to his account and used it to pay off his personal credit cards. (SOF

¶’s 50-52). 

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On December 6, 2001 in Yavapai County Court Criminal Case CR82001-0570, Reverend

McMannes was indicted on six counts arising out of his unlawful actions. (SOF ¶32). On

February 13, 2003, Reverend McMannes was convicted on the following counts: Count I:

Fraudulent Schemes - felony; Count II: Theft-felony; Count III: Money Laundering - felony

and Count IV: Perjury - felony. (SOF¶’s 33,34). On April 29, 2003, a judgment of guilt and

sentence was rendered against Revered McMannes. (SOF ¶34). 

Thus, the underlying complaint asserts that Defendant Reverend McMannes took

advantage of Ms. Smith and Mr. Shipley, who were vulnerable adults, in violation of A.R.S.

§ 46-451. (SOF ¶36). With respect to the other defendants, the underlying complaint asserts

that Defendant Yokum, as treasurer of St. Luke’s "knew or should have known" that

Reverend McMannes was engaging in this unlawful behavior as well as conspired with him.

(SOF ¶55). The underlying complaint alleges that Defendants St. Luke’s, Diocese of the

Western States, St. Luke’s Independent, Southwestern Diocese, and Sacrament Diocese

"knew or should have known" that Reverend McMannes was using his position to the

detriment of Ms. Smith and Mr. Shipley. (SOF ¶55). Moreover, Defendants Robert Eis,

David Dubois, Mary Shultzman, Mary Blakley, Shirley Dubois, Mary Schwartz, and Barbara

Yokum, as Vestry Members (the "Vestry Members") of St. Luke’s were responsible for and

accountable for the financial conduct of the parish and allowed St. Luke’s to acquire assets

to which the church was not entitled and to make payments to Reverend McMannes from the

assets of Mr. Shipley. (SOF ¶55). 

The underlying complaint seeks recovery in the form of: (1) treble compensatory damages

for the losses sustained by Ms. Smith based upon the full fair market value of the "Shotgun

Property" and the amount received by Ms. Smith and the full fair market value of all personal

property in the "Shotgun Property"; (2) prejudgment interest owing to Ms. Smith; (3) treble

compensatory damages for losses sustained by Mr. Shipley, including the full fair market

value of any and all assets of Mr. Shipley, obtained or utilized by Defendants prior to Mr.

Shipley’s death; (4) treble compensatory damages for the losses sustained by the Shipley

estate including the full fair market value of all assets belonging to Mr. Shipley at the time

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of his death; (5) prejudgment interest owing to Mr. Shipley (6) forfeiture by Defendants of

any and all rights to the Shipley estate; (7) cancellation/voiding of any and all trusts created

using Mr. Shipley’s assets and return of all property placed in any such trust; (8) return of

any and all personal property belonging to Mr. Shipley; (9) post-judgment interest; (10)

compensation for pain and suffering and mental anguish endured by Mr. Shipley prior to his

death; (11) judgment for attorney’s fees and costs and (12) such other and any further relief

awarded by the Court. (SOF ¶55). 

(3) The Present Declaratory Action

On September 19, 2003, Guideone issued a letter to its named insured informing that it

would provide a "courtesy defense, subject to a full reservation of rights..." to defendants St.

Luke’s, David McMannes, Robert Eis, Barbara Yokum, David Dubois, Shirley Dubois, Mary

Schultzman, Mary Blakely, and Mary Schwartz in response to the underlying complaint

asserted by Defendants Corey and Keur in CV2002-0433. (SOF ¶56). On November 13,

2003, Guideone filed the present action seeking a declaratory judgment that it had no duty

to defend or indemnify the defendants named in the underlying complaint because neither

Policy A or B (the "Policies") afforded any coverage. On February 20, 2004, Guideone filed

its Complaint setting forth the following six claims: (1) the Policies afford no coverage to

Defendants because of the absence of any "bodily injury" or "property damage" under

Section A of the Policies’ insuring agreement; (2) the Polices afford no coverage because the

underlying complaint does seek to recover any "personal and advertising injury" as stated

in Section B of the Policies’ Insuring agreement; (3) the Policies afford no coverage because

the underlying complaint does not seek damages arising out of an "occurrence" as defined

by the Policies; (4) the Policies afford no coverage because the Policies’ "expected or

intended" exclusion removes any coverage; (5) the Policies do not afford coverage because

the underlying complaint relates to matters that occurred outside the scope of the defendants’

duties; and (6) Plaintiff is entitled to reimbursement for the coverage it did provide under a

reservation of rights.

