IN THE

SUPREME COURT OF THE STATE OF ARIZONA

APOLLO EDUCATION GROUP, Inc., FKA Apollo Group, Inc.

Plaintiff-Appellant,

v.

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA,

A PENNSYLVANIA CORPORATION,

Defendant-Appellee.

No. CV-19-0229-CQ

Filed February 17, 2021

United States District Court for the District of Arizona

No. 2:15-cv-01948-SPL

Certified Question from the

United States Court of Appeals for the Ninth Circuit

Case No. 17-17293

QUESTION ANSWERED

COUNSEL:

Mark J. DePasquale, Mark J. DePasquale, P.C., Phoenix; Mark S. Hersh, 

Reed Smith, LLP, Chicago, IL; and Douglas E. Whitney, Douglas Whitney 

Law Offices, LLC, Chicago, IL, Attorneys for Apollo Education Group, Inc.

Bennett Evan Cooper, Vail C. Cloar, Dickinson Wright, PLLC, Phoenix; and

Timothy M. Strong, Steptoe & Johnson, LLP, Washington, DC, Attorneys 

for National Union Fire Insurance Company of Pittsburgh, PA

David L. Abney, Ahwatukee Legal Office, P.C., Phoenix, Attorney for

Amicus Curiae United Policyholders

________________
APOLLO EDUCATION V. NATIONAL UNION FIRE INSURANCE

Opinion of the Court

2

JUSTICE BOLICK authored the opinion of the Court, in which CHIEF 

JUSTICE BRUTINEL, VICE CHIEF JUSTICE TIMMER, and JUSTICES 

BEENE, and MONTGOMERY joined. JUSTICES GOULD and LOPEZ 

dissented.

_______________

JUSTICE BOLICK, opinion of the Court:

¶1 The United States Court of Appeals for the Ninth Circuit 

certified the following question to this Court: “What is the standard for 

determining whether National Union unreasonably withheld consent to 

Apollo’s settlement with shareholders in breach of contract under a policy 

where the insurer has no duty to defend?” The court clarified its question 

by asking: “Should the federal district court assess the objective 

reasonableness of National Union’s decision to withhold consent from the 

perspective of an insurer or an insured?”

¶2 We hold that, under a policy without a contractual duty to 

defend, the objective reasonableness of the insurer’s decision to withhold 

consent is assessed from the perspective of the insurer, not the insured. The 

insurer must independently assess and value the claim, giving fair 

consideration to the settlement offer, but need not approve a settlement 

simply because the insured believes it is reasonable.

BACKGROUND

¶3 Apollo Education Group, Inc. (“Apollo”) is a highereducation service provider that operates several universities in various 

countries. At the time this case arose, it was a publicly traded corporation. 

National Union Fire Insurance Company of Pittsburgh, PA (“National 

Union”) insured Apollo’s directors and officers for liability up to $15 

million under a directors and officers’ (“D&O”) liability policy. The policy 

included no duty to defend the insured if sued. Instead, Apollo would 

defend itself against any claims. Correspondingly, the policy contained no 

clause requiring the insurer to cooperate with a defense provided by 

National Union (“cooperation clause”).

¶4 The obligations of the parties were further specified as follows

(“consent-to-settlement provision”):
APOLLO EDUCATION V. NATIONAL UNION FIRE INSURANCE

Opinion of the Court

3

The Insureds shall not admit or assume any liability, enter 

into any settlement agreement, stipulate to any judgment, or 

incur any Defense Costs without the prior written consent of 

the Insurer. Only those settlements, stipulated judgments 

and Defense Costs which have been consented to by the 

Insurer shall be recoverable as Loss under the terms of this 

policy. The Insurer’s consent shall not be unreasonably 

withheld, provided that the Insurer shall be entitled to 

effectively associate in the defense, the prosecution and the 

negotiation of any settlement of any Claim that involves or 

appears reasonably likely to involve the Insurer.

¶5 On October 18, 2006, Apollo’s stock dropped 22.9%, following 

a Wall Street Journal article detailing an industry practice of backdating stock 

options for corporate executives, an investigation of Apollo by the United 

States Attorney’s Office for the Southern District of New York and the 

Securities and Exchange Commission, and an internal investigation 

followed by a public disclosure by Apollo that 57 of 100 stock option grants 

to executives during the relevant timeframe used incorrect dates for 

accounting purposes, together with a statement admitting “various 

deficiencies in the process of granting and documenting stock options.”

¶6 A class action followed in the United States District Court for

the District of Arizona. The district court dismissed the complaint with 

prejudice for failure to particularly allege falsity as required by Rule 9(b) of 

the Federal Rules of Civil Procedure. The court then denied a request for 

leave to amend and a motion to reconsider. Plaintiffs appealed to the Ninth 

Circuit.

¶7 While the appeal was pending, the plaintiffs and Apollo 

entered into mediation, which eventually resulted in an agreement to settle

for $13,125,000. Given costs incurred to that point, the D&O policy was 

down to $13,500,000 to cover a settlement.

¶8 National Union refused consent to the settlement. 

