2.2.3.2 Challenging the Reasonableness of a Stipulated Judgment

• Jurisdiction: Arizona

A valid question exists as to whether Morris, and its requirement of reasonableness for settlement enforceability, has superceded the strict principles of the Damron line of cases.^[311] Under Morris, an insurance company that defends its insured through a reservation of rights, has the benefit of a reasonableness determination. Under Damron,an insurance company that refuses to defend its insured may be risk to pay the judgment against its insured, without the benefit of judgment reduction based on reasonableness if the insurer failed to establish a valid basis for denying coverage.

The Arizona Supreme Court's decision in Arizona Property & Casualty Insurance Guarantee Fund v. Helme^[312] may be the missing link between Damron and Morris on this issue:

We do not hold that the insurer's [breach] eliminates the insured's duty of cooperation so that the insured may enter into any type of agreement or take any type of action that may protect him from financial ruin. . . . The insurer's breach narrows the insured's obligations under the cooperation clause and permits him to take reasonable steps to save himself. Among those steps is making a reasonable settlement with the claimant.^[313]

Thus, the importance of Helme is that regardless of the type of breach committed by the insurer, including breaches of the duty to defend, the insured may only enter into a "reasonable settlement with the claimant."^[314] The Helme court, however, did not discuss what constitutes a reasonable settlement agreement between an insured and a claimant.

Both prior to and subsequent to Helme, various courts have ruled that where an insurance company erroneously denies coverage and refuses to defend its insured it does so at its own peril and is liable for the judgment entered against its insured.^[315] This body of case law can reasonably be interpreted to mean that the fact of judgment cannot be attacked. However, this body of case law has left open the question of whether the amount of the judgment can be challenged. Recently, however, in dicta, the Arizona Supreme Court in Parking Concepts v. Tenney,^[316] in a footnote, stated:

[W]here the insurer has refused to defend and the parties enter into a Damron agreement, the insurer has no right to contest the stipulated damages on the basis of reasonableness, but rather may contest the settlement only for fraud or collusion. [citation omitted].

This most recent pronouncement by the Arizona Supreme Court does not contain any principled supporting analysis. A simple hypothetical example underscores the need for a more comprehensive analytic construct which protects the public policy of the state of Arizona regarding reasonableness of judicially entered judgments. What if the parties in a Damronsituation stipulated to a $50 billion dollar judgment? That type of judgment would bankrupt the vast majority of insurance companies in the United States destroying the protection that the insurance company had made available to its insureds against liability claims, and over-taxing state guarantee funds throughout the country. To assert that the insurance company is liable for any stipulated damages and that the judiciary takes no responsibility in assessing the reasonableness of stipulated damages and the consequences that can arise from an outrageous and unconscionable stipulated amount without a supporting analytic analysis, is vacuous. Either the court has the ability to scrutinize any Damron judgments for reasonableness or the court is left with the prospect of the devastating consequences that can arise from an insurance company bankruptcy based upon an unconscionable stipulated judgment. A more principled analysis would require that all stipulated judgments undergo some adjudicatory confirmation for reasonableness.^[317]

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Notes:

[311] Fulton v. Woodford, 26 Ariz. App. 17, 21, 545 P.2d 979, 983 (1976); Gen. Acc. Fire & Life Assur. v. Little, 103 Ariz. 435, 442, 443 P.2d 690, 697 1968).

[312] 153 Ariz. 129, 735 P.2d 451 (1987).

[313] Id. at 183, 735 P.2d at 460 (emphasis added). The decision in Helme is similar to cases in other jurisdictions which hold that if the insurance carrier refuses coverage or refuses to defend, in breach of its contractual obligation to defend, the insured may make a reasonable settlement in good faith which is binding on the carrier. E.g., Isaacson v. California Ins. Guar. Ass'n, 44 Cal. 3d 775, 750 P.2d 297, 308-309 (1988); Gladstone v. D.W. Ritter Co., 508 N.Y.S. 2d 880, 882 (1986); Shook v. Allstate Ins. Co., 498 So.2d 498, 500 (Fla. Ct. App. 1986); Texas United Ins. Co. v. Burt Ford Enterprises, 703 S.W.2d 828, 835 (Tex. Civ. Ct. App. 1986); Alfiero v. Burks Mut. Leasing Co., 500 A.2d 169, 172 (Pa. Super. Ct. 1985). Interestingly, the Minnesota court in Buysse, et al. v. St. Paul Fire & Marine Ins. Co., 448 N.W.2d 865 (Minn. 1989) rejected the theory of anticipatory breach adopted in Helme. Id. at 874 n.7.

[314] Helme, 153 Ariz. at 138, 735 P.2d at 460; see 41 Am Jur. 2d Indemnity Sec. 46 ("In order to recover, the indemnitee settling the claim must show that the indemnitor was legally liable, and that the settlement was reasonable"); see also Plumbers Specialty Supply v. Enter. Prod., 632 P.2d 752, 758 (N.M. 1981). In Plumbers, the New Mexico Supreme Court held that an indemnitee could recover against the indemnitor company that refused to defend, if the indemnitee could "show that it acted reasonably" by settling the claim. The Plumbers' court held that the reasonableness of the indemnitee's action is determined by looking at the amount of the settlement in light of the risk of exposure; i.e. the probable amount of a judgment if the claimant were to prevail at trial. Id.

[315] See, e.g., State Farm Mut. Auto Ins. Co. v. Paynter, 122 Ariz. 198, 204, 593 P.2d 948, 954 (Ct. App. 1979); Rogan v. Auto-Owners Ins. Co., 171 Ariz. 559, 832 P.2d 212 (Ct. App. 1991). Most recently, in Himes v. Safeway Ins. Co., 205 Ariz. 31, 66 P.3d 74, 84 (Ct. App. 2003) ("we held that there were significant differences between an insurer that had provided a defense which entitled it to intervene, [cases omitted] and one that provided no defense and was consequently only able to attack a judgment for collusion or fraud as in Damron [citation omitted]").

[316] 207 Ariz. 19, 83 P.3d 19 (Ct. App. 2004).

[317] Helme is the missing link between Damron and Morris in the evolutionary equation. A valid question exists as to whether Morris, and its requirement of reasonableness for settlement enforceability, has superceded the strict penalties of the Damron line of cases. Under Damron, an insurance company that refused to defend its insured would be at risk to pay the judgment against its insured, without the benefit of judgment reduction based on reasonableness if the insurer failed to establish a valid basis for denying coverage. However, under Morris, an insurance company that defends its insured through a reservation of rights, has the benefit of a reasonable determination. Two principal opposing views can be distilled from this case precedent. One view draws a clear distinction between Damron and Morris predicated on the insurer's choice regarding its defense of its insured. A second view finds that Damron has been superceded by the "reasonableness" approach.

1. Distinct Case Approach. If the reasonableness hearing is considered to be part of the judicial processing of the original suit to conclusion, notwithstanding the possibility that it may happen in a different proceeding attenuated from the original suit, then the insurance company's failure to defend the original suit may foreclose participation in any reasonableness determination. In a different context, a refusal to defend has precluded the insurance company's involvement in the proceedings. In Arizona, where the insurer refuses to defend and the insured retains its own...