Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-3_14-cv-08201/USCOURTS-azd-3_14-cv-08201-0/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Injunctive &amp; Declaratory Relief

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WO NOT FOR PUBLICATION 

IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF ARIZONA 

Prescott Lakes Community Association Incorporated, 

Plaintiff, 

v. 

Auto-Owners Insurance Company, et al., 

Defendants. 

No. CV-14-08201-PCT-JJT

ORDER 

 At issue is Defendant Auto-Owners Insurance Company’s (“Auto-Owners”) 

Motion for Summary Judgment Regarding Morris Agreement (Doc. 40, Mot.), to which 

Plaintiff Prescott Lakes Community Association, Inc. (the “Association”) filed a 

Response (Doc. 48, Resp.), and Auto-Owners filed a Reply (Doc. 51, Reply). The Court 

finds these matters appropriate for decision without oral argument. See LRCiv 7.2(f). For 

the reasons that follow, the Court grants in part and denies in part Defendant AutoOwners’ Motion for Summary Judgment as to the validity of the Settlement Agreement 

and Stipulated Judgment. 

I. BACKGROUND 

 The following facts are undisputed unless otherwise noted. The insurance dispute 

at issue arises out of claims asserted in an underlying construction defect lawsuit. See 

Prescott Lakes Cmty. Assoc., Inc. v. Canavast Builders, Inc. et al., No. CV2011-01685 

(the “underlying lawsuit”). The underlying lawsuit involved construction of Willow Park 

Estates – 23 duplex buildings with 26 single family units – at Prescott Lakes Community. 

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Willow Park Estates was built from 2004 to 2006, and in 2011, the Prescott Lakes 

Community Association filed the underlying lawsuit naming the following entities as 

defendants and alleging that they were involved in the development and sale of the 

property: Canavest Builders, Inc.; Canavest Development, LLC; Canavest Development 

II, LLC; The Canavest Group; and Willow Park/Canavest, LLLP. The Association 

alleges construction defects related to the property and claimed damages of 

$2,045,136.74 for the cost to repair all defects and $245,834.10 for interim repair costs. 

The Association also claims expert and attorney fees and costs, which it alleges are still 

accruing. 

 Auto-Owners issued an insurance policy to The Canavast Group and related 

entities that was effective August 1, 2004 through August 1, 2010. Canavest 

Development, LLC, Canavest Development II, LLC, and WPE/Canavest, LLLP were 

named insured on the policy from August 1, 2004 through August 1, 2006. In the 

underlying lawsuit, Auto-Owners provided a defense to its insured. It first reserved all of 

its rights in a 2012 reservation of rights letter; then on June 3, 2013, it issued an updated 

reservation of rights letter; and then on May 21, 2014, it issued another updated 

reservation of rights letter (the “Munzer letter”). 

 Auto-Owners maintains that in the 2014 Munzer letter, it withdrew its reservation 

of rights with respect to certain claims and maintained its reservation as to the remaining 

claims. The Munzer letter included a section entitled “Withdrawal of Reservation of 

Rights as to Certain Claims,” and, below that heading, a list of damages/repairs for which 

Auto-Owners maintains it specifically withdrew its reservation of rights. The Association 

objects to Auto-Owners’ assertion and maintains that Auto-Owners did not specifically 

withdraw its reservation as to certain damages/repairs because the letter did not identify 

specific claims or amounts. 

 On September 24, 2014, the Association and the insureds/defendants in the 

underlying case entered into a Morris agreement under which the parties settled the 

claims and the Association obtained an assignment of all claims against Auto-Owners. 

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Under the Morris agreement, the parties entered into a stipulated judgment against 

Canavest Builders, Inc.; Canavest Development, LLC; Canavest Development II, LLC; 

The Canavest Group; and Willow Park/Canavest, LLLP for $2.5 million, and a judgment 

in the underlying case was entered on October 10, 2014.1

 The Association covenanted not 

to execute against the insureds/defendants in the underlying case. The judgment only 

provides one lump sum amount against all defendants. The Association alleges that the 

Morris agreement is valid and reasonable and that the sum set forth in the stipulated 

judgment is covered under the Auto-Owners’ policies. 

