Morgan v. American Family

FOR PUBLICATION UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

JAY MORGAN, a minor child, by  and through his special conservator, James Clark; JAMES CLARK, on behalf of himself and on behalf of all surviving statutory beneficiaries of Geri Morgan, No. 07-16278 deceased; H GRADY JONES; GERI MORGAN; GERI MORGAN,  D.C. No. CV-06-01136-JAT Plaintiffs-Appellees, ORDER v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, a foreign corporation, Defendant-Appellant.  Appeal from the United States District Court for the District of Arizona James A. Teilborg, District Judge, Presiding

Argued and Submitted February 11, 2009—San Francisco, California

Filed April 22, 2009

CERTIFICATION OF QUESTION OF STATE LAW

4656 MORGAN v. AMERICAN FAMILY MUTUAL Before: Ronald M. Gould, Jay S. Bybee, and Timothy M. Tymkovich,* Circuit Judges.

Order; Dissent by Judge Bybee

ORDER

This diversity case is on appeal from the United States Dis- trict Court for the District of Arizona. The certified question involves the interpretation and application of Arizona’s doc- trine of reasonable expectations to insurance contracts.

Plaintiff Jay Morgan (Morgan) was a passenger in an auto- mobile driven by his father, John Morgan, when John Morgan caused a severe car accident. Morgan’s mother, Geri Morgan, was also a passenger and was killed in the accident. Morgan’s father was seriously injured and suffered permanent brain damage.

Morgan filed a claim with American Family Mutual Insur- ance Company under an umbrella personal liability insurance policy, seeking reimbursement for damages stemming from the wrongful death of his mother. American Family denied the claim pursuant to the Policy’s “intra-insured suits” exclu- sion, which bars recovery against family members for their negligence. Morgan filed suit, seeking a declaration that the intra-insured suits exclusion is invalid under Arizona law. Morgan asserted that insurance policies must be construed to further the reasonable expectations of the policyholder, and no reasonable policyholder would believe that family mem- bers are excluded from liability for their negligence.

*The Honorable Timothy M. Tymkovich, United States Circuit Judge for the Tenth Circuit, sitting by designation.

MORGAN v. AMERICAN FAMILY MUTUAL 4657 The district court granted summary judgment in favor of Morgan, though neither party presented evidence regarding John Morgan’s expectations in acquiring the Policy. Ameri- can Family now appeals.

Because the disposition of this appeal turns on an important and unsettled question of Arizona law, we submit this request to the Arizona Supreme Court to exercise its discretion to accept the following certified question in accordance with Arizona Supreme Court Rule 27 and Section 12-1861 of the Arizona Revised Statutes:

Can Arizona’s doctrine of reasonable expectations operate to void a named-insured exclusion in an insurance policy (1) without evidence of the circum- stances surrounding the acquisition and issuance of the policy, and (2) where the exclusion is contained among typical exclusions in the policy?

I. Background

The facts of this case are undisputed. Morgan’s parents, John and Geri Morgan, purchased the Policy from American Family and are listed as “named insureds” on the declarations page. In the Policy, American Family agreed to “pay, up to our limit, compensatory damages for which an insured becomes legally liable for injury caused by an occurrence covered by this policy.” The declarations page states that the limit of liability under the Policy is one million dollars for “each occurrence.” Including the declarations page, the boilerplate “Insuring Agreement,” two endorsements, and a “notice of information practices,” the Policy is eleven pages long. The “Insuring Agreement” contains twenty-five alpha- betically ordered exclusions; the intra-insured suits exclusion is number ten.

While the Policy was in effect, John Morgan negligently caused a severe automobile accident. Morgan was a passenger

4658 MORGAN v. AMERICAN FAMILY MUTUAL in the automobile, along with Geri Morgan and John and Geri’s nephew, Garth Jones. Geri Morgan died as a result of the accident. John Morgan suffered physical and mental inju- ries, including brain damage, stroke, and paralysis. Morgan and Garth Jones were also injured.

Morgan, on behalf of himself and Geri Morgan’s wrongful death beneficiaries, presented a claim to American Family for the wrongful death of Geri Morgan. American Family denied the claim, asserting the Policy’s intra-insured suits exclusion applied. The intra-insured suits exclusion states:

We will not cover personal injury to the named insured or anyone within the meaning of part a or b of the definition of insured.

Because Morgan’s claim is based on the wrongful death of Geri Morgan, it is derivative of the injuries suffered by a “named insured” and falls within the language of the intra- insured suits exclusion.

After American Family denied his claim, Morgan filed a complaint in Arizona Superior Court. The complaint sought judgment declaring the Policy’s intra-insured suits exclusion to be unenforceable under Arizona’s reasonable expectations doctrine. American Family removed to the United States Dis- trict Court for the District of Arizona, invoking federal diver- sity jurisdiction.

