Court Opinion

ID: 9549923
Source: CourtListenerOpinion
Date Created: 2023-08-07 18:26:37.607039+00
Date Added: 2024-06-11T15:21:04.216505
License: Public Domain

LANKFORD, Judge,
concurring in Part and dissenting in Part.
While I agree with the majority that the excess carrier is entitled to recover defense costs from the primary carrier, I disagree with the conclusion that only some costs can be recovered. My reasoning also differs substantially from the majority’s.
The majority holds that the primary carrier did not effectively discharge its duty to defend by paying its policy limits without obtaining an effective covenant not to execute against the insured. In my view, the primary carrier does not discharge its duty to defend even when it obtains such a covenant. Instead, the duty is extinguished only when the insurer either settles the claim by obtaining a complete release or pays a judgment against the insured.
There are several reasons that a covenant not to execute fails to extinguish the duty to defend. First, the insurance contract requires more. California Casualty’s policy relieves it of the duty to defend only when it settles the claim against the insured or pays a judgment. Mere payment of the policy limits without protection of the insured is insufficient. See, e.g., American Family Life Assurance Co. v. United States Fire Co., 885 F.2d 826, 831 (11th Cir.1989) (tender of policy limits did not relieve the primary insurer of its duty to provide a defense).
The clear intent of the policy language is that the insurer is relieved of its duty to defend only when the insured has been fully protected against liability and litigation. The insured is protected from further liability exposure and from the burden of defending only when the insurer obtains a complete release or pays a judgment.
A covenant not to execute against the insured’s personal assets does not fully protect the insured because it permits the plaintiff to proceed with the litigation against the insured. The primary insurer contractually agreed to provide a defense. That duty is independent from, and broader than, the duty to pay a liability claim. 7C John A. Appleman, Insurance Law and Practice § 4684, at 83 (Walter F. Berdal ed., rev. ed. 1979). Thus, the fact that the insurer has paid its limits and obtained a covenant does not erase the insured’s need for a defense provided by the insurer.
Nor does a covenant fully protect the insured from liability. Such a covenant may protect the insured’s personal assets from execution, but it does not prevent the entry of a judgment against the insured. That judgment is a debt of the insured. Although both plaintiff and the insured expect the excess carrier to pay that debt, the legal liability is the insured’s and not primarily the carrier’s. In fact, it is because the insured is legally hable that the excess carrier has the duty to pay. Thus, the primary carrier does not fully protect the insured from legal liability by obtaining a covenant, and consequently it does not fully discharge its duty to defend by securing such an agreement.
The second reason that obtaining the covenant does not discharge the duty to defend is that the primary carrier’s duty cannot be measured by the availability of excess coverage. The carrier’s duty to defend is instead defined by its contract with its insured, together with any public policy concerns. See Kepner v. Western Fire Ins. Co., 109 Ariz. 329, 330, 509 P.2d 222, 223 (1973); Navajo Freight Lines, Inc. v. Liberty Mut. Ins. Co., 12 Ariz.App. 424, 431, 471 P.2d 309, 316 (App.1970). The fact that State Farm covered the insured’s additional $100,000 of liability, which remained after California Casualty obtained the covenant, is therefore irrelevant to defining California Casualty’s duty. “[The primary carrier’s] duty to defend is no different than if there were no excess insurance policy at all.” Bituminous Casualty Corp. v. Iowa Nat’l Mut. Ins. Co., 132 Ill.App.3d 868, 87 Ill.Dec. 568, 570, 477 N.E.2d 694, *172696 (1985). Stated another way, the primary carrier clearly would not have discharged its duty to defend by paying its policy limits and leaving the insured exposed to $100,000 in additional liability. Because the presence or absence of excess coverage is irrelevant to defining the primary carrier’s contractual duties, California Casualty did not discharge its duty to defend by obtaining a covenant that left $100,000 in remaining liability.
The third reason that a covenant cannot discharge the duty is that the contrary rule would encourage primary carriers to unfairly shift their defense costs to excess carriers. Cf. Aetna Casualty & Sur. Co. v. Sullivan, 33 Mass.App.Ct. 154, 597 N.E.2d 62, 65 (1992) (A rule that insurer could escape the duty to defend by tendering policy limits would create an incentive to tender “whenever the insurer anticipates that the cost of providing a defense would exceed the amount of coverage. The duty to defend ... would, thus, be significantly nullified in a large number of cases.”).
Indeed, the facts of this case illustrate how that may occur. California Casualty paid $100,000—on a claim ultimately proved to be worth only $20,000—and refused to defend further. By paying its policy limits and refusing to defend further, California Casualty thereby shifted. $93,000 in defense costs to State Farm. The economic incentive to primary carriers is obvious: California Casualty opted to pay $100,000 in liability costs rather than continue to defend and incur $113,000 in total liability and defense costs, a savings to it of $13,000. The potential unfairness to excess carriers is equally apparent: State Farm was forced to bear $93,000 in defense costs on a claim for which it had no liability whatsoever.
A final reason to require the primary carrier to continue the defense is to avoid the disruptive effects of shifting the defense. “[I]t is undesirable to allow a situation that permits one insurer and its attorneys to withdraw from further handling of a claim and require a new staff and its attorneys to step into the negotiations and litigation.” Apple-man, supra, § 4682 at 37. To force the changing of legal horses in midstream is not only clearly disadvantageous to the insured, it increases total defense costs.
The only rule that avoids this unjust and inefficient result is this: The duty to defend is satisfied only by either settlement with a complete release or payment of a judgment. Requiring the primary carrier to continue defending even if it obtains a covenant not to execute removes any incentive for the primary carrier to avoid its contractual duty of paying defense costs by paying its policy limits on a claim worth less than the policy limits. This rule gives the insured what he purchased from the primary carrier: a defense. It also avoids placing defense costs on excess carriers who may have no liability on the claim.
This rule is also fair to the primary carrier. It has been paid premiums to defend. Requiring it to defend merely means that it must do what it has been paid to do. If the insured has other coverage, that fact alone does not justify the primary insurer’s escape from its contractual duties. The primary carrier is not entitled to avoid or reduce its defense costs based on the fortuity of excess coverage and at the expense of the excess carrier. Requiring the primary insurer to continue its defense induces the primary carrier to cooperate with the excess insurer in settling any claim that implicates the excess coverage. At the same time, it does not place the excess carrier in an unfairly superi- or bargaining position.
Continental Casualty Co. v. Farmers Ins. Co., 180 Ariz. 236, 883 P.2d 473 (App.1994) admittedly says otherwise, but in that case the court did not consider the effect of a covenant on the insured, the economic incentives created by allowing primary carriers to shift the defense to excess carriers, or the requirement that the duty to defend be defined by the insurance policy. In addition, the assertion in that decision that a covenant is “as complete” a settlement as the primary carrier could obtain, id. at 239, 883 P.2d at *173476, is incorrect. When a claim is settled for less than policy limits, the primary carrier can obtain a complete release. When a claim exceeds the policy limits, the primary and excess carriers can participate in a full settlement, again obtaining a complete release.
For these reasons, I cannot fully concur in the majority opinion.