Free Order on Motion for Summary Judgment - District Court of Arizona - Arizona

1 2 3 4 5 6 7 8 9 10 11 12 13 14 Defendants. 15 16 17 18 19 20 21 22 23 24 25 26 27 28 vs. State and County Mutual Fire Insurance Company, et al., Patricia Hernandez, Plaintiff, ) ) ) ) ) ) ) ) ) ) ) IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

No. CV-04-0223-PHX-PGR ORDER and OPINION

Pending before the Court is Defendants' Motion for Summary Judgment (doc. #37), wherein it seeks judgment on the third-party bad faith claim raised in the plaintiff's Second Amended Complaint. Having considered the parties' memoranda in light of the evidence of record, the Court finds that the motion should be denied. Background The following relevant facts, briefly stated, are ones that the Court believes are undisputed for purposes of the summary judgment motion. The plaintiff was seriously injured in an automobile accident on April 11, 2001 that was caused by the negligence of David Mason; the plaintiff filed a lawsuit against Mason and his parents in state court in July 2001. At the time of the accident, Mason was primarily insured, via his parents who owned the vehicle Mason was driving at the time of the accident, through a policy from Hartford Insurance Company (Hartford) and secondarily insured through his own

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policy from defendant Southern United Fire Insurance Company (Southern United).1 Hartford's policy had a limit of $100,000 per accident and Southern United's policy had limit of $20,000 per person and $40,000 per accident. By September 2001, Hartford's adjuster, who had early on recognized that the plaintiff's damages exceeded the limits of Hartford's policy, had settled the minor claims of two other persons injured in the accident for $1,200, leaving $98,800 of Hartford's policy limits to be divided between the plaintiff and the one other remaining person injured in the accident. That apportionment was settled in early December 2001 through mediation, with the plaintiff being awarded $98,050. Hartford sent its check and the settlement documents to the plaintiff's attorney on December 21, 2001. The settlement agreement between Hartford and the plaintiff released Mason's parents, the named insureds on the Hartford policy, from any further liability but expressly reserved the right to proceed against Mason for the plaintiff's damages above the Hartford payment. Hartford continued to represent Mason after the settlement was executed. Southern United assigned Lisa Harrell, then a claim adjuster trainee, to the plaintiff's claim in early May 2001. Harrell received a packet from the plaintiff's attorney on May 4, 2001 that included a description of the accident, photographs of the plaintiff's injuries and of the damage to her vehicle, and a request for a copy of the declaration page showing Southern United's policy limits. Harrell immediately refused to divulge the policy limits. The plaintiff's attorney sent Harrell another packet on July 18, 2001 that included copies of the plaintiff's medical bills totaling over $130,000 and another request for information about Southern United's policy limits. Harrell again immediately refused to provide the policy limits information.

1

Although the Court recognizes that the defendants, in their memoranda, refer to Mason's secondary insurance policy as having been issued by defendant State and County Mutual Fire Insurance Company and administered by Southern United, the Court refers to the secondary insurer as Southern United since it is undisputed that while the secondary policy was issued under State and County's name, it was in reality Southern United's policy.

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The plaintiff's attorney sent Harrell the plaintiff's first full demand package on October 1, 2001 and supplemented it the next day. He enclosed the plaintiff's medical records and documentation and demanded that Southern United pay the plaintiff its single individual policy limit of $20,000. He included a letter from Hartford's attorney confirming that Hartford had settled with two of the minor claimants, had tendered the remaining policy amount of $98,800, and had proposed that a mediation settle the apportionment of that amount between the plaintiff and the remaining claimant. Harrell immediately rejected the settlement offer, stating that Southern United could not settle any demands until Hartford had paid out its policy limits. Harrell knew by early October 2001 that Southern United was going to have to pay on the plaintiff's claim since the plaintiff's medical bills alone exceeded the combined policy limits of both policies and Hartford had agreed to pay out its policy limits, and that although she then knew that she would more than likely be offering policy limits to the plaintiff, she has no recollection of ever indicating to the plaintiff's attorney that Southern United would pay anything to the plaintiff. The plaintiff's attorney both mailed and faxed a final demand letter to Harrell on December 18, 2001 that gave Southern United until December 24, 2001 in which to tender its policy limits to the plaintiff in exchange for a full release of her claim against Mason. The plaintiff's attorney stated in the letter that any later tender of the policy limits would be categorically rejected; he also informed Harrell that Hartford had agreed to pay $98,050 to the plaintiff and that he expected to receive Hartford's check in the near future. Southern United did not timely respond to the final demand letter because no one with any responsibility for adjusting the plaintiff's claim was aware of it. While a copy of the letter was placed in the plaintiff's claim file, presumably by a clerical assistant, Harrell never saw either copy of the letter until months later because she was ill for a good portion of December, no one was routinely responsible for her claim files if she was out sick, and she did not review the claim file upon her return to the office since it was not her habit to go back and read old letters in her files. Harrell has no -3Filed 12/06/2005