Nonetheless, Apollo entered into the settlement agreement, paying the 

plaintiffs out of pocket. Apollo then sued National Union to recover the 

settlement amount, alleging both breach of contract and bad faith.

¶9 The district court granted summary judgment to National 

Union, and Apollo appealed. Finding that it could not determine under

existing precedent how this Court would analyze the breach-of-contract 
APOLLO EDUCATION V. NATIONAL UNION FIRE INSURANCE

Opinion of the Court

4

claim, the Ninth Circuit certified the question to this Court. We have 

jurisdiction pursuant to article 6, section 5(6) of the Arizona Constitution, 

A.R.S. § 12-1861, and Rule 27(a)(1) of the Rules of the Supreme Court of 

Arizona.

DISCUSSION

¶10 When two parties with a contractual relationship both have 

an interest in the defense of an action but only one has control over that 

defense, conflicts are bound to occur. These conflicts are mediated by 

distinct bodies of law: contract law, which governs the agreement between 

the parties, and tort law, which provides an action for bad faith. This case 

presents solely contract law issues.

¶11 We begin with the language of the policy. See First Am. Title 

Ins. Co. v. Johnson Bank, 239 Ariz. 348, 350 ¶ 8 (2016). “An insurance policy 

is a contract, and in an action based thereon the terms of the policy must 

govern.” Dairyland Mut. Ins. Co. v. Andersen, 102 Ariz. 515, 517 (1967). In 

interpreting a contract, we examine the language to deduce the intention of 

the parties. Fireman’s Fund Ins. Co. v. New Zealand Ins. Co., 103 Ariz. 260, 261 

(1968). We interpret that language according to its “plain and ordinary 

meaning.” Teufel v. Am. Fam. Mut. Ins. Co., 244 Ariz. 383, 385 ¶ 10 (2018). If 

the terms are clear, we enforce them unless the contract is illegal or violates 

public policy. Dobson Bay Club II DD, LLC v. La Sonrisa de Siena, LLC, 242 

Ariz. 108, 115–16 ¶ 39 (2017). We also interpret the terms in the broader 

context of the overall contract. Grosvenor Holdings, L.C. v. Figueroa, 222 Ariz. 

588, 593 ¶ 9 (App. 2009).

¶12 Here, the contract terms speak clearly and directly to whether 

the perspective of insurer or insured should guide the determination of 

whether an agreement to settle by an insured is reasonable. The consentto-settlement provision states that “[t]he Insureds shall not . . . enter into 

any settlement agreement . . . without the prior written consent of the 

Insurer.” Making the same point a different way, “[o]nly those settlements 

. . . which have been consented to by the Insurer shall be recoverable as Loss 

under the terms of this policy.” The provision further states that “[t]he 

Insurer’s consent shall not be unreasonably withheld.”

¶13 The provision refers to the insured in this context only in 

terms of what it may not do: enter into any settlement without the insurer’s 

consent. Otherwise, it speaks entirely to the insurer’s perspective. First, it 
APOLLO EDUCATION V. NATIONAL UNION FIRE INSURANCE

Opinion of the Court

5

refers three times to the insurer’s “consent.” Consent by its nature means a 

deliberate, volitional act on the part of the person conveying it. Consent, 

Black’s Law Dictionary (11th ed. 2019) (“A voluntary yielding to what 

another proposes or desires; agreement, approval, or permission regarding 

some act or purpose, esp. given voluntarily by a competent person.”). In 

turn, consent “shall not be unreasonably withheld” by the insurer. The use 

of an adverb (“unreasonably”) in this context sets the standard of behavior 

to which the person who is taking the action is held. See, e.g., Honeycutt v. 

United States, 137 S. Ct. 1626, 1633 (2017) (“obtained, directly or indirectly”); 

Flores-Figueroa v. United States, 556 U.S. 646, 650–52 (2009) (actions 

“knowingly” taken). Here, the action referred to is the insurer withholding 

consent to settlement; the requirement that withholding consent may not 

be “unreasonable” is directed to the insurer as well. Thus, the policy’s plain 

language strongly suggests that the reasonableness of withholding consent 

is to be viewed from the insurer’s perspective.

¶14 This interpretation is supported by the contract’s overall 

context. Here, the parties agreed that the defense of any action would be 

controlled by the insured, with any settlement subject to the insurer’s 

consent. It makes sense that the reasonableness of such consent would not 

be determined from the perspective of the insured, because the insured has 

a strong and often adverse interest in settling within policy limits, 

regardless of the merits of a claim. Rather, where the insurer has no control 

over the litigation, it is more reasonable that the insurer’s perspective, 

which necessarily includes consideration of the strength of the underlying 

claim in accord with its interest in avoiding unnecessary payment, should 

prevail. Of course, the converse would be true where the insurer has 

control over the defense. The terms as agreed to by these parties reflects 

this reasonable understanding of the overall nature and context of the 

contract.

