Morgan ex rel. Morgan v. American Family Mutual Insurance

dissenting:

Arizona law places important limitations on the reasonable expectations doctrine that apply in this case. Most importantly, the reasonable expectations doctrine does not operate as a per se bar against named-insured exclusions. State Farm Mut. Auto. Ins. Co. v. Falness (Falness I), 178 Ariz. 281 , 872 P.2d 1233, 1234 (Ariz.1994) (holding that a named-insured exclusion “is not invalid on its face”). But a rigid application of this circuit’s follow up decision in State Farm Mut. Auto. Ins. Co. v. Falness (Falness II), 39 F.3d 966, 968 (9th Cir.1994), will lead to just such a per se rule.

As is clear from the case law, Arizona courts disavow a categorical application of the reasonable expectations doctrine. They instead examine evidence of (1) the policyholder’s intent in acquiring an insurance policy and (2) the insurance company’s belief about the policyholder’s reasonable expectations. See, e.g., Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 140 Ariz. 383 , 682 P.2d 388, 396-97 (1984) (holding that the doctrine of reason *646 able expectations applies when “the [insurer] has reason to believe that the [insured] would not have accepted the agreement if…

*645 MEMORANDUM **

The parties are familiar with the facts of this case, and we do not repeat them here. Plaintiff Jay Morgan (Morgan) brought this action against defendant American Family Mutual Insurance Company (American Family) seeking a declaration that the named-insured exclusion in an umbrella liability insurance policy (the Policy) is invalid. The exclusion denies recovery for injuries to parties insured under the Policy. The district court, following our decision in State Farm Mutual Automobile Insurance Co. v. Falness, 39 F.3d 966, 968 (9th Cir.1994), found that the exclusion runs afoul of Arizona’s doctrine of reasonable expectations, and American Family now appeals. We affirm.

Although named-insured exclusions are not facially invalid under Arizona law, they may be ruled invalid if “the exclusion falls outside the reasonable expectations of the insureds.” State Farm Mut. Auto. Ins. Co. v. Falness, 178 Ariz. 281 , 872 P.2d 1233, 1234 (1994). Applying Arizona’s doctrine of reasonable expectations, we have held that a nearly identical named-insured provision was invalid under substantially similar circumstances. See State Farm Mut. Auto. Ins. Co. v. Falness, 39 F.3d…