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

• Decision Date: 10 June 1993
• Docket Number: No. CV-91-0411-PR,CV-91-0411-PR
• Citation: 854 P.2d 1134,175 Ariz. 148
• Parties: Bobby Sid TAYLOR, Plaintiff-Appellant, Cross-Appellee, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, an Illinois corporation, Defendant-Appellee, Cross-Appellant.
• Court: Arizona Supreme Court

Page 1134

854 P.2d 1134

175 Ariz. 148

Bobby Sid TAYLOR, Plaintiff-Appellant, Cross-Appellee, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, an Illinois corporation, Defendant-Appellee, Cross-Appellant.

No. CV-91-0411-PR.

Supreme Court of Arizona, In Banc.

June 10, 1993.

[175 Ariz. 150] Thur, Dawson & O'Sullivan by Calvin C. Thur, Steven C. Dawson, Scottsdale, and Mark Stachon and William S. Andrews, Phoenix, for Bobby Sid Taylor.

O'Connor, Cavanagh, Anderson, Westover, Killingsworth & Beshears by Ralph E. Hunsaker and Lisa M. Sommer, Phoenix, for State Farm Mut. Auto. Ins. Co.

Treon, Strick, Lucia & Aguirre by Richard T. Treon and Arthur G. Newman, Jr., Phoenix, for James Rivers, amicus curiae.

OPINION

Memorandum Decision of the Court of Appeals, Division One, filed September 17, 1991, vacated and remanded

FELDMAN, Chief Justice.

Bobby Sid Taylor petitions us to review a decision reversing a jury verdict in his favor in a bad faith claim against State Farm Mutual Automobile Insurance Co. He argues that the court of appeals erroneously held that his bad faith claim was barred by a release he signed in 1981. We granted review because the case raises important issues in the area of contract and insurance law. We have jurisdiction pursuant to Ariz. Const. art. VI, § 5(3), and Ariz.R.Civ.App.P. 23.

FACTS AND PROCEDURAL HISTORY

This insurance bad faith action arises out of an accident that occurred approximately sixteen years ago. Many of the facts are undisputed. The accident involved three vehicles--one occupied by Anne Ring and passenger James Rivers, the second by Douglas Wistrom, and the third by Bobby Sid Taylor. Ring, Rivers, and Taylor all were injured. The facts surrounding the accident are set forth in Ring v. Taylor, 141 Ariz. 56, 59, 685 P.2d 121, 124 (Ct.App.1984). Ring, her husband, and Rivers filed actions against Taylor and Wistrom. These actions were consolidated before trial. Taylor's insurer, State Farm, retained attorney Leroy W. Hofmann to defend Taylor. Taylor also personally retained attorney Norman Bruce Randall, who filed a counterclaim against Ring for Taylor's damages. Taylor, therefore, was represented by both Randall and Hofmann in the matter. Because the Rings and Rivers agreed with Wistrom to a stipulated judgment and covenant not to execute, Taylor was the only party vulnerable to the Ring/Rivers claims. At trial, the Rings and Rivers obtained combined verdicts against Taylor for approximately $2.5 million in excess of his insurance policy limits. The court of appeals affirmed these judgments. Taylor, 141 Ariz. at 59, 71, 685 P.2d at 124, 136.

The Rings eventually settled with State Farm. Taylor, however, sued State Farm for bad faith seeking damages for the excess Rivers judgment, claiming, among other things, that State Farm improperly failed to settle the Rivers matter within policy limits. State Farm moved for summary judgment, asserting that Taylor relinquished his bad faith claim when, in 1981, he signed a release drafted by attorney Randall in exchange for State Farm's payment of $15,000 in uninsured motorist benefits. ¹ Taylor also moved for partial summary judgment, seeking a ruling that, as a matter of law, the release did not preclude his bad faith claim. The judge denied both motions, finding that the release was ambiguous and that therefore parol evidence was admissible at trial to aid in interpreting the release. A second judge, who presided at trial, also denied State Farm's motion for directed verdict based on the release. Having been instructed on the interpretation of the release, the jury returned a verdict in favor of Taylor for compensatory damages of $2.1 million. The court also awarded Taylor $300,000 in attorney fees.

The court of appeals reversed, holding that the release agreement was not ambiguous and therefore the judge erred by admitting parol evidence to vary its terms. Taylor v. State Farm Mut. Auto. Ins. Co., No. 1 CA-CV 9908 (Sep. 17, 1991) (mem. dec.). Based on the agreement's "four corners," the court held that "it clearly release[d] all policy contract rights, claims, and causes of action that Taylor has or may have against State Farm." Id. at 20. According to the court, because the release should have been strictly enforced, there was no basis for Taylor's bad faith claim. Id. We believe the court's decision both incorrectly applies settled legal principles and raises unsettled issues of contract interpretation.

DISCUSSION

Much of the dispute in this case centers on the events that surround the drafting of the release and the inferences that can be drawn from those events. As noted, the trial court found that the release was ambiguous and admitted extrinsic evidence to aid in its interpretation. The court of appeals found no ambiguity. Taylor, mem. dec. at 20, 23. In resolving this issue, we must address the scope and application of the parol evidence rule in Arizona and decide whether, under these facts, the trial court properly admitted extrinsic evidence to interpret the release.

