American Family Mutual Insurance Co. v. Verdugo, 691 F. App'x 387

Moreno’s grandson died from abuse inflicted by Karlo Osuna Medina; Moreno obtained a negligence jury verdict against the Verdugos (Moreno’s daughter’s parents) for failing to report or prevent Medina’s abuse.
The Verdugos sought personal liability coverage under their American Family homeowners policy for the judgment against them.
American Family filed for declaratory relief seeking a ruling that the policy’s "abuse exclusion" barred coverage for any bodily injury "arising out of or resulting from" sexual molestation, corporal punishment, or physical/mental abuse.
The district court granted summary judgment to American Family and denied summary judgment to the Verdugos; the Verdugos appealed.
The Ninth Circuit predicted Arizona law would follow Arizona Court of Appeals precedent treating negligent supervision/entrustment claims as deriving from the excluded abusive conduct and therefore barred by an abuse exclusion.
The Ninth Circuit affirmed, holding the exclusion unambiguous and not violative of the Verdugos’ reasonable expectations of coverage.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the policy’s abuse exclusion bars coverage for Moreno’s negligence claims against the Verdugos	American Family: exclusion bars coverage because Moreno’s claims arise from Medina’s abusive conduct	Verdugos: their negligence claims are separate torts (negligent supervision/entrustment) and not barred by the exclusion	Court: exclusion bars coverage; claims "necessarily include" and cannot exist apart from the excluded abuse
Whether the abuse exclusion is ambiguous	American Family: exclusion is plain and unambiguous	Verdugos: exclusion ambiguous and should be construed in their favor	Court: exclusion is unambiguous and applies as written
Whether application of the exclusion violates reasonable expectations doctrine under Arizona law	American Family: no reasonable expectation of coverage because terms are clear and there was notice/no inducement	Verdugos: exclusion frustrates their reasonable expectations of coverage	Court: doctrine inapplicable—limited circumstances not met; exclusion does not violate reasonable expectations
Whether attorneys’ fees should be awarded to American Family under Arizona law	American Family sought fees under A.R.S. § 12-341.01	Defendants opposed	Court: declined to award fees, exercising discretion against fee award

Trishan Air, Inc. v. Fed. Ins. Co., 635 F.3d 422 (9th Cir. 2011) (federal court must predict state supreme court law when unresolved)
Vestar Dev. II, LLC v. Gen. Dynamics Corp., 249 F.3d 958 (9th Cir. 2001) (apply state substantive law in diversity actions)
Lumbermens Mut. Cas. Co. v. Kosies, 602 P.2d 517 (Ariz. Ct. App. 1979) (negligence claims tied to excluded conduct are barred by exclusion)
Behrens v. Aetna Life & Cas., 736 P.2d 385 (Ariz. Ct. App. 1987) (negligent supervision/entrustment cannot exist apart from excluded abusive conduct)
Am. Fam. Mut. Ins. Co. v. White, 65 P.3d 449 (Ariz. Ct. App. 2003) (parental negligent supervision claim excluded when derived from excluded conduct)
Martinez v. Asarco Inc., 918 F.2d 1467 (9th Cir. 1990) (follow intermediate appellate decisions absent persuasive data of contrary state supreme court view)
Gordinier v. Aetna Cas. & Sur. Co., 742 P.2d 277 (Ariz. 1987) (limited application of reasonable expectations doctrine)
Associated Indem. Corp. v. Warner, 694 P.2d 1181 (Ariz. 1985) (trial court has broad discretion in awarding attorneys’ fees)