The Arizona Supreme Court rejected the "reasonable foreseeability" test employed by a lower court in determining whether a loss is fortuitous. The case is Indus. Park Ctr., Ltd. Liab. Co. v. Great N. Ins. Co., 2026 LX 407440 (Ariz. 2026).
Background
The underlying case is a coverage dispute between property owner Industrial Park Center LLC, doing business as Mainspring Capital Group, and its insurer, Great Northern Insurance Company (GNIC). Mainspring's commercial property was covered by a GNIC all-risk policy.
Since 1990, Mainspring had leased part of the property to Star Fisheries, Inc., whose use of salt and water in its operations gradually caused deterioration to the building's concrete stairs, interior slabs, and an exterior wall.
The damage was first discovered in 2010. Mainspring hired engineering firm Meyer, Borgman & Johnson, who attributed the deterioration to Star Fisheries' daily water-based cleaning.
Mainspring amended its lease to make Star Fisheries responsible for remediation costs, and completed several of the firm's recommended fixes, including repairing drains, sealing cracks, installing weep holes, and repairing wall panels and stairs.
Mainspring did not, however, install a waterproof floor coating, vapor barrier, or additional drainage systems that the engineering firm had also recommended. Mainspring did not file a claim with its insurer at that time.
Claim Denial
In 2021, similar damage was discovered, and signs of structural trouble were confirmed in early 2022. Mainspring then filed a notice of loss with GNIC. GNIC's engineering firm, Nelson Forensics, attributed most of the deterioration to prolonged exposure to a corrosive environment near the Star Fisheries space, concluding that water and salt use may have exacerbated some damage but could not account for all of it.
GNIC denied the claim under the policy's inherent-vice, faulty-workmanship, settling, and wear-and-tear exclusions, and upheld that denial on reconsideration even after supplemental reports pointed more heavily toward moisture and salt exposure as the cause.
Mainspring filed suit in Maricopa County Superior Court in 2022 and GNIC removed the case to federal court. In 2024, the district court granted summary judgment to GNIC, applying the fortuity test formulated in Ingenco Holdings, LLC v. Ace American Insurance Co. and finding Mainspring's loss "reasonably foreseeable and almost certain to occur."
Fortuitous Loss
Mainspring appealed and the Ninth Circuit certified the following question to the Supreme Court of Arizona:
"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?"
Since there was no Arizona statute or prior case law defining "fortuitous loss," the Court turned to the Restatement (First) of Contracts § 291, which Arizona courts traditionally default to if there is no other controlling authority.
Under the Restatement, a fortuitous event is one that, as far as the parties are aware, depends on chance. The event may be beyond any human control, within a third party's control, or a past event, so long as the parties are unaware of it.
The court notes that the Restatement includes a subjective element: "courts adopting the Restatement have consistently adopted a standard focusing on the subjective knowledge of the parties at the time of contract formation." This is in contrast with the objective test used in Ingenco.
GNIC argued that a subjective standard gives too much control to the insured. The court disagreed, finding that there is a distinction between awareness of a risk, or even reckless or negligent disregard of a risk, and an intentional wrong. The court added that insurers can also minimize their liability through independently evaluating risk, declining coverage, or writing specific exclusions.
Reasonably Foreseeable
The court rejected the reasoning of the district court. It noted that Ingenco was the Ninth Circuit's prediction of how the Washington Supreme Court would define fortuity, and not binding authority in Washington.
The court also found an objective standard asking "whether the loss could reasonably have been foreseen" is inconsistent with the purpose of the fortuity doctrine. The court stated, "the Ingenco rule could create an entire class of uninsurable risks that are 'reasonably foreseeable,' largely defeating the purpose of insurance and eviscerating freedom of contract."
In response to the Ninth Circuit's certified question, the Arizona Supreme Court held that, "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."
Editor's Note
Since the facts of the underlying case are disputed, the Supreme Court did not rule on the outcome of the case but merely on what standard should be applied when determining if a loss is fortuitous. The case returns to the lower court who will decide the dispute based on the new standard set.
The new standard is subjective and focuses on the insured's knowledge when the policy was formed, rejecting the objective standard applied in Ingenco. This creates precedent not only for the underlying dispute but also for future Arizona cases addressing whether a loss is fortuitous.
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Ray Sugrim
Ray Sugrim is an Insurance Editor with FC&S Expert Coverage Interpretation, a division of National Underwriter Company and Arc Network. Ray is responsible for helping develop and edit content for subscribers. Ray is a St John’s University graduate with a degree in Risk Management & Insurance and is a CPCU candidate.