(4) The Cross-Motions For Summary Judgment Before the Court

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In moving for summary judgment, Guideone seeks a ruling on all of its claims

demonstrating that it not obligated to provide coverage to the Defendants named in the

underlying action as well as is entitled to reimbursement for the defense costs it provided

under a reservation of rights. 

Conversely, Defendants Corey and Keur move for partial summary judgment on Plaintiff’s

First, Third, and Fourth claims in seeking coverage under the Policies. Specifically,

Defendants Corey and Keur contend that: (1) the Policies afford coverage because the

underlying suit alleges "property damage" as defined by the Policies; (2) the underlying suit

alleges an "occurrence" as defined by the Policies; and (3) the damages alleged in the

underlying suit do not fall within the "expected or intended" exclusion in relation to the

Defendants named in the underlying complaint other than Defendant Reverend McMannes.

III. Summary Judgment Standard

A motion for summary judgment may be granted only if the evidence shows "that there

is no genuine issue as to any material fact and that the moving party is entitled to judgment

as a matter of law." Fed. R. Civ. P. 56(c). To defeat the motion, the non-moving party must

show that there are genuine factual issues "that properly can be resolved only by a finder of

fact because they may reasonably be resolved in favor of either party." Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 250 (1986). Summary judgment is 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

Corp., 477 U.S. at 322. The Court views the evidence in the light most favorable to the

nonmoving party and draws any reasonable inferences in the nonmoving party's favor. See

Warren v. City of Carlsbad, 58 F.3d 439, 441 (9th Cir. 1995), cert. denied, 516 U.S. 1171

(1996).

IV. Analysis

A. Insurer’s Duty To Defend And Indemnify

Under a liability policy, the insurer assumes two main express responsibilities: the duty

to indemnify and the duty to defend. See, e.g., State Farm Mutual Auto. Ins. Co. v. Peaton,

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168 Ariz. 184, 192, 812 P.2d 1002, 1010 (Ariz. App. 1990). These two duties are separate

obligations. Paulin v. Fireman's Fund Ins. Co., 1 Ariz.App. 408, 410-11, 403 P.2d 555,

557-58 (Ariz. App. 1965). However, just because a claim is made against the insured does

not mean that the insurer must automatically defend. "[T]he insurer is under an obligation

to defend only if it would be held bound to indemnify the insured in case the injured person

prevailed upon the allegations of his complaint." Id. at 410, 403 P.2d at 557. Thus, if the

insurer determines that the claim is not covered, it has the option of not accepting the

defense. Kepner v. Western Fire Ins. Co., 109 Ariz. 329, 332, 509 P.2d 222, 225 (1973). The

testing of the insurer’s liability under a policy may take the form of a declaratory judgment.

Id.

B. This Court’s Obligation To Apply Arizona Law

In a diversity case, a district court must follow the substantive law of the state. Erie R.R.

Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817 (1938). Thus, this Court will look to Arizona

law in determining the issues raised by the Policies in this case. However, where an issue

has not been addressed by an Arizona court, this Court must determine the result the Arizona

Supreme Court would reach if it were deciding the case. Molsbergen v. United States, 757

F.2d 1016, 1020 (9th Cir. 1985). 

In Arizona, interpretation of insurance contracts is a question of law for the court to

decide. Benevides v. Arizona Property & Cas. Ins. Guar. Fund, 184 Ariz. 610, 613, 911 P.2d

616, 619 (Ariz. App. 1995). "Where no ambiguity exists, the court does not invent ambiguity

and resolve it to expand coverage." Id. (citing Thomas v. Liberty Mut. Ins. Co., 173 Ariz.

322, 324, 842 P.2d 1335, 1337 (Ariz. App. 1992). "Generally, the insured bears the burden

to establish coverage under an insuring clause, and the insurer bears the burden to establish

the applicability of any exclusion. Keggi v. Northbrook Property and Cas. Ins. Co., 199 Ariz.

