FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

KNIGHTBROOK INSURANCE 

COMPANY; KNIGHT MANAGEMENT 

INSURANCE SERVICES LLC,

Plaintiffs-Counter-DefendantsAppellees,

v.

PAYLESS CAR RENTAL SYSTEM 

INCORPORATED,

Defendant-Appellant,

PCR VENTURE OF PHOENIX LLC,

Defendant-Counter-ClaimantAppellant.

No. 15-15998

D.C. No.

2:12-cv-01671-

DGC

ORDER 

CERTIFYING A 

QUESTION TO 

THE SUPREME 

COURT OF 

ARIZONA

On Appeal from the United States District Court

for the District of Arizona

David G. Campbell, District Judge, Presiding

Argued and Submitted April 6, 2017

Pasadena, California

Filed May 5, 2017
2 KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM

Before: MILAN D. SMITH, JR. and N. RANDY SMITH,

Circuit Judges, and GARY FEINERMAN, District Judge.*

Order

SUMMARY**

Certification to Arizona Supreme Court

The panel certified the following questions of state law 

to the Arizona Supreme Court:

1. Whether Arizona equitable indemnity law 

incorporates § 78 of the Restatement (First) of 

Restitution; and if so,

2. Whether equitable indemnity under § 78 requires that 

the indemnity plaintiff’s liability to the underlying 

plaintiff have been coextensive with the indemnity 

defendant’s liability to the underlying plaintiff.

 * The Honorable Gary Feinerman, District Judge for the U.S. District 

Court for the Northern District of Illinois, sitting by designation.

** This summary constitutes no part of the opinion of the court. It 

has been prepared by court staff for the convenience of the reader.
KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM 3

COUNSEL

William F. Greaney (argued), Eric C. Bosset, Daniel E. 

Matro, and Philip J. Levitz, Covington & Burling LLP,

Washington, D.C.; Arron Nesbitt, Taylor Anderson LLP, 

Denver, Colorado; for Defendants-Appellants.

Gena L. Sluga (argued), Stephen M. Dichter, Jeffrey O. 

Hutchins, Douglas L. Christian, and Alison R. Christian, 

Christian Dichter & Sluga PC, Phoenix, Arizona, for 

Plaintiffs-Appellees.

ORDER

KnightBrook Insurance Company and Knight 

Management Insurance Services, LLC (together, 

KnightBrook) sued PCR Venture of Phoenix, LLC, a 

franchisee of Payless Car Rental System, Inc. (together, 

Payless), for, among other things, equitable indemnification. 

After a bench trial, the district court awarded KnightBrook 

$970,000; in so doing, the court applied §§ 76 and 78 of the 

Restatement (First) of Restitution. Having heard oral 

argument on Payless’s appeal, we have concluded that the 

appeal’s outcome turns on two questions of law: (1) whether 

Arizona equitable indemnity law incorporates § 78 of the 

Restatement; and, if so, (2) whether equitable indemnity 

under § 78 requires that the indemnity plaintiff’s liability to 

the underlying plaintiff have been coextensive with the 

indemnity defendant’s liability to the underlying plaintiff. 

Because these questions are governed by Arizona law but 

have not been definitively resolved by the Arizona judiciary, 

we respectfully certify them to the Supreme Court of 

Arizona pursuant to Arizona Revised Statutes § 12–1861 

and Supreme Court of Arizona Rule 27.
4 KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM

I. Factual Background

KnightBrook insured Payless under a master policy that 

enabled Payless to sell supplemental liability insurance 

(SLI) to individuals who rented cars from Payless. In 

February 2010, Michael Bovre rented a car from Payless in 

Phoenix. Bovre did not purchase or pay for pay for SLI. 

However, he would later argue that he was entitled to SLI 

coverage because the Payless desk agent: (1) failed to notice 

that Bovre did not initial the line on the contract that 

expressly declined SLI; and (2) told Bovre that “liability 

coverage” was included in the rental contract. Bovre’s rental 

did include insurance coverage under a $30,000 statemandated policy.