¶15 We are unpersuaded by Apollo’s argument that we should 

construe these terms against the insurer. That rule of construction applies 

when the language is ambiguous; this language is not. See Teufel, 244 Ariz. 

at 385 ¶ 10 (construing ambiguity against the insurer only when it remains 

after applying all other means of interpretation). Furthermore, the rule 

exists to protect ordinary consumer insurance purchasers against 

standardized contracts whose language is written by the insurers, who 

should be able to avoid ambiguity. See Equity Income Partners, LP v. Chicago

Title Ins. Co., 241 Ariz. 334, 338 ¶ 13 (2017). Here, the D&O policy was 

negotiated by two sophisticated parties, so that even if the policy terms 
APOLLO EDUCATION V. NATIONAL UNION FIRE INSURANCE

Opinion of the Court

6

remained ambiguous after application of secondary interpretive principles,

that rule of construction would not apply. See Noble v. Nat’l Am. Life Ins. 

Co., 128 Ariz. 188, 189–90 (1981); cf. Abboud v. Nat’l Union Fire Ins. Co., 163 

A.3d 353, 358 (N.J. Super. Ct. App. Div. 2017) (noting “reasonable 

expectations” doctrine applies primarily to “insurance obtained by an 

unsophisticated consumer”).

¶16 Apollo argues that the outcome here is controlled by this 

Court’s decision in United Services Automobile Association v. Morris, which 

held that “[t]he test as to whether the settlement was reasonable and 

prudent is what a reasonably prudent person in the insured[’s] position

would have settled for on the merits of the claimant’s case.” 154 Ariz. 113, 

121 (1987) (emphasis changed).

¶17 The questions addressed in Morris, which involved a policy 

unlike the D&O policy here, were whether “insureds being defended under 

a reservation of rights [may] enter into a settlement agreement without 

breaching the duty to cooperate and, if so, [whether] the settlement [is]

binding on the insurer.” Id. at 114. Morris involved a homeowner’s policy 

in which the insurer had a duty to defend, which in turn obligated the 

insured to cooperate, and also allowed the insurer to defend under a 

reservation of rights. Under a duty to defend, although an insurer is 

obliged to defend claims that may not be meritorious, it “obtains the 

advantage of exclusively controlling the litigation. This control allows the 

insurer to obtain a fair adjudication of its liability and to protect itself 

against the possibility of an insured colluding with the injured party to the 

prejudice of the insurer.” Id. at 117.

¶18 The Court recognized in Morris that when the insurer defends 

under a reservation of rights, the insureds are “placed in a precarious 

position.” Id. at 118. The insurer could invoke the cooperation clause to 

prevent the insured from settling. The insured could still be liable for a jury 

verdict in excess of the policy limits and could still also be denied coverage

under the reservation of rights. Id. at 118–21.

¶19 For those reasons, the Court observed that an “insurer that 

performs the duty to defend but reserves the right to deny the duty to pay 

should not be allowed to control the conditions of payment.” Id. at 119. 

Thus, the Court held “that the cooperation clause prohibition against 

settling without the insurer’s consent forbids an insured from settling only 

claims for which the insurer unconditionally assumes liability under the 
APOLLO EDUCATION V. NATIONAL UNION FIRE INSURANCE

Opinion of the Court

7

policy.” Id.; see also Damron v. Sledge, 105 Ariz. 151, 153 (1969) (allowing an 

insured to enter a settlement agreement without breaching the cooperation 

clause in certain circumstances). When the insurer has reserved its rights 

to contest coverage and an insured settles a claim without the insurer’s 

consent, the insurer is bound by the settlement if it was given notice and an 

opportunity to defend, and if the settlement reflected what a reasonably 

prudent person in the insured’s position would have settled for on the 

merits of the case. Morris, 154 Ariz. at 120–21.

¶20 The Morris context is different in so many ways from the 

policy before us that Morris itself implies the opposite result here. The duty 

to defend was central to the holding in Morris, as were the insurer’s 

reservation of rights and the insured’s duty to cooperate. See Webb v. 

Gittlen, 217 Ariz. 363, 369 ¶ 32 (2008) (describing the Morris rule, “that a 

stipulated judgment may bind the insurer arises from the insurer’s 

contractual obligations to defend and indemnify its insured”).1 Morris

determined whether the cooperation clause was breached by the 

settlement, 154 Ariz. at 118, so it made sense to consider the reasonableness 

of the settlement from the insured’s perspective. Here, there is no 

cooperation clause. And, of course, the policy in Morris did not have a 

provision like the one here providing that consent shall not be unreasonably 

withheld.

¶21 Crucially, the central feature giving rise to the Court’s 

departure from the policy language and the exception to the duty to 

cooperate in Morris was based on who had “the advantage of exclusively 

controlling the litigation.” Id. at 117. In Morris, the insurer possessed that 

control; here, absent a duty to defend, the insured does. See Richard Squire, 

How Collective Settlements Camouflage the Costs of Shareholder Lawsuits, 62

Duke L.J. 1, 10–11 (2012) (“D&O policies are different from . . . automobile 

and homeowners liability policies” because “the corporate managers rather 

than the insurers control the defenses of shareholder lawsuits.”).

