Arizona Court of Appeals Division One Holds that Defendant May Enter a Damron Settlement Agreement, Assigning Defendant’s Rights Against Primary Insurer, Notwithstanding Defense of Defendant by Excess Insurer.

A motorist was injured in a collision at a highway construction site and brought suit against the Arizona Department of Transportation (“ADOT”) and the construction job contractor DBA Construction Company (“DBA”).  DBA’s insurer tendered defense of the action to the job subcontractors and their insurers, which rejected the tender.  The motorist later reached a settlement agreement with ADOT and DBA, which assigned to the motorist their rights against the subcontractors and their insurers.

DBA’s insurer then brought suit against the subcontractors and their insurers, seeking to recover its costs of defense and settlement.  The motorist intervened.  DBA’s insurer and the motorist eventually settled their claims against all of the defendants except for one subcontractor (“Safety Control”) and its insurer (“EMC”). 

The superior court ruled on summary judgment that EMC had breached a duty to defend DBA, which was named as an additional insured on the policy providing primary coverage for liability arising out of Safety Control’s work.  Because EMC had breached a duty to defend, DBA was entitled to settle with the motorist without EMC’s consent as long as the settlement was not collusive or fraudulent, which it was not.  The court found that EMC therefore was liable to the motorist on the stipulated judgment and for his attorneys’ fees, and that Safety Control was liable to DBA (to the extent that EMC did not satisfy what remained of the stipulated judgment and fees) for breach of Safety Control’s contract obligation to obtain completed-operations insurance coverage.

Safety Control and EMC appealed.  The Court of Appeals affirmed in part and remanded for further proceedings.

The appellate court rejected the appellants’ argument that the judgment against them was unenforceable because of a dispute remaining between the motorist and DBA’s insurer over which of them owned some of the claims at issue.  Because the motorist and insurer agreed to pursue the claims jointly, and to resolve later the allocation of proceeds, there was no violation of Ariz. R. Civ. P. 17(a) (requiring every action to be prosecuted in the name of the real party in interest) and no prejudice to Safety Control or EMC.

The “Damron” settlement agreement also was not collusive, notwithstanding that DBA did not face a risk of personal liability.  Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (1969), held that when an insurer breaches the contract of insurance by failing to defend, the insured’s duty of cooperation does not prevent the insured from entering into a settlement with the claimant and assigning his rights under the policy to the claimant. As long as the stipulated judgment is not fraudulent or collusive, an insurer that has failed to defend is bound by the judgment with respect to all matters which were litigated or could have been litigated in that action.  Given that DBA’s insurer provided DBA with a defense, EMC argued the agreement was collusive because its purpose was not to protect DBA but to shift liability for the settlement amount from DBA’s insurer to EMC.  The Court of Appeals rejected that argument.  As the primary insurer, EMC was liable for covered claims up to its policy limit, which exceeded the amount of the stipulated judgment.  Therefore, the settlement did not fraudulently or collusively shift liability from DBA’s excess insurer to EMC.  And EMC could not escape the consequences of its decision to decline to defend DBA simply because DBA’s excess insurer did not also refuse to defend DBA.

Because, however, the stipulated judgment left unresolved whether DBA’s liability to the motorist arose out of Safety Control’s work, within the meaning of the EMC policy, the Court remanded to the trial court for further proceedings to resolve that issue.

Presiding Judge Johnsen authored the opinion; Judges Orozco and Portley concurred.