Court Opinion

ID: 9537191
Source: CourtListenerOpinion
Date Created: 2023-08-07 07:14:00.265309+00
Date Added: 2024-06-11T14:56:11.320807
License: Public Domain

HOLOHAN, Justice,
dissenting.
This appeal was initially decided by the Court of Appeals by a memorandum decision. There was no new principle of law to be announced; the prevailing authority was Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (1969), decided almost 20 years ago. The insurance company had complied with the rule adopted in Damron.
Where the carrier sends its insured a notice that it is reserving its rights to contest liability for any judgment, and then goes ahead and defends the action, it is almost uniformly held that by this notice the company may defend and use its best efforts to prevent an excessive verdict, without thereby waiving its right to raise the question of liability under the terms of the policy at a later date.
Damron, 105 Ariz. at 155, 460 P.2d at 1001.
Damron held that an insured is generally freed from the obligations of the cooperation clause of the insurance contract when the insurer has breached its duty to defend or to indemnify. This rule was reaffirmed in our recent case of Arizona Property & Casualty Insurance Guaranty Fund v. Helme, 153 Ariz. 129, 735 P.2d 451 (1987).
The insurer in this case has not breached any of its obligations under the insurance contract. It has undertaken the defense of the insureds, and it was attempting to defeat the claim believing that there was “a very substantial probability of obtaining a defense verdict” in the action. If the insurer had been allowed to defend, a defense verdict would have been of mutual benefit to the insurer and the insureds.
The insurer raised the question of coverage, but it has never indicated that it has *122concluded that there is in fact no coverage. Damron allows the insurer to take this position and not be in violation of the insurance contract.
Despite our past precedent, the court takes a new direction and concludes that an insured being defended under a reservation of rights may enter into a so-called Damron agreement without breaching the cooperation clause, provided the insured does so fairly, with notice to the insurer, and without fraud or collusion on the insurer. The basis for this new direction seems to rest on a particular concern for the insured despite the clear language of the insurance contract.
The new rule announced by the court is that the cooperation clause of the insurance contract prohibiting settlements without the insurer’s consent forbids an insured from settling only claims for which the insurer unconditionally assumes liability under the policy. Two cases are cited in support of this proposition. At 119, 741 P.2d at 252. An analysis of the cited cases suggests that neither case is good precedent for the announced rule.
One of the cases cited by the court, Taylor v. Safeco Insurance Co., 361 So.2d 743 (Fla.App.1978), involved an insured who refused to allow the insurer to defend the action after the insurer had disclaimed responsibility for any judgment in the action pending against the insured. A settlement was entered into by the insured without the consent of the insurer. The Florida court held that the insured could settle the case without the insurer’s consent because the insured is not required to surrender control of the case against him to an insurer who denies liability or any judgment in the case. The cited case is an example of the majority rule which allows an insured to reject a defense offered under a reservation of rights. See at 118, 741 P.2d at 251.
Cay Divers, Inc. v. Raven, 812 F.2d 866 (3d Cir.1987), is also cited by the court in support of the new rule. A careful reading of the cited case indicates that it involves an insurer who was denying coverage under its policy for a claim made against its insured. The insured brought an action against the insurer to establish coverage and to compel the insurer to defend. The insurer agreed to defend but under a reservation of right because the insurer was denying coverage. A reasonable settlement by the insured without consent of the insurer was held not to bar indemnification. Although there is language in the Cay Divers decision, 812 F.2d at 870, which states that the no settlement clause pertains to claims for which liability is assumed under the policy, the language is dicta and the case cited in support of the statement, American Fire & Casualty Co. v. Kaplan, 183 A.2d 914, 915 (D.C.Mun.App.1962), does not support the statement.
American Fire & Casualty is an example of a Damron situation in which the insurer denied coverage and refused to defend. The District of Columbia court held:
By rejecting an asserted claim and refusing to defend in the name of the policy-holder, the insurer’s repudiation of its obligations under the policy operates to relieve the insured from the performance of provisions intended to protect the insurer if it honored its responsibility. The appellant cannot repudiate its obligations under this type of contract on the one hand and hold its insured to strict performance on the other. (Footnotes omitted)
American Fire & Casualty, 183 A.2d at 915-16.
Cay Divers is actually an example of that group of courts which permit insureds to settle even though their insurers were affording timely defenses but denying any liability under the insurance policies in question. Great American Indemnity Co. v. City of Corpus Christi, 192 S.W.2d 917 (Tex.Civ.App.1946); Thomas W. Hooley & Sons v. Zurich General Accident & Liability Insurance Co., 235 La. 289, 103 So.2d 449 (1958); Hawkeye Casualty Co. v. Stoker, 154 Neb. 466, 48 N.W.2d 623 (1951); See Sargent v. Johnson, 551 F.2d 221 (8th Cir.1977).
It is conceded that the insurer in this appeal “did not breach any of its policy obligations.” At 114, 741 P.2d at 247. Why shouldn’t the insured be equally *123bound to respect the terms of the contract? In Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986), this court indicated that there is in every insurance contract a covenant of good faith and fair dealing, implied in law, whereby each of the parties is bound to refrain from any action which would impair the benefits which the other had the right to expect from the contract or the contractual relationship.
Apparently, however, this court adopts the rationale of the Minnesota Supreme Court in Miller v. Shugart, 316 N.W.2d 729 (Minn.1982):
This is not to say that Milbank’s [Mil-bank Mutual Insurance Company] position is enviable. As the trial court observed, it had “serious doubts about the propriety of the procedure whereby the insurer is placed in a ‘no-win’ situation as was done here.” If the insurer ignores the “invitation” to participate in the settlement negotiations, it may run the risk of being required to pay, even within its policy limits, an inflated judgment. On the other hand, if the insurer decides to participate in the settlement discussions, ordinarily it can hardly do so meaningfully without abandoning its policy defense. Nevertheless, it seems to us, if a risk is to be borne, it is better to have the insurer who makes the decision to contest coverage bear the risk. Of course, the insurer escapes the risk if it should be successful on the coverage issue, and, in that event, it is plaintiff who loses.
(emphasis supplied) Miller v. Shugart, 316 N.W.2d at 734.
The Miller court recognizes the danger of its position:
Plainly, the “judgment” does not purport to be an adjudication on the merits; it only reflects the settlement agreement. It is also evident that, in arriving at the settlement terms, the defendants would have been quite willing to agree to anything as long as plaintiff promised them full immunity.
316 N.W.2d at 735.
But apparently the Minnesota Supreme Court felt it had provided a just remedy:
In these circumstances, while the judgment is binding and valid as between the stipulating parties, it is not conclusive on the insurer. The burden of proof is on the claimant, the plaintiff judgment creditor, to show that the settlement is reasonable and prudent. The test as to whether the settlement is reasonable and prudent is what a reasonably prudent person in the position of the defendant would have settled for on the merits of plaintiff's claim. This involves a consideration of the facts bearing on the liability and damage aspects of plaintiff’s claim, as well as the risks of going to trial.