¶22 In a D&O policy like the one here, no reason exists to not 

enforce the consent-to-settlement provision as plainly written and agreed 

to by the parties. The danger in Morris was leaving the insured at the 

insurer’s mercy; here, the risk is that the insured will use the insurer’s 

1 For that reason, other duty-to-defend cases relied on by Apollo are 

inapplicable here as well. See, e.g., Himes v. Safeway Ins. Co., 205 Ariz. 31 

(App. 2003).
APOLLO EDUCATION V. NATIONAL UNION FIRE INSURANCE

Opinion of the Court

8

coverage to assure it will escape liability that exceeds policy limits. Thus,

unlike in Morris, where the insured was powerless to avoid a “precarious 

position,” there is no need to protect the insured here from an unfair 

allocation of risk, such as by implying a duty to accept settlements that are 

reasonable from the insured’s perspective. Morris, 154 Ariz. at 118. Rather, 

as the contract provides, courts must determine whether consent was 

reasonably withheld. See, e.g., Schwartz v. Twin City Fire Ins. Co., 492 F. 

Supp. 2d 308, 318–19 (S.D.N.Y. 2007), aff’d, 539 F.3d 135 (2d Cir. 2008); 

Piedmont Off. Realty Tr., Inc. v. XL Specialty Ins. Co., 771 S.E.2d 864, 865–66 

(Ga. 2015); Allan D. Windt, Insurance Claims and Disputes § 6:29 n.1 (6th ed. 

2019) (“Since the insured wants to spend not its own money, but someone 

else’s money, the issue is not whether the insured had a reasonable basis to 

pay a particular amount in settlement, but whether the insurer had a 

reasonable basis not to agree to pay that amount of money in settlement.”). 

Thus, where there is no duty to defend, and the contract requires an insurer 

to not unreasonably withhold consent to a settlement proposed by the 

insured and a third party, we will examine whether the insurer’s decision 

to withhold consent to a settlement is reasonable from the insurer’s 

perspective.

¶23 The dissent joins us in finding that Morris does not apply here. 

Infra ¶ 46. It asserts, however, that reasonableness should be determined

as a matter of “equal consideration,” rather than from the insurer’s 

perspective. The dissent ignores the contract language, instead proclaiming 

that “the policy is silent” on the issue of whose perspective should guide 

the question of a settlement’s reasonableness. Infra ¶ 34. The dissent then 

proceeds to displace the policy’s terms with the implied covenant of fair 

dealing. Infra ¶ 38.

¶24 As discussed above, the parties negotiated provisions 

addressing the very question at issue here. The policy vests the power of 

consent to a settlement in the insurer, modifying that power with the 

requirement that the insurer may not “unreasonably” withhold consent. 

Thus, the standard here should focus on the reasonableness of the insurer’s 

conduct, as it was the party given the right to withhold consent under the 

contract.

¶25 The dissent also contends that equal consideration should 

apply because this is a third-party action rather than a first-party action. 

Infra ¶ 41, citing Clearwater v. State Farm Mut. Auto. Ins. Co., 164 Ariz. 256, 

258 (1990). As the dissent explains, first-party actions arise from the 
APOLLO EDUCATION V. NATIONAL UNION FIRE INSURANCE

Opinion of the Court

9

insurer’s obligation to pay benefits directly to the insured for a loss, while 

third-party claims are based on an obligation to indemnify the insured 

against liability to third parties. Infra ¶¶ 40–41. 

¶26 The dissent urges that in the context of a third-party action, 

the duty to defend is irrelevant. To the contrary, in addition to the policy 

terms, the duty to defend is the central factor in determining whose 

perspective should guide reasonableness in approving a settlement. In 

Clearwater, the Court discussed the distinction between first-party and 

third-party claims precisely because the latter usually, but not always, 

encompasses an insurer’s duty to defend. As the Court emphasized, in such 

circumstances the insurer “takes on the additional responsibility of 

defending the claim, and typically has exclusive authority to accept or reject 

offers of settlement.” 164 Ariz. at 259. Thus, the Court rejected the “fairly 

debatable” standard in determining an insurer’s duty in third-party cases 

but retained that standard in first-party cases. Id. at 260. But the Court 

made clear that the heightened standard in third-party actions applies 

“because of the different relationships and duties that exist between the 

parties.” Id. Where “the insurer exclusively controls settlement,” the 

“insured bears a disproportionate share of the risk if the insurer fails to 

accept a reasonable settlement offer within policy limits . . . . Therefore, 

although the ‘fairly debatable’ standard sufficiently protects both parties’ 

interests” where those circumstances are not present, “it inadequately 

protects the insured’s interests” where the insurer has exclusive control, 

requiring the insurer to consider “the insured’s interests equally with its 

own interests.” Id.

¶27 Here, the insured controls the litigation. An equal 

consideration requirement might force an insurer to accept a settlement, 

controlled entirely by the insured, for the full policy limit, even if the 

insurer fairly valued the claim at zero or an amount below the policy limit. 

Thus, where the insurer lacks control over litigation and settlement, we 

hold that the reasonableness of the settlement must be viewed from the 

insurer’s perspective.