43, 46, 13 P.3d 785, 788 (Ariz. App. 2000). 

C. Issues Not Disputed

(1) Application of the Policies’ Intentional Acts Exclusion to Defendant 

 Reverend McMannes.

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Although a court may not grant a motion for summary judgment simply because the

non-moving party does not file opposing material, a court may grant summary judgment

when the unopposed moving papers are sufficient on their face and show that no issues of

material fact exist. See Henry v. Gill Indus., 983 F.2d 943, 950 (9th Cir.1993). In the present

case, Defendant Keur, in responding to Plaintiff’s motion for summary judgment concedes

several issues of coverage associated with Plaintiff’s Motion. First, Defendant Keur

concedes that the Policies’ "expected or intended" exclusion excludes any coverage under

the Polices for Defendant Reverend McMannes. 

Both Policies exclude coverage for ""bodily injury" or "property damage" expected or

intended from the standpoint of the insured." (SOF ¶4,17). Here, as demonstrated by his

criminal conviction in Yavapai County, it is clear that Reverend McMannes’ conduct of

engaging in felonious intentional conduct falls within the scope of this exclusion. See

Phoenix Control Systems v. Insurance Co. of North America, 165 Ariz. 31, 796 P.2d 463,

467 (1990). As such, summary judgment on this issue will be granted in favor of Plaintiff.

(2) There Is No Factual Issue Regarding The Potential Application Of 

 The Policies’ Provisions Regarding "Personal Injury" Or 

 "Advertising Injury;" Directors And Officers Liability And Coverage For Equitable Relief.

Defendant Keur concedes several more issues in Response to Plaintiff’s Motion for

summary judgment. Specifically, Defendant Keur agrees with Plaintiff that there is no

factual issue suggesting coverage would attach based upon the Policies "Personal Injury" or

"Advertising Injury" provision. This provision of the Policies provides in pertinent part:

Section I - Coverages

***

Coverage B, Personal and Advertising Injury Liability

1. Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as

 damages because of "personal injury" or "advertising injury" to which this 

 insurance applies....

(SOF ¶’s 5,15). 

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 As Plaintiff points out, and Defendants agree, this provision is not applicable to the 

unlawful activities alleged in the underlying complaint. As such this issue does not warrant

any further consideration. Therefore, summary judgment will be granted to Plaintiff on its

second claim regarding the lack of coverage found under this section of the Policies.

 Moreover, Defendants agree with Plaintiff that Policy B’s Directors, Officers and 

Trustee’s endorsement does not provide any potential coverage in this matter. Specifically,

this endorsement was added to Coverage B of Policy B and provides in pertinent part:

The following is added to Coverage B. Personal and Advertising Injury Liability

(Section 1 - Coverages)

(a) We will pay the amount of "loss" your "Directors, Officers or Trustees,"

individually or collectively, or their estates, heirs, Executors, Administrators or

assigns become legally obligated to pay as the result of a "wrongful act"

committed solely in their capacity as "Directors, Officers, or Trustees."...

(SOF ¶28). 

 This endorsement is only applicable to coverage under Section B relating to "Personal and

Advertising Injury" of Policy B, which, as mentioned above, Defendant Keur does not seek

coverage under. As such, because there is no suggestion that coverage would be afforded

under the provision, the Court will grant summary judgment in favor of Plaintiff on this

issue. 

Lastly, Defendant Keur does not dispute that the Policies at issue do not provide coverage

for any claims of equitable relief stated in the underlying suit. See Bowen v. Massachusetts,

487 U.S. 879 (U.S. 1988) (stating that most general liability policies only apply to "damages"

which does not include claims for equitable relief.). Thus, Plaintiff argues that to the extent

the underlying complaint seeks equitable relief, as for example, to cancel or void trusts that

were created from Mr. Shipley’s estate, there would be no coverage for such claims. Again,

Defendants concede this point and do not seek coverage based upon equitable relief. As

such, there is no disputed fact surrounding this issue.

