Waddell v. Titan Ins. Co., Inc., 1 CA-CV 01-0611.

• Decision Date: 29 April 2004
• Docket Number: No. 1 CA-CV 01-0611.,1 CA-CV 01-0611.
• Citation: 207 Ariz. 529,88 P.3d 1141
• Parties: Eugene WADDELL, a natural father and next friend of Carmen Jude Waddell, an incapacitated person, and Christopher Araiza, a single person, Plaintiffs-Appellees, v. TITAN INSURANCE COMPANY, INC., Intervenor-Appellant.
• Court: Arizona Court of Appeals

88 P.3d 1141

207 Ariz. 529

Eugene WADDELL, a natural father and next friend of Carmen Jude Waddell, an incapacitated person, and Christopher Araiza, a single person, Plaintiffs-Appellees, v. TITAN INSURANCE COMPANY, INC., Intervenor-Appellant.

No. -0611.

Court of Appeals of Arizona, Division 1, Department D.

April 29, 2004.

Beale & Micheaels, P.C. By John A. Micheaels, Norman D. Hall, Jr., Phoenix, Attorneys for Plaintiffs-Appellees and Feder Law Office, P.A. By Harold, Phoenix, Feder Co-Counsel for Plaintiffs-Appellees.

Renaud, Cook & Drury, P.A. By Charles A. Struble, Christina J. Reid-Moore, Phoenix, Attorneys for Intervenor-Appellant.

OPINION

GEMMILL, Judge.

¶ 1 Titan Insurance Company, intervenor below, appeals from the judgment entered by the trial court against Titan's insured, Edward Rodriguez, in favor of Eugene Waddell, natural father and next friend of Carmen Jude Waddell, and Christopher Araiza (collectively "Plaintiffs"). We affirm the judgment against Rodriguez. We also hold that Titan is entitled to challenge the reasonableness of Rodriguez's settlement with the Plaintiffs, as explained in this opinion.

FACTS AND PROCEDURAL HISTORY

¶ 2 Carmen Waddell, Christopher Araiza, and Edward Rodriguez were occupants of a car involved in a single-car rollover accident. All three had consumed alcohol. None was wearing a seat belt. Plaintiffs Waddell and Araiza sustained serious injuries. Titan provided liability coverage for permissive users of the car under a minimum-limits automobile insurance policy.

¶ 3 After the accident, Plaintiffs claimed that Rodriguez was the driver of the car and that the accident was his fault. Plaintiffs made a demand on Titan for payment of the liability coverage policy limits within a specified period of time. Titan did not initially agree to pay its policy limits. Later, after the Plaintiffs' time limit for acceptance of the policy limits demand had expired, Titan offered its policy limits but the offer was not accepted. Plaintiffs filed suit against Rodriguez, and Titan retained counsel to represent and defend him. Titan unconditionally defended Rodriguez against the lawsuit brought by Plaintiffs until a default agreement was reached between Plaintiffs and Rodriguez.

¶ 4 Plaintiffs claimed that Titan, by not settling the Plaintiffs' claims for policy limits when it had the opportunity to do so, breached its duty to give equal consideration to the interests of its insured and to its own interests. Plaintiffs proposed a default agreement to Rodriguez that was accepted.¹ Rodriguez agreed to withdraw his answer, allow a default to be taken against him, and assign any claims he had against Titan to Plaintiffs. In return, Plaintiffs agreed not to execute on the anticipated judgment against Rodriguez's personal assets. Rodriguez's answer was withdrawn and default was entered against Rodriquez.

¶ 5 Titan requested, and was granted, leave to intervene prior to the hearing on damages. In addition to contesting damages, Titan sought to present evidence at the damages hearing regarding liability and comparative fault issues. Titan claimed that there was a dispute whether Rodriguez was driving the car at the time of the accident. Titan also asserted Plaintiffs' comparative fault in failing to wear seat belts and in getting into a car after all three individuals had been drinking. In support of its request to present evidence on these issues, Titan referenced our supreme court's explanation in Morris that determining the reasonableness of a settlement agreement "involves evaluating the facts bearing on the liability and damage aspects of claimant's case, as well as the risks of going to trial." 154 Ariz. at 121, 741 P.2d at 254. The Plaintiffs argued, and the court agreed, that Titan should be limited to contesting only the damages to be awarded.

¶ 6 Following the damages hearing, the trial court determined Carmen Waddell's damages to be $2,156,662.87 and Christopher Araiza's damages to be $264,568.12. A judgment was entered against Rodriguez that included the language of finality required by Arizona Rule of Civil Procedure 54(b).

¶ 7 Titan, as intervenor, appeals and raises three issues: (1) whether its insured, Rodriguez, was entitled to enter into the default agreement without breaching his duty of cooperation under the insurance policy; (2) whether the trial court erred by prohibiting Titan from presenting evidence regarding liability and comparative fault at the damages hearing; and (3) whether the court abused its discretion in permitting certain medical testimony at trial that, according to Titan, had not been timely disclosed.

