Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-3_13-cv-08194/USCOURTS-azd-3_13-cv-08194-2/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1441 Petition for Removal- Breach of Contract

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UNITED STATES DISTRICT COURT

DISTRICT OF ARIZONA

White Mountain Communities 

Hospital Incorporated, )

)

Plaintiff, ) 3:13-cv-8194 JWS

)

vs. ) ORDER AND OPINION

)

Hartford Casualty Insurance Company, ) [Re: Motions at Dockets 78, 96]

)

Defendant. )

)

I. MOTIONS PRESENTED

At docket 78 defendant Hartford Casualty Insurance Company (“Hartford”) filed a

motion for summary judgment. At docket 96 Plaintiff White Mountain Communities

Hospital Incorporated (“White Mountain”) filed an opposition and a cross motion for

summary judgment as to the issue of property damage. Defendant Hartford filed its

reply and response at docket 116. White Mountain filed its reply at docket 123. Oral

argument was heard March 30, 2015. 

II. BACKGROUND

Hartford issued a commercial property insurance policy to White Mountain

covering the period from April 1, 2011 thru April 1, 2012. The policy provided insurance

coverage against business income losses as well as property losses. White Mountain’s

hospital located near Springerville was affected by the Wallow Fire, which began

burning on May 29, 2011, and which led to the temporary evacuation of Springerville

Case 3:13-cv-08194-JWS Document 148 Filed 04/17/15 Page 1 of 13
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through June 13, 2011. White Mountain sought payment under the policy for business

income losses and property damage. Originally, Hartford processed the business

income loss claim pursuant to the “Civil Authority” provision of the policy, which insures

against business income loss in the event access to the property is prohibited by order

of a civil authority.

1

 Hartford paid $433,520 based on the provision. Later, in

November, after a new adjuster was appointed to the file, Hartford decided that there

could be coverage under the “Business Income Coverage” provision in the policy,

2

based on reported smoke damage, but it determined that a reasonable period for

repairs would have been 60 days. It then paid another $250,000 to White Mountain for

business income lost during the additional 60 days. In total, Hartford paid White

Mountain $723,548 on the claims, consisting of a little over $40,000 for property

damage claims and $683,520 for business interruption through August 6, 2011. White

Mountain contends that it is entitled to be paid more money on its business income loss

claim and thus brings a breach-of-contract claim against Hartford. It also brings an

insurance bad faith claim and punitive damages claim against Hartford based upon

Hartford’s denial of additional payments and White Mountain’s allegation of inadequate

investigation and delayed payments. White Mountain also raises an unjust enrichment

claim against Hartford.

III. STANDARD OF REVIEW

Summary judgment is appropriate where “there is no genuine dispute as to any

material fact and the movant is entitled to judgment as a matter of law.”3 The

materiality requirement ensures that “only disputes over facts that might affect the

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

1Doc. 79-1 at p. 50.

2Doc. 79-1 at p. 64.

3Fed. R. Civ. P. 56(a).

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judgment.”4 Ultimately, “summary judgment will not lie if the . . . evidence is such that a

reasonable jury could return a verdict for the nonmoving party.”5 However, summary

judgment is mandated under Rule 56(c) “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.”6

 The moving party has the burden of showing that there is no genuine dispute as

to any material fact.7

 Where the nonmoving party will bear the burden of proof at trial

on a dispositive issue, the moving party need not present evidence to show that

summary judgment is warranted; it need only point out the lack of any genuine dispute

as to material fact.8

 Once the moving party has met this burden, the nonmoving party

must set forth evidence of specific facts showing the existence of a genuine issue for

trial.9 All evidence presented by the non-movant must be believed for purposes of

summary judgment, and all justifiable inferences must be drawn in favor of the

non-movant.10 However, the non-moving party may not rest upon mere allegations or

denials, but must show that there is sufficient evidence supporting the claimed factual

dispute to require a fact-finder to resolve the parties’ differing versions of the truth at

trial.11

4Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

5

Id.

6Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

7

Id. at 323.

8

Id. at 323-25.

9Anderson, 477 U.S. at 248-49.

10

Id. at 255.

11

Id. at 248-49.

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IV. DISCUSSION

A. Breach of Contract

White Mountain alleges Hartford breached the insurance contract when it denied

White Mountain’s claim for business income losses incurred after August 6, 2011. 

