Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_11-cv-02599/USCOURTS-azd-2_11-cv-02599-0/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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The parties’ request for oral argument is denied because the parties have had an

adequate opportunity to present their written arguments, and oral argument will not aid the

Court’s decision. See Lake at Las Vegas Investors Grp., Inc. v. Pac. Malibu Dev., 933 F.2d

724, 729 (9th Cir. 1991).

WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Benjamin Taft, et al.,

Plaintiffs,

v.

American Family Mut. Ins. Co.,

Defendant. 

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No. CV-11-2599-PHX-SMM

MEMORANDUM OF DECISION

 AND ORDER

Pending before the Court is Defendant’s Motion to Strike Undisclosed Exhibits and

Legal Theories (Doc. 59) and Defendant’s Motion for Partial Summary Judgment (Doc. 47).

Both matters are now fully briefed. (Docs. 48, 52-53, 56-58, 60-62.) After reviewing the

briefs and having determined that oral argument is unnecessary,1

 the Court will grant in part

and deny in part Defendant’s Motion to Strike Undisclosed Exhibits and Legal Theories, and

will grant in part and deny in part Defendant’s Motion for Partial Summary Judgment.

RELEVANT FACTUAL BACKGROUND

On July 27, 2010 Plaintiff Benjamin Taft (“Ben Taft” or “Taft”) was operating a

motor vehicle headed West on Bell Road in Surprise, Arizona when a motor vehicle traveling

South on Grand Avenue ran a red light at an excessive speed and, from the wrong lane,

turned left in front of Taft’s vehicle causing a collision. (Doc. 53-1 at 2-9.) The driver of

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the other vehicle, Jacqueline Cox, was cited in the police reports as being at fault. (Id.) Taft

was taken to the hospital for emergency treatment and evaluation, including x-rays. (Doc.

53-3 at 2-12.) Immediately after the collision, Taft indicated that he felt pain in his neck,

shoulders, back, hips, and left lower extremities. (Doc. 53-2 at 2-3.) At the time of the

collision Taft further indicated that he felt a popping sensation in his left knee and believed

he had broken his left ankle. (Id.) Following Taft’s discharge from the hospital, he

continued medical treatment for his injuries with Dr. Robert Fauer, his family physician.

(Doc. 53-4 at 2-20.) 

Two days after the accident, Dr. Fauer noted extensive bruising and tenderness and

diagnosed soft tissue traumas including neck, thorax, lumbar spine, and upper extremities and

knee bruising. (Doc. 53-4 at 2-3.) Dr. Fauer prescribed medication and physical therapy.

(Id. at 2.) Taft complied with his doctor’s orders and followed through with physical therapy

treatment. (Doc. 53-5 at 2-57.) Taft continued in physical therapy from August 5, 2010 until

discharge from treatment on January 17, 2011. (Id.) Taft continued his doctor’s visits with

Dr. Fauer mainly for his left knee, but also for problems with his left ankle. (Doc. 53-4 at

2-20.) Dr. Fauer also referred Taft to an orthopedic specialist, Dr. Theodore Hofstedt, for

an evaluation. (Doc. 53-7 at 2-9.) Dr. Fauer, Dr. Hofstedt, and MRI records support that

Taft suffered from a left knee patella injury, specifically grade 2 chondromalacia, and a

possible anterior cruciate ligament sprain. (Docs 53-4, 53-6 and 53-7.) 

At the time of the accident, Taft was a 30-year-old executive chef employed by Fox

Restaurant Concepts at North Restaurant in Scottsdale earning $44,000 a year plus bonuses

and benefits. (Doc. 53-10 at 2-7.) On July 28, 2010, one day after the collision, Taft’s

position at North was terminated because the restaurant closed. (Doc. 53-2 at 2.) However,

in an affidavit, Taft states that he subsequently received a call from his District Manager at

Fox indicating that Fox had purchased an airline ticket for him to fly to California to help a

restaurant open in Newport Beach. (Id.) However, due to his injuries, Taft stated that he was

not able to pursue the job opening. (Id.) District Manager John Steen stated that “[Taft] was

told that had [Taft] been physically able to accept it at that time, employment would have

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been found at a Fox restaurant, pending permanent placement. Said employment would have

been at the same pay and benefit scale that [Taft] had been receiving at North restaurant.”

(Doc. 56-1 at 2.)

Taft’s medical file following the accident shows notes from both Dr. Fauer and Dr.

Hofstedt taking him off work. (See, e.g., Dr. Fauer’s notes, Doc. 53-4 at 2 (“Patient to be off

work for the next two weeks . . .”); Doc. 53-4 at 4 (noting that Taft would continue to be “off

work for four weeks.”); Dr. Hofstedt’s notes, Doc. 53-7 at 6 (stating that Taft is in a no work

status for two weeks)). In November 2010, Taft returned to work for Fox restaurants. (Doc.

53-10.) Taft indicated that the pain in his left knee was too much and had to leave work after

three days and go back for medical treatment; he was then terminated by Fox. (Doc. 53-2;

Doc. 53-10.) In January 2011, Taft went to work for Fireside Grill as a chef, but allowed him

to leave when in pain. At Fireside, Taft disclosed that he made $1,200 a month less than he

made with Fox. (Doc. 53-16 at 8, Doc. 57-1 at 35, Doc. 60-3 at 3 citing Doc. 60-1 at 8, Doc.

