United Services Auto. Ass'n v. Morris

• Decision Date: 16 June 1987
• Docket Number: No. CV-86-0569-PR,CV-86-0569-PR
• Citation: 154 Ariz. 113,741 P.2d 246
• Parties: UNITED SERVICES AUTOMOBILE ASSOCIATION, a foreign reciprocal international exchange, Plaintiff-Appellee, v. John I. MORRIS, Defendant-Appellant.
• Court: Arizona Supreme Court

Page 246

741 P.2d 246

154 Ariz. 113

UNITED SERVICES AUTOMOBILE ASSOCIATION, a foreign reciprocal international exchange, Plaintiff-Appellee, v. John I. MORRIS, Defendant-Appellant.

No. CV-86-0569-PR.

Supreme Court of Arizona, In Banc.

June 16, 1987.

Reconsideration Denied Sept. 15, 1987.

Ridenour, Swenson, Cleere & Evans by Harold H. Swenson, Lloyd J. Andrews, Phoenix, for plaintiff-appellee.

Friedman & Ziskin by Charles I. Friedman, Ronald A. Spears, Phoenix, for defendant-appellant.

FELDMAN, Vice Chief Justice.

John I. Morris petitioned this court to review a memorandum decision of the court of appeals affirming a summary judgment in favor of plaintiff, United Services Automobile Association (USAA). The court of appeals held that USAA's insureds breached their contractual duty to cooperate with USAA by entering into a stipulated settlement, thereby discharging USAA from its responsibility to pay the resulting judgment. United Services Automobile Association v. Morris, No. 1 CA-CIV 8092 (Ariz.Ct.App. July 31, 1986) (memorandum decision).

We granted review to address questions of first impression: may insureds being defended under a reservation of rights enter into a settlement agreement without breaching the duty to cooperate and, if so, is the settlement binding on the insurer? See Rule 23(c), Ariz.R.Civ.App.P., 17A A.R.S. (Supp.1986). We have jurisdiction pursuant to Ariz. Const. art. 6, § 5(3) and A.R.S. § 12-120.24.

FACTS AND PROCEDURAL HISTORY

The trial court granted summary judgment in favor of USAA. Therefore, we view the record in the light most favorable to defendants. See Farmers Insurance Co. of Arizona v. Vagnozzi, 138 Ariz. 443, 448, 675 P.2d 703, 708 (1983).

On January 30, 1982, Morris broke into defendant Pamela Taylor's home. In fear, Taylor handed a gun to Robert Waltz, her brother, and told him to shoot Morris, but Waltz refused and tossed the gun on a bed. Waltz told police that he subsequently retrieved the gun and purposely shot Morris because he feared that Morris, enraged and out of control, would injure or kill the other occupants of the house.

In May 1982, Morris filed a tort action against Taylor and Waltz, alleging that he had been injured by their gross negligence and recklessness. Taylor carried homeowner's coverage with USAA, under which Waltz was an omnibus insured. The policy provided $100,000 liability coverage per occurrence with an exclusion for injuries "expected or intended by the insured." Notified of the action, USAA employee Daryl Geller interviewed Taylor and Waltz about the shooting incident. During these interviews, Geller obtained a signed "nonwaiver agreement" from Taylor, acknowledging that USAA was not waiving any policy or coverage defenses by investigating and defending the case. Either intentionally or through oversight, Geller failed to ask Waltz to sign a nonwaiver agreement.

USAA then retained attorney James M. Koontz to defend Taylor and Waltz. During a deposition, Waltz again stated that he shot Morris to stop him from harming Taylor and other occupants of the house. Shortly after this deposition, Morris moved to amend his complaint to include allegations that Waltz and Taylor had injured him intentionally.

Because the homeowner's policy would not indemnify the insureds for acts within the meaning of the intentional act exclusion, Koontz was faced with a conflict of interest between his clients and USAA. Koontz therefore requested that USAA retain another attorney to protect its own interests. The record is sketchy, but apparently while Morris's motion to amend the complaint to add the intentional tort theory was pending, Koontz verbally notified the attorney retained by USAA that the parties were negotiating a settlement.

On February 2, 1984, USAA warned Koontz that it would consider any settlement by the insureds a material breach of the policy conditions, releasing USAA from its duty to indemnify. Counsel wrote:

Please be advised that USAA does not agree to either insured (Taylor or Waltz) allowing or in any way encouraging a judgment in any amount to be taken against them by the plaintiff.... Whereas we appreciate the advantages accruing to the insureds as a result of such a maneuver, it would deprive USAA of what I consider to be a very substantial probability of obtaining a defense verdict in the tort action.