D. Disputed Issues Regarding Coverage

While the parties do agree that the Policies do not provide coverage in some areas there

is dispute as to other areas of the Policies. Specifically, Defendant Corey and Keur seek

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partial summary judgment on issues that would provide coverage under Section A of the

Policies’ Insuring Agreements. In response to Plaintiff’s Motion for summary judgment,

Defendant Keur argued in his brief that the Policies actually do provide coverage based upon

the underlying suit’s allegation of emotional damages which falls within the scope of the

"bodily injury" provision of the Policies. Additionally, in Defendant Corey and Defendant

Keur’s Motion for partial summary judgment, they contend that the Policies, as a matter of

law, afford coverage to the Defendants because the underlying complaint seeks a claim based

upon "property damage" arising out of an "occurrence" as defined by the Policies. Lastly,

they contend that the application of the Policies' "expected or intended" exclusion has no

application as a matter of law to the Defendants other than Defendant Reverend McMannes.

(1) The Policies’ Scope Of Coverage. 

Both Policy A and B possess identical statements of coverage for its insureds under

Coverage A of Section I of the Policies. This is the only section of coverage to which

Defendants seek coverage. Specifically, the Policies provides in pertinent part:

Section I - Coverages

Coverage A. Bodily Injury And Property Damage Liability

1. Insuring Agreement 

We will pay those sums that the insured becomes legally obligated to pay as

damages because of "bodily injury" or "property damage" to which this insurance

applies....

***

(b) This insurance applies to "bodily injury" and property damage" only if: 

(1) The "bodily injury" or "property damage" is caused by an "occurrence" that

 takes place in the "coverage territory"; and

(2) The "bodily injury" or "property damage" occurs during the policy period.

(SOF ¶2,16, DSOF ¶7). 

 (a) The Policies’ Coverage For "Bodily Injury" 

The Policies define "bodily injury" as "bodily injury, sickness or disease sustained by a

person, including death resulting from any one of these at any time." (SOF ¶9,22). In

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Defendant Keur's response to Plaintiff's Motion for summary judgment, Defendant Keur

argued the existence of a "bodily injury" as defined by the Policies. Specifically, Defendant

Keur cited the portion of the underlying complaint stating that Mr. Shipley suffered

emotional damages over a long period of time resulting from the gradual loss of his financial

security. (Defendant Keur's Statement of Facts in support of Response to Plaintiff's motion

for summary judgment, ¶1). However at oral argument, Defendant Keur's counsel conceded

the absence of any allegation suggesting the existence of a "bodily injury" in the underlying

complaint. Moreover, in reviewing the papers presented and the state of the law in Arizona

it is clear that any reliance on Mr. Shipley's emotional damages as "bodily injury" is

misplaced. See Transamerica Ins. Co. v. John and Jane Doe, 173 Ariz. 112, 114, 840 P.2d

288, 290 (Ariz. App. 1992) (rejecting the argument that a claim for "bodily injury" under the

language of the underinsured motorist policy could be made based upon anxiety and

emotional damages of insureds resulting from fear of contracting AIDS after treating victim

involved in traffic accident.). Thus, there is no factual issue suggesting the existence of

"bodily injury" as defined by the Policies in the underlying complaint.

 (b) The Policies Coverage For "Property Damage"

Considering that the underlying complaint does not touch on "bodily injury," as defined

by the Policies, the next obvious question in determining if coverage applies to the

Defendants is whether the underlying complaint asserts "property damage" thus bringing it

within the scope of coverage. The Policies define 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 shall

be deemed to occur at the time of the "occurrence" that caused it.

(SOF ¶’s12,25). 

 Defendant Corey and Keur do not seek coverage under the first prong of the definition

of "property damage," but rather rely only on the second prong. Defendant Keur argues that

because the underlying complaint alleges that Mr. Shipley lost the use of his tangible

property when Reverend McMannes wrongfully acquired his jeep and real property and

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withdrew cash from Mr. Shipley’s bank account that a claim falling within the scope of

"property damage" has been sufficiently alleged. Additionally, Defendant Keur argued at

oral argument that had Plaintiff intended to exclude such claims based upon "property

damage" it easily could have done so with a more exact definition of "property damage" or

with the plain language of an exclusion. However, the Court finds that Defendant Keur's

arguments to invoke "property damage" fail for several reasons.

 (i) The Underlying Complaint Does Not Allege "Loss of Use." 