60-3 at 8-10, Doc. 60-12 at 7.) Taft now works for Amuse Bouche. (Id.) 

Ultimately, Plaintiffs settled with Jacqueline Cox for her policy limits, $50,000. (Doc.

48-1 at 10.) In August 2011, claiming injury loss above $50,000, Plaintiffs filed a claim with

their insurer, Defendant American Family Mutual Insurance Company for underinsured

motorist (“UIM”) benefits. (Doc. 53-16.) Defendant investigated Plaintiffs’ claims which

included a medical review by Registered Nurse Karen Van Belle. (Doc. 53-14.) Nurse Van

Belle testified that her responsibilities were to respond to the adjuster’s questions and provide

information that would assist him in settling the claim. (Id.) Nurse Van Belle opined that

Taft had patellar tendonitis and chondromalacia. (Id. at 6-7.) She further opined that she

understood Taft to be symptom free at the time of her evaluation. (Id. at 3, 8.) She stated

that she was not aware of and did not consider Dr. Fauer’s opinion that Taft was not

symptom free and would have expenses for future medical care. (Id. at 3.) On November

22, 2011, in a one paragraph letter, Defendant informed Plaintiffs that the $50,000 policy

limits paid by Cox’s insurance company adequately compensated Taft for his injuries. (Doc.

48-1 at 10.) This litigation ensued.

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STANDARD OF REVIEW

I. Motion to Strike

Federal Rule of Civil Procedure 37(c)(1), provides that “[i]f a party fails to provide

information or identify a witness as required by Rule 26(a) or (e), the party is not allowed to

use that information or witness to supply evidence on a motion, at a hearing, or at trial, unless

the failure is substantially justified or harmless.” Rule 37(c)(1) also provides additional

sanctions that a court may impose on a party “in addition to or instead of” striking the

witness. Fed. R. Civ. P 37(c)(1)(A)-(C). The 1993 Advisory Committee Notes to Rule 37

state that sanctions under Rule 37(c)(1) are “automatic,” and provide “strong inducement for

disclosure of material.” Fed.R.Civ.P. 37 advisory committee’s note (1993).

The Ninth Circuit Court of Appeals has observed that “we give particularly wide

latitude to the district court’s discretion to issue sanctions under Rule 37(c)(1).” Yeti by

Molly, Ltd. v. Deckers Outdoor Corp., 259 F.3d 1101, 1106 (9th Cir. 2001). As the rule

provides, however, sanctions will not be imposed if the failure to disclose was substantially

justified or harmless. Fed. R. Civ. P 37(c)(1). “Implicit in Rule 37(c)(1) is that the burden is

on the party facing sanctions to prove harmlessness.” Yeti by Molly, Ltd., 259 F.3d at 1106.

“For purposes of Rule 37(c)(1), a party’s failure to disclose is substantially justified

where the non-moving party has a reasonable basis in law and fact, and where there exists

a genuine dispute concerning compliance. See Nguyen v. IBP, Inc., 162 F.R.D. 675, 680 (D.

Kan. 1995)). “Failure to comply with the mandate of the Rule is harmless when there is no

prejudice to the party entitled to the disclosure.” Id.

II. Partial Summary Judgment

Upon motion at any time, a party defending against a claim may move for “partial

summary judgment,” that is, “summary judgment in the party’s favor as to . . . any part

thereof.” Fed. R. Civ. P. 56(b). A court must grant summary judgment if the pleadings and

supporting documents, viewed in the light most favorable to the nonmoving party, “show 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); see Celotex Corp. v. Catrett, 477 U.S.

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317, 322-23 (1986); Jesinger v. Nevada Fed. Credit Union, 24 F.3d 1127, 1130 (9th Cir.

1994). Substantive law determines which facts are material. See Anderson v. Liberty

Lobby, 477 U.S. 242, 248 (1986); see also Jesinger, 24 F.3d at 1130. “Only disputes over

facts that might affect the outcome of the suit under the governing law will properly preclude

the entry of summary judgment.” Anderson, 477 U.S. at 248. The dispute must also be

genuine, that is, the evidence must be “such that a reasonable jury could return a verdict for

the nonmoving party.” Id.; see Jesinger, 24 F.3d at 1130.

A principal purpose of summary judgment is “to isolate and dispose of factually

unsupported claims.” Celotex, 477 U.S. at 323-24. 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.” Id. at 322; see also Citadel Holding Corp. v. Roven, 26 F.3d 960, 964 (9th Cir.

1994). The moving party need not disprove matters on which the opponent has the burden

of proof at trial. See Celotex, 477 U.S. at 317. The party opposing summary judgment “may

not rest upon the mere allegations or denials of [the party's] pleadings, but . . . must set forth

specific facts showing that there is a genuine issue for trial.” FED. R. CIV. P. 56(e); see

Matsushita Elec. Indus. Co. v.Zenith Radio, 475 U.S. 574, 585-88 (1986); Brinson v. Linda

Rose Joint Venture, 53 F.3d 1044, 1049 (9th Cir. 1995).

III. Breach of Contract

A federal court sitting in diversity applies state substantive law. See Hambleton Bros.