While driving his Payless rental car, Bovre collided with 

Robert and Lorraine McGill’s motorcycles, causing them 

serious injuries. Bovre received coverage under the $30,000 

state-mandated policy and $500,000 of coverage from his 

personal liability policy from Travelers Insurance Company.

The McGills sued Bovre in state court. KnightBrook 

denied Bovre’s request for SLI coverage, explaining in a 

letter that “you did not purchase the optional Supplemental 

Liability Insurance (SLI) coverage at the time of the rental.” 

KnightBrook did not defend Bovre under a reservation of 

rights or file a declaratory judgment action over the coverage 

dispute.

Bovre settled with the McGills. The settlement included 

a “Damron agreement,” see Damron v. Sledge, 460 P.2d 997 

(Ariz. 1969), in which the parties stipulated to an $8 million 

judgment in exchange for: (1) the McGills’ covenant not to 

execute upon the judgment against Bovre’s personal assets; 

and (2) Bovre’s assignment to the McGills of Bovre’s claims 

against KnightBrook. Bovre also paid the McGills 
KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM 5

$530,000, the combined limits of the state-mandated and 

Travelers policies.

Next, the McGills sued KnightBrook and Payless in state 

court, and the case was removed to federal court. The 

McGills pursued the claims that Bovre had assigned to them 

(breach of contract, negligence, and insurance bad faith) and 

also sought to recover the $8 million stipulated judgment. 

The McGills made a settlement demand of $970,000. 

KnightBrook asked Payless if it would contribute 50% to 

satisfy that demand, and Payless declined.

Ultimately, KnightBrook alone settled with the McGills. 

The settlement agreement provided that: (1) the McGills 

would dismiss all of their claims against KnightBrook in 

exchange for $970,000; and (2) the McGills would assign to 

KnightBrook all of their claims against Payless in exchange 

for 15% of the first $250,000 and 10% of any amount in 

excess of $250,000 that KnightBrook recovered from 

Payless. Payless was not notified of the terms of the final 

settlement agreement until after it had been signed.

KnightBrook then took over as the plaintiff against 

Payless. Its amended complaint asserted the contract and 

negligence claims that Bovre had assigned to the McGills 

and that the McGills had in turn assigned to KnightBrook, as 

well as KnightBrook’s own claims against Payless for 

equitable indemnification and breach of fiduciary duty. 

Payless filed a counterclaim against KnightBrook for 

insurance bad faith. The district court dismissed the contract 

claims on summary judgment, reasoning that they were 

extinguished through an accord and satisfaction when 

KnightBrook paid the McGills $970,000. The remaining 

claims proceeded to a bench trial. After the trial, the district 

court ruled: (1) that KnightBrook’s negligence and breach of 

fiduciary duty claims were barred by the statute of 
6 KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM

limitations; (2) that KnightBrook was entitled to equitable 

indemnification for the entire settlement payment of 

$970,000; and (3) that Payless had failed to prove its 

insurance bad faith claim.

Payless filed this appeal challenging the district court’s 

ruling in favor of KnightBrook on KnightBrook’s equitable 

indemnification claim and Payless’s insurance bad faith 

claim. The questions of law certified in this Order concern 

only the equitable indemnification claim.

II. The Questions of Law

The outcome of this appeal turns on two issues of state 

law: (1) whether Arizona equitable indemnity law 

incorporates § 78 of the Restatement; and (2) whether 

equitable indemnity liability under § 78 requires that the 

indemnity plaintiff’s liability to the underlying plaintiff have 

been coextensive with the indemnity defendant’s liability to 

the underlying plaintiff.