First, completely absent from the underlying complaint is any request to recover "loss of

use" damages regarding the assets wrongfully acquired by Reverend McMannes. Rather, the

underlying complaint seeks only to recover possession of the assets and/or the full market

value of these assets wrongfully acquired. (SOF ¶55). The significance is that there is no

allegation in the underlying complaint seeking to recover damages based upon either prong

of the Policies’ definition of "property damages." In other words, there is no claim to recover

damages based upon physical injury to any of these assets nor is there is any claim for

damages based upon "loss of use" of these assets. Therefore, there is no claim that falls

within the scope of the Policies "property damage" based upon loss of use of tangible

property not physically injured. (emphasis added). This point is exemplified in Sony

Computer Entertainment America v. American Home Ins. Co., 2005 WL 2137772 (N.D.

Cal. 2005). In Sony, in applying a "property damage" provision identical to the provision

in this case, the district court explained that the insurer was not obligated to provide coverage

to Sony, the manufacturer of the Sony Playstation 2002 product, where the third-party

underlying complaint did not seek damages for the new games or movie disks, but rather,

sought only compensation for the costs of repairing the insured’s defective product, i.e., the

Sony Playstation 2002. Id. at * 4. The district court noted that "in order to show "loss of

use," the plaintiff must request damages equivalent to the "rental value of similar property

which the plaintiff can hire for use during the period when he is deprived of the use of his

own property." (citing Collin v. American Empire Ins. Co., 21 Cal.App.4th 787, 818, 26

Cal.Rptr.2d 391 (1994); see also Farmers Ins. Co. of Arizona v. R.B.L. Inv. Co., 138 Ariz.

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562, 565, 675 P.2d 1381, 1384 (Ariz. App. 1983) (citing that "where the plaintiff’s claim is

one for the loss of use of his property, the rental value of the property during the period in

which the plaintiff was deprived of it is often one element of damages he is allowed to

recover."); Home Idem. Co. v. Bush, 20 Ariz.App. 355, 361, 513 P.2d 145, 151 (Ariz. App.

1973) (stating that "damages for loss of use of vehicle are measured by the reasonable rental

value therefor at the time of the loss.") (citation omitted). Thus, because the underlying

complaint in Sony did not seek any such "loss of use" damages, coverage was not triggered.

Id.

 The same is true here. In the present case, the underlying complaint seeks no relief based

upon the recovery of the reasonable rental value of the assets wrongfully acquired by

Reverend McMannes. The underlying complaint seeks only to recover the fair market value

of these assets and/or to simply recover the assets to the extent possible. As such, the

application of second prong of "property damage" regarding "loss of use of tangible property

that is not physically injured" is not applicable. 

 (ii) The Underlying Complaint Does Not Relate Any Physical Injury To

 Property

Second, even if the underlying complaint did seek to recover "loss of use" damages for

the property and assets wrongfully acquired by Reverend McMannes, the underlying

complaint is wholly absent of any hint of actual physical damage associated with the assets

wrongfully acquired by Reverend McMannes. Although Defendant Corey and Keur seek

coverage under the second prong of "property damage" which provides coverage for "loss

of use of property that is not physically injured" there still needs to be some indication of

actual damage to property for this prong to apply. At oral argument, Defendant Corey and

Keur's counsel conceded the absence of any such damage, but argued that none was

necessary to invoke coverage under the second prong of the Policies' definition of "property

damage." However, Plaintiff’s persuasive reliance on the Ninth Circuit’s holding in Anthem

Electronics, Inc., v. Pacific Employers Ins. Co., 302 F.3d 1049 (9th Cir. 2002) is instructive

in rejecting this contention. 

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In Anthem, in reversing the district court, the Ninth Circuit explained that general liability

policies are not meant to provide insureds with coverage against claims for inferior or

defective work, "[r]ather liability coverage comes into play when the insured’s defective

materials or work cause injury to property other than the insured’s own work or products."

Id. at 1057 (emphasis added). In Anthem, the Ninth Circuit held that because the insured’s

defective circuit boards caused damage to the overall scanners, causing them to be

inoperable, it found that "property damage" provision of the policy was triggered which

afforded coverage to "loss of use of tangible property, even if the property itself is not itself

physically injured." Id. 

