HNRK Coverage Corner

Answering a certified question from the Ninth Circuit, the Arizona Supreme Court recently clarified that fortuity under Arizona law turns on the insured’s subjective knowledge when coverage attached, not on whether a loss was reasonably foreseeable.  In Industrial Park Center, LLC v. Great Northern Insurance Company, the Court adopted a subjective standard of fortuity, distinguishing an objectively foreseeable risk from a loss-causing event the insured actually knew “had already occurred, was already in progress, or was certain to occur.”  Following that decision, the Ninth Circuit vacated the district court’s summary judgment rulings and remanded the coverage dispute for further proceedings.

Background

Industrial Park Center LLC d/b/a Mainspring Capital Group (“Mainspring”) owns a commercial building in Arizona insured under an all-risk property insurance policy issued by Great Northern Insurance Company (“Great Northern”).  During the policy period, Mainspring discovered damage to the building’s structural integrity associated with a tenant’s routine practice of hosing down the foundation and exterior concrete staircase with fresh water throughout the day.  Mainspring submitted a claim to Great Northern for the damage.

Great Northern initially denied the claim under the policy’s wear-and-tear and settling exclusions, attributing the damage to inadequate soil preparation and compaction, settlement, and long-term corrosion. On reconsideration, Great Northern maintained its denial based on the wear-and-tear exclusion.

The District Court Applies an Objective Foreseeability Test

Mainspring sued Great Northern in Arizona state court for breach of contract and bad faith.  The case was subsequently removed to federal court based on diversity jurisdiction. 

Both parties moved for summary judgment on the breach of contract claim, and Great Northern also sought summary judgment on bad faith.  The district court granted summary judgment for Great Northern on both claims and denied Mainspring’s motion.  The district court held that Mainspring failed to show that the loss was “fortuitous,” which is a condition of coverage under Arizona law for all insurance policies.  The Arizona courts have not defined “fortuitous loss.”  Applying an objective reasonable-foreseeability test adopted by the Ninth Circuit under Washinton law, the district court concluded that Mainspring’s loss was not fortuitous because the loss was reasonably foreseeable and almost certain to occur given the tenant’s longstanding business practices and Mainspring’s failure to take measures to prevent water damage.

Mainspring appealed.  

On December 23, 2025, the Ninth Circuit certified the following question to the Arizona Supreme Court because Arizona appellate courts had not yet defined the parameters of fortuity:

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 Adopts a Subjective Fortuity Standard

In Industrial Park Center, LLC v. Great Northern Insurance Company, 595 P.3d 119 (Ariz. 2026), the Arizona Supreme Court adopted the definition of a fortuitous event in the Restatement (First) of Contracts (the “Restatement”).  The Restatement provides:

A fortuitous event within the meaning of the present and subsequent Sections is an event which so far as the parties to the contract are aware, is dependent on chance.  It may be beyond the power of any human being to bring the event to pass; it may be within the control of third person; it may be a past event, as the loss of a vessel, provided that the fact is unknown to the parties.  The event may be positive or negative—an occurrence or a failure to occur.  But the fact that the time or amount of performance is dependent on fortuitous event does not make a promise aleatory.

The Court emphasized that this definition includes a subjective element: fortuity depends on the facts known to the insured.  That approach is consistent with existing Arizona caselaw that applies a subjective standard, focusing on the insured’s state of mind, when determining other insurance coverage issues.

The Court rejected Great Northern’s argument that a subjective analysis would give insureds too much control.  The Court reasoned that an insured’s awareness of a risk, no matter how substantial, does not equate to a certainty that the loss will occur.  Further, the Court noted that insurers are not powerless in minimizing liability.  They can assess the risk, decline coverage, and draft clear exclusions.

The Court also rejected Great Northern’s reliance on Ingenco Holdings, LLC v. Ace American Insurance Company, 921 F.3d 803 (9th Cir. 2019), which applied an objective foreseeability standard based on the Ninth Circuit’s prediction of Washington law.  The Arizona Supreme Court explained that insurance protects against reasonably foreseeable risks that are not known to be certain.  Adopting an objective test would undermine that purpose and the parties’ freedom of contract.  The Court also noted that a majority of other jurisdictions have adopted a similar subjective standard.

On this basis, the Arizona Supreme Court answered the Ninth Circuit’s certified question as follows: “A loss is non-fortuitous only when the insured knew, at the time coverage attached, that the loss-causing event had already occurred, was already in progress, or was certain to occur because no material contingency remained between the facts known to the insured and the loss-causing event.”

The Ninth Circuit Remands for Further Coverage Analysis

Following the Arizona Supreme Court’s decision, the Ninth Circuit vacated summary judgment for Great Northern on the breach of contract claim and remanded the case back to the district court for analysis consistent with the new definition of fortuity under Arizona law.  The Ninth Circuit also vacated the denial of Mainspring’s summary judgment motion and summary judgment for Great Northern on bad faith. The district court had not determined whether the wear-and-tear and settling exclusions applied or whether reliance on those exclusions was reasonable.