¶28 From that conclusion, it follows that there may be cases in 

which it would be reasonable for the insured to settle, but also reasonable 

for the insurer to withhold consent. See, e.g., Hilco Cap., LP v. Fed. Ins. Co.,

978 A.2d 174, 179, 180–81 (Del. 2009) (holding that the standard in this 

context is whether the insurer had “a reasonable basis for its decision to 

withhold consent,” and that it is “not enough for the [plaintiffs] to show 
APOLLO EDUCATION V. NATIONAL UNION FIRE INSURANCE

Opinion of the Court

10

that the settlement offer was reasonable”). At the same time, the insured 

must receive the bargained-for benefit of its policy. Thus, we next address 

how to determine reasonableness from the insurer’s perspective while 

protecting the insured’s contractual interests.

¶29 Our cases discussing the tort of bad faith help determine

whether an insurer reasonably withholds consent to its insured’s 

prospective settlement of a claim. Specifically, whether the insurer acted 

reasonably is one element of that tort. See, e.g., Brown v. Superior Court, 137 

Ariz. 327, 336 (1983); Trus Joist Corp. v. Safeco Ins. Co. of Am., 153 Ariz. 95, 

104 (App. 1986). The inquiry is an objective one: “did the insurance 

company act in a manner consistent with the way a reasonable insurer 

would be expected to act under the circumstances”? Trus Joist Corp., 153 

Ariz. at 104.

¶30 To act reasonably, the insurer is obligated to conduct a full 

investigation into the claim. Zilisch v. State Farm Mut. Auto. Ins. Co., 196 

Ariz. 234, 238 ¶ 21 (2000); Deese v. State Farm Mut. Auto. Ins. Co., 172 Ariz. 

504, 507 (1992). The Court has described the insurer’s role as “an almost 

adjudicatory responsibility.” Rawlings v. Apodaca, 151 Ariz. 149, 154 (1986). 

To carry out this responsibility, the insurer “evaluates the claim, determines 

whether it falls within the coverage provided, assesses its monetary value, 

decides on its validity and passes on payment.” Id. The company may not 

refuse to pay the settlement simply because the settlement amount is at or 

near the policy limits. Rather, the insurer must fairly value the claim. See 

Zilisch, 196 Ariz. at 238 ¶ 21. The insurer may, however, discount 

considerations that matter only or mainly to the insured—for example, the 

insured’s financial status, public image, and policy limits—in entering into 

settlement negotiations. See Clearwater, 164 Ariz. at 259. The insurer may

also choose not to consent to the settlement if it exceeds the insurer’s 

reasonable determination of the value of the claim, including the merits of 

plaintiff’s theory of liability, defenses to the claim, and any comparative 

fault. In turn, the court should sustain the insurer’s determination if, under 

the totality of the circumstances, it protects the insured’s benefit of the 

bargain, so that the insurer is not refusing, without justification, to pay a 

valid claim. Rawlings, 151 Ariz. at 154–55 (describing insurer’s duties to the 

insured); Noble, 128 Ariz. at 190 (emphasizing the nature of an insured’s 

contractual expectations).

¶31 Under this formulation, an insurer has every incentive to act 

prudently, both for itself and its insured. An insurer is unlikely to reject a 
APOLLO EDUCATION V. NATIONAL UNION FIRE INSURANCE

Opinion of the Court

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settlement if the objective value of the claim is commensurate with the 

settlement, for it will likely have to pay out regardless. Should the insurer 

act unreasonably in rejecting the settlement, the insured may challenge that 

determination, and may file a bad-faith tort action if circumstances warrant, 

as Apollo is pursuing here.

CONCLUSION

¶32 For the foregoing reasons, we answer the Ninth Circuit’s 

certified question as follows: reasonableness is assessed from the 

perspective of the insurer, not the insured. The insurer must, in deciding 

whether to consent to a settlement, give the matter full and fair 

consideration applying the factors set forth in paragraph 30, but need not 

consider any additional factors that may have induced the insured to settle.
APOLLO EDUCATION V. NATIONAL UNION FIRE INSURANCE

JUSTICE GOULD, joined by JUSTICE LOPEZ, Dissenting

12

GOULD, J., joined by Lopez, J., dissenting:

¶33 I respectfully dissent. The Ninth Circuit asked us to provide 

the standard that applies under Arizona law for determining whether 

National unreasonably withheld its consent to Apollo’s settlement 

agreement. They certified this question to us because the policy does not 

provide the standard. Simply put, the policy, by its terms, does not state 

whether the reasonableness of National’s decision is viewed from its own 

perspective or Apollo’s.

¶34 Nevertheless, the majority goes to great lengths searching for 

the answer in the policy. It fails. At bottom, the majority’s textual analysis 

simply proves that the policy imposed a duty on National to act reasonably 

in withholding its consent. But no one has ever disputed this fact. Nor has 

anyone disputed the majority’s conclusion that this contractual duty 

focuses on the reasonableness of National’s conduct, as opposed to

Apollo’s. Rather, the issue here is whether National breached the standard 

of care that applies to this duty. The policy is silent on this issue.