A. Section 78 of the Restatement

Section 78 of the Restatement (First) of Restitution 

provides, in relevant part:

A person who with another became subject to 

an obligation or supposed obligation upon 

which, as between the two, the other had a 

prior duty of performance, and who has made 

payment thereon although the other had a 

defense thereto,

(a) is not entitled to restitution if he 

became subject to the obligation 
KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM 7

without the consent or fault of the 

other;

(b) is entitled to restitution if he became 

subject to the obligation with the 

consent of or because of the fault of 

the other and, if in making payment, 

he acted 

. . .

(ii) in the justifiable belief that 

such duty existed . . . .

The district court cited § 78 for the proposition that for 

purposes of its equitable indemnification claim against 

Payless, “it is sufficient if [KnightBrook] w[as] subject to a 

‘supposed obligation’ which [Payless] had a greater 

responsibility to discharge, [KnightBrook] became subject 

to the obligation because of the fault of [Payless], and, in 

choosing to make the settlement payment, [KnightBrook] 

acted in the ‘justifiable belief’ that [it] would be liable in the 

McGills’ lawsuit.” The district court awarded equitable 

indemnification—without finding that either KnightBrook 

or Payless would have been found liable in the underlying 

lawsuit—on the ground that “[t]he requirements of § 78 of 

the Restatement are satisfied.”

At the time the district court issued its opinion, § 78 had 

never been cited in a published decision of an Arizona court. 

After the district court issued its decision, however, the 

Arizona Court of Appeals applied § 78 in Hatch 

Development, LLC v. Solomon, 377 P.3d 368 (Ariz. Ct. App. 

2016), in holding that “a duty to indemnify may arise in at 

least two alternative circumstances: First, when the party 
8 KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM

seeking indemnity has ‘extinguished an obligation owed by 

the party from whom it seeks indemnification,’ or second, 

when the indemnity defendant is ‘at fault.’” Id. at 372. The 

district court’s decision is the only authority cited in Hatch 

for the proposition that Arizona equitable indemnity law 

incorporates § 78 of the Restatement.

B. Coextensive Liability

If Arizona law incorporates § 78, the next question is 

whether equitable indemnity liability under § 78 requires 

that the indemnity plaintiff’s potential liability to the 

underlying plaintiff have been coextensive with the 

indemnity defendant’s potential liability to the underlying 

plaintiff.

The district court recognized that KnightBrook and 

Payless did not face coextensive obligations in the McGills’ 

suit. KnightBrook paid the McGills $970,000 to settle a case 

in which the McGills “sought to recover [from KnightBrook] 

the $8 million established in the consent judgment against 

Bovre.” The suit asserted negligence, breach of contract, 

and insurance bad faith claims. But only KnightBrook, and 

not Payless, was potentially liable for the insurance bad faith 

claim and the $8 million Damron judgment. See Webb v. 

Gittlen, 174 P.3d 275, 280–81 (Ariz. 2008) (en banc) (ruling 

that insurance agents are not bound by Damron agreements 

to which they were not parties). Accordingly, as the district 

court correctly observed, although the McGills could have 

recovered $8 million from KnightBrook, they could have 

recovered from Payless only $1 million (the maximum 

available amount of SLI coverage) plus any compensable 

damages for Bovre’s “emotional suffering, time, effort, and 
KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM 9

inconvenience.”1 Because KnightBrook’s settlement 

payment to the McGills enabled it to avoid substantial 

liability that Payless did not face, KnightBrook’s and 

Payless’s liability to the McGills was not coextensive.

Whether this matters under Arizona law is unclear. In 

Herstam v. Deloitte & Touche, LLP, 919 P.2d 1381 (Ariz. 

Ct. App. 1996), the court observed that “[i]ndemnity allows 

one who has discharged a common liability to seek 

reimbursement in full from another,” but it did not define 

“common liability” or otherwise address whether 

coextensive liability is a necessary prerequisite for equitable 

indemnity. Id. at 1388. Although other state courts have 

held that an indemnitee and indemnitor’s respective 

obligations to the underlying plaintiff must be identical for 

equitable indemnity liability to attach, see, e.g., Denny’s Inc. 

v. Avesta Enters., Ltd., 884 S.W.2d 281, 291 (Mo. Ct. App. 