Lumber Co. v. Balkin Enterprises, Inc., 397 F.3d 1217, 1227 (9th Cir. 2005). Thus, this

Court applies Arizona law to the interpretation of the insurance contract at issue. See

Benevides v. Arizona Prop. & Cas. Ins. Guar. Fund, 184 Ariz. 610, 613, 911 P.2d 616, 619

(App. 1995). In an action for breach of contract, the plaintiff has the burden of proving “the

existence of a contract, breach of the contract, and resulting damages.” Chartone, Inc. v.

Bernini, 207 Ariz. 162, 170, 83 P.3d 1103, 1112 (App. 2004) (citing Thunderbird

Metallurgical, Inc. v. Ariz. Testing Lab., 5 Ariz.App. 48, 423 P.2d 124 (1976)).

Provisions of insurance contracts should be construed according to their plain and

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ordinary meaning. National Bank v. St. Paul Fire & Marine Ins. Co., 193 Ariz. 581, 584, 975

P.2d 711, 714 (App. 1999). The interpretation of an insurance contract is a question of law,

as is the question of whether the contract’s terms are ambiguous. Id. In Arizona, courts must

construe a clause which is subject to differing interpretations by “examining the language of

the clause, public policy considerations, and the purpose of the transaction as a whole.” State

Farm Mut. Auto. Ins. Co. v. Wilson, 162 Ariz. 251, 257, 782 P.2d 727, 733 (1989).

IV. Bad Faith

“An insurance contract is not an ordinary commercial bargain; implicit in the contract

and the relationship is the insurer’s obligation to play fairly with its insured.” Zilisch v. State

Farm Mut. Auto. Ins. Co., 196 Ariz. 234, 237, 995 P.2d 276, 279 (2000) (further quotation

omitted). Although insurers do not owe fiduciary duties to their insureds, they do owe some

duties of a fiduciary nature including equal consideration, fairness and honesty. Id. The

insurer is obligated to conduct a prompt and adequate investigation, to act reasonably in

evaluating the insured’s claim, and to promptly pay a legitimate claim. Id. at 238, 995 P.2d

at 280.

“An insurer acts in bad faith when it unreasonably investigates, evaluates, or processes

a claim (an “objective” test), and either knows it is acting unreasonably or acts with such

reckless disregard that such knowledge may be imputed to it (a “subjective” test).” Nardelli

v. Metro. Group Prop. & Cas. Ins. Co., 230 Ariz. 592, 597-98, 277 P.3d 789, 794-95 (App.

2012) (citing Zilisch, 196 Ariz. at 238, 995 P.2d at 280). The objective and subjective

elements of bad faith are applied to both the insurer’s evaluation of the claim and the

insurer’s claims handling process. Id. 

The insurer “may challenge claims which are fairly debatable. To determine fair

debatability, the Court first looks to whether the insurer’s actions were objectively

reasonable, which is based upon a simple negligence standard–whether the insurance

company acted in a manner consistent with the way a reasonable insurer would be expected

to act under the circumstances. Trus Joist Corp. v. Safeco Ins. Co. of Am., 153 Ariz. 95, 104,

735 P.2d 125, 134 (App. 1986). If the insurer acted objectively unreasonably, then the Court

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moves to the subjective inquiry and determines if the insurer knew or was conscious that its

conduct was unreasonable. Id. Generally, the insurer’s “belief in fair debatability ‘is a

question of fact to be determined by the jury.’” Zilisch, 196 Ariz. at 280, 995 P.2d at 279

(citing Sparks v. Republic Nat’l Life Ins. Co., 132 Ariz. 529, 539, 647 P.2d 1127, 1137

(1982). However, if the insured offers no significantly probative evidence that calls into

question the insurer’s subjective belief in fair debatability, the court may rule on the issue as

matter of law. See Knoell v. Metropolitan Life Ins. Co., 163 F. Supp.2d 1072, 1076 (D. Ariz.

2001). Thus, an insurance company can be liable for bad faith for either unreasonably

denying a claim that was not fairly debatable or for acting unreasonably in how it processed

a claim whether the claim was fairly debatable or not. 

DISCUSSION

I. Motion to Strike–Legal Theories

Lost Earning Capacity

Defendant contends that Plaintiffs’ Complaint did not include allegations of lost

earning capacity and that Plaintiffs never disclosed this item of damages. (Doc. 59 at 6.)

According to Defendant, Plaintiffs did not allege lost earning capacity damages until their

response to Defendant’s motion for partial summary judgment. (Id.) Defendant does not

dispute that Plaintiffs timely disclosed lost wages damages, but it does dispute that by

disclosing lost wages damages Plaintiffs also disclosed lost earning capacity. (Doc. 62 at 2.)

Plaintiffs argue that they did properly disclose lost earnings capacity damages to

Defendant, citing their initial demand letter, supplemental disclosure statement, and answers

to interrogatories. (Doc. 60 at 3.) According to Plaintiffs, these documents disclose that due

to pain and debilitating injury from the accident, Taft was not able to work the hours

necessary to continue in his former position as an executive chef, and that he loses $1,200

in income every month as a result of injuries from the accident. (Doc. 60-3 at 3 citing Doc.

60-1 at 8, Doc. 60-3 at 8-10, and Doc. 60-12 at 7.) 