The Ninth Circuit cited several other cases to demonstrate this point. For instance, in

Hendrickson v. Zurich Am. Ins. Co., 72 Cal.App.4th 1084, 1091-92, 85 Cal.Rptr.2d 622

(1999) the court held that where the insured strawberry plant supplier sold defective plants,

the supplier was covered for liability stemming from the lost use of the land on which the

plants were grown, unproductively. Moreover, in Travelers Ins. Co. v. Pendra Corp., 974

F.2d 832-33 (7th Cir. 1992) the court held that where the insured supplied defective pages for

incorporation into a larger book, that the insured was covered for liability stemming from the

lost use of the entire book, while the pages were replaced. 

Thus, the key to applying the "loss of use" provision regarding the scope of "property

damage" is the existence of some defect or physical damage to the property. Here, the

underlying complaints speaks nothing of damage to the property and assets at issue. Rather,

the underlying complaint speaks only of recovering the full fair market value of the assets

wrongfully acquired by Revered McMannes and recovery of any such assets. Although there

does not appear to be any express Arizona authority on this issue, the weight of authority

requires the existence of actual damage. Thus, because there is no indication of any actual

damage to any property that would invoke liability coverage based upon "property damage"

the "loss of use" provision does not apply. 

 (iii) The Underlying Complaint’s Claim For Conversion Does Not Assert

 "Property Damage" 

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Lastly, as discussed above, the underlying complaint seeks to recover the fair market value

and/or the return of the property and assets based upon the conduct of Defendant Reverend

McMannes and the other Defendants. Such claims for relief are akin to the tort claim for

conversion. See Focal Point, Inc., v. U-Haul Co. of Arizona, Inc., 155 Ariz. 318, 746 P.2d

488 (Ariz. App. 1986) (stating that according to the Restatement (Second) of Torts,

"conversion" is "an intentional exercise of dominion or control over a chattel which so

seriously interferes with the right of another to control it that the actor may justly be required

to pay the other the full value of the chattel.") (Underlying Suit, ¶ 45(a),(c),&(h)). However,

a claim for conversion of property does not touch on the issue of "property damage." As

explained in Collin v. American Empire Ins. Co., 21 Cal.App.4th 787, 408, 26 Cal.Rptr.2d

391, 408 (Cal.App. 1994) a claim for "conversion of property is not "property damage."" In

finding such, the appellate court reversed the trial court's determination that coverage was

afforded under the applicable commercial general liability policy because the definition of

"property damage" also included "loss of use" of property. Id. Specifically, the appellate

court held ""Loss of use" of property is not the same as "loss" of property." Id. The

appellate court in reviewing the definition of "property damage," which was identical to the

definition at issue in the instant case, found that in reviewing other jurisdictions, that virtually

every other court that has addressed whether "conversion" is "property damage" has found

that it is not covered. Id. (citing Nortex Oil & Gas, Corp. v. Harbor Insur. Co., 456 S.W.2d

489, 493 (Tex.App. 1970) (stating "[t]here is a material difference between 'property taken'

and 'property damaged.'); Travelers Ins. Companies v. P.C. Quote, Inc., 211 Ill.App.3d 719,

570 N.E.2d 614, 618 (Ill.App. 1991) (stating "[t]here is a difference between damage to

property and loss of property.")(citations omitted)); Inland Const. Corp. v. Continental Cas.

Co., 258 N.W.2d 881, 885 (Minn. 1977) (stating that insurer was not required to defend its

insured under a general liability policy of insurance when the insured is sued for converting

personal property and the pleadings filed against the insured contain no allegations of

"property damage" within the contemplation of insurance coverage). The court in Collins

explained that had the policy affording coverage for "loss of use" of tangible property

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intended to provide coverage for converted property, the policy would have made clear that

"loss of property" is covered. Id. at 818-19. However, because the policy afforded no such

coverage and the damages sought by the underlying complaint sought were not "loss of use"

damages but the value of the property itself, that coverage based upon "property damage"

was inapplicable. Id.

The same is true here. As explained above, the underlying complaint seeks to recover

damages not for the "loss of use" of property but rather to recover compensation in the form

of the fair market value of the property that was wrongfully converted and/or the return of

such property. As such, the Policies’ provision of "property damage" is not invoked by the

underlying complaint.

