Benson v. Casa De Capri Enters.

1

Jacob Benson, et al., Plaintiffs, v. Casa De Capri Enterprises LLC, et al., Defendants.

No. CV-18-00006-PHX-DWL

United States District Court, D. Arizona

April 11, 2023

ORDER

Dominic W. Lanza, United States District Judge

INTRODUCTION

Jacob Benson is a disabled vulnerable adult who received skilled nursing care at a now-defunct facility called Casa de Capri Enterprises LLC (“Capri”). In December 2012 Benson and other family members (together “Plaintiffs”) brought a negligence action against Capri in Arizona state court.

At the time, Capri had a “claims paid” insurance policy issued by Defendant Continuing Care Risk Retention Group Inc. (“CCRRG”). Under this unusual type of policy, the insurer is only responsible for indemnifying the insured against claims that become payable while the policy remains in effect. In contrast, under an “occurrence” policy or a “claims made” policy (which are more common), the insurer becomes responsible for indemnification so long as the liability-generating event occurred (or was disclosed to the insurer) during the policy term.

CCRRG initially assumed the defense of Plaintiffs' lawsuit against Capri pursuant to Capri's insurance policy. However, after Capri became insolvent, stopped paying its premiums, declared bankruptcy, and cancelled the policy, CCRRG withdrew the defense. Years later, after the bankruptcy stay was lifted, Plaintiffs obtained a $1.5 million judgment against Capri and then initiated this garnishment action against CCRRG.

In February 2023, after years of complicated litigation, the Court issued a lengthy order resolving the parties' cross-motions for summary judgment, holding that CCRRG had no duty under the relevant insurance policies to indemnify Capri for the judgment. (Doc. 149.) However, in a footnote, the Court noted that it was unclear whether the summary judgment ruling was sufficient to fully dispose of the case, given that Plaintiffs had asserted during oral argument that they “also seek to recover under the theory that CCRRG breached its duty to defend Capri in the underlying lawsuit.” (Id. at 15 n.4.) Accordingly, the Court ordered the parties to submit supplemental briefing on “whether Plaintiffs may separately pursue relief in this garnishment action under a breach-of-the-duty-to-defend theory.” (Id. at 41.)

Now pending before the Court are the parties' supplemental briefs. (Docs. 156, 157.) For the following reasons, the Court concludes that Plaintiffs adequately disclosed their intention to pursue relief under a breach-of-the-duty-to-defend theory. To the extent the parties attempted, in their supplemental briefs, to go beyond the disclosure issue and address the merits of Plaintiffs' alternative theory, that briefing is undeveloped and premature. Accordingly, and in an effort to ensure that the issues are presented in a procedurally appropriate format, the Court will authorize the parties to file a second round of summary judgment motions.

BACKGROUND

I. Relevant Facts

The background details of this case are set forth in the February 2023 summary judgment order. (Doc. 149.) An abbreviated summary is provided below to set the stage for the disputed disclosure issue.

On December 10, 2012, Plaintiffs filed suit in Maricopa County Superior Court against Capri, alleging abuse and neglect of a vulnerable adult and negligence. (Doc. 65 ¶ 1.)

At the time the lawsuit was served, Capri was insured under a “professional liability insurance policy” issued by CCRRG. (Doc. 65 ¶ 3.) The policy (the “2012 Policy”) provided coverage from January 1, 2012 to January 1, 2013 and had a policy limit of $1 million. (Doc. 56-1 at 36.) Capri renewed its policy with CCRRG the following year (the “2013 Policy”). (Doc. 65 ¶ 4.) The 2013 Policy provided coverage from January 1, 2013 to January 1, 2014. (Doc. 13-1 at 5.)

The 2012 and 2013 Policies are “claims paid” policies. (Doc. 132 ¶ 1.) In the “Coverages” section of each policy, under the subheading “Insuring Agreement,” CCRRG agreed to pay “amounts within the policy limits for ‘Damages,' [and] ‘Cost of Defense' . . . on behalf of a ‘Member' who becomes legally obligated to ‘Pay' ‘Damages' and Costl of Defense' during the time they are a CCRRG ‘Member.'” (Doc. 13-1 at 13, emphasis added.) In the subscription agreement, CCRRG elaborated that “[t]he terms and conditions of this type of coverage differ significantly from a typical occurrence or claims made indemnification insurance policy. In essence, . . . CCRRG has no responsibility for any portion of a claim not actually paid during the contract period. Under the Claims Paid policy losses are only covered by the Company if the insured is a Member of CCRRG when the payment is made . . . .” (Id. at 58.)

Before the 2013 renewal, CCRRG offered Capri two renewal options: (1) to continue with the existing “claims paid” policy for $256,169.32; or (2) to switch to a “claims made” policy for $292,345.45. (Doc. 132 ¶ 17.) Capri chose the less expensive “claims paid” option. (Id.)