In a personal injury action, “Arizona allows unlimited recovery for actual damages,

expenses for past and prospective medical care, past and prospective pain and suffering, lost

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earnings, and diminished earning capacity.” Wendelken v. Superior Court in and for Pima

County, 137 Ariz. 455, 458, 671 P.2d 896, 899 (1983). Thus, in a personal injury action,

there is recovery for a decrease in earning capacity as distinct from lost wages. Mandelbaum

v. Knutson, 11 Ariz. App. 148, 149, 462 P.2d 841, 842 (1969). “[I]mpairment of earning

capacity is an item of general damage, permitting recovery for loss or diminution of the

power to earn in the future and is based upon such factors as plaintiff’s age, life expectancy,

health, habits, occupation, talents, skills, experience, training and industry.” Id. at 149-50,

462 P.2d at 842-43. “To sustain such an award, the injured person must establish the fact of

diminished capacity and the fact that it is permanent.” Id. at 150, 462 P.2d at 842.

Based upon the Court’s review of the discovery documents cited by Plaintiffs, the

Court finds sufficient disclosure of Taft’s claim for lost earnings capacity damages.

Although Defendant claims that Taft has not offered sufficient evidence that he suffers from

a permanent impairment (Doc. 62 at 2-3), a motion to strike tests insufficient disclosure, not

insufficient proof. Therefore, the Court will not strike Plaintiffs’ damage claim for lost

earnings capacity. 

Institutional Bad Faith/Hidden or Secret Requirements for UIM Benefits

Although Defendant concedes that Plaintiffs disclosed a bad faith claim based on the

manner in which Defendant handled Taft’s individual claim (Doc. 62 at 3-5), Defendant

contends that Plaintiffs failed to properly disclose the facts they rely on in support of their

new, previously undisclosed claim that Defendant engaged in institutional bad faith. (Doc.

59 at 6.) Defendant contends that Plaintiffs failed to disclose allegations that Defendant has

hidden or secret requirements to obtain UIM benefits. (Doc. 62 at 3-5.) The gist of these

new allegations is that Defendant had a policy that “required actual contemporaneous

off-work slips and that an after-the-fact doctor’s affirmation would not suffice.” (Id.)

Defendant contends that if it had known that Plaintiffs were pursuing an institutional bad

faith claim, it would have engaged Plaintiffs in additional discovery, which cannot now be

completed unless discovery is reopened. (Id.) Defendant further contends that it would have

hired an expert to testify regarding the institutional bad faith claim and the hidden or secret

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requirements for UIM benefits. (Doc. 59 at 7.) 

 Plaintiffs argue that they are not raising institutional bad faith arguments or new facts

in support of bad faith, and that their bad faith claim is limited to Defendant’s improper

evaluation of Taft’s UIM benefits claim. In support, Plaintiffs state that their response to

Defendant’s motion for partial summary judgment only stated facts disclosed by the

Defendant’s representatives during depositions to the effect that Defendant had a policy of

only accepting a loss of earnings statement if the doctor contemporaneously made a record

taking the plaintiff off work. It would not accept an after-the-fact affirmation by the doctor.

Plaintiffs argue that this does not raise a new theory of the case or disclose new facts.

The Court finds that “institutional” bad faith is not a commonly recognized and

accepted legal claim. Although Defendant contends that Plaintiffs have raised a claim of

“institutional” bad faith as if it were so, Defendant did not provide the Court with any

controlling authority in support of this legal theory. Furthermore, the Court finds no

controlling authority in Arizona establishing institutional bad faith as a claim. Absent such

authority, the Court will not grant Defendant’s motion to strike on this basis. Moreover,

Plaintiffs concede that they are not attempting to raise institutional allegations and that they

limit their bad faith claim to allegations that Defendant improperly evaluated Taft’s UIM

claim. Further, the Court finds that Plaintiffs raised no new allegations regarding hidden or

secret requirements to obtain UIM benefits when they referenced statements made by

Defendant’s representatives in their response to Defendant’s motion for summary judgment.

The Court construes those references to be in support of Plaintiffs’ allegations that Defendant

improperly evaluated Taft’s UIM claim. Therefore, Plaintiffs’ bad faith claim is limited to

allegations that Defendant improperly evaluated Taft’s UIM claim, and the Court will not

strike Plaintiffs’ factual assertions based on statements made by Defendant’s representatives

during their depositions. 

Emotional Damages

Defendant concedes that Plaintiffs disclosed a bad faith claim and that Plaintiffs can

attempt to seek emotional distress damages related to Defendant’s handling of Taft’s UIM

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claim. (Doc. 62 at 6.) However, Defendant contends that Plaintiffs’ alleged emotional

damages claim for the lost equity in their home is not logically related to the administration

of Taft’s UIM claim and was not timely disclosed. (Id.) By not receiving timely disclosure

of the lost equity claim, Defendant contends that it was prevented from submitting discovery

requests on the topic and from asking relevant deposition questions. (Id.) 

Plaintiffs agree that they did not lose any equity in their house. (See Doc. 52 at 8

(“The resultant statement of lost equity is just wrong.”).) According to Plaintiffs, they have

submitted no new claim for emotional distress damages. (Doc. 60 at 4.) 

