State Farm Mut. Auto. Ins. Co. v. Paynter

Decision Date10 April 1979
Docket NumberCA-CIV,No. 1,1
Citation593 P.2d 948,122 Ariz. 198
PartiesSTATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, an Illinois Corporation, Appellant, v. Ted PAYNTER and Ada Paynter, his wife, Appellees. 3820.
CourtArizona Court of Appeals
Shimmel, Hill, Bishop & Gruender, P.C. by Charles A. Finch, Phoenix, for appellant
OPINION

SCHROEDER, Presiding Judge.

This is an action by the appellees, Ted Paynter and Ada Paynter, against State Farm Automobile Insurance Company (State Farm), Appellant, to recover under a judgment previously obtained by Ted Paynter against an insured of State Farm.

The previous judgment was obtained after State Farm refused to defend its insured. The insured admitted liability pursuant to an agreement in which Paynter agreed not to execute against the insured, in exchange for an assignment of the insured's rights in the State Farm insurance policy. In this action, the trial court entered summary judgment in favor of the Paynters and against State Farm, and State Farm appeals.

State Farm's appeal raises several issues challenging the validity of the covenant not to execute, coverage under its policy for the accident, and the trial court's ruling that State Farm is responsible for the full amount of the previous judgment without regard to the limits of State Farm's policy. We hold that the judgment is enforceable against State Farm but only to the extent of its policy limits.

The facts underlying these issues can be briefly summarized. In 1972, State Farm issued an automobile insurance policy to Wayne and Virginia Jones on a truck which they owned. The policy contained coverage up to $50,000. Subsequently, on the afternoon of May 3, 1972, the truck was being used to tow a disabled forklift on a highway near Phoenix. The truck was moving at a slow rate of speed, and the forklift had no flags, signs or flashing devices to warn vehicles approaching from the rear. A young man was perched at the back of the forklift, however, and observed a car, driven by appellee, Ted Paynter, approaching at a rapid rate. The young man attempted to signal him to slow down. Paynter collided with the back of the forklift and suffered serious injuries. He was cited for driving at an unlawful speed and while intoxicated. Shortly after the accident, Jones notified State Farm and was informed that the policy did not provide coverage for an accident which occurred while the truck was towing a forklift. In March of 1974, Paynter filed a personal injury action against the Joneses alleging negligence in towing the forklift at a minimal speed on a major highway without warning to others. Counsel for Jones transmitted a copy of the complaint to State Farm and requested that State Farm defend the tort action pursuant to the following clause in the insurance policy:

State Farm . . . (a)grees . . . to defend, with attorneys selected by and compensated by the company, any suit against the insured alleging such bodily injury or property damage and seeking damages which are payable hereunder even if any of the allegations of the suit are groundless, false or fraudulent. . . .

State Farm again disavowed coverage and refused to participate in the court proceedings.

Faced with the necessity of litigating the tort action at their own expense, the Joneses entered into an agreement with Paynter similar to the agreement described in Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (1969). Such agreements have come to be known in this jurisdiction as "Damron Agreements." Pursuant to the agreement, Paynter received $500.00 from Jones and an assignment of the Joneses' rights under the insurance policy. Paynter in return agreed not to execute against Jones on any judgment obtained in the tort action. Jones then admitted liability in a pretrial statement, and a brief trial was held on the damages. The trial court entered judgment against Jones in the amount of $143,956.81. At no time in that action did Jones raise any defense of contributory negligence.

Paynter then instituted this action against State Farm to recover under the judgment. State Farm unsuccessfully challenged the validity of the Damron Agreement and coverage under the policy for the accident. State Farm also urged that in no event should its liability exceed the $50,000 policy limit. The trial court entered summary judgment in favor of Paynter for the full amount of the previous judgment. This appeal followed.