White Mountain argues that the contract provides coverage for reduced revenue

caused by the fire and that Hartford failed to fully compensate it as required. The basis

for White Mountain’s breach-of-contract claim and its opposition to Hartford’s motion for

summary judgment is its belief that losses stemming from the fire are covered as long

as there has been some property damage; that is, it believes Hartford should pay them

for business losses through at least part of 2012 because the facility suffered some

property damage due to the fire and those damages were not fully repaired until 2012. 

White Mountain’s argument is off base. The Business Income Coverage provision does

not cover all income losses caused by the fire; rather, it covers only those income

losses resulting from actual physical damage to the facility caused by fire. The policy

states as follows:

We will pay up to the Special Business Income Limit of Insurance . . . for

the actual loss of Business Income you sustain and the actual, necessary

and reasonable Extra Expense you incur due to the necessary interruption

of your business operations during the Period of Restoration due to direct

physical loss of or direct physical damage caused by or resulting from a

Covered Cause of Loss to property . . .

12

Hartford correctly stresses that only income lost because of business interruption

caused by physical damage to the property is covered. Business income lost because

of the fire in general is not covered. 

White Mountain clearly had some physical property damage. It is undisputed

that White Mountain staff had to clean some soot and that ultimately White Mountain

discovered damage to air conditioners and carpet and that there were some

microscopic smoke toxins found in air filters that had already been removed from the

12Doc 79-1 at p. 64.

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facility.

13

 Plaintiff asserts there are disputed facts about the extent of smoke

contamination, but the dispute over the existence or extent of the smoke contamination

inside the facility, if any, is immaterial. Plaintiff fails to point to any evidence that it lost

business income due to smoke contamination or any physical damage to the facility. 

That is, there is nothing to show that the AC repairs, cleaning, carpet replacement, or

smoke inside the building, as opposed to the economic conditions in the area from the

fire, caused a cessation or slowdown of business. There is no evidence that any part of

the facility was physically dysfunctional during repairs or that it lost patients because of

the damage or repair work. To the contrary, the record shows that despite the repairs

and cleaning that had to be done, White Mountain did not have to turn away patients

after the facility’s reopening.

14

 Indeed, White Mountain’s CEO could not name any

services that the hospital was unable to provide because of property damage, except

for perhaps its sleep studies services, which the evidence shows was back in service by

the end of June.15 The industrial hygienist’s report indicated that there was no threat to

human safety after testing for microscopic particles.16 Plaintiff presents no evidence

from which a jury could find that physical damage or smoke contamination kept people

away from White Mountain’s facility. 

Moreover, the record actually shows that White Mountain was given the benefit

of the doubt and was paid for any income lost because of physical damage through

August 6, 2011, even if there was no direct proof that the physical damage itself, as

opposed to the fire in the area generally, caused a business slow down. The evidence

13See doc. 99-1 at pp. 165-66 noting that the air filters, which had already been removed

and replaced, had some smoke toxin residue, but noting that there were minimal toxins found in

the facility’s HVAC system and patient areas and concluding that there was no threat to human

safety.

14Doc. 80-1 at pp. 58-62.

15Doc. 80-1 at pp. 60-61; Doc. 80-1 at p. 132.

16Doc. 99-1 at p. 166.

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on the record demonstrates that White Mountain was evacuated for a short period of

time, from June 3, 2011 through June 14, 2011. Hartford covered any income lost

during this period pursuant to the Civil Authority provision in the insurance contract. 

The Arizona Department of Health conducted a full inspection of the facility and allowed

it to reopen after some basic cleaning. White Mountain’s CEO stated in his deposition

that the staff cleaned as required within several days, except for one wing of the

hospital where it took staff members about a month before they had time to clean up

any residue.17 Even if the smoke residue itself caused a slowdown or cessation in

business, which again has not been demonstrated, the record demonstrates that at

most it took a month to clean the visible residue. As noted above, Hartford ended up

agreeing to apply the Business Income Coverage provision in the policy and cover any

business income losses through August 6, 2011, based on White Mountain’s report of

necessary cleaning and repairs. Thus, White Mountain would have been compensated

for any income losses that happened to be caused by that physical damage. White

Mountain does not explain or provide supporting evidence to demonstrate how any

other later discovered physical damage interrupted White Mountain’s business

operations. 

