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Associated Aviation Underwriters v. Wood9/29/2004
less." Id. at 120, 741 P.2d at 253. Applying those principles to the case at hand, the court stated that, "despite the insured's settlement stipulations, the coverage issue is clearly unresolved and USAA may litigate it on remand." Id. Accordingly, the court concluded, "the insurer [on remand] is not bound by any factual stipulations and... is free to litigate the facts of the coverage defense." Id. at 121, 741 P.2d at 254.
Based primarily on those statements in Morris, AAU essentially argues it may fully litigate all liability and damage issues in the coverage phase of this DRA, irrespective of what occurred in the Gerardo or Valenzuela cases. Thus, AAU contends, neither the Morris agreement nor the consent judgment precludes it from avoiding coverage by challenging TAA/City's fault, causation, and Intervenors' alleged damages under the basic insuring provision of its policies. See 8, supra. Stated differently, AAU essentially argues that in this DRA Intervenors were required, and failed, to prove liability against TAA/City under landlord/tenant law, a causal relationship between TCE and Intervenors' alleged injuries, and each Intervenors' damages in order to establish coverage under AAU's policies.
Based on our reading of Morris, we reject AAU's argument. Viewed in context, the statements in Morris on which AAU relies, see 31, supra, are much more limited than AAU asserts and do not support its position. Significantly, the only issue on which USAA's coverage defense in Morris was based was whether the insureds had acted intentionally so as to preclude coverage under the policy's intentional act exclusion. See id. at 117-18, 741 P.2d at 250-51. USAA had "unequivocally reserved its right to assert the intentional act exclusion as to both [insureds]." Id. at 117, 741 P.2d at 250. Thus, the "potential coverage defense" or "coverage issue" in Morris, id. at 118, 120, 741 P.2d at 251, 253, related solely to that exclusion. Unlike AAU, USAA did not seek to challenge in the coverage case the fact of its insureds' liability. That is to say, the insureds ' liability in Morris could have been premised on either negligent or intentional conduct, but only the former would fall within the policy's coverage. Thus, USAA's coverage defense neither encompassed nor equated to a potential liability defense.
In short, the court in Morris permitted USAA to litigate the "coverage issue" on remand, limiting the scope of that litigation to the facts bearing on the intentional act exclusion. See id. at 118, 741 P.2d at 251 (noting USAA's "chance at escaping the obligation to indemnify" by "relitigat the intentional act exclusion coverage issue in a declaratory judgment action such as this"). Despite the arguably broad, unqualified language in Morris, the court did not hold that, as part of its coverage defense, USAA could litigate on remand issues having nothing to do with that exclusion, but rather, bearing solely on the insureds' fault, causation, or the plaintiff's damages. See id. (differentiating "the insured's liability" from "the coverage defense" in rejecting an approach that would permit "the insurer a double bite at escaping liability"). Indeed, the court expressly rejected USAA's position on that point:
USAA, however, wants to litigate more than just the coverage issue. Assuming that there was coverage and that [the insureds] did not breach the duty to cooperate, USAA argued to the trial court that the settlement agreement should not be binding on USAA because it would have won the liability case at trial. USAA urged an absolute right to relitigate all aspects of the liability case, including liability and amount of damages. USAA's absolute position would destroy the purpos
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