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recollection of ever informing Mason about the plaintiff's settlement offer. Harrell was telephonically informed by Hartford's adjuster on February 4, 2002 that Hartford had settled the case with the plaintiff and had paid her its policy limits. Harrell did not seek the authority to settle the plaintiff's claim for Southern United's policy limits until March 28, 2002, which is when she received written confirmation from Hartford's attorney that Hartford had paid out its policy limits to the plaintiff. Southern United transferred the plaintiff's claim file from Harrell to its litigation department and adjuster Pamela Gilbert on April 26, 2002. Gilbert, having determined from reviewing the claims file that the plaintiff's claim was worth between $550,000 and $750,000 and having quickly concluded that Southern United had to offer its policy limits to the plaintiff, made a policy limits offer to the plaintiff's counsel in a letter dated April 29, 2002. The plaintiff's counsel immediately rejected the offer as being outrageously late. Southern United then hired an attorney to represent its interests and to defend Mason if necessary. Settlement discussions between the plaintiff and Mason, who was still being defended by Hartford, continued through the summer of 2002. Southern United's attorney, who was being kept abreast of the negotiations, was provided a draft copy of the proposed Morris agreement between the plaintiff and Mason by Hartford's attorney in July 2002. The Morris agreement, executed on September 4, 2002, provided that the plaintiff would not attempt to collect any judgment against Mason in exchange for Mason assigning to the plaintiff his rights against Southern United stemming from its bad faith or other misconduct; it also provided that the amount of damages to be awarded to the plaintiff would be determined through binding arbitration and that a stipulated non-appealable judgment would then be entered. Hartford's attorney sent Southern United's attorney a copy of the executed Morris agreement on October 2, 2002 and formally tendered Mason's defense to Southern United at that time. Southern United never accepted the tender and Hartford continued to represent Mason through the arbitration hearing, which was held on December 12, 2002. As a result of the -4Filed 12/06/2005

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arbitration hearing, in which Southern United's attorney refused to participate because he had not been authorized by Southern United to do so, the plaintiff was awarded $1.5 million in damages. The state court entered a stipulated judgment for that amount on January 16, 2003. Southern United sent the plaintiff's counsel a check for $20,041 on January 17, 2003; the check included on its face a release of all of the plaintiff's claims against Southern United. The plaintiff never cashed the check. Discussion The plaintiff alleges in her Second Amended Complaint that the defendants are tortiously liable for the failure of Southern United to timely accept the plaintiff's offers to settle her lawsuit against Mason for the limits of its policy.2 The Arizona Supreme Court has stated that [i]t is settled law in Arizona, based on a covenant of good faith and fair dealing, that an insurance company owes its insured a duty of good faith in deciding whether to accept or reject settlement offers. In the third party context, this duty of good faith requires an insurer to give equal consideration to the protection of the insured's as well as its own interests. If an insurance company fails to settle, and does so in bad faith, it is liable to the insured for the full amount of the judgment. Hartford Accident & Indemnity Co. v. Aetna Casualty & Surety Co., 164 Ariz. 286, 289, 792 P.2d 749, 752 (1990) (Internal citations and footnote omitted). The Arizona Supreme Court recognizes that an insurer's failure to give equal consideration to the insured's interest when considering a settlement offer is one of the circumstances in which the insured may enter into a Morris agreement. Safeway Insurance Co. v. Guerro, 210 Ariz. 5, 106 P.3d 1020, 1024 (2005). A. Viability of Bad Faith Claim The defendants argue that they have no bad faith liability as a matter of law in part because Southern United's belated tender of its policy limits was due to mistake, negligence or inadvertence. As the defendants' correctly note, the Arizona Court of
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Although the bad faith alleged by the plaintiff is Southern United's failure to accept the plaintiff's two policy limits demands, the focus of the summary judgment motion is on the final one made on December 18, 2001.

