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Associated Aviation Underwriters v. Wood9/29/2004
sured from settling only claims for which the insurer unconditionally assumes liability under the policy. Thus, an insured being defended under a reservation of rights may enter into a Damron agreement without breaching the cooperation clause. Such agreements must be made fairly, with notice to the insurer, and without fraud or collusion on the insurer. The insurer's reservation of the privilege to deny the duty to pay relinquishes to the insured control of the litigation, almost as if the insured had objected to being defended under a reservation.
Id. at 119, 741 P.2d at 252 (citations omitted).
In upholding the validity of Morris agreements in this context, however, the court recognized the tension between, on the one hand, giving real meaning and effect to an insured's settlement with a claimant when the insurer has reserved its right to later deny coverage and, on the other, the impulse for the insured to "settle for an inflated amount or capitulate to a frivolous case merely to escape exposure or further annoyance." Id. at 120, 741 P.2d at 253; see also id. at 118, 741 P.2d at 251 (noting that insureds defended under a reservation of rights are in "a precarious position"). After all, the court noted, " nsureds' settlements often are motivated solely by their strongly-felt need for economic survival and the claimant's desire for a quick judgment that will enable him to get after what he perceives as the real business -- collecting from the insurer." Id. at 119, 741 P.2d at 252. And, because the insured "may be persuaded to enter into almost any type of agreement or stipulation by which the claimant hopes to bind the insurer by judgment and findings of fact," such agreements pose "a great danger to the insurer." Id. at 119-20, 741 P.2d at 252- 53; see also Parking Concepts, Inc. v. Tenney, 207 Ariz. 19, 14, 83 P.3d 19, 22 (2004) (" either party to the standard Morris agreement has any compelling reason to act reasonably in setting the settlement amount."); Waddell v. Titan Ins. Co., 207 Ariz. 529, 19, 88 P.3d 1141, 1146 (App. 2004).
To alleviate this tension, the court in Morris opted for a "better result" that "permit the insurer to raise the coverage defense, and also permit an insured to protect himself from the risk of noncoverage or excess judgment, while at the same time protecting the insurer from unreasonable agreements between the claimant and the insured." Morris, 154 Ariz. at 119, 741 P.2d at 252. In addressing the question of "whether USAA is bound by the settlement agreement or whether it may 'relitigate' any aspect of the original tort claim," the court in Morris concluded that "neither the fact nor amount of liability to the claimant is binding on the insurer unless the insured or claimant can show that the settlement was reasonable and prudent." Id. at 120, 741 P.2d at 253.
In reaching that conclusion, the court made several statements on which AAU heavily relies to support its position. For example, the court stated as a fundamental proposition that " n insured's settlement agreement should not be used to obtain coverage that the insured did not purchase." Id. More particularly, the court noted that, notwithstanding any unapproved settlement between the claimant and the insured, "the indemnitor may contest its liability." Id. Similarly, quoting from Cay Divers, Inc. v. Raven, 812 F.2d 866, 870 (3d Cir. 1987), the court in Morris recognized that an insured's settlement "does 'nothing to compromise [an insurer's] reserved right to contest coverage.'" 154 Ariz. at 119, 741 P.2d at 252 (alteration in Morris ). The court also remarked that "any stipulation of facts [in the underlying tort action] essential to establishing coverage would be worth
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