¶35 Nevertheless, the majority claims that the policy “clearly and 

directly,” supra ¶ 12, states that the reasonableness of National’s decision to 

withhold consent must be viewed from National’s perspective, and, as a 

result, we need not consider the implied covenant of good faith and fair 

dealing in determining the standard. Indeed, according to the majority, 

considering the implied covenant would “displace” the clear and 

unambiguous terms of the policy. Supra ¶ 23.

¶36 For the reasons discussed below, I disagree with the 

majority’s conclusion. The answer to the certified question is that, under 

Arizona law, the implied covenant of good faith and fair dealing required

National to give equal consideration to Apollo’s interests as well as its own 

in deciding whether to consent to the settlement agreement. This 

framework for third-party settlement offers has been the law in Arizona for 

decades.

¶37 But what confuses me about the majority’s analysis is that, 

after initially rejecting the equal consideration framework, they ultimately 

adopt it. Specifically, in explaining its reasonableness standard, the 
APOLLO EDUCATION V. NATIONAL UNION FIRE INSURANCE

JUSTICE GOULD, joined by JUSTICE LOPEZ, Dissenting

13

majority relies on cases that are based on the implied covenant of good faith 

and fair dealing. Supra ¶¶ 29–30. And then, to make matters more 

confusing, they craft a standard that is virtually indistinguishable from the 

equal consideration standard. Supra ¶¶ 29–31. In short, there is no 

consistent analytical framework for their conclusion. As a result, I fear the 

majority’s opinion will create confusion and generate unnecessary 

litigation for years to come.

I.

¶38 Because the policy does not provide the standard for 

determining whether National unreasonably withheld consent, we must 

look to the implied covenant of good faith and fair dealing, which is a part 

of every insurance contract. Rawlings, 151 Ariz. at 153. The essence of that 

covenant is that “neither party will act to impair the right of the other to 

receive the benefits which flow from their agreement or contractual 

relationship.” Id.

¶39 Although the implied covenant of good faith and fair dealing 

exists in every contract, in the context of “the insurance relationship [it] is 

unique from that of other contracts.” Taylor v. State Farm Mut. Auto. Ins. Co., 

185 Ariz. 174, 176 (1996). Unlike other contracts, the insured does not seek 

to “realize a commercial advantage but, instead, seeks protection and 

security from economic catastrophe.” Rawlings, 151 Ariz. at 154. Rather, 

“one of the benefits that flow from the insurance contract is the insured’s 

expectation that his insurance company will not wrongfully deprive him of 

the very security for which he bargained or expose him to the catastrophe 

from which he sought protection.” Id. at 155. Thus, “the insurance contract 

and the relationship it creates contain more than the company’s bare 

promise to pay certain claims when forced to do so; implicit in the contract 

and the relationship is the insurer’s obligation to play fairly with its 

insured.” Id. at 154. And while the insurer is not “a fiduciary . . . it has 

some duties of a fiduciary nature,” including treating its insured with 

“[e]qual consideration, fairness and honesty.” Id. at 155.

¶40 Based on the implied covenant of good faith and fair dealing, 

“an insurance company owes its insured a duty of good faith in deciding 

whether to accept or reject settlement offers.” Hartford Acc. & Indem. Co. v. 

Aetna Cas. & Surety Co., 164 Ariz. 286, 289 (1990). However, because the 
APOLLO EDUCATION V. NATIONAL UNION FIRE INSURANCE

JUSTICE GOULD, joined by JUSTICE LOPEZ, Dissenting

14

relationships and risks involved in first- and third-party claims are 

different, we apply different standards to each type of claim. Clearwater, 

164 Ariz. at 259–60. First-party claims involve the insurer’s agreement “to 

pay benefits directly to the insured,” and include coverage for health, 

disability, and life insurance. Id. at 258; Taylor, 185 Ariz. at 175–76 (same). 

First-party claims do not involve liability claims made against an insured 

by a third party. Clearwater, 164 Ariz. at 258–59; Taylor, 185 Ariz. at 175–76.

¶41 In contrast, a third-party claim involves a third-party who is 

making a liability claim against the insured. Clearwater, 164 Ariz. at 258; 

Acosta v. Phx. Indem. Ins. Co., 214 Ariz. 380, 383 ¶ 13 (App. 2007). Thus, 

“third-party coverage arises when the insurer contracts to indemnify the 

insured against liability to third parties.” Clearwater, 164 Ariz. at 258. 

Moreover, because third-party claims involve the potential liability of an 

insured to a third-party claimant,

The type of claim is not determined by the identity of the 

party bringing the bad faith action against the insurer. For 

example, a third-party action might be brought by the insured

in the event that he is subjected to excess liability by reason of 

the insurer’s bad faith refusal to settle. In that event, the 

standards applicable to third-party claims would govern the

action, although it was brought by the insured, rather than a 

third-party assignee.

Clearwater, 164 Ariz. at 258; see Taylor, 185 Ariz. at 175–76 (same).