In sum, the underlying complaint does not assert "property damages" as defined in the

Policies in this case. Therefore, summary judgment is appropriate regarding claim one of

Plaintiff’s declaratory Complaint because the underlying complaint does not invoke coverage

based upon "bodily injury" or "property damage." 

 (c) The Policies’ Application Of An "Occurrence" And The"Expected Or

 Intended" Acts Exclusion.

Plaintiff additionally contends that the Policies afford no coverage to the Defendants in

this matter, because the requisite "occurrence" did not take place triggering coverage.

Specifically, the Policies provide in pertinent part:

Section I - Coverages

Coverage A. Bodily Injury And Property Damages Liability

1. Insuring Agreement.

***

b. This insurance applies to "bodily injury" and "property damage" only if

 (1) The "bodily injury" or "property damage" is caused by an "occurrence."

***

Section V - Definitions

***

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(9) "Occurrence" means an accident including continuous or repeated 

 exposure to substantially the same generally harmful conditions.

(SOF ¶10,23). 

To dispute the contention that an "occurrence" had taken place, Defendants rely on the

claims asserted in the underlying complaint suggesting that they "knew or should have

known" that Defendant Reverend McMannes was engaging in the unlawful conduct at issue.

Such a claim is akin to a claim for negligent supervision. Although the area of law on this

topic is unclear in Arizona and elsewhere, it appears that other courts have found that an

"occurrence" can be found based upon such a claim. See Interstate Fire & Cas. Co. v.

Archdiocese of Portland, 35 F.3d 1325, 1329 (9th Cir. 1994) (holding that repeated exposure

of boy to negligently supervised priest, resulting in injury provides the basis for

indemnification and invoked Policies' definition of "occurrence"). 

Here, as Defendants point out, the underlying complaint suggests that the Defendants

failed to supervise the actions of Defendant Reverend McMannes. As such, this Court

cannot say, as a matter of law, that the allegations regarding the Defendant's failure to

supervise Defendant Reverend McMannes failed to invoke an "occurrence" as defined by the

Policies. However, that being said, as explained above, this analysis is not dispositive in

favor of coverage, because the threshold elements of "bodily injury" and "property damage"

have not been invoked, therefore, eliminating any obligation of coverage, thus the Court will

make no express ruling on this issue.

The same is true with respect to the application of the "expected or intended" exclusion

upon which the parties dispute. Specifically, Plaintiff contends that if any coverage was

found under the Policies, it was removed because of Defendant Reverend McMannes'

expected and intended acts with respect to Ms. Smith and Mr. Shipley. Defendant on the

other hand contests such a notion based upon the language of the exclusion applying only to

"the insured" rather than "an insured." See United Services Auto Ass’n v. DeValencia, 190

Ariz. 436, 949 P.2d 525 (Ariz. App. 1997) (stating that where insurance policy contains

separation of insurance clause, exclusions are applied separately to each insured). However,

only if coverage is found in the insuring agreement does the Court need to determine whether

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Defendants offer no argument to dispute Plaintiff’s position regarding

reimbursement. 

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an applicable exclusion would remove it. Pacific Indem. Co. v. Kohlhase, 9 Ariz. App. 595,

597, 455 P.2dd 277, 279 (App. Ariz. 1969). Thus, here while the application of the

"expected or intended" exclusion of the Policies may apply only to Defendant Reverend

McMannes for his negligent acts, such determination does not assist bringing coverage back

to the Defendants because coverage was never found under the insuring agreement. 

 (d) Reimbursement

Lastly, Plaintiff seeks summary judgment based upon its claim for reimbursement.

Specifically, Plaintiff contends that because it properly reserved its rights in its letter to the

insureds named in the underlying complaint that it is entitled to reimbursement for indemnity,

defense costs, attorney’s fees and costs of suit based upon this Court’s finding that it is not

obligated to defend or indemnify the insureds under the Policies. 

Plaintiff cites the language of the reservation of rights letter issued to the Defendants

named in the underlying complaint on September 19, 2003. (SOF ¶65). Specifically, the

letter relates in pertinent part to the Defendants:

This reservation of rights includes a reservation of the right to recover from any

insureds, and/or from any other insurer or any other parties, any payments made by

Guideone, including payments for indemnity, defense costs and expenses, attorneys’

fees and costs of suit.