On December 28, 2012, Capri was served in the Arizona state court lawsuit. (Doc. 65 ¶ 2.) It is undisputed that Capri timely reported the lawsuit to CCRRG, as it was required to do under the 2012 Policy. (Id. ¶ 20.) It is also undisputed that CCRRG accepted Capri's tender under the 2012 Policy and appointed defense counsel to defend the lawsuit without a written reservation of rights. (Id. ¶¶ 21, 23.)

Regarding CCRRG's duty to defend, the 2012 Policy states: “Our right and duty to defend ends when we have exhausted the applicable limit of insurance by the payment of ‘Cost of Defense'. . . under this Policy or, when this policy is cancelled or not renewed for any reason, provided however, in the event CCRRG is paying ‘Cost of Defense'. . . CCRRG shall continue to pay ‘Cost of Defense'. . . for all such ‘Claims' for a period of time not to exceed thirty (30) days to enable such former ‘Member' to assume its own legal defense.” (Doc. 56-1 at 2.) The relevant language in the 2013 Policy is identical. (Doc. 13-1 at 13.)

After CCRRG began providing a defense of the lawsuit, Capri defaulted on its obligation to pay certain deductibles. (Doc. 65 ¶ 24.) As a result, Magnolia,^[1] through Bates, sent Capri a letter on July 15, 2013 informing Capri of its “seriously delinquent” status “in meeting its insurance deductible payment obligations.” (Doc. 56-6 at 1-2.) The letter stated that CCRRG's board of directors could terminate Capri's membership for the outstanding delinquencies, in which case “Capri's right to continued coverage of existing open claims . . . may be at risk if the outstanding default in payment is not cured to the satisfaction of the [board].” (Id. at 1.)

On July 19, 2013, CCRRG and Capri agreed to a payment plan concerning the outstanding deductible obligation. (Doc. 65 ¶ 25.) However, less than one month into that plan, Capri again defaulted. (Id.) As a result, CCRRG again threatened action against Capri. (Id.)

On August 13, 2013, CCRRG issued a notice of intent to cancel the 2013 Policy, which stated that the Policy would be cancelled if Capri did not pay $22,270.03 by August 27, 2013. (Doc. 56-8 at 1; Doc. 65 ¶ 26.)

On August 19, 2013, Capri filed for bankruptcy. (Doc. 65 ¶ 27.) Afterward, Plaintiffs' lawsuit against Capri was stayed. (Doc. 1-1 at 54-55, 58-59, 62.)

By August 22, 2013, CCRRG received notice of the bankruptcy. (Doc. 65 ¶ 33.) That same day, the bankruptcy court authorized a debtor in possession loan for Capri “to immediately pay the . . . monthly premium for liability insurance of approximately $30,000.” (Doc. 65-13 at 3 ¶ 7.)

On September 6, 2013, CCRRG rescinded its previously issued notice of intent to cancel. (Doc. 64 ¶ 35; Doc. 56-13.)

On September 20, 2013, the bankruptcy court approved the sale of Capri's assets to an unrelated party. (Doc. 65 ¶ 36.)

On September 25, 2013, Capri stopped payment on a pair of premium checks it had previously sent to CCRRG, which CCRRG had not yet deposited in light of the bankruptcy proceeding. (Doc. 65 ¶ 37.)

On October 18, 2013, Capri's agent sent an email to CCRRG requesting the cancellation of the 2013 Policy “effective 8/1/13.” (Doc. 56-14 at 1-2.)^[2]

Capri had the option to purchase an “Extended Reporting Period” upon cancellation of the 2013 Policy, which would have had the effect of maintaining indemnity coverage for existing claims that had not yet been paid. (Doc. 132 ¶ 24.) The premium for the Extended Reporting Period would have been “300% of the premium charged for the annualized 2013 Policy, or approximately $599,328.90.” (Id. ¶ 26.) It is undisputed that Capri declined to purchase the Extended Reporting Period, although the parties previously disputed Capri's reasons for doing so.

On November 19, 2013, CCRRG (via Magnolia) sent a letter to Capri confirming that the 2013 Policy had been terminated as of August 1, 2013. (Doc. 65-19.) This letter further provided:

This is a courtesy reminder that [Capri] elected to cancel its membership in the Continuing Care Risk Retention Group (CCRRG), which membership was terminated on August 1, 2013 and, . . . as a result of that cessation of membership, the obligation of CCRRG to make any payments under the above policy for indemnity ended as of that day. Moreover, the obligation of CCRRG to pay for the defense of the above claim ended thirty (30) days after the cessation of membership, or on August 31, 2013.

(Id. at 1.)

On August 14, 2014, defense counsel withdrew from representing Capri in Plaintiffs' lawsuit. (Doc. 65 ¶ 47; Doc 1-1 at 65-66.)

In March 2015, Plaintiffs tendered a policy limits settlement demand to CCRRG, which was rejected. (Doc. 65 ¶¶ 48-49.) Plaintiffs then sought and obtained relief from the bankruptcy stay “in order...