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When the carrier has sent its insured a notice that it is reserving its right to contest liability for any judgment, and then proceeds to defend the action, it is almost unvaryingly held that by that notice the company may defend and use its best efforts to prevent an excessive verdict, as such waiv- ing its right to raise the question of liability under the terms specified in the policy at a later date. Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997, 1969 Ariz. (Ariz. 1969).
Waiver/Estoppel
Waiver of a right requires a clear showing of an intent to waive that right. Servs. Holding Co. v. Transamerica Oc- cidental Life Ins. Co., 180 Ariz. 198, 206 (Ct. App. 1994). A party asserting an estoppel claim must show that it, “having the right to do so under all the circumstances of the case, has, in good faith, relief thereon to its detriment.” Id. at 207 (quoting Waugh v. Lennard, 69 Ariz. 214, 223 (1949).
Grounds/Defenses – Morris Agreement
A “Morris Agreement” is a settlement agreement entered into when the insurer is defending under a reservation of rights under which the insured stipulates to a judgment, assigns his rights against the insurer to the claimant, and re- ceived in return a covenant from the claimant not to execute against the insured. U.S. Automobile Assoc. v. Morris, 154 Ariz. 113 (1987).
According to the Arizona Supreme Court, if an insurer de- fends under a reservation of rights, then the insurer has “not abandoned its insured by breaching any policy obligations,” but the insurer also has not “accepted full responsibility
for the insureds’ liability exposure.” Id. Thus, the Arizona Supreme Court distinguishes between an insurer’s duty
to defend and duty to indemnify. Morris concluded that
an insurer “who performs the duty to defend but reserves the right to deny the duty to pay should not be allowed to control the conditions of payment.” As a result, the Arizona Supreme Court held that, “an insured being defended under a reservation of rights may enter into a Morris Agree- ment without breaching the cooperation clause.”
Morris agreements require the insurer to identify all of its bases for denying coverage. Grounds not identified in
the reservation of rights may not be asserted later by the insurer as defenses to coverage. The policy behind this rule for Morris agreements stems from the competing interests of the insured and insurer that arise during the insurer’s defense of a third-party action.
When the insurer defends the insured under a reservation of rights, the insurer controls the defense of the insured, includ- ing the right to settle the case with the injured third-party. No conflict of interest exists in cases where the insurer has
not indicated that it may deny coverage for the potential li- ability because the insured likely believes any liability it faces will be covered by the policy. But “when a claimant seeks damages the insurer may contend are not covered under the policy, the interests of the insured and insurer diverge.” Pueblo Santa Fe Townhomes Owner’s Ass’n v. Transconti- nental Ins. Co., 218 Ariz. 13, 19 (Ct. App. 2008).
If the insured does not know the grounds on which the insurer may contest coverage, the insured is placed at a disadvantage because it loses the opportunity to investigate and prepare a defense on its own. Therefore, in the Morris context, where “[b]y virtue of its duty to defend, and insurer gains ‘the advantage of exclusive control’ over the litiga- tion[,]” it would be unreasonable to permit the insurer to not disclose potential bases for denying coverage. Id. at 18 (quoting Morris, 154 Ariz. at 117).
If the insured is aware of the grounds on which it intends
to deny coverage, the insured “may protect itself from the sharp thrust of personal liability by assigning to the claim- ant the insured’s coverage rights under the policy.” Id. at 19. Without notice that the insurer is reserving its rights, the insured “has no reason to act to protect its rights because
it is unaware that a conflict of interest exists between itself and the insurer.” Id. The general rule precluding an insurer from raising new grounds contesting coverage in a subse- quent action is justified in the Morris context.
An Insurer’s Right to Reimbursement
An Arizona District Court recognized an insurer’s right to re- imbursement in Phillips & Assoc. v. Navigators Ins. Co. The court held that under either California or Arizona law, a car- rier that reserves the right to seek reimbursement of defense and indemnity payments may recover those payments from its insured if it is adjudicated that the policy of the insurance ultimately did not cover the claim. Phillips & Assoc. v. Navi- gators Ins. Co., 764 F. Supp. 2d 1174 (D. Ariz. 2011).
In Phillips, the carrier provided the insured law firm with errors and omissions coverage. A suit was filed against the insured, and ultimately the carrier settled the suit against the law firm, under reservation of rights, and with the consent to the insured. The insurer client moved for judgment on the pleadings, requesting that the court determine whether the carrier has a right of reimbursement from the insured if the policy ultimately did not cover the claim. The court found that because the carrier had reserved its rights to include the right to seek reimbursement, and because the insured had consented to the settlement with the prior knowledge that the carrier had reserved its rights, the carrier was entitled to be reimbursed from the insured for the defense and indem- nity paid to settle an uncovered claim. The court noted that public policy favors such a result:
2018 ReseRvation of Rights - special edition
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