¶42 Because the insured’s liability to the claimant may exceed the 

policy limits, in a third-party claim there is “the added risk of subjecting the 

insured to liability in excess of the policy limits because of the insurer’s bad 

faith refusal to settle within those limits.” Clearwater, 164 Ariz. at 259. In 

contrast, “[f]irst-party claims do not involve the insurer in defending a legal 

action brought by a third party that could result in financial ruin of its 

insured.” Id.

¶43 Thus, for first-party claims, we examine the reasonableness of 

settling a claim from the perspective of the insurer. See id.; Rawlings, 151 

Ariz. at 156. However, “[i]n the third-party context, [the] duty of good faith 

requires an insurer to give equal consideration to the protection of the 

insured’s as well as its own interests.” Hartford, 164 Ariz. at 289; see 
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Clearwater, 164 Ariz. at 259 (stating that in third-party cases “the duty of 

good faith and fair dealing requires that an insurer give ‘equal 

consideration’ to the interests of its insured in deciding whether to accept 

an offer of settlement”). Applying this standard, an insurer must consider 

“the amount of financial risk to which each party is exposed in the event of 

a refusal to settle,” including “the financial risk to the insured in the event 

of a judgment in excess of the policy limits.” Clearwater, 164 Ariz. at 259–

60.

¶44 Equal consideration applies here because this case involves a 

third-party claim. The policy, by its terms, provides liability coverage for 

claims made against Apollo by a third-party. Specifically, the policy states 

that Apollo “shall not admit or assume any liability, enter into any settlement 

agreement, stipulate to any judgment . . . without the prior written consent of 

[National].” (Emphasis added). Further, the policy provides that “[o]nly 

those settlements, stipulated judgments and Defense Costs which have been 

consented to by [National] shall be recoverable as Loss under the terms of 

this policy.” (Emphasis added).

¶45 Here, Apollo seeks indemnity from National for its liability to 

the Teamsters Local 617 Pension & Welfare Funds (“Teamsters”). As is 

common to third-party claims, the Teamsters’ lawsuit against Apollo 

sought damages in excess of National’s policy limits. Nevertheless, the 

Teamsters’ eventually offered to settle their claims against Apollo for an 

amount within the policy limits. Thus, if National withheld its consent to 

this settlement agreement without giving equal consideration to the 

interests of Apollo, it breached the insurance contract, and Apollo was free 

to enter the settlement agreement without National’s consent. Safeway Ins. 

Co. v. Guerrero, 210 Ariz. 5, 9 ¶ 11 (2005); see also Ariz. Prop. & Cas. Ins. Guar. 

Fund v. Helme, 153 Ariz. 129, 137 (1987) (stating that when an insurer 

breaches any of its express or implied duties under the insurance contract, 

thereby exposing an insured to a judgment in excess of the policy limits, the 

insured “is generally held to be freed” from its obligations under the 

contract).

II.

¶46 Apollo urges us to apply the standard set forth in Morris, 154 

Ariz. at 120–21, which examines the reasonableness of a settlement offer 

from the perspective of the insured. The majority rejects this standard, and 
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JUSTICE GOULD, joined by JUSTICE LOPEZ, Dissenting

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I agree. Apollo never entered a Morris agreement, and, as a result, the 

unique circumstances involved in examining the reasonableness of such an 

agreement are not present here. Supra ¶¶ 17–20; Guerrero, 210 Ariz. at 7 ¶ 1 

& n.1, 9 ¶ 9 (same); Himes v. Safeway Ins. Co., 205 Ariz. 31, 37 ¶ 12 (App. 

2003) (same).

¶47 In contrast, National urges us to view the settlement 

agreement from the perspective of the insurer, thereby adopting the 

standard for first-party claims. The majority apparently agrees. Indeed, 

the cases cited by the majority in support of its proposed standard involve 

only first-party claims. Zilisch, 196 Ariz. at 238 ¶ 21; Rawlings, 151 Ariz. 

at 153; Noble, 128 Ariz. at 190.

¶48 Thus, for the first time in our jurisprudence, the majority 

applies a first-party standard for settlement offers involving a third-party 

claim. The majority justifies this holding on the grounds that, because 

National has no duty to defend Apollo under the policy, equal 

consideration does not apply. Supra ¶ 27. The majority is wrong. The duty 

of equal consideration is not based on the duty to defend, but rather is based 

on the implied covenant of good faith and fair dealing. Supra ¶¶ 39–43. As 

a result, the “duty to give equal consideration to offers of settlement exists 

separate and apart from the duty to defend.” Equity Gen. Ins. Co. v. C & A 

Realty Co., 148 Ariz. 515, 519 (App. 1985); see Helme, 153 Ariz. at 137 (stating 

that apart from its express contractual duties, “insurance carriers owe their 

insureds . . . the duty to treat settlement proposals with equal 

consideration”); see also Mora v. Phx. Indem. Ins. Co., 196 Ariz. 315, 319 ¶ 16

(App. 1999) (stating that the implied covenant of good faith and fair dealing 

gives rise to “a third, implied duty: the duty to treat settlement offers with 

equal consideration”); Mut. Ins. Co. of Ariz. v. Am. Cas. Co. of Reading, Pa., 

189 Ariz. 22, 26 & n.7 (App. 1996) (same), superseded on other grounds by 

A.R.S. § 12-341.01; State Farm. Mut. Auto. Ins. Co. v. Peaton, 168 Ariz. 184, 192 

(App. 1990) (same).

