Nolan v. Hsb

NOTICE: NOT FOR OFFICIAL PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

IN THE

ARIZONA COURT OF APPEALS
DIVISION ONE

NOLAN REAL ESTATE SERVICES INC,
Plaintiff/A ppellee,

Vv.

THE HARTFORD STEAMBOILER
INSPECTION AND INSURANCE COMPANY,
Defendant/Appellant.

No. 1 CA-CV 20-0104
FILED 3-23-2021

Appeal from the Superior Court in Maricopa County
No. CV2012-013163
The Honorable Rosa Mroz, Judge

AFFIRMED

COUNSEL

Richards & Moskowitz, PLC, Phoenix
By William A. Richards
Co-Counsel for Plaintiff/Appellee

Lewis Rice, LLC, Kansas City, MO
By Thomas R. Larson, M. Cory Nelson
Co-Counsel for Plaintiff/Appellee

Raymond Greer & McCarthy, PC, Scottsdale
By Daniel W. McCarthy
Co-Counsel for Defendant/A ppellant
Gammage & Burnham, PLC, Phoenix
By Cameron C. Artigue, Christopher L. Hering
Co-Counsel for Defendant/A ppellant

Jones Turner, LLP, Irvine, CA
By Alan M. Jones, Jeffrey N. Gesell
Co-Counsel for Defendant/A ppellant

MEMORANDUM DECISION

Judge David D. Weinzweig delivered the decision of the Court, in which
Presiding Judge David B. Gass and Judge Michael J. Brown joined.

WEINZWEIG Judge:

q1 The Hartford Steam Boiler Inspection and Insurance
Company (“Hartford”) appeals a jury verdict for Nolan Real Estate
Services, Inc. (“Nolan”). Because Hartford shows no error, we affirm.

FACTS AND PROCEDURAL BACKGROUND

q2 We view the facts and inferences in the most favorable light
to sustaining the jury’s verdict. Gonzales v. City of Phoenix, 203 Ariz. 152,
153, § 2 (2002). Nolan managed an apartment complex owned by Parkway
Associates (“Parkway”) under a management agreement, which
designated Nolan as Parkway’s exclusive agent to manage and maintain
the complex.

I. Broken Chiller

q3 The apartment complex’s air conditioning system included a
commercial chiller and water tower. The chiller broke in the summer of
2011, after operating for over 18,000 hours, leaving the complex without
enough air conditioning. Nolan hired cooling experts to examine the
chiller, and they diagnosed the problem as a “badly scarred” slide valve.
More specifically, the slide valve moved back and forth on a “steel rod or
shaft housed inside of rubber-encased metal spring seals” to increase and
decrease the delivery of cool air; the rubber seals eroded over time,
exposing the metal springs underneath; and the springs scratched the steel
shaft—causing the valve to stick at a 40 percent load capacity. Nolan
replaced the slide valve and repaired the chiller at Parkway’s expense.
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Decision of the Court

II. Insurance Policy

q4 Nolan had an insurance policy (“Policy”) with Hartford for
“Equipment Breakdown Coverage.” As relevant here, the Policy covered
loses caused by a “fortuitous event,” which included a “mechanical
breakdown.” The Policy did not, however, cover loses caused by “wear
and tear” or “any gradually developing condition.” Neither “mechanical
breakdown” nor “wear and tear” was defined by the Policy.

q5 Nolan tendered an insurance claim to Hartford under the
Policy for the broken chiller. Hartford’s engineer investigated the claim and
concluded “[t]he root cause for this damage to the slide valve shaft was
mechanical wear — metal against metal rubbing — that occurred over weeks
or months.” Hartford thus denied the claim, reasoning that “the loss is due
to wear and tear of the slide valve and seals,” and “[s]ince wear and tear is
specifically excluded under the [Policy], this loss is not covered.” Nolan
sued Hartford for breach of contract and bad faith. Hartford unsuccessfully
moved for summary judgment on the coverage issue.

Ill. Jury Trial

6 A jury trial was held. Nolan and Hartford agreed on what
caused the chiller’s malfunction, and their expert witnesses agreed the
rubber seals should have prevented direct contact between the metal
springs and shaft. They disagreed, however, on whether this represented a
covered loss under the Policy. Nolan argued the chiller suffered a
“mechanical breakdown,” while Hartford argued it malfunctioned based
on “wear and tear.”

q7 Nolan called an expert witness, Bill Alexander, who owns a
full service mechanical contracting company that installs and services air
conditioning systems. Alexander told the jury that ordinary wear of the
seals did not cause the chiller to malfunction and instead pointed to other
possible causes, including contaminated oil, excessive oil, excessive oil
pressure or a defective rubber-coating design. The jury also heard
testimony that the chiller’s manufacturer—Carrier Corporation—had
changed the rubber material encasing the metal springs based on reports of
multiple instances of seal failure. Midway through trial, Hartford
unsuccessfully moved for judgment as a matter of law, arguing that Nolan
sustained no damage or loss because the apartment complex’s owner,
Parkway, paid to fix the chiller.

q8 At the end of trial, the court instructed the jury on the
elements of Nolan’s breach of contract claim. As shown in these
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screenshots, which refer to Hartford as “HSB,” the jury instructions
explained the court's role to interpret the insurance contract:

Interpretation of Contract

The interpretation of a contract, including the insurance policy issued
by HSB to Nolan is a question of law for the Court to decide. You may not
attempt to interpret the policy in a manner contrary to these instructions.

q9 The court thus defined the relevant contract terms for the jury
(“mechanical breakdown” and “wear and tear”) as follows:

Breach of Contract

Nolan claims that HSB breached the parties’ insurance contract. On
this claim, Nolan must prove that there was an insurance contract, HSB
breached the contract, and that breach resulted in damage to Nolan.