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Appeals has stated, in a third-party bad faith case involving a Morris agreement stemming from the insurer's delay in responding to claimant's time-limited settlement demand letter due to misplacing it, that "[m]ere mistake and inadvertence are not sufficient to establish a claim for bad faith." Miel v. State Farm Mutual Automobile Insurance Co., 185 Ariz. 104, 110, 912 P.2d 1333, 1339 (App. 1995) (Court also recognized that while a claimant may set a short time limit for accepting a settlement offer, "an insurer that allows such a time limit to expire does not necessarily act in bad faith."); see also, Rawlings v. Apodaca, 151 Ariz. 149, 157, 726 P.2d 565, 573 (1986) (Court noted that "[a]s long as [the insurer] acts honestly, on adequate information and does not place paramount importance on its own interests, it should not be held liable because of a good faith mistake in performance or judgment.") The defendants contend that it is undisputed that Southern United did not timely respond to the plaintiff's December 2001 final demand letter only because its adjuster, Lisa Harrell, was out of the office due to illness. Even assuming that Harrell was ill at the critical time3, the Court concurs with the plaintiff that a jury issue is presented as to whether Southern United's mistake or inadvertence was in good faith. The Court concludes that a jury could reasonably conclude from the evidence of record, when that evidence and all reasonable inferences arising from it are viewed in the plaintiff's favor, that Southern United's failure to keep abreast of the plaintiff's claim during the critical period of December 2001 was not a good faith mistake. First, there is evidence that the final demand letter was timely received by Southern United and placed in the plaintiff's claim file by a clerk without being reviewed by anyone with authority over the plaintiff's claim, that it was in effect the custom at Southern United that no one normally took responsibility for Harrell's case files if she was out of the office, and that December 2001 was a time period during
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As the plaintiff correctly points out, there is no evidence in the record establishing which specific days Harrell was absent from her office in December 2001.

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which the plaintiff's file should have been closely monitored since Harrell then knew that Southern United's excess policy would come into play because Hartford was in the process of finalizing its policy limits settlement with the plaintiff which was undisputedly insufficient to satisfy the plaintiff's damages. Second, the plaintiff has submitted an affidavit from her insurance practices expert, Thomas Carter, whose expertise in the field is not challenged by Southern United, wherein he opined in part that Southern United's claim that the final demand letter was ignored as a result of mere mistake and inadvertence is not supportable under applicable insurance industry standards. See In re Worlds of Wonder Securities Litigation, 35 F.3d 1407, 1425 (9th Cir. 1994), cert. denied, 516 U.S. 909 (1995) ("As a general rule, summary judgment is inappropriate where an expert's testimony supports the non-moving party's case."); accord, Thomas v. Newton Internat'l Enterprises, 42 F.3d 1266, 1270 (9th Cir. 1994) ("Expert opinion evidence is itself sufficient to create a genuine issue of disputed fact sufficient to defeat a summary judgment motion.") See also, Rawlings v. Apodaca, 151 Ariz. at 158, 726 P.2d at 574 ("Although compliance with industry custom is not an absolute defense, failure to comply may be relevant to the question of an insurer's alleged bad faith.") The defendants also argue that there is no legal basis for the bad faith claim because Southern United had no legal obligation in December 2001 to immediately respond to and accept the plaintiff's final settlement offer. The defendants' contention is that Southern United's acceptance of the policy limits settlement offer on April 29, 2002 was timely because its obligation to consider the settlement offer did not arise as a matter of law until it was provided with confirmation that Hartford had actually paid its limits, which the defendants claim was not received until March 28, 2002 pursuant to a letter from Hartford's counsel; they argue that in December 2001 Southern United had only been advised by the plaintiff's counsel that Hartford was going to pay its policy limits but had not yet received any such confirmation from Hartford. In support of this position, the defendants cite to Liberty Mutual Fire Insurance Co. v. Mandile, 192 Ariz. 216, 222, 963 P.2d 295, 301 (App. 1997), wherein in the court, in a case involving a -7Filed 12/06/2005

