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Associated Aviation Underwriters v. Wood9/29/2004
bsequent proceeding those issues as to which there was a conflict of interest, whether or not the insurer defended in the original tort claim." 138 Ariz. at 448, 675 P.2d at 708. Because collateral estoppel principles should be suspended "where there is an adversity of interests" between the insured and insurer, the court ruled, the insurer "was not collaterally estopped [in the DRA] from asserting the policy exclusion for intentional acts." Id. And that was so even though " he facts which establish coverage under the policy for [the claimant's] injury [were] identical to and inseparable from those alleged in the tort action," and even though the claimant had obtained an unopposed, partial summary judgment against the insured finding him negligent in the underlying tort case. Id. at 447, 675 P.2d at 707; see also Morris, 154 Ariz. at 120, 121, 741 P.2d at 253, 254 (noting that, under Vagnozzi, "insurers are not even bound by litigated issues as to which there was a conflict of interest" and that insurer on remand was "not bound by any factual stipulations" and was "free to litigate the facts of the coverage defense").
Based on Restatement ยง 58 and Vagnozzi, AAU asserts that the very fact that it defended the underlying cases under a reservation of rights, in and of itself, establishes there was a patent conflict of interest between it and TAA/City on all aspects of the underlying tort actions. AAU correctly observes that the attorneys it retained and paid to defend TAA/City in those actions owed a duty of unfettered loyalty and fidelity to TAA/City. See Paradigm Ins. Co. v. Langerman Law Offices, P.A., 200 Ariz. 146, 16, 24 P.3d 593, 597 (2001); Vagnozzi, 138 Ariz. at 448, 675 P.2d at 708. AAU argues that those attorneys were duty-bound to have the tort claims fall within AAU's coverage and, if expedient or advantageous to the insureds, to enter into a Morris settlement rather than litigating disputed issues of fault, causation, and damages. Because of defense counsel's obligations to TAA/City in the underlying tort cases and because AAU was not a party to those actions, AAU contends it "los complete control over the defense" of those actions.
According to AAU, that "coverage conflict" not only prevented it from forcing litigation of disputed liability and damage issues in the tort actions, but also entitled it "to litigate any fact related to coverage," including those identical issues, in phase I of the DRA.
We find several flaws in AAU's argument. Like Morris, Vagnozzi involved a policy's intentional act exclusion and, at a minimum, a factual dispute on whether the insured's act had been intentional. Thus, the entire discussion about conflict of interest in Vagnozzi, as in Morris, revolved around the insurer's coverage defense, which was based on the intentional act exclusion. Vagnozzi, 138 Ariz. at 448, 675 P.2d at 708. The court in neither Vagnozzi nor Morris suggested, let alone held, that merely defending an insured under a reservation of rights creates a conflict of interest between the insurer and insured on all issues and claims in the underlying case, thereby entitling the insurer to litigate all liability and damage issues in a subsequent DRA in an effort to avoid coverage. Thus, neither case authorizes or supports AAU's contention that it may litigate as coverage issues in this DRA "any potential liability" of TAA/City and " he existence of an actual bodily injury " because those matters are "fully intertwined with the coverage issue here."
Our supreme court recently recognized that "the insurer and insured have valid 'conflicting interests' when a defense is offered with a reservation of rights." Parking Concepts, 207 Ariz. 19, 12, 83 P.3d at 22;
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