To the extent that Plaintiffs assert a claim for emotional distress damages related to

lost equity in their home, the Court will strike this claim. Plaintiffs did not lose any equity

in their home. Plaintiffs’ claim for emotional distress is therefore limited to those damages

related to Defendant’s administration or handling of Taft’s UIM claim. See Farr v.

Transamerica Occidental Life Ins. Co., 145 Ariz. 1, 7, 699 P.2d 376, 382 (App. 1984); see

also Kaufman v. Langhofer, 223 Ariz. 249, 253, 222 P.3d 272, 276 (App. 2009).

II. Motion to Strike–Exhibits

Dr. Fauer’s Medical Report

Defendant moves to strike Dr. Fauer’s October 15, 2012 medical report regarding Ben

Taft because it was not timely disclosed. (Doc. 59 at 3.) Plaintiffs state that Dr. Fauer

testified at his October 17, 2012 deposition about this particular appointment with Taft and

stated that his report of Taft’s visit had not yet been finalized in writing but would be within

the week. (Doc. 60-8 at 2-4.) Subsequently, counsel for Plaintiffs sent an email to

Defendant stating that he had received a copy of Dr. Fauer’s report and checking to ensure

that Defendant had also received a copy. (Doc. 60-9 at 2.) Defendant indicated that he had

not as yet but would be looking for it in the mail. (Id.) Defendant does not state when they

received Dr. Fauers’ report; it moves to strike because the document was untimely disclosed.

(Doc. 62 at 7-8.) 

Although Defendant acknowledges that the discovery cut-off deadline in this case was

October 19, 2012, it moves to strike a document that Dr. Fauer created post discovery cut-off

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because it was untimely disclosed. The Court will deny Defendant’s motion. It is undisputed

that Defendant questioned Dr. Fauer about this particular visit during the deposition. (Doc.

60-8 at 2-4.) On this record, the Court finds that any delayed disclosure of Dr. Fauer’s

October 15, 2012 medical report regarding Taft was harmless and thus the Court will not

strike the report.

December 6, 2010 Report of Illness or Physical Disability

Defendant has withdrawn its request to strike this document. (Doc. 62 at 8.)

December 9, 2012 Ben Taft Declaration 

Defendant seeks to strike certain information contained in Taft’s declaration as being

untimely disclosed. (Doc. 59 at 3-4.) Defendant moves to strike Taft’s declaration to the

extent that it asserts that Taft had emotional distress related to his house going into

foreclosure due to Defendant’s bad faith administration of his claim for UIM benefits. (Doc.

62 at 8-9.) Defendant argues that Plaintiffs did not disclose their allegation that this item of

distress damage was connected with his bad faith claim. (Id.) Plaintiffs respond that this

assertion was disclosed. (Doc. 60 at 6-8.) 

The Court finds that Plaintiffs did disclose the following: 

The financial impact on Ben and his wife has been devastating. Their house was in foreclosure and was only recently saved to give them a chance

to make a short sale. Due to the financial losses suffered as a result of this

collision, Ben and his wife lost what, at one point, had been a quarter of a

million dollar house, at a foreclosure auction where it sold for $55,000.

(Doc. 60-1 at 8; see also Doc. 60-3 at 10.) The Court finds that Plaintiffs’ disclosure did not

connect allegations of bad faith administration of Taft’s claim for UIM benefits with

emotional distress damages related to their home going into foreclosure. Rather, as the

disclosed statement indicates, the financial losses suffered by Plaintiffs were the result of

Taft’s car collision and the injuries he suffered. Thus, the Court will strike from Taft’s

declaration his assertion that the emotional distress he suffered from their home going into

foreclosure was a consequence of Defendant’s bad faith administration of his claim for UIM

benefits.

///

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III. Defendant’s Motion for Partial Summary Judgment

Breach of Contract–UIM Damages Due to Lost Equity in the Home

Defendant moves for partial summary judgment on Plaintiffs’ claim for breach of

contract contending that its car insurance contract with Plaintiffs for alleged UIM benefits

does not include damages related to lost home equity. (Doc. 47 at 4.) Defendant argues that

under its insuring provisions for UIM coverage, Defendant is obligated to pay Taft

compensatory damages for bodily injury only. (Doc. 48-1 at 41.) Under the policy, UIM is

defined as:

[A] land motor vehicle which is insured by a liability bond or policy at the

time of the accident which provides bodily injury liability limits less than the

amount an insured is legally entitled to recover.

(Id.) Based on these provisions, Defendant argues that it only owes Taft UIM compensatory

damages for which Taft is legally entitled to recover that are in excess of the $50,000 he

already received. (Id.) Defendant argues that any loss of equity in Plaintiffs’ home is not

damage that naturally arises from the contract or was in contemplation of the parties when

the auto policy contract was entered. (Doc. 47 at 5.) Moreover, Defendant argues that even

if Plaintiffs had presented a factual connection between the UIM provisions and lost home

equity damages, Plaintiffs have not shown that they suffered lost home equity damages. (Id.)

Plaintiffs respond that their lost home equity claim is not a contract damages claim

but an emotional distress claim for damages arising from their claim for insurance bad faith.