The parties agree that there was an insurance contract.

Nolan claims that HSB breached the insurance contract. On its claim
for breach of contract, Nolan must prove that an “accident”, as defined in the
policy, occurred. To show that an “accident” occurred, Nolan must prove the
following elements:

1. there was a “fortuitous event’; and
2. the event caused direct physical damage to “covered equipment”.

A “fortuitous event” includes a “mechanical breakdown.” The term
“mechanical breakdown” is not specifically defined in the HSB insurance
policy. For purposes of this case, the term “mechanical breakdown” means “a
functional defect in the moving parts of machinery which causes it to operate
improperly or cease operating.”

As defined in the policy, none of the following is an “accident”, however
caused and without regard to whether such condition or event is normal and
expected or unusual and unexpected: (1) depletion, deterioration, ... or wear
and tear; (2) any gradually developing condition; or (5) misalignment,
miscalibration, tripping off-line, or any condition which can be corrected by
resetting, tightening, adjusting or cleaning, or by the performance of
maintenance.

The term “wear and tear” is also not specifically defined in the HSB
insurance policy. For purposes of this case, the term “wear and tear’ means
deterioration or abrasion which an object experiences by its expected
contacts between its component parts and outside objects during the period

of its natural life expectancy.

NOLAN v. HSB
Decision of the Court

710 Hartford did not object to these jury instructions. The jury
rejected Nolan’s bad faith claim but found that Hartford breached the
insurance contract and awarded Nolan over $250,000 in damages. After the
verdict, Hartford unsuccessfully renewed its motion for judgment as a
matter of law and moved for a new trial under Arizona Rule of Civil
Procedure 59(a)(1)(H). The superior court granted Nolan’s requests for
prejudgment interest, attorney fees and costs. Hartford timely appealed the
breach of contract verdict. We have jurisdiction. See A.R.S. § 12-2101(A)(1).

DISCUSSION

q11 Hartford raises two arguments on appeal. Hartford first
reargues that the broken chiller was not a covered loss under the Policy
because it broke from gradual “wear and tear.” Hartford then asserts that
Nolan cannot recover under the Policy because Parkway ultimately paid to
repair the chiller. We address each argument.

I, “Wear and Tear” Exclusion

q12 Hartford urges this court to “overturn” the jury’s verdict in
favor of Nolan for the breach of contract claim because “the undisputed
facts” show the chiller was not covered. Hartford contends we should
accord no deference to the jury’s verdict because “the interpretation and
application of an insurance policy” presents a pure question of law. This
argument fails.

q13 We affirm a jury verdict if, viewing the evidence in the light
most favorable to upholding it, “any substantial evidence could lead
reasonable persons to find the ultimate facts sufficient to support the
verdict.” Gonzales, 203 Ariz. at 153, § 2. The superior court may grant a
new trial when a jury’s verdict is not justified by the evidence or is contrary
to law. Ariz. R. Civ. P. 59(a)(1)(H). We review the denial of a new trial for
a clear and manifest abuse of discretion, “recognizing [the superior court]
ha[s] substantial latitude in deciding whether to upset the [jury’s] verdict.”
Hutcherson v. City of Phoenix, 192 Ariz. 51, 53, § 12 (1998), abrogated on other
grounds by State v. Fischer, 242 Ariz. 44 (2017). “Because a jury plays a vital
role in our civil justice system, a trial court may not simply substitute its
judgment for the jury’s.” Soto v. Sacco, 242 Ariz. 474, 477, § 7 (2017).

q14 On this record, the jury could reasonably conclude that a
“mechanical breakdown” caused the chiller to malfunction rather than
“wear and tear,” as defined by the court in the jury instructions. The record
includes substantial evidence that a “functional defect” in the rubber
NOLAN v. HSB
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material caused the breakdown. As described above, the jury received
substantial evidence to support its verdict. See supra | 7.

qb Hartford counters that “[a]ll the evidence” proves a “worn
slide valve” caused the chiller to break, and the slide valve was damaged
“over a period of time,” but that confuses the issue and overlooks the
record. The court instructed the jury — without objection from Hartford —
that a “mechanical breakdown” or “functional defect” is covered even if it
emerges “over a period of time.” Because the record has substantial
evidence to support the jury’s verdict, we affirm.

IL. “Valuation” Clause

716 Next, Hartford argues it need not pay an _ insured’s
“equipment breakdown’ claim if the insured does not ultimately cover the
cost of repair from its own pockets. Hartford relies on the “Valuation”
provision, which states that Hartford’s “payment for damaged ‘covered
property’ will be the smallest of [three options, including] [t]he amount you
actually spend that is necessary to repair or replace the damaged property.”
Nolan disputes Hartford’s interpretation and argues it waived the
argument.

917 Even if this argument were preserved, however, the plain
terms of the “Valuation” clause concern the amount or valuation of an
insurance claim and not whether losses are covered. Keggi v. Northbrook
Prop. & Cas. Ins. Co., 199 Ariz. 43, 46, § 11 (App. 2000) (construing insurance
contract under its plain and ordinary meaning). Moreover, any ambiguity
in an insurance contract is construed against the insurer. Id. Because
Hartford shows no abuse of discretion, we affirm.!

1 Hartford also moves to vacate the superior court’s attorney fees
award. Because we affirm the verdict, we reject Hartford’s request.
NOLAN v. HSB
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CONCLUSION

18 We affirm the jury’s verdict and final judgment on Nolan’s
breach of contract claim. Both parties request their attorney fees and costs.
As the prevailing party, we grant Nolan’s request for reasonable attorney
fees on appeal under A.R.S. § 12-341.01(A). We also award Nolan its
reasonable costs upon compliance with ARCAP 21.

AMY M. WOOD « Clerk of the Court
FILED: AA