The parties subsequently filed cross-motions for summary judgment. After hearing oral argument on the cross-motions, the district court issued an order granting summary judgment in favor of Morgan. The order applied Arizona’s reasonable expectations doctrine to invalidate the Policy’s intra-insured suits exclusion, even though Morgan was unable to present testimony from his injured parents regarding their reasonable expectations of the Policy’s coverage because Geri Morgan was deceased and John Morgan suffered severe cognitive def-

MORGAN v. AMERICAN FAMILY MUTUAL 4659 icits as a result of the accident. Due to the lack of testimonial evidence, the district court relied on the form and content of the policy alone as the factual basis for judgment in Morgan’s favor. The court relied on State Farm Mutual Automobile Insurance Co. v. Falness, 39 F.3d 966 (9th Cir. 1994), to reach its conclusion.

II. Analysis

We have applied the Arizona reasonable expectations doc- trine to invalidate a named-insured exclusion in similar cir- cumstances to this case. Falness, 39 F.3d at 967-68. In Falness, the named insureds under the policy, John and Anna Hugg, were killed in an automobile collision, and Anna Hugg’s estate sought to collect under the policy’s liability provisions. Id. at 966. State Farm refused to pay the claim, citing the named-insured exclusion, which stated, “[t]here is no coverage . . . for any bodily injury to: . . . you.” Id. at 967. “You” was defined in the policy as “the named insured or named insureds.” Id.

Prior to issuing our decision in Falness, we certified two questions to the Arizona Supreme Court: (1) whether the named-insured exclusion was facially invalid under Darner Motor Sales, Inc. v. Universal Underwriters Insurance Co., 682 P.2d 388 (Ariz. 1984), and (2) whether the doctrine of reasonable expectations applied to the named-insured exclu- sion. See Falness, 39 F.3d at 967; State Farm Mut. Auto Ins. Co. v. Falness (Falness II), 872 P.2d 1233, 1234 (Ariz. 1994). The Arizona Supreme Court answered that the named-insured exclusion was not facially invalid under Darner, but could be ruled invalid “under appropriate circumstances.” Falness II, 872 P.2d at 1234. The court then stated, “[a]n analysis of the format and clarity of the policy, as well as the circumstances surrounding its acquisition and issuance, is required to deter- mine whether the exclusion falls outside the reasonable expectations of the insureds.” Id. (emphasis added).

4660 MORGAN v. AMERICAN FAMILY MUTUAL Because the Huggs were deceased, we could not “make the specific factual inquiry suggested by the Arizona Supreme Court.” Falness, 39 F.3d at 968. However, we found there was “no meaningful distinction” between the named-insured exclusion at issue and a household exclusion invalidated by the Arizona Court of Appeals in State Farm Mutual Automo- bile Insurance Co. v. Dimmer, 773 P.2d 1012 (Ariz. Ct. App. 1988). Falness, 39 F.3d at 968. Indeed, as we noted, “[t]he Dimmers had purchased substantially the same form of policy from State Farm as the Huggs did.” Id. at 967. We therefore adopted the reasoning of Dimmer and invalidated the State Farm named-insured exclusion. Id. at 968.

Here, we cannot analyze “the circumstances surrounding [the Policy’s] acquisition and issuance” because the policy- holders cannot provide testimony. See Falness II, 872 P.2d at 1234. We also do not have the benefit of a decision by an Ari- zona court construing “substantially the same form of policy,” as we did in Falness. See 39 F.3d at 968.

Furthermore, various cases from the Arizona Supreme Court and Arizona Court of Appeals suggest the reasonable expectations doctrine does not apply unless there is some evi- dence that the insurance company had reason to believe the insureds expected coverage. See Darner, 682 P.2d at 396-97 (the doctrine of reasonable expectations applies when “the [insurer] has reason to believe that the [insured] would not have accepted the agreement if he had known that the agree- ment contained the particular term” (quoting Restatement (Second) of Contracts § 211 cmt. f (1981) (emphasis added))); see also Phila. Indem. Ins. Co. v. Barerra, 21 P.3d 395, 404 (Ariz. 2001) (an insured reasonably believed he would be covered by an insurance policy when driving under the influ- ence in part because the car rental company who sold the insurance rented him a car knowing he had been in a DUI- related accident two weeks before); Averett v. Farmers Ins. Co. of Ariz., 869 P.2d 505, 508 (Ariz. 1994) (the insured was particularly concerned about coverage for his family because

MORGAN v. AMERICAN FAMILY MUTUAL 4661 his wife had health problems, and the insurance agent alleg- edly knew of these health problems); Do v. Farmers Ins. Co. of Ariz., 828 P.2d 1254, 1257-58 (Ariz. Ct. App. 1991) (the insured’s expectations that his children were covered under a policy were “not unreasonable” because an insurance agent told the insured his family would be covered up to the poli- cy’s limits); State Farm Fire & Cas. Co. v. Powers, 786 P.2d 1064, 1067 (Ariz. Ct. App. 1989) (though the insured testified she thought she was covered, “[t]here was no evidence that the insurance company had reason to believe that [the insureds] would not have accepted the insurance policy if they had known of the exclusion”); cf. Shade v. U.S. Fid. & Guar. Co., 801 P.2d 441, 443 (Ariz. Ct. App. 1990) (“The record is devoid of any evidence supporting the [plaintiffs’] theory of reasonable expectation.”).

