Holt v. Utica Mut. Ins. Co.

• Decision Date: 02 June 1987
• Docket Number: CA-CIV,No. 1,1
• Citation: 759 P.2d 617,157 Ariz. 471
• Parties: William G. HOLT and William D. Holt, Plaintiffs-Appellees, v. UTICA MUTUAL INSURANCE COMPANY, Garnishee Defendant-Appellant. 8927.
• Court: Arizona Court of Appeals

Page 617

759 P.2d 617

157 Ariz. 471

William G. HOLT and William D. Holt, Plaintiffs-Appellees, v. UTICA MUTUAL INSURANCE COMPANY, Garnishee Defendant-Appellant.

No. 1 CA-CIV 8927.

Court of Appeals of Arizona,

Division 1, Department B.

June 2, 1987.

[157 Ariz. 472] Langerman, Begam, Lewis & Marks by Stanley J. Marks, Phoenix, for plaintiffs-appellees.

Sorenson, Moore, Evens & Burke by Patrick E. Burke, and John S. Schaper, Phoenix, for Garnishee defendant-appellant.

OPINION

GREER, Judge.

This litigation involves garnishment proceedings in which a judgment creditor sought the proceeds of an errors and omissions policy issued to an insurance broker. The primary issue on appeal is whether Sandoval v. Chenoweth, 102 Ariz. 241, 428 P.2d 98 (1967) precludes the insurer from defending against the creditor on grounds that the insured breached his duty to cooperate with the insurer by defaulting in the underlying lawsuit.

William G. Holt paid premiums to Vince Anderson, an insurance agent, to purchase policies of liability insurance on his vehicles. On April 14, 1981, one of Holt's vehicles was involved in a collision with Louis Mendicino. Mendicino suffered personal injuries in the accident and filed a negligence claim against Holt and against Holt's son William D. Holt, the driver of the vehicle. Holt notified Anderson that a lawsuit had been filed and demanded that Anderson notify the responsible insurance carrier to request that it tender a defense and pay any sums found due. Notwithstanding the notice and demand which had been communicated to Anderson, no insurance carrier undertook the Holts' defense. The Holts filed this lawsuit against Vince Anderson, Vince Anderson, Ltd. and Western Surety Co. on June 24, 1982. Their complaint alleged that Anderson accepted premiums from Holt but failed to procure automobile liability coverage for Holt's vehicles, including the vehicle involved in the Mendicino accident. The Holts' request for relief, included requests for reimbursement for any loss incurred in the Mendicino suit, an accounting for premiums paid and attorney's fees.

Anderson was covered by an errors and omissions policy issued by Utica Mutual Insurance Company (Utica) at the time of the occurrences which were the subject of the Holts' complaint. Counsel for the Holts sent a letter to Utica indicating that a suit had been filed against Anderson and requesting Utica to undertake the defense of the Holts in the Mendicino action. Utica did not respond to this request.

On September 7, 1982, a default judgment for $45,000 was entered in favor of Mendicino and against the Holts. All parties appear to agree that a covenant not to execute was entered into by Mendicino and the Holts in connection with the entry of judgment. However, the record does not contain any such covenant. Similarly, it is not clear whether Mendicino acquired any claims that the Holts might have against Anderson or Anderson's errors and omissions insurer. If the Holts have no liability to satisfy the Mendicino judgment, questions arise concerning the real parties in interest in this litigation. Nevertheless, our disposition of this appeal makes it unnecessary to address these issues.

In July of 1983, Anderson acknowledged personal service of the summons and complaint and defaulted in the action. Neither Anderson nor the Holts advised Utica that Anderson had been served; nor did Anderson inform Utica that he had consented to the entry of default against himself and Vincent Anderson, Ltd. An affidavit of Anderson's default was filed on August 25, 1983 and a default judgment for $45,045 was entered in favor of the Holts on January 3, 1984.

The Holt claim against Western Surety was resolved by stipulation and order of dismissal and Western is not involved in this appeal.

On February 19, 1985, the Holts obtained a writ of garnishment which was served upon Utica. Utica answered, denying any indebtedness to Anderson. The Holts filed an objection to the answer contending that Anderson was insured by Utica against the Holts' claims in this action under an errors and omissions policy and obtained an order for the garnishee to appear.

