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Rogan v. Auto-Owners Insurance Co.8/13/1991
is liable on any judgment entered against its insured. State Farm Mut. Auto. Ins. Co. v. Paynter, 122 Ariz. 198, 204, 593 P.2d 948, 954 (App.1979); Samson v. Transamerica Ins. Co., 30 Cal.3d 220, 237, 178 Cal.Rptr. 343, 353, 636 P.2d 32, 42 (1981). However, the insurer's liability is not unlimited. Absent the refusal of a reasonable settlement offer, an insurer is not liable for the amount of a judgment that exceeds the policy limits. Id. at 205, 593 P.2d at 955; State Farm Auto. Ins. Co. v. Civil Service Emp. Ins. Co., 19 Ariz. App. 594, 602-03, 509 P.2d 725, 733-34 (1973). Accord Employers Nat'l Ins. Corp. v. Zurich American Ins., 792 F.2d 517 (5th Cir.1986) (applying Texas law); George R. Winchell, Inc. v. Norris, 6 Kan.App.2d 725, 633 P.2d 1174, 1178 (1981) (absent a settlement offer, the existence of good or bad faith is irrelevant). See generally W. Shernoff, S. Gage and H. Levine, Insurance Bad Faith Litigation ยง 3.05(1) (1989).
In Paynter, we held that a judgment entered against an insured was enforceable against the insurer, "but only to the extent of its policy limits." 122 Ariz. at 199, 593 P.2d at 949. The insured had notified its insurer, State Farm, of an accident in which the insured was involved. State Farm responded that the insurance policy did not provide coverage. Thereafter, the injured party filed a personal injury action against the insured. The insured's counsel mailed a copy of the complaint to State Farm and requested that it defend the action pursuant to the terms of the insurance
policy. State Farm denied coverage and refused to participate in the proceedings.
The insured and the injured party then entered into a "Damron Agreement" in which the insured assigned its rights under the policy to the injured party and the injured party agreed not to execute against the insured on any judgment entered in the tort action. The insured admitted liability and a brief trial was held on the issue of damages. The trial court entered judgment against the insured for $143,956.81.
The injured party then filed suit against State Farm to recover the judgment. One of the defenses raised by State Farm was that its liability should not exceed the $50,000.00 policy limit. The trial court disagreed and entered judgment against State Farm for the full amount of the judgment against the insured. On appeal, we modified the judgment to $50,000.00. Id. at 205, 593 P.2d at 955. We said that "the decisive factor in extending liability beyond the policy limit was not the refusal to defend, but the refusal to accept an offer of settlement within the policy limits." Id. Because State Farm had never refused a settlement offer, its liability for refusing to defend was "confined to the limits of the policy." Id.
In reaching this conclusion, we relied, in part, upon the opinion of the California Supreme Court in Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 328 P.2d 198 (1958). There, the insured injured two pedestrians in a crosswalk. The insured's policy contained liability limits of $10,000.00 for each person and $20,000.00 for each accident. The insurer declined coverage and refused to defend a lawsuit filed by the injured parties. On the second day of trial, the insured informed the insurer that the injured parties would settle their claims for $4,000.00. The insurer refused to settle and judgment was rendered against the insured for $26,250.00.
After obtaining an assignment of all rights the insured had against the insure
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