USAA also stated that it was not estopped from asserting a policy defense because the company "has never done anything to waive any of its rights under the policy." In addition, it promised to file a declaratory judgment action within a week based on the intentional act exclusion:

Obviously if the proposed amendments to the Complaint are granted, USAA reserves all rights concerning defendant Waltz as well as defendant Taylor concerning allegations of intentional acts.

(emphasis added). ¹

The following day, Taylor and Waltz followed Koontz's advice and settled the case. In exchange for a covenant not to execute against their assets, Taylor and Waltz stipulated to a $100,000 judgment to be collected solely from USAA. After this stipulation was entered, the trial court granted Morris's motion to amend the complaint to allege intentional acts.

On February 7, 1984, USAA filed this action seeking a declaration that it is not obligated to pay the $100,000 judgment because (1) the insureds' actions were intentional and thus outside the policy's coverage, and (2) the insureds breached their contractual duty to cooperate. In summary judgment motions, Morris argued that because USAA failed to have Waltz sign a nonwaiver agreement, it is now estopped from asserting the intentional act exclusion. Vagnozzi, supra. Thus, Morris argued, USAA must pay the full amount of the judgment. ²

In response to this argument, USAA contended that Waltz had reviewed the nonwaiver agreement signed by his sister and justifiably had assumed it applied to him also. USAA submitted an affidavit from Waltz confirming that this was his understanding and that he had been led to believe that USAA would not indemnify him if his acts were found to be intentional.

The trial court correctly found that genuinely contested issues of material fact precluded granting summary judgment on the intentional act exclusion issue. ³ However, the court granted summary judgment in favor of USAA on the ground that USAA was discharged from its duty to indemnify Taylor and Waltz because, by settling, they had breached their duty to cooperate. ⁴

In its memorandum decision, the court of appeals adopted the trial court's analysis. According to the court of appeals, Taylor and Waltz breached the cooperation clause by settling over USAA's objection and "of course, without consulting the insurance company." Memo. decision at 4.

DISCUSSION

A. Was Waltz Being Defended Under Reservation of Rights?

USAA acknowledges that Taylor was being defended under a reservation of rights, but now claims that Waltz was not and that this fact is relevant to determining the effects of Waltz's settlement agreement. An insurer with a coverage defense must defend its insured under a properly communicated reservation of rights or it will lose its right to later litigate coverage. Vagnozzi, 138 Ariz. at 448, 675 P.2d at 708, citing Restatement (Second) of Judgments § 58 (1982); 7C J. APPLEMAN, INSURANCE LAW AND PRACTICE § 4692, at 297 (1979); A. WINDT, INSURANCE CLAIMS AND DISPUTES: REPRESENTATION OF INSURANCE COMPANIES AND INSUREDS § 2.05, at 25 (1982). The trial court found that USAA had not reserved its rights because it failed to obtain a nonwaiver agreement from Waltz. This factual conclusion was incorporated into the parties' arguments and was not questioned by the court of appeals. The trial court's conclusion has two distinct ramifications. First, by unconditionally defending Waltz, USAA would have waived the intentional act coverage defense. Vagnozzi, supra. Second, if the company was defending Waltz unconditionally, the cooperation clause of the policy would have prohibited Waltz from settling the claim without the insurer's consent. See Arizona Property & Casualty Insurance Guaranty Fund v. Helme, 153 Ariz. 129, 735 P.2d 451 (1987). This is so because the purpose of a cooperation clause is to prevent insureds from compromising a claim for which the insurer unconditionally has assumed liability under the policy, thus obviating, at least to the extent of the policy limit bargained for, the insured's exposure to personal liability. Cay Divers, Inc. v. Raven, 812 F.2d 866 (3rd Cir.1987).

The record unmistakably shows, however, that the trial court's finding that USAA had not reserved its rights against Waltz is clearly erroneous. See Smith v. Melson, 135 Ariz. 119, 121, 659 P.2d 1264, 1266 (1983) (trial court's findings of fact will be adopted on appeal unless they are clearly erroneous or unsupported by any credible evidence). The fact that Waltz did not sign the nonwaiver agreement does not mean as a matter of law that USAA was defending him unconditionally. First, a carrier need not reserve its rights immediately upon learning of a suit; it may subsequently reserve its rights upon learning new information that would provide a coverage or policy defense. A. WINDT, supra § 2.05, at 26. Second, it would have been illogical for USAA to reserve its rights as to Taylor and not as to Waltz, who did the actual shooting. Third, and most important, the intent of the parties--insurer and insured--must prevail. Smith, supra. USAA stated in its motions for summary judgment that it had reserved its rights as to Waltz and that Waltz understood that he was being defended under reservation. In an affidavit taken by USAA, Waltz acknowledged that he had known all along that USAA was reserving its rights. Thus, both insurer and insured acknowledged that USAA undertook the defense pursuant to a reservation of rights.

Finally, the day before Taylor and Waltz settled the case with Morris and while Morris's ...