ALLEGED FRAUD IN OBTAINING THE UNDERLYING TORT JUDGMENT

We turn first to the arguments raised by appellant in support of its position that the underlying judgment in favor of Paynter is unenforceable against State Farm by virtue of fraud and collusion. The general rule, accepted by both parties to this appeal, is that, in the absence of fraud or collusion, an insurance company which refuses to defend its insured is bound by a judgment against its insured with respect to all matters which were litigated or could have been litigated in that action. Lane v. Hartford Fire Insurance Co., 343 F.Supp. 79 (E.D.Mo.1972); Stephenson v. Duriron Co., 292 F.Supp. 66 (S.D.Ohio 1968), Aff'd, 428 F.2d 387, Cert. denied, 400 U.S. 943, 91 S.Ct. 245, 27 L.Ed.2d 247 (1970); Dairyland Insurance Co. v. Richards, 108 Ariz. 89, 492 P.2d 1196 (1972); Zander v. Casualty Insurance Co. of California, 259 Cal.App.2d 793, 66 Cal.Rptr. 561 (1968); 46 C.J.S. Insurance § 1251, 257-259. This rule is grounded upon the broad duty of the insurer to defend claims under policy provisions similar to the clause in the policy issued by State Farm in this case. Under such a clause, the insured is entitled to a defense in any case in which there is coverage under the policy. "A purchaser of liability insurance has a right to expect not only indemnification at the end but also a shield against liability claims at the outset." Orleans Village v. Union Mutual Fire Insurance Co., 133 Vt. 217, 221, 335 A.2d 315, 318 (1975). See also Bandy v. Avondale Shipyards, Inc., 458 F.2d 900 (5th Cir. 1972); Tucson Public School District No. One v. Home Insurance Co., 9 Ariz.App. 233, 451 P.2d 46 (1969); 7 Appelman, Insurance Law and Practice, § 4683, and authorities cited therein. By refusing to defend, the insurer takes the risk that it may have erred in determining that the policy did not provide coverage. Having refused to provide a defense, the insurer is said to have been "vouched in" the action against the insured and is bound by the judgment. In the absence of fraud or collusion, it is not entitled to relitigate the merits of the claim. Lane v. Hartford Insurance Co., supra.

The question then becomes whether there was fraud or collusion in connection with the judgment obtained by Paynter in his suit against State Farm's insured. The judgment was, of course, entered after the defendants admitted liability and assigned their rights under the insurance policy to Paynter. The Supreme Court of Arizona, however, has held that an agreement of that nature is not inherently fraudulent as a matter of law. Damron v. Sledge, supra. The Court there reasoned that the policy holder who has been abandoned by his insurer should not be forced to litigate the claim at his own expense. The insurance company knew that a judgment might be entered against its insured. If in fact the policy provided coverage, the insurance company should be liable on the judgment. The Court in Damron relied heavily upon the California decision in Critz v. Farmers Insurance Group, 230 Cal.App.2d 788, 41 Cal.Rptr. 401, 12 A.L.R.3d 1142 (1964).

State Farm argues in this case that there was fraud apart from the assignment of policy rights and covenant not to execute. The alleged fraud is that the plaintiff and the defendant in the underlying personal injury action failed to disclose to the court all of the facts surrounding the accident itself. State Farm emphasizes the failure of its insured to raise any defense of contributory negligence and particularly the failure to disclose Paynter's intoxication at the time of the accident. State Farm also stresses that the parties did not disclose that a person was riding on the back of defendants' forklift presumably to warn traffic approaching from the rear. In essence, appellant argues that Paynter and its insured permitted the trial court to enter judgment in favor of Paynter upon a misunderstanding of the true facts, and that this conduct amounted to fraudulent collusion precluding enforcement of the judgment against State Farm.

We have carefully reviewed the authorities cited to us by both sides concerning the type of fraudulent and collusive conduct which might bar enforcement of a judgment against the defendant's insurer. We are not persuaded that the conduct here met that standard. The net effect of the defendant's actions in this case was to permit a judgment to be entered without litigating a potential defense. State Farm's argument that the defendant should have raised all matters relating to a potential defense is tantamount to a contention that the insured was required to offer vigorous defense at his own expense after his insurer had breached its contractual obligation to provide such a defense. This contention flies in the face of Damron v. Sledge, supra, holding that an abandoned insured may enter into a reasonable agreement limiting his liability in order to avoid litigation of the claim at his own expense.

State Farm has cited several cases in which the courts have, on grounds of fraud, refused to enforce a judgment against an insurer. Those cases, however, involved conduct of a very different nature than that presented here. Generally they involved collusion by the plaintiff and the insured with respect to the institution of the lawsuit in an effort to defraud the insurance company. Thus, for example, in Venditti v. Mucciaroni, 54 Ohio App. 513, 8 N.E.2d 460 (1936), the plaintiff and the...

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