Parsons v. Continental Nat. Am. Group

• Decision Date: 24 May 1976
• Docket Number: No. 12223--PR,12223--PR
• Citation: 550 P.2d 94,113 Ariz. 223
• Parties: Ruth PARSONS, a single woman, Dawn Parsons and Gail Parsons, minors, by and through their quardian ad litem, Donald S. Robinson, and Michael Smithey, by his guardian ad litem, Appellants, v. CONTINENTAL NATIONAL AMERICAN GROUP, Appellee.
• Court: Arizona Supreme Court

Page 94

550 P.2d 94

113 Ariz. 223

Ruth PARSONS, a single woman, Dawn Parsons and Gail Parsons, minors, by and through their quardian ad litem, Donald S. Robinson, and Michael Smithey, by his guardian ad litem, Appellants, v. CONTINENTAL NATIONAL AMERICAN GROUP, Appellee.

No. 12223--PR.

Supreme Court of Arizona, In Banc.

May 24, 1976.

Rehearing Denied June 22, 1976.

Robertson, Molloy, Fickett & Jones, P.C. by Michael J. Meehan, Burton J. Kinerk, Tucson, for appellants.

Chandler, Tullar, Udall & Richmond by D. B. Udall, Tucson, for appellee.

GORDON, Justice:

Appellants Ruth, Dawn and Gail Parsons obtained a judgment against appellant Michael Smithey, and then had issued and served a writ of garnishment on appellee, Continental National American Group (hereinafter referred to as CNA). The Superior Court of Pima County entered judgment in favor of the garnishee, CNA and from this judgment appellants appealed. The Court of Appeals, Division Two, reversed the judgment of the Superior Court, 23 Ariz.App. 597, 535 P.2d 17 (1975). Opinion of the Court of Appeals vacated and judgment of the Superior Court of Pima County reversed, and it is ordered that the judgment be entered in favor of appellants in the sum of $50,000.

We accepted this petition for review because of the importance of the question presented. We are asked to determine whether an insurance carrier in a garnishment action is estopped from denying coverage under its policy when its defense in that action is based upon confidential information obtained by the carrier's attorney from an insured as a result of representing him in the original tort action.

Appellant, Michael Smithey, age 14, brutally assaulted his neighbors, appellants Ruth, Dawn and Gail Parsons, on the night of March 26, 1967.

During April, 1967 Frank Candelaria, CNA claims representative, began an in vestigation of the incident. On June 6, 1967 he wrote to Howard Watt the private counsel retained by the Smitheys advising him that CNA was 'now in the final stages of our investigation,' and to contact the Parsons' attorney to ascertain what type of settlement they would accept. Watt did contact the Parsons' attorney and requested that a formal demand settlement be tendered and the medical bills be forwarded to Candelaria. On August 11, 1967 Candelaria wrote a detailed letter to his company on his investigation of Michael's background in regards to his school experiences. He concluded the letter with the following:

'In view of this information gathered and in discussion with the boy's father's attorney, Mr. Howard Watts, and with the boy's parents, I am reasonably convinced that the boy was not in control of his senses at the time of this incident.

'It is, therefore, my suggestion that, and unless instructed otherwise, I will proceed to commence settlement negotiations with the claimant's attorney so that this matter may be disposed of as soon as possible.'

Prior to the following dates: August 15, 1967, August 28, 1967, and October 23, 1967, Candelaria tried to settle with the Parsons for the medical expenses and was unsuccessful.

On October 13, 1967 the Parsons filed a complaint alleging that Michael Smithey assaulted the Parsons and that Michael's parents were negligent in their failure to restrain Michael and obtain the necessary medical and psychological attention for him. At the time that the Parsons filed suit they tendered a demand settlement offer of $22,500 which was refused by CNA as 'completely unrealistic.'

CNA's retained counsel undertook the Smithey's defense and also continued to communicate with CNA and advised him on November 10, 1967:

'I have secured a rather complete and confidential file on the minor insured who is now in the Paso Robles School for Boys, a maximum-security institution with facilities for psychiatric treatment, and he will be kept there indefinitely and certainly for at least six months * * *.