Plaintiff cites the affidavit of White Mountain’s CEO wherein he generally states

that a wing of the hospital was unusable because of smoke damage, but he provides no

supporting factual details to explain why it was closed or when or for how long.

18

 Such

a conclusory affidavit, lacking details and unsupported by factual data, is insufficient to

create a genuine issue of fact.19

 During the CEO’s earlier deposition, he mentioned an

inoperable wing of the facility that was cleaned about a month after the fire.20

 Assuming

17Doc. 80-1 at pp. 59-60.

18Doc. 98-1 at p. 96.

19Hansen v. United States, 7 F.3d 137, 138 (9th Cir. 1993).

20Doc. 80-1 at p. 60.

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that this is the same wing discussed in the affidavit and assuming the closure of this

wing actually caused income loss, White Mountain would still not be entitled to more

money from Hartford based on this damage since it received payment for any income

lost during the month needed to clean this part of the facility. Despite the CEO’s bare

assertion that “there is no doubt whatsoever that the business was interrupted due to

the smoke that engulfed the property and caused damages,” there is no evidence that

the actual damage to the property slowed operations. That is, there is no evidence

from which a jury could infer that White Mountain is entitled to more money under the

Business Income Coverage provision in addition to what it already received.21 

Plaintiff also asserts that the hospital never functioned normally after the fire and

that its reputation in the community had been damaged due to its disrepair. While that

very well may be, there is no supporting proof in the record from which a jury could

conclude this was caused by physical property damages.

While not clearly stated in the complaint, White Mountain argues in its response

brief that Hartford also breached the insurance contract by not properly calculating the

business losses that it did pay. Hartford, in its reply, provides a thorough and

persuasive explanation of how the policy provides for two methods of calculating

business income loss and how it complied with one of those methods by determining

White Mountain’s net expected income and subtracting from that income any noncontinuing expenses (expenses the insured saved by not operating at full capacity).22

White Mountain did not provide any competing evidence to demonstrate that Hartford’s

method was incorrect, nor did it set forth what the correct calculation for determining

21Doc. 98-1 at p. 97. Plaintiff also cites to its expert report to state that physical damage

from the smoke caused a slowdown of business, but upon close examination of the report, it

does not state that the physical damage itself caused a slowdown of business but rather that

the loss of business income was caused by the fire generally. Again, that is not sufficient to

trigger coverage.

22Doc. 112 at pp. 10-11.

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what White Mountain’s business income losses should have been.23 White Mountain

asserts that the amount of non-continuing expenses Hartford subtracted is disputed, but

it does not point to any evidence to show what the correct amount should have been

and why.

24

 White Mountain also asserts that Hartford did not properly account for its

employees’ paid time off benefits. Again, Hartford’s reply clearly and persuasively

explains and demonstrates that when it calculated White Mountain’s business income

loss it assumed all payroll expenses continued unabated and did not deduct any payroll

saving as non-continuing expenses.25 Thus, there is no evidence creating a dispute

about Hartford’s calculation.

White Mountain also argues that it is entitled to more benefits under the

insurance policy’s extended income and future earning endorsements. Under the

extended income provision, when an insured experiences a “necessary suspension of

. . . operations” that results in business income loss payable under the policy, Hartford

will pay for an extended period of business income loss. As with the Business Income

Coverage provision, this extension in coverage only applies to business income loss

that results from physical property damage.26 The future earnings coverage is also

linked to business income loss attributable to the physical damage.27 As stated above,

there is no evidence in the record to show that the income loss was due to physical

property damage itself, as opposed to the unfavorable business conditions in the area

as a result of the fire.

23Doc. 116-1 at pp. 7-8.

24Doc. 96 at p. 20.

25Doc. 116 at pp. 11-12.

26Doc. 79-1 at pp. 51-52.

27Doc. 79-1 at p. 52.

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 B. Bad Faith and Punitive Damages

Hartford also seeks summary judgment as to White Mountain’s claims for

insurance bad faith and punitive damages based on Hartford’s handling of the

insurance claim. Under Arizona law, “the tort of bad faith arises when the insurer

‘intentionally denies, fails to process or pay a claim without a reasonable basis.’”28

 An

insurer may be liable for bad faith even if it has not breached the insurance contract

itself.

29

 An insured alleging bad faith must show that the insurer acted unreasonably

and either knew or recklessly disregarded the fact that its conduct was unreasonable.30

“The first prong of the test for bad faith is an objective test based on reasonableness. 