THE PROPRIETY OF THE DEFAULT AGREEMENT

¶ 8 Ordinarily an insured defendant is prohibited by the insurance contract from making a settlement with the tort plaintiff without permission of the insurer. However, if the insurer defends while reserving the right to contest coverage or breaches one or more of its contract obligations to the insured, the insured is free to make a reasonable agreement with the tort plaintiffs and does not breach the cooperation clause of the policy by making such an agreement. See Morris, 154 Ariz. at 117-20, 741 P.2d at 250-53; Arizona Property & Cas. Ins. Guar. Fund v. Helme, 153 Ariz. 129, 138, 735 P.2d 451, 460 (1987). Titan contends that Rodriguez breached his duty of cooperation under the policy by entering into the default agreement because Titan had not violated any duty owed to Rodriguez. Titan emphasizes that it offered its policy limits and unequivocally defended Rodriguez.

¶ 9 In making this argument, Titan is essentially asking for a determination that Rodriguez breached the insurance contract and thereby voided all coverage. But Titan did not affirmatively seek this relief from the trial court prior to this appeal. The trial court did not rule on this issue, and the judgment entered against Rodriguez does not purport to adjudicate either coverage or the propriety of the default agreement.

¶ 10 Accordingly, the questions whether Titan breached its duty of equal consideration and whether Rodriguez breached his duty to cooperate and voided coverage by entering into the default agreement are not properly before this court, and we do not reach these issues.

THE SCOPE OF THE DAMAGES HEARING

¶ 11 Titan argues that it should have been allowed to present evidence and argument regarding liability and comparative fault issues at the damages hearing. Titan is in essence arguing that the damages hearing should have been expanded or transformed into a "reasonableness hearing" as contemplated under Morris.²

¶ 12 In Morris, an insured was defended by his insurer under a reservation of rights. 154 Ariz. at 116-17, 741 P.2d at 249-50. Because of the financial uncertainty created by the reservation of rights, the supreme court upheld the right of the insured to enter into an agreement with the tort plaintiff that resulted in economic protection for the insured. Id. at 119, 741 P.2d at 252. The agreement in Morris included a stipulated judgment against the insured for a specified amount of money (in contrast to the default scenario implemented in this case). Id. at 115, 741 P.2d at 248. The court held that the judgment would be binding and enforceable against the insurer only to the extent that the insured or tort plaintiff could prove the settlement was reasonable:

Morris will have the burden of showing that the judgment was not fraudulent or collusive and was fair and reasonable under the circumstances. If Morris cannot show that the entire amount of the stipulated judgment was reasonable, he may recover only the portion that he proves was reasonable. If he is unable to prove the reasonableness of any portion of the judgment, USAA will not be bound by the settlement.

Id. at 121, 741 P.2d at 254 (citation omitted; emphasis added).

¶ 13 In the wake of Morris, "reasonableness hearings" were conducted to determine the reasonableness of similar agreements. Several issues regarding the evidence that may be considered at such hearings have been addressed by our appellate courts. See Tenney, 207 Ariz. at 19, 20, 24-26 ¶¶ 1, 26-31, 83 P.3d at 20, 24-26; Himes, 205 Ariz. at 41-43, ¶¶ 32-37, 66 P.3d at 84-86; Munzer v. Feola, 195 Ariz. 131, 136-37, ¶¶ 31-34, 985 P.2d 616, 621-22 (App.1999). Titan claims that it should be able to test the reasonableness of the default agreement and resulting judgment.

¶ 14 A liability insurer in Arizona owes two express duties and one implied duty to its insured. The express duties are the duty to defend the insured and the duty to indemnify the insured. Mora v. Phoenix Indem. Ins. Co., 196 Ariz. 315, 319, ¶ 16, 996 P.2d 116, 120 (App.1999). The implied duty is the duty to treat settlement offers with equal consideration. Id. In response to Titan's claim that it is entitled to test the reasonableness of the default agreement, Plaintiffs initially contend that Titan is not entitled to a reasonableness hearing because Titan breached its duty to treat settlement offers with equal consideration and, according to Plaintiffs, an insurer who breaches this duty is not entitled to a reasonableness hearing. In contrast to Morris in which the insurer had not breached any obligation to its insured but had simply reserved its right to contest coverage, Plaintiffs argue that if they succeed in proving that Titan breached its duty to give equal consideration to settlement offers, then Titan should be bound by the entire judgment. Whether Titan has breached its duty to Rodriguez is not an issue presented in this appeal, but we must assume the potential of such a breach in order to resolve the issues presented.³

¶ 15 The question whether an insurer is entitled to a reasonableness hearing, if the insurer has breached the duty of equal consideration, was squarely addressed by this court in Himes, 205 Ariz. at 40-41, ¶¶ 27-30, 66 P.3d at 83-84. The court considered the same argument made by Plaintiffs...