 In its Controverting Statement of Facts, the Association states that, through 

Canavest’s attorneys, it provided Auto-Owners with the following: Prescott 

Lakes/Willow Park Estate Association’s Interim Repair Chart dated March 3, 2014; 

Nautilus General Contractors’ Preliminary Estimate of Costs Willow Park Estates dated 

May 5, 2014; and Nautilus Building Consultants, Inc.’s Report of Findings for Willow 

Park Estates dated May 5, 2014. 

 In its Controverting Statement of Facts, the Association also sets forth the groups 

of interim repair invoices as listed in Auto-Owners’ Munzer letter and states what the 

Association “guessed” Auto-Owners was referring to. The Association alleges that AutoOwners did not set forth a specific sum for which it would indemnify Canavest regarding 

the repair invoices and that the repairs as Auto-Owners listed them excluded additional 

services and repairs listed in the original invoices. Auto-Owners further alleges that the 

original invoices did not itemize costs for individual repairs, but only listed one lump 

sum. The Court now resolves Auto-Owners’ Motion for Summary Judgment regarding 

the Morris agreement. 

/// 

/// 

/// 

 

1

 The Court refers to the settlement agreement and stipulated judgment together as the “Morris agreement” throughout this Order. 

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II. LEGAL STANDARDS 

 A. Summary Judgment 

 Under Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment is 

appropriate when: (1) the movant shows that there is no genuine dispute as to any 

material fact; and (2) after viewing the evidence most favorably to the non-moving party, 

the movant is entitled to prevail as a matter of law. Fed. R. Civ. P. 56; Celotex Corp. v.

Catrett, 477 U.S. 317, 322–23 (1986); Eisenberg v. Ins. Co. of N. Am., 815 F.2d 1285, 

1288–89 (9th Cir. 1987). Under this standard, “[o]nly disputes over facts that might affect 

the outcome of the suit under governing [substantive] law will properly preclude the 

entry of summary judgment.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). 

A “genuine issue” of material fact arises only “if the evidence is such that a reasonable 

jury could return a verdict for the non-moving party.” Id.

 In considering a motion for summary judgment, the court must regard as true the 

non-moving party’s evidence if it is supported by affidavits or other evidentiary material. 

Celotex, 477 U.S. at 324; Eisenberg, 815 F.2d at 1289. The non-moving party may not 

merely rest on its pleadings; it must produce some significant probative evidence tending 

to contradict the moving party’s allegations, thereby creating a question of material fact. 

Anderson, 477 U.S. at 256–57 (holding that the plaintiff must present affirmative 

evidence in order to defeat a properly supported motion for summary judgment); First 

Nat’l Bank of Ariz. v. Cities Serv. Co., 391 U.S. 253, 289 (1968). 

 “A summary judgment motion cannot be defeated by relying solely on conclusory 

allegations unsupported by factual data.” Taylor v. List, 880 F.2d 1040, 1045 (9th Cir. 

1989). “Summary judgment must be entered ‘against a party who fails to make a showing 

sufficient to establish the existence of an element essential to that party’s case, and on 

which that party will bear the burden of proof at trial.’” United States v. Carter, 906 F.2d 

1375, 1376 (9th Cir. 1990) (quoting Celotex, 477 U.S. at 322). 

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 B. Liability Insurance Contracts 

 In a liability insurance contract, the insurer agrees to indemnify the insured if 

liability under the policy is established. United Servs. Auto. Ass’n v. Morris, 741 P.2d 

246, 250 (Ariz. 1987). The insurer “obligates itself to defend any claim potentially 

covered by the policy.” Id. The insured also has an obligation under the insurance policy 

and must cooperate with the insurer when the insurer defends the insured in accordance 

with the insurer’s contractual obligation. Id. The insured “may not settle with the 

claimant without breaching the cooperation clause [in the insurance policy] unless the 

insurer first breaches one of its contractual duties.” Id. “If the insurer performs its 

obligations, the cooperation clause applies with full force, and settlement by the insured 

constitutes a breach of the [insurance] policy.” Id. at 250–51. 

 Where the insurer asserts a coverage defense and defends the insured under a 

reservation of rights, not unconditionally assuming liability under the policy, there is no 

breach of the cooperation clause if the insured enters into a settlement agreement with the 

claimant without the insurer’s consent. Id. at 252. Under Morris, an agreement can be 

made that allows a plaintiff and defendant, “whose insurer will only defend under a 

reservation of rights, to agree that judgment may be entered against the defendant in a 

specified amount with the understanding that the plaintiff will not execute on the 

judgment against the defendant.” Munzer v. Feola, 985 P.2d 616, 618 (Ariz. Ct. App. 

