PHOENIX (KVOA) – The Arizona Supreme Court has issued a new legal standard for determining when an insurance loss qualifies as “fortuitous” and may be covered under a policy.
The court ruled that a loss is fortuitous when it depends on chance based on what the parties knew at the time coverage began. A loss is not fortuitous only when the insured knew the event causing the loss had already happened, was already happening or was certain to happen because nothing important remained that could prevent it.
The case involves Industrial Park Center LLC, doing business as Mainspring Capital Group, and its commercial property insurance company, Great Northern Insurance Company. Mainspring leased part of its property to Star Fisheries, whose use of water and salt over many years caused damage to parts of the building.
After additional damage was discovered in 2021 and structural problems were confirmed in 2022, Mainspring filed a claim under its all-risk insurance policy. Great Northern denied the claim.
A federal district court ruled for Great Northern, finding that the damage was reasonably foreseeable and almost certain to occur. Mainspring appealed, and the Ninth Circuit asked the Arizona Supreme Court to clarify Arizona law on what makes a loss “fortuitous.”
The Supreme Court adopted a definition from the Restatement of Contracts that focuses on what the parties knew when the insurance policy took effect. The court explained that insurance is intended to protect against risks, not losses that are already certain.
The court rejected a rule that would deny coverage simply because a loss was reasonably foreseeable. The court said that approach could make many ordinary risks uninsurable and undermine the purpose of insurance.
The court emphasized that all-risk insurance does not mean an insurer must cover every possible loss. Instead, the loss must be fortuitous, unless the policy contains a specific exclusion.
The court’s ruling does not decide whether Mainspring is entitled to insurance coverage for the damage to its property. The case will now continue in federal court under the standard announced by the Arizona Supreme Court.