1994) (“[T]he doctrine [of implied indemnity] is 

inapplicable unless the indemnitee and the indemnitor have 

co-extensive, identical duties.”); Nat’l Fruit Prod. Co. v. 

Balt. & Ohio R.R. Co., 329 S.E.2d 125, 130 (W. Va. 1985) 

(observing that “[s]everal other courts . . . have concluded 

that the lack of a common and coextensive obligation 

 1 KnightBrook made its settlement payment to the McGills in 

connection with several obligations, including “the duty to defend and 

indemnify Mr. Bovre in the Underlying Lawsuit”—a duty that Payless 

did not owe. KnightBrook’s decision to deny coverage in July 2010 was 

the factual basis for the insurance bad faith claim; that decision was also 

a necessary prerequisite for the Damron agreement. See Damron, 

460 P.2d at 1001 (“If the [insurance] company refuses to defend at all, it 

must accept the risk that an unduly large verdict may result . . . .”). As 

KnightBrook’s CEO testified at trial, KnightBrook’s exposure to at least 

$8 million of potential liability arising from the “bad faith claim against 

KnightBrook” and the Damron judgment was an important factor 

motivating his decision to settle the case for $970,000.
10 KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM

forecloses any claim of implied indemnity” and citing 

cases), no Arizona court has resolved this issue. Cf. Hatch, 

377 P.3d at 373 (affirming an equitable indemnity judgment 

without addressing whether the plaintiff and the defendant 

faced coextensive liability to the underlying plaintiff).

The evolution of Arizona’s equitable indemnity doctrine 

is better entrusted to the Supreme Court of Arizona than to 

us. We therefore certify the foregoing questions of law to 

the Supreme Court of Arizona. The Clerk shall file with the 

Supreme Court of Arizona an original and six certified 

copies of this Order, along with counsel’s addresses and 

telephone numbers, as directed by Supreme Court of 

Arizona Rule 27.

III. Counsel

For Plaintiffs-Appellees KnightBrook Insurance 

Company and Knight Management Insurance Services, 

LLC: Alison R. Christian, Gena L. Sluga, Jeffrey O. 

Hutchins, Stephen M. Dichter, Christian Dichter & Sluga, 

P.C., 2700 North Central Avenue, Suite 1200, Phoenix, AZ 

85004, Telephone (602) 792-1700.

For Defendants-Appellants Payless Car Rental System, 

Inc. and PCR Venture of Phoenix, LLC: William F. 

Greaney, Eric C. Bosset, Philip J. Levitz, Covington & 

Burling LLP, One CityCenter, 850 Tenth Street, NW, 

Washington, DC 20001, Telephone (202) 662-6000; and 

Arron Burt Nesbitt, Taylor Anderson, LLP, 1670 Broadway, 

Suite 900, Denver, CO 80202, Telephone (303) 551-6657.

IV. Filing Fee

The parties shall equally share the required filing fees 

under Supreme Court of Arizona Rule 27(a)(3)(D).
KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM 11

V. Stay of Proceedings and Withdrawal of Submission

In light of our decision to certify the two issues set forth 

above, the submission of this appeal is withdrawn, and all 

further proceedings in this case before our court are stayed 

pending final action by the Supreme Court of Arizona, save 

for any petition for rehearing regarding this order. The Clerk 

is directed to administratively close this docket, pending 

further order. The parties shall notify the Clerk of this court 

within fourteen days of the Supreme Court of Arizona’s 

acceptance or rejection of certification, and again, if 

certification is accepted, within fourteen days of the 

Supreme Court of Arizona’s issuance of a decision.

QUESTION CERTIFIED; PROCEEDINGS 

STAYED.