The Holts moved for summary judgment and Utica filed a cross-motion for summary judgment, contending that Anderson was not covered by the Utica policy because he had failed to comply with the conditions of the policy requiring cooperation in the event of a lawsuit. Utica alleged that Anderson had failed to notify it of the service of the Holt complaint, had retained independent counsel, had not responded to the complaint, and had consented to the entry of a default judgment. Utica also asserted that in 1984 it first learned through correspondence from the Holts' counsel that a default judgment had been entered against Anderson. Utica argued that it owed no coverage to Anderson and therefore, it could not be found liable to the Holts. ¹

On January 3, 1986, the Holts' motion for summary judgment was granted and Utica's cross-motion was denied. Judgment against Utica was entered on February 7, 1986 awarding the Holts $45,045 plus interest. This appeal followed.

The Holts argued below that although Utica could raise the issue of its insured's non-compliance by motion to set aside the underlying judgment, it could not raise the issue in a garnishment proceeding. They also contended that the defenses that Utica had against its insured could not defeat the claims of an injured third party. Both arguments were based on their interpretation of Sandoval v. Chenoweth and its applicability to an errors and omissions insurance policy. We find nothing in general garnishment law that precludes Utica from raising that issue in a garnishment proceeding. We also conclude that Sandoval does not govern this case. Accordingly we reverse summary judgment in favor of the Holts.

Most jurisdictions hold that in the absence of statutory provisions to the contrary, the insured's breach of policy conditions generally will preclude an injured person from recovering against the insurer. See generally 8 J. Appleman, Insurance Law and Practice § 4815 (1981). Some jurisdictions have limited such defenses against an injured third party to breaches that are material, reasonably necessary to protect the insurer or breaches which have caused prejudice to the insurer. See, e.g., National Semiconductor Corp. v. Allendale Mut. Ins. Co., 549 F.Supp. 1195 (D.C.Conn.1982); Sly v. American Indem. Co., 127 Cal.App. 202, 15 P.2d 522 (1932); Dietz v. Hardware Dealers Mut. Fire Ins. Co., 88 Wis.2d 496, 276 N.W.2d 808 (1979). See generally 8 J. Appleman, supra.

Sandoval involved an insured who notified his automobile liability carrier of an accident, but did not advise the insurer that suit had been brought. A default judgment was entered, and a garnishment was obtained against the carrier several months later. The Arizona Supreme Court held that the carrier could not assert the insured's breach of the policy clause requiring that notification of any lawsuit be given to the insurer. The court cited A.R.S. § 28-1170 of the Financial Responsibility Law, which provides that no violation of a motor vehicle liability policy "shall defeat or void the policy." 102 Ariz. at 244, 428 P.2d at 101. Accordingly, the insurer was not allowed to invoke the policy defense in the garnishment proceedings.

Unlike Sandoval, the instant case does not involve a motor vehicle liability policy governed by either the extensive legislative provisions of A.R.S. § 28-1101 et seq., or the related public policy considerations which mandate coverage other than those specified by contract. The determination of coverage in Sandoval was based upon a statute expressly providing that no violation of the conditions of the policy would defeat coverage. Sandoval does not purport to be a statement of general insurance law.

While Sandoval provides that the insurer's remedy was to move to set aside the default judgment rather than to raise a defense in the garnishment proceedings, these statements were made in the context of the applicability of A.R.S. § 28-1170 to the available defenses.

Absent statutory provisions to the contrary, it is well established in Arizona that in a garnishment proceeding a garnishor cannot obtain rights against the garnishee any greater than the rights held by the judgment debtor against the garnishee. See, e.g., Mid-State Elec. Supply Co. v. Arizona Title Ins. & Trust Co., 105 Ariz. 321, 323-24, 464 P.2d 604, 606-07 (1970); Webster v. USLIFE Title Co., 123 Ariz. 130, 132, 598 P.2d 108, 110 (App.1979).

In Kepner v. Western Fire Ins. Co., 109 Ariz. 329, 509 P.2d 222 (1973), our supreme court stated:

Where there are facts which might exclude coverage, the insurer cannot always defend with complete fidelity. There must be a proceeding at which the insurer and the insured are represented by counsel of their own choice to fight out their differences. Such a testing of the insurer's liability may take the form of a declaratory judgment brought in advance of the third party's action or proceedings on garnishment following the trial of the third party's action as in the instant case.

109 Ariz. at 332, 509 P.2d at 225.

Nevertheless, the Holts argue that Utica should be treated as though it were an automobile liability insurer because it provided errors and omissions coverage to an individual who was providing automobile liability insurance. They argue that unless we treat the errors and omissions carrier as an automobile liability insurer, injustice will be done because Holt will remain uninsured and Mendicino will be without any remedy.

First, we note that based on the record before us, we cannot determine whether Mendicino has been left without a remedy. Mendicino may have had uninsured motorist coverage. Of greater concern is the Holts' attempt to expand the holding in Sandoval v. Chenoweth to apply to any injured party rather than parties falling within the...