Appeals Court Asks Arizona Justices to Define ‘Fortuitous Loss’

What constitutes a fortuitous loss in Arizona? That’s the question the 9th U.S. Circuit Court of Appeals has asked the Arizona Supreme Court to answer to resolve a commercial property damage dispute.

The circuit court is seeking clarity from the state Supreme court, because Arizona case law is unclear on when a loss becomes fortuitous.

In the underlying case, the owner of a Tempe commercial building submitted a claim to Great Northern Insurance Company seeking coverage for property damage caused by of one of its tenants, a seafood distributor. Mainspring Capital Group, the building owner, found multiple instances of damage over a 12-year period.

Mainspring first discovered damage caused by the seafood distributor in 2010 and made repairs based on recommendations by an engineering firm. Mainspring did almost everything the engineers recommended but stopped short of taking any optional measures described in the firm’s remediation program.

In 2014, Mainspring added a provision to the lease that made the tenant responsible for certain restoration obligations.

The second discovery of damage occurred in 2021. This included cracking in concrete wall panels and stairs near the fishery’s docking bay.

More damage was discovered in 2022, including the degradation of concrete tilt panels to the extent that the building’s structural integrity was compromised. Mainspring sent a notice of loss to Great Northern.

The insurer denied Mainspring coverage under an all-risk property insurance policy after its investigation concluded that the building damage was a result of poor soil preparation, settlement, and long-term erosion, a loss the insurer said fell within the policy’s inherent-vice, faulty-workmanship, settling, and wear-and-tear exclusions.

After conducting a second site visit at the request of Mainspring, the insurer again denied coverage, asserting that the cause of loss was expressly excluded from coverage by the wear-and-tear and settling exclusions.

Mainspring sued Great Northern in the Superior Court for Maricopa County, alleging the insurer breached the terms of the policy by denying coverage and breached its duty of good faith and fair dealing.

The court granted Great Northern’s motion to dismiss the lawsuit and awarded the insurer approximately $200,000 in attorneys’ fees.

While the district court found no evidence that Mainspring knew the loss would occur, the court reasoned that the loss was not fortuitous because it “was reasonably foreseeable and almost certain to occur,” as Mainspring took only the engineering firm’s recommended measures to “mitigate” future damage, and not the measures recommended to “prevent it.”

The provision in the lease shifting the cost of any repair onto the tenant showed that Mainspring anticipated that future damage may occur, the district court ruled.

Mainspring appealed the case to the Ninth Circuit, which homed in on the “primary issue” of whether Mainspring’s loss was fortuitous. The issue of fortuity is fundamental to the practice of insurance.

“The principle that insurance may cover only the risk of fortuitous loss is one of the few ‘mandatory rules’ of insurance law—a rule that is considered to ‘protect interests or further goals that are sufficiently important to supplant freedom of contract.'” the appeals court wrote.

Allowing coverage for a non-fortuitous event would tend to encourage fraud and reward the intentional destruction of insured property, the court said.

Upon finding no precedent of Arizona appellate courts defining the parameters of when a loss is fortuitous, the appeals court panel certified the following question to the Arizona Supreme Court: Is damage to property a “fortuitous” loss when, based on the insured’s knowledge at the time the insurance policy issued, it was reasonably foreseeable that such damage was almost certain to occur if certain preventative measures were not taken?

The Arizona Supreme Court may expand or modify upon the question as it deems appropriate, the appeals court said. Should the Arizona Supreme Court decide not to accept certification, Ninth Circuit will decide the question as it believes an Arizona court would.