The second prong is a subjective test, requiring the plaintiff to show that the defendant

insurance company committed consciously unreasonable conduct.”31 An insurer may

be liable for bad faith if it denied a claim that was not fairly debatable or if it acted

unreasonably in processing a claim, regardless of that claim’s merits.32 In either case,

the objective and subjective elements of bad faith are applied. That is to say, an

insurer “may commit bad faith not only by intentionally and unreasonably denying a

claim, but also by intentionally processing, evaluating, or paying a claim in an

unreasonable manner.”33

White Mountain alleges Hartford committed bad faith both in its denial of

additional coverage and in its handling of the insurance claim. As discussed above,

Hartford denied White Mountain’s request for payments for business income losses

28Zilisch v. State Farm Mut. Auto. Ins. Co., 995 P.2d 276, 279 (Ariz. 2000) (quoting

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

29Deese v. State Farm Mut. Auto. Ins. Co., 838 P.2d 1265,1270 (Ariz. 1992).

30Milhone v. Allstate Ins. Co., 289 F. Supp. 2d 1089, 1094 (D. Ariz. 2003).

31

Id.

32Zilisch, 995 P.2d at 280.

33

James River Ins. Co. v. Herbert Schenk, P.C., 523 F.3d 915, 923 (9th Cir. 2008).

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after August 6, 2011, based on the fact that White Mountain’s business was not

interrupted due to physical damage. There is nothing in the record to demonstrate that

this conclusion was objectively unreasonable; White Mountain fails to point to evidence

to show that its business slowdown was a result of the physical damage to air

conditioners, some air filters or vents, and carpet, or a result of smoke residue. Thus,

White Mountain’s claim for additional business income loss coverage was fairly

debatable. Even if additional coverage was not fairly debatable, there is no bad faith

on the part of an insurer based on denial of coverage if it believed the claim to be fairly

debatable. This subjective inquiry is usually a question for the jury; however, a court

may rule on the issue as a matter of law “[i]f the plaintiff offers no significantly probative

evidence that calls into question the defendant’s belief in fair debatability.”34 Again,

there is no evidence to show that the physical damage was the reason for White

Mountain’s claim for additional business income losses, and there is no evidence to

suggest Hartford’s denial was a pretext to avoid payments. 

White Mountain also argues that Hartford inadequately handled its insurance

claim. White Mountain stresses the delay in payment and Hartford’s failure to send

someone to the facility to investigate the damage. The record shows that Hartford paid

White Mountain for business income loss related to the evacuation within a month of

receiving the profit and loss statements, which the parties do not dispute is a

reasonable request for an insurance company to make when processing a business

income loss claim.

35

 It is also within the time allotted under the contract.36 White

Mountain also states that it did not receive payment for the property damage until

November 30, 2011, which it asserts was an unreasonable six-month delay. However,

34Young v. Allstate Ins. Co., 296 F. Supp. 2d 1111, 1116 (D. Ariz. 2003).

35Doc. 99 at 43; Doc. 80-1 at p. 90.

36Doc. 79-1 at p. 43 (stating that payment will be made within 30 days after Hartford

receives proof of the loss if the parties have agreed about the amount of loss or an appraisal

award has been made). 

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White Mountain provides no evidence of the date on which White Mountain requested

payment for any specific claim for physical damage nor the date on which it sent a

proper proof of loss as required by the insurance contract. All the record shows is that

White Mountain did not report physical damages right away and that Hartford was not

aware that White Mountain was claiming property damage until July.

37 Clearly, the

parties were still assessing the extent of any smoke damage in August and

September.38

 There is simply no evidence which demonstrates an unreasonable delay

in payment.

As for Hartford’s investigation, White Mountain argues that Hartford acted in bad

faith when it failed to send someone out to examine the property and failed to arrange

and provide the labor for duct cleaning and air quality testing. White Mountain did not

mention its concern of continuing smoke contamination until late July, and Hartford

contacted a vendor to investigate.39 The vendor indicated that there was no smoke in

the building,

40

 but recommended duct cleaning and air testing. That work was not

completed until February of 2012. White Mountain asserts without support that it was

Hartford’s responsibility to follow up on the vendor’s recommendation and to facilitate

getting testing and cleaning completed rather than just pay the bill for such services. It

then asserts that the delay in facilitating the recommended cleaning and testing

amounts to unreasonable conduct. However, even if it were Hartford’s responsibility to

obtain estimates and arrange for the labor, there is no evidence that further

investigation would have revealed relevant facts that would have led to more benefits

37Doc. 98-1 at p. 149; Doc. 116-1 at p. 60.

