Holt v. Utica Mut. Ins. Co.
| Decision Date | 30 June 1988 |
| Docket Number | No. CV-87-0273-PR,CV-87-0273-PR |
| Citation | 759 P.2d 623,157 Ariz. 477 |
| Parties | William G. HOLT and William D. Holt, Plaintiffs/Appellees, v. UTICA MUTUAL INSURANCE COMPANY, Garnishee Defendant/Appellant. |
| Court | Arizona Supreme Court |
Langerman, Begam, Lewis and Marks by Stanley J. Marks and Neil J. Harrington, Phoenix, for plaintiffs/appellees.
Sorenson, Moore, Evens & Burke by Patrick E. Burke and John S. Schaper, Phoenix, for defendant/appellant.
This petition for review asks us to determine whether there are genuine issues of material fact precluding summary judgment on insurance questions of duty to defend, breach of a cooperation clause and substantial prejudice to an insurer. We granted review to clarify several matters of statewide importance. Rule 23, Ariz.R.Civ.App.P., 17A A.R.S. We have jurisdiction under Ariz. Const. art. 6, § 5(3) and A.R.S. § 12-120.24.
The operative facts are undisputed. William G. Holt paid insurance agent Vince Anderson for liability insurance on Holt's automobiles. Anderson accepted the money but failed to either procure the requested coverage or tell Holt that the policy had not been issued. At the time, Anderson was covered for his professional errors and omissions as an insurance agent under a policy issued by Utica Mutual Insurance Company (Utica).
Subsequently, while driving the family car, Holt's son was involved in an accident with Louis Mendicino. Mendicino was injured in the mishap and sued father and son for damages. Holt notified Anderson that a lawsuit had been filed and demanded that the responsible insurance carrier tender a defense and cover any losses.
Of course, no automobile insurer came forward to defend the Holts. On June 24, 1982, the Holts sued Anderson for negligently failing to obtain liability coverage for the family cars. They sought indemnity for any loss they might sustain in the Mendicino suit, attorney's fees and an accounting for premiums paid. Their attorney spoke with Utica representatives and then wrote Utica, confirming that the Holts had sued Anderson. He enclosed a copy of the Holts' complaint against Anderson, and asked Utica to defend the Holts in the Mendicino action. Utica did not respond or make any appearance in the Mendicino case.
On September 7, 1982, the superior court entered a default judgment for $45,000 plus costs in favor of Mendicino and against the Holts. This was apparently the result of some type of "Damron agreement" between Mendicino and the Holts. See Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (1969) (). In July 1983, Anderson acknowledged personal service of the summons and complaint in Holt v. Anderson and agreed to the entry of judgment in favor of the Holts. Neither Anderson nor the Holts advised Utica that Anderson had accepted service and consented to judgment. The superior court entered a default judgment in favor of the Holts and against Anderson on January 3, 1984. The amount of the judgment was $45,045, the exact amount of Mendicino's judgment against the Holts. On January 11, 1984 the Holts' attorney sent a letter to Utica informing Utica of the default judgment. Utica still took no action.
The Holts served a writ of garnishment on Utica on February 19, 1985, claiming that Utica was indebted to Anderson as an insurer or indemnitor. After Utica answered the writ denying any indebtedness, the Holts moved for summary judgment, claiming that Utica's only "defense" was Anderson's supposed breach of the cooperation clause. The breach consisted of Anderson's failure to notify Utica of the proposed entry of default judgment in favor of the Holts. According to the Holts, this defense was untenable, primarily because it contradicted the holding of Sandoval v. Chenoweth, 102 Ariz. 241, 428 P.2d 98 (1967) ().
Utica responded and filed a cross-motion for summary judgment, asserting that Anderson's noncooperation abrogated Utica's duty of indemnification. Denying the relevance of Sandoval, Utica alleged that Anderson had breached his obligations to his carrier by not notifying Utica of actual service of the Holts' complaint nor asking Utica to defend him. Instead, Anderson retained separate counsel and then gave his written consent to the entry of a default judgment, all in "apparent collusion" with the Holts.
The trial court granted the Holts' motion for summary judgment, denied Utica's cross-motion and entered judgment against Utica for $45,045 plus interest. Utica appealed.
