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Associated Aviation Underwriters v. Wood9/29/2004
e served by allowing insureds to enter into Damron agreements because claimants would never settle with insureds if they never could receive any benefit.
Id. at 120, 741 P.2d at 253. Similarly, AAU's "absolute position" that it should have been allowed to fully litigate liability and damage issues in the phase I coverage trial in this DRA is foreclosed by Morris.
In addition, the procedural posture in Morris not only distinguishes that case from this one but also lends much needed context to the court's discussion. The insureds in Morris "stipulated that their actions during the shooting incident were either negligent or intentional," thereby leaving "the coverage issue... clearly unresolved." Id. But here, the "coverage" issues AAU seeks to litigate hinge on facts and law bearing directly on the insureds' liability, and those issues were completely subsumed in the consent judgment (albeit not actually litigated or determined by a trier of fact) in the underlying tort actions.
Moreover, the unresolved coverage issue in Morris related to the nature or characterization of the insureds' conduct and not to other issues of fault, causation, or damages. Although Intervenors' complaints in Gerardo and Valenzuela generally alleged, inter alia, intentional misconduct, Intervenors did not pursue that claim. Nor does AAU now contend that the intentional act exclusion in its policies plays any significant role in the coverage defense it seeks to litigate here. Indeed, the trial court (J. Velasco) found no evidence to suggest any intentional wrongdoing on TAA/City's part, and AAU does not challenge that finding.
In sum, we reject AAU's Morris -based argument that Intervenors were required to prove at the phase I trial on coverage any actionable fault on TAA/City's part that caused injury to the Intervenors and that, absent such proof, AAU is entitled to a declaration of "no coverage" under its policies. Rather, we agree with Intervenors that when an insured who is being defended under a reservation of rights enters into a Morris agreement and stipulates to an adverse judgment, the insurer may not litigate in the coverage phase of a DRA "the same legal and factual issues" that underlie the judgment. Contrary to AAU's argument, Morris does not authorize, but rather essentially prohibits, an insurer's attempt in that context to litigate tort liability and damage issues in the guise of a coverage defense. Accordingly, the trial court did not err in rejecting AAU's evidence and arguments to that effect in the phase I trial.
B. The Smith Decision
Our conclusions are consistent with this court's previous opinion in this case. In Smith, we recognized that when an insured enters into a Morris agreement, the insurer "retain the right to contest coverage and to further contest whether the settlement was reasonable and prudent." 180 Ariz. at 166, 882 P.2d at 1292. But we rejected the insurers' position, taken again by AAU here, "that no coverage existed because TAA and the City were not liable for the actions of their lessees in disposing of TCE." Id. The issue of "whether TAA and the City were 'legally obligated'" under the terms of the policies, we stated, was "a liability question, not a coverage question." Id.
Ultimately, this court held in Smith that "'liability' under Morris includes not only how the trier will view the facts but also how the court will apply the law." Id. Consequently, we stated, an insurer whose insured has entered into a Morris agreement "is foreclosed... [from] claim that no liability existed in the original case and thus no coverage exists in this ." Id. We noted, however, that in any future hearing on the reaso
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