38Doc. 98-1 at p. 175.

39Doc. 98-1 at p. 175.

40Doc. 98-1 at p. 175.

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being paid.41 Indeed, the subsequent analysis in February indicated no problem with

the air quality and recommended only that old air filters, which had already been

removed, be disposed of properly because of minor amounts of toxins found in those

old filters.42

The claim file shows that Hartford continually worked to assess White Mountain’s

claim. The claim file notes show that it was willing to reconsider White Mountain’s

claims as needed and reassess based on any new information.43

 The notes also show

that there were numerous communications between the parties from June 2011 through

the spring of 2012. Plaintiff does not have evidence to demonstrate an indifference to

facts on the part of Hartford; rather, the claim file shows that Hartford’s decisions were

not groundless or based on inadequate consideration. Moreover, nothing in the record

demonstrates there was some nondisclosure, violation of industry custom, reneging on

promises, or obfuscation on Hartford’s part.44 

At most, the record shows that Hartford may have been negligent given that

there appears to have been some mis-communication or misunderstanding about

coverage and about who was responsible for facilitating or arranging repairs, but that

alone is not tantamount to bad faith.45 White Mountain suggests that Hartford’s removal

41Aetna Cas. and Surety Co. v. Superior Court, 778 P.2d 1333, 1336 (Ariz. Ct. App.

1989).

42Doc. 98-1 at pp. 192-93.

43Doc. 80-1 at pp. 2-49.

44See Bowman v. Country Preferred Ins. Co., No. CV-12-02720, 2015 WL 1470086, at

*4 (D. Ariz. Mar. 31, 2015) (stating that in addition to groundless denials or inadequately

investigated reasons for denials, other common examples of bad faith include such things as

deceit, nondisclosure, reneging on promises, or obfuscation). 

45Miel v. State Farm Mut. Auto. Ins. Co., 912 P.2d 1333, 1339 (Ariz. Ct. App. 1995)

(“Mere mistake and inadvertence are not sufficient to establish a claim for bad faith.”); see also

Rawlings v. Apodaca, 726 P.2d 565, 573 (Ariz. 1986) (“As long as [the insurer] acts honestly,

on adequate information and does not place paramount importance on its own interests, it

should not be held liable because of a good faith mistake in performance or judgment.”).

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of the original adjuster from the claim file shows that he had been handling the claim

unreasonably. However, the only evidence related to the change of adjusters shows

that a new adjuster was assigned after the prior one had been terminated for reasons

unrelated to White Mountain’s claim.

46

 Thus, there is no evidence on the record to

support an inference that Hartford was consciously unreasonable. Likewise, there is no

evidence of an improper motive or “evil mind” to support punitive damages.47

C. Unjust Enrichment

Hartford requests summary judgment on White Mountain’s unjust enrichment

claim. Under Arizona law, an unjust enrichment claim is an equitable action that only

applies where a party has no other remedy at law.

48 Here, there can be no unjust

enrichment claim where the policy governs the relationship and provides a remedy.

49

White Mountain does not provide an argument in opposition. 

V. CONCLUSION

Based on the preceding discussion, Hartford’s motion for summary judgment at

docket 78 is GRANTED, and White Mountain’s motion for summary judgment at

docket 96 is DENIED. 

DATED this 17th day of April 2015.

/s/ JOHN W. SEDWICK

SENIOR UNITED STATES DISTRICT JUDGE

46Doc. 99 at p. 84.

47Rawlings, 726 P.2d at 577-78.

48City of Sierra Vista v. Cochise Enters., Inc., 697 P.2d 1125, 1131 (Ariz. Ct. App. 1984);

49Brooks v. Valley Nat’l Bank, 548 P.2d 1166, 1171 (Ariz. 1976) (noting that if there is a

“specific contract which governs the relationship of the parties, the doctrine of unjust

enrichment has no application.”); Trustmark Ins. Co. v. Bank One Ariz., NA, 48 P.3d 485, 491

n.5 (Ariz. Ct. App. 2002).

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