The U.S. Court of Appeals for the Ninth Circuit has paused a significant insurance dispute, asking the Arizona Supreme Court to weigh in on a fundamental question of insurance law: what exactly constitutes a “fortuitous” loss under an all-risk policy?
The case involves Industrial Park Center LLC, doing business as Mainspring Capital Group, which sued its insurer, Great Northern Insurance Company, after a claim for structural damage to a commercial building in Tempe, Arizona, was denied. The core of the dispute, and the reason for the pause by the federal appellate court, hinges on whether the damage—which stemmed from the routine, long-term practices of a tenant—was accidental enough to trigger coverage.
The Dispute Over Fortuity
Mainspring held an all-risk property insurance policy from Great Northern. When the property sustained significant structural damage, Mainspring filed a claim. Great Northern denied it, leading to a lawsuit for breach of contract and bad faith.
The district court initially sided with Great Northern, granting summary judgment. The lower court reasoned that the loss was not “fortuitous.” This finding was critical because, under Arizona law governing all-risk policies, the insured must first prove the loss was fortuitous to establish a right to coverage. The district court determined that because the damage—caused by a tenant’s daily hosing down of the foundation—was “reasonably foreseeable and almost certain to occur” without preventative action, it failed the fortuity test.
Tenant’s Wet Business Practices Led to Damage
The background of the damage is detailed. Mainspring leased space to a wholesale seafood distributor, Star Fisheries, since 1990. Star Fisheries routinely hosed down the slab-on-grade foundation and exterior stairs, creating a persistently wet environment.
Engineering reports dating back to 2010 documented severe deterioration, including concrete spalling, cracking, and corroded rebar, all linked to high moisture levels in the subgrade soil. While Mainspring took some recommended mitigation steps in 2011—like installing weep holes and sealing cracks—they skipped optional, more comprehensive measures, such as installing a waterproof floor coating or a full vapor barrier system.
When major structural compromise was discovered in 2021/2022, Great Northern initially attributed the damage to poor soil preparation and wear-and-tear exclusions. However, after Mainspring presented counter-evidence, Great Northern’s own engineers ultimately agreed the cause was “long-term, repetitive exposure to excess moisture” originating from the tenant’s operations. Despite this revised finding, Great Northern stuck to its denial, arguing the deterioration was wear-and-tear, not a covered fortuitous event.
Why the Ninth Circuit Needs Guidance
The Ninth Circuit panel noted that the definition of “fortuitous” under Arizona law is an issue of first impression—no published state appellate court decision clearly defines its boundaries.
The court emphasized that defining fortuity is not just important for this specific insurance claim; it has “important public policy ramifications” and “broad application” throughout Arizona law. Fortuity is considered implicit in the very concept of insurance, and potentially in any “aleatory” contract (one dependent on an uncertain event), such as betting or suretyship agreements.
The federal judges highlighted two competing public policy concerns that make the decision difficult:
1. Against Coverage: Allowing coverage for foreseeable, almost certain events could encourage fraud and reward intentional destruction of property, running contrary to public policy.
2. For Contract Freedom: Arizona has a strong public policy favoring freedom of contract. A mandatory rule against covering foreseeable loss might be interpreted too narrowly, potentially overriding what parties intended to agree upon in their contract.
Because resolving this tension between preventing fraud and upholding contract freedom requires balancing weighty state policy considerations, the Ninth Circuit chose to defer to the Arizona Supreme Court.
The Ninth Circuit has temporarily withdrawn the appeal from submission, retaining jurisdiction until the Arizona Supreme Court issues its ruling on the certified question. If the Arizona Supreme Court declines to take the case, the Ninth Circuit panel will proceed to decide the issue based on its best interpretation of existing Arizona law.