Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_03-cv-02364/USCOURTS-azd-2_03-cv-02364-0/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Insurance Contract

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

SWA Painting, Inc.,

Plaintiff,

v.

Golden Eagle Insurance Corporation;

Does 1-100; XYZ Corporations 1-100;

Black and White Business Entities 1-100,

Defendants.

 

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CV-03-2364-PHX-DGC

ORDER

The Court held an evidentiary hearing on October 26, 2005. Witnesses and exhibits

were presented by both sides. 

A. RULINGS AT HEARING.

At the end of the hearing, and for t he reasons stated on the record, the Court ruled

as follows:

1. A Damron agreement was entered into between SWA Painting, Inc. and

CMS in the Spring of 2002. 

2. CMS’s tender of a defense t o Golden Eagle in the Fall of 2002 did not

repudiate, rescind, or modify the Damron agreement.

3. Golden Eagle did not establish by clear and convincing evidence that the

Damron agreement was the result of fraud or collusion.

4. Because a valid and binding Damron agreement has been entered into in t his

case, Golden Eagle is not entitled to a hearing on the reasonableness of the

Case 2:03-cv-02364-DGC Document 125 Filed 10/31/05 Page 1 of 4
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$500,000 stipulated judgment obtained by SWA. See Parking Concepts, Inc.

v. Tenney, 83 P.3d 19, ¶ 15 n.3 (Ariz. 2004).

5. After hearing Golden Eagle’s proffer of evidence that would be presented to

the Court on the question of “understandable mistake,” see Dunmore v.

United States, 358 F.3d 1107, 1112 (9th Cir. 2004), the Court concluded that the

bankruptcy trustee’s ratificat ion of SWA’s action in this case resolves

potential standing problems raised by Defendant. See Fed. R. Civ. P. 17(a).

B. GOLDEN EAGLE’S COVERAGE ARGUMENT.

On March 18, 2005, the Court held a hearing on the parties’ cross-motions for

summary judgment. For reasons stated in detail on the record at the hearing, the Court

found that Golden Eagle’s insurance policy p rovided coverage for SWA’s claim.

Specifically , the Court held that SWA had established the existence of “property damage”

within the meaning of Golden Eagle’s p olicy . T he Court was unable, on the then-existing

record, to determine what portions of SWA’s claim were covered and whet her inquiry into

such coverage issues was even appropriate. 

The parties have now briefed t he coverage issue extensively. The Court has

considered the briefing as well as the evidence p resent ed at the hearing on

October 26, 2005. As not ed above, SWA and CMS entered into a valid and binding

Damron agreement. This agreement was made at a time when Golden Eagle had declined

to indemnify and defend CMS with respect t o claims made by SWA. “[I]n cases where the

insurer has refused to defend and the parties enter int o a Damron agreement, the insurer

has no right to contest the stipulated damages on the basis of reasonableness, but rather

may contest the settlement only for fraud or collusion.” Tenney, 83 F.3d at ¶ 15 n.3; see

also Himes v. Safeway Ins. Co., 66 P.3d 74, ¶ 1 n.2 (Ariz. Ct. App. 2003). 

Golden Eagle argues that it may parse the $500,000 stipulated judgment in this case,

showing which portions are covered and which portions are not, and even arguing as to

t he sufficiency of the evidence to establish damages where portions are covered. But such

a procedure would be tantamount to a hearing on the reasonableness of the stip ulat ed

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judgment. Because such an inquiry is not permitted for this Damron agreement, and

because the Court has already concluded t hat t he Golden Eagle policy provided coverage

for this claim, the Court concludes that further inquiry into t he coverage issue is not

appropriate.

Even if the Court were to conduct such an inquiry, however, it likely would conclude

that the entire $500,000 judgment is covered. The Golden Eagle policy specifically states:

“ We will pay those sums that the insured becomes legally obligated to pay as damages

because of . . . ‘property damage’ t o which this insurance applies.” Golden Eagle

Insurance Contract at I(A)(1)(a). SWA presented evidence at the hearing on October 26,

2005, that the $500,000 judgment was intended to reflect both out-of-p ocket expenses

incurred in correcting the property damage to houses painted with faulty CMS paint, and

profit s lost to SWA as a result of the resources diverted to repainting the houses and the

substantial loss of rep ut at ion resulting from the faulty paint jobs. SWA principal Stephen

Anderson testified credibly that his lost profits resulted directly from the faulty CMS paint

applied to the cust om houses – that is, directly from the “property damage” the Court

found to exist at t he hearing on March 18, 2005. Thus, the lost profits constituted sums

that CMS was legally obligated to pay SWA as “damages because of . . . ‘property

damage’” caused by CMS’s faulty product, and therefore are covered by the insurance

policy Golden Eagle issued to CMS. See Policy § I(A)(1)(a).

Golden Eagle argues that the evidence presented by SWA in support of the lost

profits amount is defective because it reflects lost gross revenues, not lost profits. The

question to be considered at this point in the litigation, however, is not whether SWA

sufficiently proved lost profits, but whether lost profits are covered by the Golden Eagle

insurance policy. Once the Court concludes that coverage exists, Golden Eagle is not be

permitted to quibble with the amount of those profit s or t he p roof that established them.

A Damron agreement eliminates the insurer’s ability to contest matters that might have

been challenged had the insurer assumed the defense of it s insured in the underlying

litigation. Absent fraud and collusion, t he insurer cannot challenge the reasonableness

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of covered damages st ip ulated to in a Damron agreement. And as explained on the record

at the end of the October 26, 2005 hearing, t he Court found sufficient evidence of lost

profits to overcome any suggestion by Golden Eagle that the $500,000 stipulated judgment

resulted from fraud or collusion.

C. REMAINING LITIGATION SCHEDULE.

The Court will hold a hearing at 4:30 p.m. on November 22, 2005 t o schedule a trial

in this matter. The parties are directed to meet and confer about the possibility of settling

this case before a jury trial.

DATED this 31st day of October, 2005.

Case 2:03-cv-02364-DGC Document 125 Filed 10/31/05 Page 4 of 4