1999). The plaintiff may then “proceed against the defendant’s insurer, and if the plaintiff 

prevails on the coverage issue, it may collect its judgment from the insurer to the extent 

that the judgment is what a reasonable and prudent defendant would have paid to settle 

the case.” Id. at 618–19. Where the insurer issues a reservation of rights, it must “fairly 

inform the insured of the insurer’s position.” Desert Ridge Resort LLC v. Occidental Fire 

& Cas. Co. of N. Carolina, No. CV-14-01870-PHX-DLR, 2015 WL 6600079, at *3 (D. 

Ariz. Oct. 7, 2015) (quoting Equity Gen. Ins. Co. v. C & A Realty Co., 715 P.2d 768, 771 

(Ariz. Ct. App. 1985)). 

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III. ANALYSIS

A. Munzer Letter 

In Munzer, the Arizona Court of Appeals considered the validity of a Morris 

agreement where an insurer was only defending some, but not all, of the claims against 

the insured under a reservation of rights. 985 P.2d at 616. Munzer involved the insurers of 

an insured law firm that originally offered to defend the firm with a reservation of rights 

as to all claims, but later, partially withdrew their reservation of rights as to the claim for 

general damages while continuing to defend the malpractice claim under a reservation of 

rights. Id. at 618. The claimants and the insured law firm entered into a settlement 

agreement for all claims with a judgment that was approximately all of the claimant’s 

alleged damages entered against the insured law firm. Id. at 619. The court held that the 

Morris agreement was valid only as to the claims for which the insurer reserved its rights. 

Id. at 619–21. Because the insurer withdrew its reservation of rights as to the general 

damages claim against the insured law firm, the insured law firm breached the 

cooperation clause of the insurance contract and voided the policy as to that claim by 

entering into the Morris agreement. Id. at 621. The court did not hold that the entire 

Morris agreement was invalid, but only that part involving the claims for which the 

insurer withdrew its reservation of rights. 

 Auto-Owners argues that its May 21, 2014 Munzer letter clearly set forth that it 

was withdrawing its reservation of rights as to certain damages and repairs. (Reply at 5–

9.) Auto-Owners contends that, as a result, the Morris agreement is invalid because it 

includes claims that Auto-Owners withdrew its reservation of rights to and thus the 

insured, Canavest, breached the cooperation clause. The Association argues that AutoOwners’ Munzer letter was illusory and did not unconditionally agree to indemnify 

Canavast for any certain claim. (Resp. at 9.) The Association contends that, from the 

letter, it was unascertainable what Auto-Owners was specifically indemnifying because 

the damages/repairs listed in the letter did not identify which invoices they were 

associated with and the damages/repairs referred to were specific items included as part 

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of lump sum invoices for which there were no individual costs. (Resp. at 11–16.) The 

Association also argues that the Munzer letter was ineffective because the 

damages/repairs listed could only be made in conjunction with other repairs for which 

Auto-Owners did not withdraw its reservation of rights. (Resp. at 11.) 

 This case presents a situation similar to that in Munzer because Auto-Owners 

changed its position from defending under a complete reservation of rights to 

withdrawing its reservation of rights as to certain claims in its Munzer letter. (See Munzer 

letter at 15.) Despite the Association’s contention that the Munzer letter was illusory, the 

Court finds that, taken as a whole, the Munzer letter fairly informed a reader of average 

intelligence that Auto-Owners was withdrawing its reservation of rights as to certain 

damages/repairs. See Equity Gen. Ins. Co., 715 P.2d at 770–71. The first page of the 

Munzer letter states: 

Auto-Owners further recognizes, however, that some of the claims may be 

covered, in which case Auto-Owners will indemnify those entities that 

qualify as insureds for those claims. Auto-Owners has determined that it 

will continue to provide this defense to the Canavest entities under a 

reservation of rights for certain claims as asserted herein, but withdraws its 

reservation of rights as to other claims. 

(Munzer letter at 1.) 

