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Colorado Casualty Ins. v. Safety Control Co. - 9/11/2012

Arizona Court of Appeals Division One Holds That (1) a Damron Agreement in which a contractor assigns an indemnity claim to a tort victim is valid and (2) the indemnity claim may be enforced only if the stipulated judgment falls within the insurer’s policy.


The case concerns the validity of a Damron agreement by which a contractor (“DBA”) assigned rights against its insurer to a tort victim.  DBA had been hired by ADOT to perform road improvements. Following an accident at the construction site, its primary insurer (Colorado Casualty Ins. Co.) tendered its defense to the subcontractors.  The subcontractor (Safety Control) and its insurer (Employer’s Mutual Casualty Co. -- “EMC”) rejected the tender.  DBA stipulated with the victim for an entry of judgment, and DBA and Colorado Casualty assigned to the victim their rights against the subcontractors and their insurers. 

Colorado Casualty filed suit against the subcontractors and their insurers to recover its defense costs.  The victim moved to intervene and dismiss the suit, arguing that Colorado Casualty had assigned its rights to him.  The trial court did not dismiss the suit, but allowed the victim to intervene.  On summary judgment, the trial court ruled that EMC breached a duty to defend DBA and that DBA was therefore entitled to settle with the victim without EMC’s consent.  The court found that the stipulated judgment was neither collusive nor fraudulent.  Safety Control and EMC appealed. 

The Court of Appeals affirmed in part and reversed in part.   Affirming the superior court, the Court of Appeals held that the Damron agreement was valid.  EMC had challenged the validity of the Damron agreement under a number of theories.  Citing Ariz. R. Civ. P. 17(a), EMC argued that the agreement was unenforceable because a dispute remained between the victim and Casualty Colorado as to who owned the claims.  Noting that the purpose of Rule 17(a) is to enable the defendant to raise any defenses that he has against the real party in interest, the Court held that under the circumstances of this case Safety Control and EMC had the opportunity to raise any defense and had not been prejudiced. 

EMC also claimed that the agreement was collusive and an invalid attempt to shift Colorado Casualty’s obligations to EMC.  The Court dismissed EMC’s collusive argument, reasoning that it has previously approved a Damron agreement in a purely commercial indemnity context, A Tumbling-T Ranches v. Flood Control Dist. of Maricopa County, 220 Ariz. 202, 204 P.3d 1051, 1056 (App. 2008), and that EMC had reason to know when it declined to defend the claim that a judgment might be entered against the insured.  The Court also held that the settlement agreement did not shift Colorado Casualty’s obligations to EMC as the settlement assigned an indemnity claim that may be enforced only if the stipulated judgment is liability within the scope of the coverage.

The Court, however, found that issues of fact exist as to whether the judgment falls within the policy.  The EMC policy insured for liability arising out of Safety Control’s “ongoing operations performed.”  Because the defense was tendered to EMC and EMC declined to participate in the case, the Court held that EMC is bound for purposes of coverage by any issues determined by the stipulated judgment.  The record, however, contained no findings about DBA’s liability to the victim arising out of Safety Control’s operations.  The Court reversed and remanded with instructions for the superior court to hold further proceedings to resolve the issue. 

The Court of Appeals nonetheless affirmed the superior court’s rulings on summary judgment regarding Safety Control’s “ongoing operations” and the policy’s “intended use” exclusion.  The Court also agreed that Safety Control breached the subcontract by failing to procure “completed operations” coverage as required by the subcontract.  

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

Posted by: Grace Rebling

Posted On: 10/1/2012