(Id.).

Based upon the language of this letter, Plaintiff requests that it is entitled to reimbursement

as a matter of law.1

 Persuasive support for this position can be found in the holding set forth

in Capitol Indem. Corp. v. Blazer, 51 F. Supp.2d 1080, 1090 (D.Nev. 1999). In Capitol, the

defendant insurer, as in this case, sought and achieved a declaratory judgment that it was not

obligated to provide a defense or indemnity to its insured. In moving for summary judgment

on the coverage issue, the plaintiff insurer also sought summary judgment on its claim for

reimbursement. Id. In denying the insurer’s request the district court noted that "[t]he right

to reimbursement does not arise unless there is a clear understanding between the parties that

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the insured would be required to reimburse the insurer for monies expended in providing a

defense. Id. (citing St. Paul Mercury Ins. Co.,v. Ralee Engineering Co., 804 F.2d 520, 522

(9th Cir. 1986). Thus, because the plaintiff insurer produced no evidence of any such

understanding, and it failed to show that it reserved its rights to reimbursement, its request

for reimbursement was denied. 

Conversely, in Omaha Indem. Ins. Co. v. Cardon Oil Co., 687 F. Supp 502 (N.D. Cal.

1988) the district court held, in applying California law, that the declaratory plaintiff insurer,

upon finding that it was not obligated to provide coverage to its insured, had properly

reserved its rights and its entitlement to reimbursement for costs associated with the defense.

Specifically, the court held that the insurer’s "reservation of rights letter explicitly advised

defendants that it was reserving its right to seek reimbursement and would seek such

reimbursement in a court action. Id. at 504. The reservation language used in Omaha, was

similar to the language used by the Plaintiff in our case in that it expressly advised the

insured that the insurer was reserving its rights to recover from the insured payments made

by the insurer for the coverage afforded. Id. Because the insured did not contest the

reservation language but rather appeared to have acquiesced to the terms specified in the

reservation letter the court held the language to be controlling and supported the insurer’s

request. Id.

The same is true here. Although, there does not appear to be any Arizona case on point,

it appears the weight of authority permits reimbursement under such circumstances. There

is no evidence suggesting that the insureds’ disputed the plain terms of the reservation of

rights coverage afforded to them. Rather, the evidence suggests that like Omaha, the

insureds accepted or at the very least acquiesced to the terms of the coverage afforded to

them. As such, the Plaintiff is entitled to reimbursement for the costs associated with the

coverage afforded to the Defendants in the underlying action. 

V. Conclusion

Of the disputed matters raised in the pleadings regarding the cross-motions between the

parties, it is clear that the Policies do not afford coverage to the Defendants based upon the

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allegations set forth in the underlying complaint. The threshold elements of coverage based

upon either "bodily injury" or "property damage" are wholly absent from the underlying

complaint. Additionally, there is no dispute that the Policies do not afford coverage under

Section I(B) of the Policies Insuring Agreement. Therefore, the subsequent issues of whether

the underlying complaint invokes an "occurrence" or whether coverage is excluded based

upon the Policies exclusion for expected or intended acts by the insured is not dispositive.

Further, the Plaintiff is entitled to reimbursement for the costs incurred in supplying a

defense subject to the terms of the reservation of rights to the Defendants. 

Accordingly,

IT IS HEREBY ORDERED that Plaintiff’s Motion for summary judgment is granted in

part and denied in part. Plaintiff's Motion is granted with respect to its First, Second and

Sixth declaratory claims for relief. (Dkt.#83). Plaintiff's Motion is denied as moot as to its

Third, Fourth and Fifth declaratory claims. Therefore, Plaintiff is not obligated to provide

a defense or indemnify the Defendants pursuant to the terms of the Policies. Additionally,

Plaintiff is entitled to reimbursement for the costs of the defense it did provide to the

Defendants named in the underlying complaint. 

 IT IS FURTHER ORDERED that Defendant Corey and Keur’s Motion for partial

summary judgment is denied regarding Plaintiff's First declaratory claim and denied as moot

as to Plaintiff's Third and Fourth declaratory claims. (Dkt.#90). 

DATED this 25th day of March, 2006.

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