Monterey Homes Ariz., Inc. v. Federated Mut. Ins. Co. (2/10/2009)

March 3, 2009

Arizona Court ofAppeals Division One Holds That an Insurer Defending Under a Reservation of Rights and Seeking to Assert a Subrogation Claim That Has Been Released by the Insured in a Settlement Agreement May Intervene to Contest Whether the Insured Gave Appropriate Notice of the Settlement Agreement and Whether the Settlement Was Reasonable.

In 2004, Monterey Homes Arizona, Inc. and a related entity (collectively “Monterey”) were named as defendants in a construction defect suit brought by homeowners.  Monterey filed a third-party complaint alleging indemnity claims against several of its subcontractors including BBP Concrete Company, Inc. (“BBP”), which then tendered its defense to its insurer, Federated Mutual Insurance Company (“Federated”) under a “complete reservation of rights.”  BBP denied the third-party claims and requested attorneys’ fees under A.R.S. § 12-341.01, which Federated believed would be recovered due to its contention that the third-party claims were meritless.  In 2007, BBP entered into a walk-away settlement with Monterey without Federated’s consent in which the parties agreed to “no indemnity or defense payments”.  Asserting that it had become subrogated to BBP’s rights to recover the “defense payments” from Monterey, Federated moved to intervene.   The superior court denied intervention and Federated appealed.   

The ArizonaAppeals Court reversed and remanded, holding that Federated was entitled to intervene as a matter of right pursuant to Ariz. R. Civ. P. 24(a).  The court explained that under United Services Automobile Ass’n v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987), Federated was entitled to intervene in order to contest both the appropriateness of the notice given by BBP of the settlement agreement and the reasonableness of the settlement agreement itself.   The Court held that although Federated’s subrogation rights could not limit BPP from entering into a settlement that released those rights because there was a reservation of rights, the principles set forth in Morris allowed it to contest whether it had been given appropriate notice of the settlement and whether the settlement was reasonable and prudent under the circumstances.

The Court rejected Monterey’s argument that simply by defending BBP under a reservation of rights, Federated necessarily forfeited its subrogation rights and that intervention by Federated was therefore futile.

Presiding Judge Norris authored the opinion; Judges Kessler and Gemmill concurred.