 The Munzer letter then includes a section under the heading “WITHDRAWAL 

OF RESERVATION OF RIGHTS AS TO CERTAIN CLAIMS,” which states: 

Based upon the information that Auto-Owners has obtained during the course 

of its investigation in this matter, and subject to all of the other applicable 

terms, provisions and exclusions contained in the policy, it appears that 

coverage may be available to the extent that any insured is found liable for 

the following damages/repairs, as have been claimed by plaintiff in this 

lawsuit and set forth in the above-noted reports. 

(Munzer letter at 15.) The letter then lists the types of damages/repairs, such as stucco 

and roof tile, and specific repairs identified by date, type of repair, and Bates number. 

(See Munzer letter at 15–17.) 

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 After the list of the various repairs, the letter clarifies Auto-Owners’ withdrawal of 

its reservation of rights: 

Auto-Owners does not reserve its rights as to those items of resultant 

damage, as itemized above, and will agree to indemnify any insured entity 

should it be found liable for this resultant damage and the associated repairs 

for such damages, as itemized above. This withdrawal of the reservation of 

rights includes only those bolded items listed above, as set forth in the 

Nautilus Estimate of Costs, and the specific repairs designated above, as 

included in the Interim Repair Chart. Further, this withdrawal of the 

reservation of rights applies only to such damage, as set forth above, that 

occurred prior to 8/1/06. 

(Munzer letter at 17) (emphasis in original). The Munzer letter goes on to discuss that 

Auto-Owners continues to reserve its rights relating to such damage, “other than as 

identified above for which Auto-Owners has expressly withdrawn its reservation of 

rights.” (Munzer letter at 19) (emphasis in original). Finally, the letter cites to Morris and 

Munzer, noting that any settlement the insured enters into for any claim for which AutoOwners “has accepted coverage or withdrawn its reservation of rights” will violate the 

conditions of the insurance policy. (Munzer letter at 20.) 

 The Association points to language in the Munzer letter that it contends evinces its 

illusory nature. The Association refers to the following language: “some of the claims 

may be covered” (Munzer letter at 1; Resp. at 10) (emphasis added); “it appears that 

coverage may be available to the extent that any insured is found liable for the following 

damages/repairs” (Munzer letter at 15; Resp. at 10) (emphasis added); and “[t]o the 

extent that the faulty work itself and/or the faulty product itself has resulted in damage to 

other property, Auto-Owners does not reserve its rights” (Munzer letter at 17; Resp. at 

10) (emphasis added). The Association also points to language on page 18 of the Munzer 

letter, under the heading “CONTINUING RESERVATION OF RIGHTS,” and notes 

that Auto-Owners never defined the specified scope of the phrase “your work” as 

included in the policy (Munzer letter at 18; Resp. at 10–11). Finally, the Association 

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points to the above-quoted language on page 19 of the Munzer letter, contending that it 

states that Auto-Owners may not cover anything. (Resp. at 11.) 

 The Court does not find persuasive the Association’s references to the somewhat 

vague language scattered throughout the Munzer letter and the language under the 

“Continuing Reservation of Rights” section. The Munzer letter clearly provided a section 

entitled “Withdrawal of Reservation of Rights as to Certain Claims,” provided a detailed 

list of damages/repairs, and stated that Auto-Owners “does not reserve its rights as to 

those items of resultant damage, as itemized above.” (Munzer letter at 15–17) (emphasis 

in original). Moreover, the Munzer letter instructed the insured to advise Auto-Owners if 

the insured believed that Auto-Owners misstated or omitted any material facts. (Munzer 

letter at 19.) The Court determines that, taken as a whole, the Munzer letter fairly 

informed the Association of Auto-Owners’ intent to withdraw its reservation of rights as 

to certain, listed damages/repairs. Accordingly, Auto-Owners withdrew its reservation of 

rights as to certain claims, barring a settlement agreement as to those claims. See Munzer, 

985 P.2d at 619–21. 

B. Morris Agreement 

 Auto-Owners argues that because it withdrew its reservation of rights as to certain 

claims in its Munzer letter, the insured was barred from entering into a settlement 

agreement as to those claims, and because the Morris agreement included those claims, 

the Morris agreement is invalid as a matter of law. (Mot. at 9–13.) Although the Morris 

agreement did not distinguish between covered and non-covered claims and only 

provided for a lump-sum payment, the Morris agreement is not invalid as a whole. As in 

Munzer, the Morris agreement is valid with respect to those claims that Auto-Owners had 

reserved its rights, but invalid with respect to the claims for which Auto-Owners had 

withdrawn its reservation of rights pursuant to the Munzer letter. See Munzer, 985 P.2d at 

621. 

