2.2.3.4 The Role of the Judiciary in the Reasonableness Deter-mination Process
Jurisdiction | Arizona |
The role of the trial court in the process of determining reasonableness was recently discussed by the Arizona Court of Appeals in Himes v. Safeway Ins. Co.[345] In Himes the claimant was severely injured in an automobile accident.[346] The tortfeasor was insured by Safeway Insurance Company. Safeway had issued a minimum limits automobile liability policy providing $15,000 per person and $30,000 per accident coverage.[347] A Damron-type agreement was entered into upon the contention that Safeway had breached its duty to give equal consideration to its insured's interests by failing to settle within policy limits.[348] As a result of the Damron-type agreement, the insured consented to the entry of judgment against him in the amount of $12,000,000 and assigned all of his rights against Safeway to the claimant.[349] Safeway intervened.[350] Judgment was entered in accordance with the Damron-type agreement.[351] Safeway requested and was granted an evidentiary hearing as to the reasonableness of the settlement.[352] Following that evidentiary hearing the trial court ruled that the Damron-type agreement and the judgment resulting therefrom was reasonable to the extent of $9,000,000 and not the $12,000,000 stipulated to.[353] The claimant immediately moved for reconsideration of the trial court's determination. Thereafter the trial court modified its earlier decision and found that the entire $12,000,000 settlement was reasonable.[354]
Upon reconsideration, the trial court found that it was inappropriate for the trial court "to substitute its believe of what was reasonable absent evidence to the contrary."[355] The trial court observed that there was no evidence that the agreement was unreasonable.[356] The Arizona Court of Appeals reversed and in a well-reasoned opinion, the court analyzed the role of the judiciary in the process of determining reasonableness, delineated the test to be applied in determining reasonableness, and specified the factors to be considered by the trial court in determining reasonableness.[357]
It is reversible error for the trial court to enter a stipulated judgment prior to a prejudgment hearing on liability and damages.[358]
A. The Burden of Proof
In Himes, the trial court enforced the agreed upon settlement amount of $12,000,000 because there was "no evidence that the agreement was unreasonable."[359] In reversing the trial court's decision, the court of appeals observed that
It is clear that the trial judge either (a) accepted an erroneous legal argument made by [claimant] that the claimant satisfied her burden unless the settlement amount was "unreasonable per se" or that the burden shifted to the insurer upon a prima facie showing by the claimant or (b) engaged in a clear error of fact by finding that "[t]his court has no evidence that the settlement was unreasonable."[360]
In a Damron-type situation the claimant has the affirmative duty to prove that the agreement is reasonable.[361] It is irrelevant that the settlement amount may have been stipulated to by experienced lawyers, who were acting in good faith.[362] In the Damron/Morris setting, there is no practical incentive for the insured to enter into a reasonable settlement amount. The opposite is true. The incentive is to accept whatever number is proposed by the claimant in order to avoid the "sharp thrust of personal liability."[363] Therefore, the settlement does not raise an evidentiary presumption in favor of the insured (or the insured's assignee) regarding an assessment of liability and damages.[364]
In a Damron/Morris situation, an ethical duty is owed to the insured by the attorney appointed by the insurance company.[365] If that attorney tries to arrange a more reasonable settlement, he may violate the legal and ethical duties owed to the insured. The lawyer is forced to deal with the ethical pressures involved when procuring a judgment against the insurance company, who happens to be paying his bill and with whom he may maintain a professional and business relationship. If an agreement cannot be reached because the claimant demands an excessive amount, an argument could be made that the attorney was disproportionately favoring the insurance company over the insured. If this were to occur then counsel's "own malpractice carrier would likely come calling if counsel's aggressive attempts to negotiate a lower number resulted in no agreement at all."[366] These concerns were exemplified by the facts presented in the reasonableness hearing in Himes. There, counsel for the insured testified that he believed he "could have negotiated a lower amount if [he] wanted to."[367] Counsel did not attempt to negotiate a lower settlement amount due to legal and ethical reasons. This represents a clear deviation from the normal circumstance where a client is told by counsel that a settlement can be negotiated more favorably and the client authorizes those additional discussions. In the Damron/Morris situation, the lack of financial incentive on the part of the insured does not prompt the insured client to advise counsel to pursue a lower settlement and counsel's primary legal and ethical responsibilities limit it.[368] For this reason the test of reasonableness must be applied to every Damron-type...
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