2.2.3.5 Breach of the Cooperation Clause

JurisdictionArizona

As the Morris decision has aged, issues regarding the scope of permissible conduct have arisen. As with all significant judicial decisions, Morris has proven to be flexible in its ultimate fairness toward balancing the respective rights of insurers and insureds. This flexibility was recently exhibited by the Arizona Court of Appeals in holding that insureds can, in the right circumstances, breach the policy cooperation clause by entering into Morris agreements.

The court in Morris held that an insurance company could not invoke a policy cooperation clause to prevent insureds, being defended under a reservation of rights, from protecting themselves by settling with the claimant.[392] In analyzing this issue, the court recognized that when an insurer unconditionally defends its insured, it waives all coverage defenses.[393] In exchange for this unequivocal grant of coverage, the insured is required by the policy to cooperate with the insurance company by not settling any covered claim without the insurer's consent.[394] This is so because, by accepting the claim without reservation, the insured's exposure to personal liability is eliminated to the extent of the purchased policy limits. The fundamental underpinning for displacement of the cooperation clause, i.e., personal exposure on the part of the insured, does not exist (at least to the extent of purchased coverage) where the insurance company agrees to unequivocally cover and defend the claim.

The analysis used by the court in Morris translated well to situations where the insurance company's coverage defense was a global one, applying to all claims of liability and all damages. The translation was not clear where, on a multi-count complaint, the insurer partially reserves its rights. In the cross hairs of this issue is the following statement made by the court in Morris:

Accordingly, we hold that the cooperation clause prohibition against settling without the insurer's consent forbids an insured from settling only claims for which the insurer unconditionally assumes liability under the policy.[395]

The partial reservation of rights issue was addressed recently by the Arizona Court of Appeals in Munzer v. Smith & Feola.[396] In Munzer the court found that the insured was prohibited by the policy's cooperation clause from settling those claims for which the insurer unconditionally assumes liability under the policy notwithstanding a partial reservation of rights on other claims within the case.[397]

The Munzer case involved a legal malpractice claim. The Munzers retained the law firm of Smith & Feola to represent them in connection with an Environmental Protection Agency investigation of an environmental problem arising from the Munzers' business operation.[398] At issue was the failure of the attorneys to present the EPA claim to certain general liability insurance companies that covered the Munzers' business operations during the relevant time frame in question.[399] Eventually, the claim for coverage and a defense of the EPA proceedings was made to the general liability carriers. The carriers denied the claim.[400] Thereafter, the Munzers brought a legal malpractice action against Smith & Feola alleging breach of fiduciary duty, malpractice and breach of contract.[401] As general damages, the Munzers sought the money they were required to pay to settle with the EPA.[402] The Munzers also sought reimbursement of the attorneys' fees they had paid to Smith & Feola for work the firm had done in connection with the environmental claim.[403] The Munzers argued that these fees were unnecessarily incurred because the general liability insurers would have agreed to defend the Munzers in the EPA proceedings if the defense had been timely tendered by Smith & Feola.[404]

Smith & Feola tendered the malpractice claim to Admiral Insurance Company, their Errors & Omissions carrier. Admiral agreed to cover all claims for liability asserted by the Munzers, and agreed to pay the general damages flowing from a liability verdict.[405] However, Admiral, relying on a policy exclusion regarding reimbursement of attorneys' fees, reserved its rights to pay any damage claim regarding the reimbursement of fees.[406]

The Munzers and Smith & Feola entered into a Morris agreement regarding all claims of liability and all damages, including those liability claims and damages that Admiral had agreed to unconditionally cover.[407] Admiral intervened. The trial court held that the Morris agreement amount was reasonable. Admiral appealed.

The Court of Appeals in Munzer held that Smith & Feola breached the cooperation clause in Admiral's policy by entering into a Morris agreement on covered claims.[408] The Morris agreement was enforceable only as to the claim for damages?reimbursement of attorneys' fees?for which Admiral reserved its rights.[409]

A contrary result in Munzer would have...

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