(Doc. 52 at 8.) Therefore, this issue is undisputed. Defendant’s car insurance contract with

Plaintiffs for alleged UIM benefits does not include Plaintiffs’ lost home equity as part of a

contract damages claim. Therefore, the Court will grant Defendant’s motion for partial

summary judgment on this issue. Specifically, Defendant did not breach its car insurance

contract with Plaintiffs for alleged UIM benefits because the insurance contract does not

include lost home equity as part of a contract damages claim. 

Insurance Bad Faith

Plaintiffs assert that Defendant unreasonably evaluated and processed their claim for

UIM benefits with reckless disregard as to whether it conducted itself unreasonably. (Doc.

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52 at 4-7.) First, Plaintiffs argue that Taft had undisputed medical bills in excess of $28,000.

(Doc. 53-15 at 3.) Taft also asserts future medical bills of $1,200 a year for exacerbations

related to his injuries and $200 a year for continuing office visits and medication. (Docs. 53-

11 at 3.) Second, it is undisputed that Plaintiffs received $50,000 from the at-fault driver in

the accident. Plaintiffs conclude that Defendant unreasonably denied their UIM claim in bad

faith because in addition to Taft’s medical bills, Taft’s claim for lost wages and lost earning

capacity totaled more than $28,000. Defendant challenges Taft’s lost wages/earnings

damages and the sufficiency of Taft’s doctors’ notes taking him off work. Ultimately,

Defendant determined that the $50,000 Plaintiffs received adequately compensated them and

thus that they were not entitled to UIM benefits. (Doc. 48-1 at 10.)

The Court first looks to whether the insurer’s actions were objectively reasonable,

which is based upon a simple negligence standard–whether the insurance company acted in

a manner consistent with the way a reasonable insurer would be expected to act under the

circumstances. Trus Joist Corp., 153 Ariz. at 104, 735 P.2d at 134. Thus, the Court will first

turn to Taft’s lost wages and lost earning capacity claims and Defendant’s evaluation and

justification for denying this claim.

On the day of the collision Taft was employed by Fox Restaurant Concepts as a chef

at North Restaurant in Scottsdale earning $44,000 a year plus bonuses and benefits. (Doc.

53-10 at 2-7.) After the collision, Dr. Fauer stated that Taft would be off work for at least

two weeks. (Doc. 53-4 at 2.) On July 28, 2010, one day after the collision, Taft’s position

at North was terminated because that restaurant closed. (Doc. 53-2 at 2.) However, in an

affidavit, Taft states that he subsequently received a call from his District Manager at Fox

indicating that Fox had purchased an airline ticket for him to fly to California to help a

restaurant open in Newport Beach. (Id.) However, due to his injuries, Taft stated that he was

not able to pursue the job opening. (Id.) District Manager John Steen indicated that “[Taft]

was told that had [Taft] been physically able to accept it at that time, employment would

have been found at a Fox restaurant, pending permanent placement. [] employment would

have been at the same pay and benefit scale that [Taft] had been receiving at North

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restaurant.” (Doc. 56-1 at 2.)

Defendant argues that Steen lacked authority to offer Taft a job, that his declaration

only expresses a sentiment to employ Taft, that it does not prove Taft actually had a job and

a paycheck after the accident, and that it does not constitute material evidence sufficient to

prevent summary judgment on Plaintiffs’ bad faith claim. (Doc. 57 at 11-12.) 

The Court disagrees with Defendant’s assessment of the evidence. Viewing Steen’s

declaration in the light most favorable to the nonmoving party, there is a genuine issue of

material fact regarding Plaintiffs’ claim for lost wages and lost earnings capacity. Steen’s

declaration raises a material question of fact as to whether Taft had a reasonable expectation

of receiving wages after the accident. The appropriate question is whether there is sufficient

evidence from which reasonable jurors could conclude that in the investigation and

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

the fact that its conduct was unreasonable. 

Regarding lost earnings or diminished earnings capacity, the Court has already

discussed that Taft disclosed his assertion that due to pain and debilitating injury from the

accident he was not able to work the hours necessary to continue in his former position as

an executive chef, and that he loses $1,200 in income every month as a result of injuries from

the accident. (Doc. 60-3 at 3 citing Doc. 60-1 at 8, Doc. 60-3 at 8-10, and Doc. 60-12 at 7.)

Therefore, at issue is whether the insurer acted in bad faith in failing to consider and

evaluate his lost earnings evidence given that it had already determined that Taft had not

proven that he would have had a job with Fox but for the accident and his injuries. The

Court finds that this evidence is such that a reasonable jury could return a verdict on this

issue for the nonmoving party. See Anderson, 477 U.S. at 248. 

Next, the Court has reviewed Taft’s medical file and the notes from Dr. Fauer and Dr.

Hofstedt taking Taft off work for a period of time after the accident. (See, e.g., Dr. Fauer’s

notes, Doc. 53-4 at 2 (“Patient to be off work for the next two weeks . . .”); Doc. 53-4 at 4

(noting that Taft would continue to be “off work for four weeks.”); Dr. Hofstedt’s notes,

Doc. 53-7 at 6 (stating that Taft is in a no work status for two weeks). At deposition,

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Defendant’s adjuster Barry Friedman testified that he interpreted Taft “continuing off work”

as a statement of historical fact because of the closing of the restaurant, not a doctor’s order

taking Taft off work. (Doc. 53-14.) Plaintiffs argue that Defendant conveniently

misinterpreted these doctor’s notes because the notes clearly state that Taft should be offwork for a period of time due to his injuries. (Doc. 52 at 6-7.) The claims supervisor,

Marshall Westbrook, also took the position that the doctor’s notes were insufficient. He

testified that there was no documentation to support that Taft was physically unable to

perform his job. (Doc. 53-15 at 6.)