Id.

Sargent v. Johnson, supra, provides a different viewpoint about the actions of insureds who undertake settlements which avoid all personal liability and shift the full consequences of the settlement on the insurer. The Sargent Court observed:
This standard of good faith and mutual respect applies to both parties to the insurance contract. In this case, under the circumstances previously related, we must conclude that the insured’s conduct in discharging defense counsel provided by the insurance carrier and entering into a settlement of the pending litigation without the insurer’s consent, even with court approval, constituted a violation of terms of the existing policies. Moreover, the insured not only breached its contract, but acted in bad faith. Counsel for the insured did not enter into a bargain to settle its liability claims for a fair price, but entered into a questionable collaboration by which the parties maneuvered through terms of a settlement agreement to impose an uncompromised full balance of a judgment upon the insurer, while the insured incurred no real detriment. In light of the questionable validity of the judgment on its face, and the substantial sum obtained outright by Sargent from Ohman, this seems particularly unreasonable. This kind of bargain represents the antithesis of mutual respect for rights.
Haglin’s breach of insurance policy provisions ... and its failure to deal with *124Liberty in good faith, effectively severed the insured-insurer relationship.
Sargent v. Johnson, 551 F.2d at 232.
The insurance contract in this case defined the risk. If the acts of the insured come within the risk, the insurer is obligated to pay any judgment or settlement up to policy limits. • If the acts of the insured do not come within the risk, the insurer is not obligated to pay. There is nothing unusual about such a situation nor is there anything unjust if there happens to be no coverage. The coverage question in an insurance policy is a matter of contract law, not social welfare. The insurer in this case has remained faithful to its obligations under the insurance contract, and it had a “reasonable expectation” that the insured would deal fairly with it and refrain from any action which would impair the benefits inherent in the contractual relationship.
Not only have the insureds violated the terms of the contract, they have entered a settlement which does not represent a fair disposition of their liability. It is in fact not a good faith settlement. I dissent.