 The Court agrees with Auto-Owners that because the Morris agreement in this 

case does not allocate between covered and non-covered claims, this case is different than 

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Munzer, where the two claims at issue and the associated damages were clearly 

delineated. In this case, the Court cannot yet determine what portion of the $2.5 million 

Morris agreement is attributable to covered and non-covered claims or claims identified 

in the Munzer letter. This uncertainty, however, will be resolved in the next steps in this 

case and does not require the invalidation of the entire Morris agreement, as AutoOwners contends. 

IV. CONCLUSION 

 The Munzer letter fairly informed a reasonable reader, including the Association, 

that Auto-Owners was withdrawing its reservation of rights as to some claims, and the 

Morris agreement is valid as to only those claims for which Auto-Owners reserved its 

rights. The Court recognizes the continuing uncertainty regarding the scope of the 

withdrawal of Auto-Owners’ reservation of rights in the Munzer letter and thus, what the 

Morris agreement could include. Given what is before the Court thus far, it cannot yet 

make that determination, but will do so in the next steps of this case. 

 When parties have entered into a Morris agreement, neither the fact nor amount of 

liability in the settlement or stipulated judgment is binding on the insurer unless the 

claimant can show that the settlement was reasonable and prudent under all the 

circumstances. See Morris, 741 P.2d at 253; Munzer, 985 P.2d at 618–19. The parties are 

given the opportunity to present their arguments in a reasonableness hearing – an 

evidentiary hearing “where the stipulated damages amount, or stipulated judgment, in a 

. . . Morris agreement . . . is subject to review or the amount has been left open and is to 

be determined by the trial judge or fact finder without reference to a figure stipulated to 

by the parties.” Himes v. Safeway Ins. Co., 66 P.3d 74, 79 (Ariz. Ct. App. 2003). Thus, 

while uncertainty with regard to the Morris agreement still exists, such uncertainty will 

be resolved through the litigation of the underlying claims, including the determination of 

the insurance policy coverage and the reasonableness of the Morris agreement. 

 The Court acknowledges Auto-Owners’ request to strike the Declaration of 

William Shore (Doc. 50), submitted in support of the Association’s Response. (See 

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Doc. 52 at 3, 4, 7.) Because the Court did not consider the Declaration in its resolution of 

Auto-Owners’ Motion, the Court denies Auto-Owners’ request to strike the Declaration 

as moot. 

 Finally, the Court finds that there is no question of material fact as to the validity 

of the settlement agreement and stipulated judgment. The Court finds that the Morris 

agreement is valid as to those claims for which Auto-Owners reserved its rights and 

invalid as to those claims for which Auto-Owners withdrew its rights. The Court thus 

declines to invalidate the entire Morris agreement. 

 IT IS THEREFORE ORDERED granting in part and denying in part Defendant 

Auto-Owners’ Motion for Summary Judgment Regarding Morris Agreement (Doc. 40). 

The Morris agreement is valid as to those claims for which Auto-Owners agreed to 

defend under a reservation of rights and invalid as to claims for which Auto-Owners 

withdrew its reservation of rights. 

 IT IS FURTHER ORDERED resetting discovery deadlines pursuant to the Court’s 

September 24, 2015 Order (Doc. 54), as follows: 

1. Fact discovery shall be completed by March 11, 2016. 

2. All discovery must be completed by March 11, 2016. 

3. The parties must complete all pre-trial disclosure required under Fed. R. 

Civ. P. 26(a)(3), of all exhibits to be used and all witnesses to be called at trial, on or 

before January 15, 2016. 

4. Good Faith Settlement discussions are to be held no later than April 15, 

2016. 

5. All dispositive motions shall be filed no later than May 13, 2016. 

6. All other aspects of the Court’s scheduling Order (Doc. 54) remain in 

effect. 

 Dated this 16th day of December, 2015. 

 

 Honorable John J. Tuchi 

 United States District Judge 

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