An insurance contract is not an ordinary commercial bargain; implicit in the contract

and the relationship is the insurer’s obligation to play fairly with its insured.” Zilisch, 196

Ariz. at 237, 995 P.2d at 279. Although insurers do not owe fiduciary duties to their

insureds, they do owe some duties of a fiduciary nature including equal consideration,

fairness and honesty. Id. The insurer is obligated to conduct a prompt and adequate

investigation, to act reasonably in evaluating the insured’s claim, and to promptly pay a

legitimate claim. Id. at 238, 995 P.2d at 280. The question is whether reasonable jurors

could conclude that in the investigation and evaluation of these doctor’s notes, Defendant

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

unreasonable. The Court finds that from this evidence a reasonable jury could return a

verdict on this issue for the nonmoving party. See Anderson, 477 U.S. at 248. 

Therefore, because the jury must decide the question of whether Defendant knowingly

acted unreasonably toward Plaintiffs in its investigation and handling of this claim, and

because Plaintiffs have presented reasonably competent evidence, this Court must deny

Defendant’s motion for summary judgment as to the bad faith claim.

IV. Punitive Damages

Defendant moves for summary judgment against Plaintiffs’ claim for punitive

damages, citing insufficient evidence. (Doc. 47 at 7-8.) 

In a bad faith tort case against an insurance company, punitive damages may only be

awarded if the evidence reflects “something more” than the conduct necessary to establish

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the tort. Rawlings v. Apodaca, 151 Ariz. 149, 160, 726 P.2d 565, 576 (1986). In Rawlings,

the Arizona Supreme Court explained the parameters of punitive damages as follows:

We restrict [the availability of punitive damages] to those cases in which the defendant’s wrongful conduct was guided by evil motives. Thus, to

obtain punitive damages, plaintiff must prove that defendant’s evil hand was

guided by an evil mind. . . . [P]unitive damages will be awarded on proof from which the jury may find that the defendant was ‘aware of and consciously

disregard[ed] a substantial and unjustifiable risk that’ significant harm would

occur.

151 Ariz. at 162, 726 P.2d at 578 (citations omitted). Summary judgment on the issue of

punitive damages must be denied if a reasonable jury could find the requisite evil mind by

clear and convincing evidence; summary judgment should be granted if no reasonable jury

could find the requisite evil mind by clear and convincing evidence. Thompson v. Better-Bilt

Aluminum Prod. Co., 171 Ariz. 550, 558, 832 P.2d 203, 211 (1992). The court construes the

evidence and all reasonable inferences drawn from the evidence in a light most favorable to

the non-moving party. Id.

Plaintiffs argue that they have submitted sufficient evidence in support of punitive

damages to avoid summary judgment. Plaintiffs contend that Defendant knew that Taft was

destitute and physically and emotionally vulnerable, yet pursued a course of action in

disregard of his interests. (Doc 52 at 11.) Plaintiffs also cite the lack of explanation they

received from Defendant on the claim, Adjuster Friedman’s multiple misinterpretations of

Taft’s doctor’s orders taking him off work, and Supervisor Westbrook’s unfair requirement

regarding the precise timing and wording of Doctor’s notes needed in order to substantiate

Taft being unable to work, and Nurse Van Belle’s alleged mistaken conclusion that Taft was

symptom free when he returned to work. (Id. at 11-13.) Plaintiffs argue that the evil mind

required to support punitive damages by clear and convincing evidence can be inferred from

the testimony of Supervisor Westbrook. (Id. at 13.) Westbrook testified that Taft had been

fully compensated by the $50,000 he already received; he did not testify that Defendant

placed a value higher than that on the claim. (Id.)

Despite the parties’ bona fide dispute as to the amount of Plaintiffs’ UIM claim, and

despite that Plaintiffs have presented sufficient evidence to support their claim of insurance

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bad faith, such facts do not automatically give rise to a claim of punitive damages. The

evidence must establish “something more” than the conduct necessary to establish the tort

of insurance bad faith. Rawlings, 151 Ariz. at 160, 726 P.2d at 576. To establish a claim for

punitive damages, the evidence must support a showing that Defendant (1) intended to cause

injury; (2) engaged in wrongful conduct motivated by spite or ill will; or (3) acted to serve

its own interests, having reason to know and consciously disregarding a substantial risk that

its conduct might significantly injure the rights of others, even though defendant had neither

desire nor motive to injure. See Bradshaw v. State Farm Mut. Auto. Ins. Co., 157 Ariz. 411,

422, 758 P.2d 1313, 1324 (1988). 

Here, at the this stage of the litigation, taking all of the evidence and considering it in

the light most favorable to the Plaintiffs, Plaintiffs have presented sufficient evidence by

which a jury could find that Defendant acted with the requisite “evil mind.” Defendant acted

to serve its own interests, having reason to know and consciously disregarding a substantial

risk that its conduct might significantly injure the rights of Plaintiffs, even though Defendant

had neither desire nor motive to injure. Therefore, the Court will deny Defendant’s motion

for partial summary judgment as to punitive damages.