A. Legal principles

The application of the parol evidence rule has been the subject of much controversy and scholarly debate. See generally Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 140 Ariz. 383, 392-93, 682 P.2d 388, 397-98 (1984); John D. Calamari & Joseph M. Perillo, THE LAW OF CONTRACTS §§ 3-2 to 3-16, at 135-77 (3d ed. 1987); Robert L. Gottsfield, Darner Motor Sales v. Universal Underwriters: Corbin, Williston and the Continued Viability of the Parol Evidence Rule in Arizona, 25 ARIZ.ST.L.J. 377 (1993). "When two parties have made a contract and have expressed it in a writing to which they have both assented as the complete and accurate integration of that contract, evidence, whether parol or otherwise, of antecedent understandings and negotiations will not be admitted for the purpose of varying or contradicting the writing." 3 Arthur L. Corbin, CORBIN ON CONTRACTS § 573, at 357 (1960) ("CORBIN"); see also Rental Dev. Corp. v. Rubenstein Const. Co., 96 Ariz. 133, 136, 393 P.2d 144, 146 (1964) (citing CORBIN). Antecedent understandings and negotiations may be admissible, however, for purposes other than varying or contradicting a final agreement. 3 CORBIN § 576, at 384. Interpretation is one such purpose. 3 CORBIN § 579, at 412-13; Restatement (Second) of Contracts § 214(c) & cmt. b (1979) ("Restatement").

Interpretation is the process by which we determine the meaning of words in a contract. See Restatement § 200. Generally, and in Arizona, a court will attempt to enforce a contract according to the parties' intent. See Darner, 140 Ariz. at 393, 682 P.2d at 398; Polk v. Koerner, 111 Ariz. 493, 495, 533 P.2d 660, 662 (1975); Sam Levitz Furniture Co. v. Safeway Stores, Inc., 105 Ariz. 329, 330-31, 464 P.2d 612, 613-14 (1970). "The primary and ultimate purpose of interpretation" is to discover that intent and to make it effective. 3 CORBIN § 572B, at 421 (1992 Supp.). The court must decide what evidence, other than the writing, is admissible in the interpretation process, bearing in mind that the parol evidence rule prohibits extrinsic evidence to vary or contradict, but not to interpret, the agreement. See 3 CORBIN § 543, at 130-34. These substantive principles are clear, but their application has been troublesome.

1. Restrictive view

Under the restrictive "plain meaning" view of the parol evidence rule, evidence of prior negotiations may be used for interpretation only upon a finding that some language in the contract is unclear, ambiguous, or vague. E. Allan Farnsworth, FARNSWORTH ON CONTRACTS § 7.12, at 270 (1990) ("FARNSWORTH").). Under this approach, "if a writing, or the term in question, appears to be plain and unambiguous on its face, its meaning must be determined from the four corners of the instrument without resort to extrinsic evidence of any nature." Calamari & Perillo, supra § 3-10, at 166-67; cf. Gottsfield, supra, at 388-89. Thus, if the judge finds from the face of a document that it conveys only one meaning, parol evidence is neither considered nor admitted for any purpose. The danger here, of course, is that what appears plain and clear to one judge may not be so plain to another (as in this case), and the judge's decision, uninformed by context, may not reflect the intent of the parties.

2. Corbin view

Under the view embraced by Professor Corbin and the Second Restatement, there is no need to make a preliminary finding of ambiguity before the judge considers extrinsic evidence. 3 CORBIN § 542, at 100-05 (1992 Supp.); Restatement § 212 cmt. b; FARNSWORTH § 7.12, at 272; Gottsfield, supra, at 384. Instead, the court considers all of the proffered evidence to determine its relevance to the parties' intent and then applies the parol evidence rule to exclude from the fact finder's consideration only the evidence that contradicts or varies the meaning of the agreement. 3 CORBIN § 542, at 100-01 (1992 Supp.). According to Corbin, the court cannot apply the parol evidence rule without first understanding the meaning the parties intended to give the agreement. Id. To understand the agreement, the judge cannot be restricted to the four corners of the document. Again, even under the Corbin view, the court can admit evidence for interpretation but must stop short of contradiction. See 3 CORBIN § 574, at 371-72; Gottsfield, supra, at 386-87, 392.

3. Arizona view

Writing for a unanimous court in Smith v. Melson, Inc., 135 Ariz. 119, 121-22, 659 P.2d 1264, 1266-67 (1983), Chief Justice Holohan expressly committed Arizona to the Corbin view of contract interpretation. Burkons v. Ticor Title Ins. Co. of Cal., 168 Ariz. 345, 350-51, 813 P.2d 710, 715-16 (1991); see also Darner, 140 Ariz. at 393, 682 P.2d at 398; cf. Gottsfield, supra, at 389-90 & n. 83 (citing numerous cases decided before Melson). We have not, however, fully explored Melson 's application. See Gottsfield, supra, at 378. We have held that a...