¶49 Indeed, the duty of equal consideration arises before an 

insurer has a duty to defend. The duty to defend is triggered when a thirdparty claimant files a lawsuit and presents the insurer with the complaint. 

Manny v. Estate of Anderson, 117 Ariz. 548, 550 (App. 1977); Pesqueria v. 

Factory Mut. Liab. Ins. Co. of Am., 16 Ariz. App. 407, 412 (1972); see Salvatierra 

v. Nat’l Indem. Co., 133 Ariz. 16, 19 (App. 1982) (stating the duty to defend 
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JUSTICE GOULD, joined by JUSTICE LOPEZ, Dissenting

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is generally determined by the face of the complaint). In contrast, the duty 

to give equal consideration arises when there is an offer to settle a thirdparty claim within the policy limits. Fulton v. Woodford, 26 Ariz. App. 17, 22 

(1976); Peaton, 168 Ariz. at 192 (same). Thus, an insurer’s duty of equal 

consideration exists before any legal action has been formally initiated. See 

Mut. Ins. Co. of Ariz., 189 Ariz. at 26 n.7 (stating that unlike the duty to 

defend, which “is generally determined by the face of the complaint,” the 

duty of insurers to treat settlement proposals with equal consideration 

“may exist before any legal action has been formally initiated”); Brisco v. 

Meritplan Ins. Co., 132 Ariz. 72, 74 (App. 1982) (stating that an insurer owes 

its insured a good faith duty “to terminate a claim against its insured by 

settlement”).

¶50 The majority’s reliance on Clearwater is also misplaced. There, 

we held that equal consideration is the standard that applies to third-party 

claims. Clearwater, 164 Ariz. at 259–60. And although we discussed the 

importance of applying equal consideration when an insurer, through its 

duty to defend, controls litigation, we never held that equal consideration 

was based upon an insurer’s duty to defend. Id. Of course, here, despite 

the absence of a duty to defend, National does have a great deal of control 

over this litigation by virtue of its authority to accept or reject any 

settlement agreement negotiated by Apollo’s attorneys. Nevertheless, the 

majority’s construction of Clearwater would create an anomaly in our 

jurisprudence, given the fact that we have consistently held that an 

insurer’s duty to give equal consideration to the interests of its insured is 

separate and independent from its duty to defend. Supra ¶¶ 48–49.

¶51 The majority also mistakenly equates equal consideration 

with the Morris standard, claiming that it requires a court to focus on the 

perspective of the insured. Supra ¶ 23. The majority’s view appears to be 

based on the belief that the standard for considering settlement offers is 

binary: the court must examine the reasonableness of the insurer’s decision 

from either the viewpoint of the insurer or the insured. However, the law 

does not support this view. Rather, in contrast to the Morris standard, equal 

consideration requires the insurer to consider both its own interests and the 

interests of the insured.
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JUSTICE GOULD, joined by JUSTICE LOPEZ, Dissenting

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III.

¶52 The Ninth Circuit’s concern that the duty of equal 

consideration only applies to bad faith tort claims, and therefore is not 

applicable to Apollo’s breach of contract claim, is misplaced. The Ninth 

Circuit correctly notes that, as a general matter, an insured’s breach of 

contract claim is separate from its bad faith claim. Specifically, although a 

bad faith action is based on the insurance contract, unlike a breach of 

contract action, it requires proof of the insurer’s intent to violate the implied 

covenant of good faith and fair dealing. Taylor, 185 Ariz. at 176; Clearwater, 

164 Ariz. at 259. Thus, “[n]ot every breach of an express covenant in an 

insurance contract” constitutes bad faith, and, conversely, the implied 

covenant of good faith and fair dealing may be breached “even though the 

express covenants of the contract are fully performed.” Rawlings, 151 Ariz. 

at 157, 163; see Deese, 172 Ariz. at 508–09 (to same effect); Borland v. Safeco 

Ins. Co. of Am., 147 Ariz. 195, 200 (App. 1985) (to same effect).

¶53 But here, Apollo’s breach of contract and bad faith claims are 

based on the same allegation: National unreasonably withheld its consent 

to the subject settlement agreement. And because there is no standard set 

forth in the policy itself, based on the implied covenant of good faith and 

fair dealing, National was required to give equal consideration to the 

interests of Apollo in deciding whether to consent to the settlement 

agreement.

¶54 Arizona has spent several decades carefully developing the 

equal consideration standard to protect insureds from the potential 

financial ruin they face in third-party claims. Unfortunately, today, the 

majority has decided to depart from that jurisprudence. This will 

undoubtedly create confusion and generate litigation for years to come. I 

therefore dissent.