'The above referred-to confidential file shows that the boy is fully aware of his acts and that he knew what he was doing was wrong. It follows, therefore, that the assault he committed on claimants can only be a deliberate act on his part.'

After CNA had been so advised they sent a reservation of rights letter to the Smitheys stating that the insurance company, as a courtesy to the insureds, would investigate and defend the Parsons' claim, but would do so without waiving any of the rights under the policy. The letter further stated that it was possible the act involved might be found to be an intentional act, and that the policy specifically excludes liability for bodily injury caused by an intentional act. This letter was addressed only to the parents and not to Michael.

In preparing for trial the CNA attorney retained to undertake the defense of the Smitheys interviewed Michael and received a narrative statement from him in regards to the events of March 26, 1967, and then wrote to CNA: 'His own story makes it obvious that his acts were willful and criminal.'

CNA also requested an evaluation of the tort case and the same attorney advised CNA: 'Assuming liability and coverage, the injury is worth the full amount of the policy or $25,000.00.'

On the issue of liability the trial court directed a verdict for Michael's parents on the grounds that there was no evidence of the parents being negligent. This Court affirmed, Parsons v. Smithey, 109 Ariz. 49, 504 P.2d 1272 (1973). On the question of Michael's liability the trial court granted plaintiff's motion for a directed verdict after the defense presented no evidence and there was no opposition to the motion. Judgment was entered against Michael in the amount of $50,000.

The Parsons then garnished CNA, and moved for a guardian ad litem to be appointed for Michael which was granted by the trial court. On November 23, 1970 appellee Parsons offered to settle with CNA in the amount of its policy limits, $25,000. This offer was not accepted.

CNA successfully defended the garnishment action by claiming that the intentional act exclusion applied. The same law firm and attorney that had previously represented Michael represented the carrier in the garnishment action.

Appellants contend that CNA should be estopped to deny coverage and have waived the intentional act exclusion because the company took advantage of the fiduciary relationship between its agent (the attorney) and Michael Smithey. We agree.

The attorneys, retained by CNA, represented Michael Smithey at the personal liability trial, and, as a result, obtained privileged and confidential information from Michael's confidential file at the Paso Robles School for Boys, during the discovery process and, more importantly, from the attorney-client relationship. Both the A.B.A. Committee on Ethics and Professional Responsibility and the State Bar of Arizona, Committee on Rules of Professional Conduct have held that an attorney that represented the insured at the request of the insurer owes undivided fidelity to the insured, and, therefore, may not reveal any information or conclusions derived therefrom to the insurer that may be detrimental to the insured in any subsequent action. The A.B.A. Committee on Ethics and Professional Responsibility in Informal Opinion Number 949 stated:

'If the firm does represent the insured in the personal injury action, to subsequently reveal to the insurer any information received from the insured for possible use by the insurer in defense of a garnishment proceeding by the injured person, would be a clear violation of both Canon 6 and Canon 37 regarding confidences of a client. A successful defense of the garnishment proceeding by the insurer would be contrary to the interests of the insured, because if the insurer is not obligated to pay the judgment, execution against the insured can be expected. The result would not be different in practical effect from a suit directly against the insured to escape liability under the policy.

'If the firm does not defend the insured in the personal injury action, the firm cannot reasonably expect the attorney who does represent the insured to furnish either to the firm or to the insurer, for use in a garnishment action by the injured person against the insurer, information that attorney learns during the course of defending the insured, since that attorney should not be expected to breach his professional obligations by furnishing information Canons 6 and 37 prohibit him from furnishing.' August 8, 1966.

The Arizona Ethics Opinion No. 261 adopted November 15, 1968 stated:

'A.B.A. Informal Opinion C728 makes it very clear that the inquiring attorney is the attorney for the insured, B, even though the attorney would be paid by G Insurance Company. The undivided fidelity owed by the attorney, then, is to B and not to G Insurance Company.

'* * * it was unethical for the inquiring attorney to represent the insurance company in an action against the insured, after judgment against the insured, to declare that the policy did not provide coverage. A full reading of that opinion and in particular the last paragraph thereof, leads us to this conclusion. That opinion ended as follows:

'Is it now ethical for you to represent the company in an action against the insured to declare that the policy does not cover? We believe that to do so...