Because the Arizona Supreme Court has held that named- insured exclusions are not “facially invalid,” Falness II, 872 P.2d at 1234, we are reluctant to apply the reasonable expec- tations doctrine in this case without any evidence allowing us “to determine whether, and to what extent, there was a meet- ing of the minds between the contracting parties” with regard to the intra-insured suits exclusion at issue. Id. (quoting Aver- ett, 869 P.2d at 508). To do so would in effect adopt a per se rule against the exclusion, a position the Arizona courts have declined to adopt. See Averett, 869 P.2d at 507.

As a second matter, the Arizona Supreme Court advises us to consider the “format and clarity” of insurance policies in considering the doctrine of reasonable expectations. But the intra-insured exclusion in the Morgans’ Policy is not exceed- ingly complex or submerged in legalese beyond the ability of an ordinary consumer, and there is no basis here to conclude that it was more complex or unclear than any other exclusion in the Policy. See Restatement (Second) of Contracts, § 211 cmt. f (doctrine of reasonable expectations applies to terms that are “bizarre and oppressive” or undermine the dominant purpose of the contract). And State Farm Fire & Insurance

4662 MORGAN v. AMERICAN FAMILY MUTUAL Co. v. Grabowski, 150 P.3d 275, 282 (Ariz. App. 2007), indi- cates that Arizona’s intermediate court understands this inquiry might be a fact question for the jury in the absence of evidence that the insurance company had reason to believe the policyholder would not have agreed to the exclusion. Perhaps this inquiry is a question of law for the court absent evidence as to the parties’ expectations or beliefs, see Falness, 39 F.3d at 968, but precedent from Arizona courts is not explicit on this point.

In sum, given that the Policy differs from those considered in the Arizona cases cited above, we would benefit from guid- ance as to how insurance policies should be evaluated under Arizona law, where:

(1) no evidence exists regarding the policyholder’s expec- tations or the insurance company’s beliefs, and

(2) the language and placement of the named-insured exclusion among other policy exclusions does not suggest a reasonable policyholder would have declined the policy.

III. Certification of the Question to the Arizona Supreme Court

This court therefore concludes that certification of the ques- tion presented will further the interests of comity and federal- ism by giving the Arizona Supreme Court the opportunity to answer the question presented in the first instance, should it elect to do so. This court recognizes the discretion of the Ari- zona Supreme Court to reformulate the question posed herein. See Torres v. Goodyear Tire & Rubber Co., 786 P.2d 939, 941 n.1 (Ariz. 1990).

In compliance with Arizona Supreme Court Rule 27(a)(3)(C), the court provides the following information regarding the names and addresses of counsel of record:

MORGAN v. AMERICAN FAMILY MUTUAL 4663 On behalf of American Family Mutual Insurance Com- pany:

Lynn M. Allen Allen & Lewis, PLC 4835 E. Cactus Road, Suite 340 Scottsdale, Arizona 85254 (602) 443-0402

On behalf of Jay Morgan:

Ronald Ozer and Herbert L. Ely Ely, Bettini, Ulman & Rosenblatt 3200 N. Central Avenue, Suite 1930 Phoenix, Arizona 85012 (602) 230-2144

The Clerk of this court shall transmit a copy of this certifi- cation order to counsel for all parties. The Clerk shall also for- ward, under the Ninth Circuit’s official seal, the original and six copies of this certification order to the Arizona Supreme Court.

This appeal is ordered ABATED pending resolution of the certified question.

Judge Gould, Presiding Circuit Judge United States Court of Appeals for the Ninth Circuit

BYBEE, Circuit Judge, dissenting:

Fifteen years ago we certified a nearly identical question to the Arizona Supreme Court. See State Farm Mut. Auto. Ins.

4664 MORGAN v. AMERICAN FAMILY MUTUAL Co. v. Falness, 39 F.3d 966, 967 (9th Cir. 1994). We received an answer and we then issued an opinion in Falness. Id.; State Farm Mut. Auto. Ins. Co. v. Falness, 872 P.2d 1233, 1234 (Ariz. 1994). Falness is not in question in Arizona courts. Indeed, the Arizona Supreme Court has cited our Falness decision with approval. See Philadelphia Indem. Ins. Co. v. Barerra, 21 P.3d 395, 404 (Ariz. 2001) (en banc).

Here, the majority has certified nearly the same question again to the Arizona Supreme Court. There really isn’t much doubt how this case must be resolved after Falness. Rather, we are certifying because we doubt the wisdom of Arizona’s application of its rule. In effect, we are inviting Arizona to revisit the reasonable expectations doctrine as applied to the named insured exclusion. I have my own doubts about the wisdom of the rule and its operation in Arizona, but I still don’t think there is any lack of “controlling precedent in the decisions of the [Arizona S]upreme [C]ourt and intermediate appellate courts” to justify our order. See ARIZ. REV. STAT. § 12-1861. I respectfully dissent.

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