CONCLUSION

Accordingly, on the basis of the foregoing,

IT IS HEREBY ORDERED granting in part and denying in part Defendant’s motion

to strike undisclosed exhibits and legal theories. (Doc. 59.)

IT IS FURTHER ORDERED denying Defendant’s motion to strike Plaintiffs’ claim

for lost earning capacity and institutional bad faith, and denying the motion to strike Dr.

Fauer’s October 15, 2012 and December 6, 2010 reports. 

IT IS FURTHER ORDERED granting Defendant’s motion to strike to the extent

that Plaintiffs assert a claim for emotional distress damages related to lost equity in their

home, and striking from Taft’s declaration his assertion that emotional distress from their

home going into foreclosure was related to Defendant’s alleged bad faith administration of

his claim for UIM benefits.

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IT IS FURTHER ORDERED granting in part and denying in part Defendant’s

motion for partial summary judgment. (Doc. 47.)

IT IS FURTHER ORDERED granting Defendant’s motion for partial summary

judgment as to Plaintiffs’ breach of contract claim on the issue of lost home equity damages.

Defendant did not breach its insurance contract by denying UIM benefits for lost home

equity. 

IT IS FURTHER ORDERED denying Defendant’s motion for partial summary

judgment as to Plaintiffs’ claim of insurance bad faith.

IT IS FURTHER ORDERED denying Defendant’s motion for partial summary

judgment against Plaintiffs’ claim for punitive damages.

IT IS FURTHER ORDERED setting this case for a Final Pretrial Conference on

November 18, 2013 at 2:30 p.m. This matter appearing ready for trial, a Final Pretrial

Conference shall be held in Courtroom 605, Sandra Day O’Connor U.S. Federal Courthouse,

401 W. Washington St., Phoenix, Arizona 85003. The attorneys who will be responsible for

the trial of the case shall attend the Final Pretrial Conference. Counsel shall bring their

calendars so that trial scheduling can be discussed.

IT IS FURTHER ORDERED that, if this case shall be tried to a jury, the attorneys

who will be responsible for the trial of the lawsuit shall prepare and sign a Proposed Pretrial

Order and submit it to the Court on Friday, October 25, 2013.

IT IS FURTHER ORDERED that the content of the Proposed Pretrial Order shall

include, but not be limited to, that prescribed in the Form of Pretrial Order attached hereto.

Statements made shall not be in the form of a question, but should be a concise narrative

statement of each party’s contention as to each uncontested and contested issue.

IT IS FURTHER ORDERED pursuant to Federal Rule of Civil Procedure 37(c) that

the Court will not allow the parties to offer any exhibits, witnesses, or other information that

were not previously disclosed in accordance with the provisions of this Order and/or the

Federal Rules of Civil Procedure and/or not listed in the Proposed Pretrial Order, except for

good cause. 

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IT IS FURTHER ORDERED directing the parties to exchange drafts of the

Proposed Pretrial Order no later than seven (7) days before the submission deadline.

IT IS FURTHER ORDERED that the parties shall file and serve all motions in

limine no later than Friday, October 25, 2013. Each motion in limine shall include the legal

basis supporting it. Responses to motions in limine are due Friday, November 1, 2013. No

replies will be permitted. The attorneys for all parties shall come to the Final Pretrial

Conference prepared to address the merits of all such motions.

IT IS FURTHER ORDERED directing the parties to complete the following tasks

by the time of the filing of the Proposed Pretrial Order if they intend to try the case before

a jury:

(1) The parties shall jointly file a description of the case to be read to the jury.

(2) The parties shall jointly file a proposed set of voir dire questions. The voir

dire questions shall be drafted in a neutral manner. To the extent possible, the parties

shall stipulate to the proposed voir dire questions. If the parties have any

disagreement about a particular question, the party or parties objecting shall state the

reason for their objection below the question.

(3) The parties shall file a proposed set of stipulated jury instructions. The

instructions shall be accompanied by citations to legal authority. If a party believes

that a proposed instruction is a correct statement of the law, but the facts will not

warrant the giving of the instructions, the party shall so state. The party who believes

that the facts will not warrant the particular instruction shall provide an alternative

instruction with appropriate citations to legal authority.

(4) Each party shall submit a form of verdict to be given to the jury at the end of

the trial.

IT IS FURTHER ORDERED directing the parties to submit their proposed joint

statement of the case, joint voir dire questions, stipulated jury instructions, and verdict forms.

IT IS FURTHER ORDERED that if the case will be tried to the Court, rather than

to a jury, instead of filing a Proposed Pretrial Order, each party shall submit proposed

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findings of fact and conclusions of law by the same date the Proposed Pretrial Order is due.

IT IS FURTHER ORDERED that the parties shall keep the Court apprised of the

possibility of settlement and should settlement be reached, the parties shall file a Notice of

Settlement with the Clerk of the Court.

IT IS FURTHER ORDERED that this Court views compliance with the provisions

of this Order as critical to its case management responsibilities and the responsibilities of the

parties under Rule 1 of the Federal Rules of Civil Procedure.

DATED this 26th day of September, 2013.

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