The court of appeals transposed the results reached below. Holt v. Utica Mutual Insurance Co., 157 Ariz. 471, 759 P.2d 617 (Ariz.Ct.App.1987). The court reversed the Holts' summary judgment, reasoning that Utica had not breached its obligations to Anderson. Id. at 476, 759 P.2d at 622. On the contrary, the court found that Anderson had violated the cooperation clause by failing to advise Utica when he ultimately accepted service of process and by allowing entry of a default judgment. Id. at 476-477, 759 P.2d at 622-623. The court held that Utica was prejudiced as a matter of law by Anderson's conduct, giving Utica a complete defense under the cooperation clause of the contract. Id. at ---, 759 P.2d at 623. The court thus concluded that the trial court had erred in granting summary judgment to the Holts. The opinion went even further: although it conceded that the trial court's order denying Utica's motion for summary judgment was "generally neither appealable nor subject to review on appeal from a final judgment," the court of appeals concluded as a matter of law that Utica's cross-motion for summary judgment could be granted. 157 Ariz. at 477, 750 P.2d at 623. The court of appeals therefore not only reversed the trial court's judgment in favor of the Holts, but remanded with directions to enter judgment in favor of Utica. We then granted the Holts' petition for review.
In essence, the Holts contend that there are three genuine issues of material fact precluding summary judgment in favor of Utica. 1 Rule 56(c), Ariz.R.Civ.P., 16 A.R.S.; Nicoletti v. Westcor, Inc., 131 Ariz. 140, 142, 639 P.2d 330, 332 (1982). These issues are:
1. Whether Utica breached its contractual duty to defend Anderson.
2. Whether Anderson violated the cooperation clause.
3. Whether Anderson's conduct substantially prejudiced Utica.
We must consider a fourth issue argued in the court of appeals before we can resolve any of the issues raised in this court. In the trial court and the court of appeals, the Holts argued that they were entitled to summary judgment even if Anderson had breached the cooperation clause of the Utica policy because under Arizona law no breach of a cooperation clause by an insured will defeat or void an insurance policy. We first consider this threshold question.
We agree with the court of appeals that the Sandoval doctrine is inapplicable and that Utica could raise Anderson's breach of the cooperation clause as a defense. See 157 Ariz. at 474-475, 759 P.2d at 620-621. The Sandoval concept that breach of policy provisions is not a valid defense to an action on an insurance policy is based on A.R.S. § 28-1170(F)(1), a portion of Arizona's financial responsibility laws covering motor vehicle liability insurance policies. See A.R.S. § 28-1101 et seq. Thus, Sandoval held that a motor vehicle liability carrier could not assert its insured's breach of the cooperation clause as a defense. We do not recede from the reasoning of Sandoval, but decline to apply it to anything other than the specific type of policy covered by the statute. Professional errors and omissions coverage for an insurance agent selling motor vehicle liability policies is not the equivalent of a motor vehicle policy and does not come within the bounds of either the statute or Sandoval.
Thus, an insured's breach of policy conditions, including the cooperation clause, might be a defense to an action on the policy. See 8 J. APPLEMAN, INSURANCE LAW AND PRACTICE § 4815 (1981). Arizona has recognized this principle in previous cases. See, e.g., Arizona Property & Casualty Insurance Guaranty Fund v. Helme, 153 Ariz. 129, 136-37, 735 P.2d 451, 458-59 (1987); Globe Indemnity Co. v. Blomfield, 115 Ariz. 5, 8, 562 P.2d 1372, 1373 (App.1977). However, to constitute a valid defense, the breach must be material, violating a provision reasonably necessary for the protection of the insurer, and it must substantially prejudice the insurer. 8 J. APPLEMAN, supra.
Under the present facts, therefore, Utica could raise its insured's breach of the cooperation clause as a possible defense to an action on the policy. The trial court's order of January 3, 1986, granting the Holts' motion for summary judgment, does not specify the grounds upon which it is based. Given the arguments made in the motion, it is possible that the trial court granted summary judgment in favor of the Holts on the theory that a cooperation clause defense was unavailable to Utica as a matter of law. The order does indicate that the trial court took the motions under advisement and "after review of the pleadings as well as Sandoval v. Chenoweth," granted the Holts' motion for summary judgment. See Minute Entry dated Jan. 3, 1986. Based upon the court's implicit reliance on Sandoval and the lack of any other articulated explanation for the court's ruling, we must approve the court of appeals' reversal of the trial court's summary judgment in favor of the Holts.
We therefore turn to the propriety of the court of appeals' remand of the case with instructions that the trial court grant Utica's motion for summary judgment.
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