Arizona Court ofAppeals Division One Holds that a Damron/Morris Agreement Can Be Enforceable even if the Agreement Arises out of an Indemnity and Hold-Harmless Provision Within a Property Easement Agreement, Rather Than an Insurance Contract, But the Ultimate Liability of the Indemnitor Will Depend on the Language and Intent of the Underlying Indemnity Provision.

Owners of the Gillespie Dam gave the Maricopa County Flood Control District an easement to establish a channel in portions of the Gila River upstream from the Gillespie Dam.  The easement contained an indemnity agreement whereby the District agreed to indemnify and hold the dam owners harmless for certain liabilities.  When the dam failed, various farmers who owned land adjacent to theGila River sued the dam owners and the District claiming that the District’s upstream project had partially caused the farmers’ damages.  The dam owners twice tendered their defense to the District, but the District declined.  After a jury found liability, but before the damages trial, the dam owners entered into a settlement agreement with the farmers.  The agreement provided that a stipulated judgment would be entered in favor of the farmers and against the dam owners in the amount of fourteen million dollars.  The stipulated judgment further provided that the dam owners would pay three-plus million dollars in return for a covenant not to execute against the dam owners for the remainder of the judgment.  The trial court held a reasonableness hearing on the amount of the settlement agreement and concluded that the amount was reasonable and the indemnity claim against the District was not limited to the three-plus million dollars that the dam owners had actually paid.  The District appealed.     

The ArizonaAppeals Court affirmed with a modification.  It explained that a Damron/Morris agreement is based on general principles of indemnity law, not on aspects peculiar to the insurer-insured relationship.  See United Servs. Auto. Ass’n v. Morris, 154Ariz. 113, 120, 741 P.2d 246, 253 (1987); Restatement (Second) of Judgments § 57(1) (1982).  Therefore, it agreed with the farmers and dam owners that such an agreement may arise out of a property easement, not just an insurance contract.  Furthermore, because the District had refused the dam owners undisputed attempts to tender the defense, and because significant evidence indicated that the dam owners defended and settled the action with “due diligence and reasonable prudence,” the Court upheld the trial court’s conclusion that the settlement amount was reasonable.  The District, however, would be allowed in due course to litigate whether the language of the indemnity provision includes liability for amounts that the dam owners are not obligated to pay in light of the covenant not to execute.  That question of fact must be decided in the first instance in the trial court.                         

Judge Barker authored the opinion; Judge Brown and Maricopa County Superior Court Judge Foster, sitting by designation, concurred.