Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_10-cv-00781/USCOURTS-azd-2_10-cv-00781-0/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:2201 Declaratory Judgment (Insurance)

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Phillips & Associates, P.C., an Arizona

corporation; Phillips & Associates, an

Arizona corporation; and Pacific Law

Center, a California corporation, 

Plaintiffs/Counterdefendants, 

vs.

Navigators Insurance Company, a New

York corporation, 

Defendant/Counterclaimant.

_________________________________

Navigators Insurance Company, 

Third-Party Plaintiff,

vs.

Robert F. Clarke; Jeffrey L. Phillips; and

Robert Arentz,

Third-Party Defendants.

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No. CV-10-781-PHX-DGC

ORDER

Plaintiffs seek a declaratory judgment that insurance policies issued by Defendant

Navigators Insurance Company (“Navigators”) provide coverage for legal malpractice claims

asserted against Plaintiffs and Third-Party Defendant Robert Clark (the “Insureds”) in

Aganowski v. Pacific Law Center, No. 37-2009-93677-CU-PN-CTL (Super. Ct. Cal. July 9,

2009) (the “Aganowski action”). Doc. 1-1 at 3-13. The Insureds have filed motions for leave

to amend their pleadings to add a bad faith claim against Navigators. Docs. 38, 39. The

Case 2:10-cv-00781-DGC Document 50 Filed 11/22/10 Page 1 of 3
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motions are fully briefed. Docs. 43, 44. No party has requested oral argument. For reasons

stated below, the motions will be denied.

Rule 15 of the Federal Rules of Civil Procedure declares that courts should “freely

give leave [to amend] when justice so requires.” Fed. R. Civ. P. 15(a)(2). While “this

mandate is to be heeded,” leave to amend may be denied if the amendment would be futile.

Foman v. Davis, 371 U.S. 178, 182 (1962).

Navigators defended the Aganowski action under a reservation of rights. As the

parties approached a mediation in the case, the Insureds demanded that Navigators “work

hard to resolve this case, within available policy limits, at [the] mediation.” Doc. 43-1 at 20.

Navigators did settle the case within policy limits at the mediation, still reserving its right to

seek reimbursement of settlement and defense costs. The Insureds agreed to the settlement,

but objected to Navigators’ continuing reservation of rights. Docs. 38-3 at 30, 39-3 at 17.

The Insureds now seek leave to claim that Navigators acted in bad faith by settling the case

with a reservation of rights.

The proposed amended pleadings show that the Insureds “assented to the

reasonableness and desirability of a [settlement within policy limits] and declined to pursue

their own defense.” Progressive W. Ins. Co. v. Dallo, No. 07CV1003 IEG (BLM), 2007 WL

3225439, at *8 (S.D. Cal. Oct. 30, 2007). The Insureds did not seek to take over the defense

of the Aganowski action, but instead urged Navigators to settle the case within policy limits.

Doc. 43-1 at 20. Where the insurer and insured expressly agree to settle a claim within

policy limits and the insurer makes clear that it intends to seek reimbursement, the insurer

does not act in bad faith by “unilaterally reserv[ing] its right to later assert non-coverage of

[the] settled claim, even over the insured’s objection[.]” Burlington Ins. Co. v. Devdhara,

No. C 09-00421 SBA, 2010 WL 3749301, at *12 (N.D. Cal. Sept. 23, 2010) (citing Blue

Ridge Insurance Co. v. Jacobsen, 22 P.3d 313, 321 (Cal. 2001)); see also Desert Mountain

Props. Ltd. P’ship v. Liberty Mut. Fire Ins. Co., 236 P.3d 421, 443 (Ariz. Ct. App. 2010)

(“[A]n insurer does not commit bad faith simply by asserting a policy defense that turns out

to be invalid or unfounded.”).

Case 2:10-cv-00781-DGC Document 50 Filed 11/22/10 Page 2 of 3
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Citing United Services Automobile Association v. Morris, 741 P.2d 246, 251 (Ariz.

1987), the Insureds contend that Navigators should not be allowed to “control the conditions

of payment” while defending under a reservation of rights. Doc. 44 at 3. Morris holds that

an insured confronted with a defense under a reservation of rights may unilaterally enter into

a settlement agreement with the claimant that stipulates to a reasonable judgment, provides

that the claimant will not seek to recover from the insured, and assigns to the claimant the

insured’s claims against the insurer. Morris holds that such an agreement does not breach

the insured’s cooperation obligation. The Insureds in this case, however, did not seek to

enter into a Morris agreement with the claimants in the Aganowski action. They instead

attended the mediation (Docs. 38-3 at 17, 39-3 at 5), agreed to the settlement amount (Id. at

30, 17), and signed the settlement agreement (Doc. 43-1 at 15-17). The Insureds do not

dispute that they demanded that Navigators settle the case within policy limits (see Doc. 43-1

at 19-20), that Navigators did settle within policy limits, and that the Insureds agreed to the

settlement (Docs. 38-3 at 17, 39-3 at 5). In effect, the Insureds are claiming that Navigators

acted in bad faith by asserting that it had policy defenses. As already noted, however, “an

insurer does not commit bad faith simply by asserting a policy defense[.]” Desert Mountain

Props. Ltd. P’ship, 236 P.3d at 443.

The Court therefore will deny leave to amend on the ground of futility. See Foman,

371 U.S. at 182.

IT IS ORDERED that the motions for leave to amend pleadings to add a bad faith

claim (Docs. 38, 39) are denied.

DATED this 22nd day of November, 2010.

Case 2:10-cv-00781-DGC Document 50 Filed 11/22/10 Page 3 of 3