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declaratory judgment action by an insurer seeking a ruling that it had no duty to pay underinsured motorist benefits because the insureds did not give it timely notice of their claim, stated that "UIM coverage is similar to excess coverage in that both are triggered only upon the payment of another's coverage limits." Even if the prerequisite for excess insurance liability is "payment" of the primary policy limits, the Court concludes that the defendants are not entitled to summary judgment as to this issue when the evidence and reasonable inferences from that evidence are viewed in the plaintiff's favor because it is undisputed that Hartford paid the plaintiff on December 21, 2001, which was prior to the plaintiff's settlement demand deadline to Southern United of December 24, 2001 and four months before Southern United first accepted the plaintiff's settlement offer. Moreover, if confirmation of Hartford's payment is also a prerequisite to Southern United's duty to fairly consider the plaintiff's settlement offer, it is undisputed that Hartford's adjuster personally informed Harrell on February 4, 2002 that Hartford had paid the plaintiff, which was almost three months prior to the time Southern United first agreed to pay its policy limits to the plaintiff.4 Further, it is not clear to the Court that actual "payment" of the primary policy limits is the factor under Arizona law that triggers the duties owed by the excess insurer. In a case not cited by either side, Twin City Fire Insurance Co. v. Burke, 204 Ariz. 251, 256, 63 P.3d 282, 287 (2003), a bad faith action brought by an excess insurer against the primary insurer for its failure to settle within the limits of the primary policy, the Arizona Supreme Court stated that "[u]ntil a primary insurer offers its policy limit, the excess insurer does not have a duty to evaluate a settlement offer, to participate in the defense, or to act at all." (Emphasis added). If merely "offering" is the test then Southern United had the legal obligation to properly consider the plaintiff's final
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The Court rejects the defendants' unsupported contention that the triggering date should be Southern United's receipt on March 28, 2002 of the payment confirmation letter from Hartford's counsel.

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settlement offer when it was made because it is undisputed that Hartford had offered its remaining policy limits to the plaintiff, and that it and the plaintiff had agreed on exactly how much Hartford would pay the plaintiff, by early December 2001, which was prior to the plaintiff's final demand letter to Southern United; it is also undisputed that Southern United was informed of that agreement in the plaintiff's final demand letter. Also militating against entering summary judgment for Southern United on this issue is the fact that Thomas Carter, the plaintiff's expert, has opined in his affidavit that Southern United's delay in accepting the plaintiff's final settlement offer breached its duty to Mason. The defendants further argue that the stipulated judgment stemming from the Morris agreement is not enforceable, and cannot be the basis for imposing any bad faith liability, because it contravenes the policy reasons underlying Morris agreements inasmuch as Mason was protected at all times prior to the execution of the agreement given that he was being defended by Hartford, Southern United had not denied coverage, and Southern United had tendered its full policy limits months before the agreement was executed. The defendants' contention is that an insured who is being defended by a primary carrier, and whose sole complaint is the excess insurer's alleged failure to settle, should not be allowed for public policy reasons to stipulate to judgment and assign a bad faith claim for the excess verdict. Noting that no Arizona cases have addressed this question, the defendants rely solely on California law to support their contention. The Court need not dwell on the California case law cited by the defendants because the Court is unpersuaded that Arizona law mandates a finding that the Morris agreement at issue is unenforceable as violative of Arizona public policy. First, the fact that the Morris agreement was entered into while Mason was being defended by Hartford cannot itself make Morris agreement unenforceable as a matter of law. Under Arizona law, the insured, even if defended, need not wait until an excess judgment is entered against him as a result of the insurer's failure to reasonably settle the action in -9Filed 12/06/2005

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order to enter into a reasonable settlement agreement. Arizona Property and Casualty Insurance Guaranty Fund v. Helme, 153 Ariz. 129,138, 735 P.2d 451, 460 (1987) ("We hold ... that once the insurer commits an anticipatory breach of its policy obligations, the insured need not wait for the sword to fall and financial disaster to overtake. The insurer's breach ... permits [the insured] to take reasonable steps to save himself. Among those steps is making a reasonable settlement with the claimant.") Second, the Court cannot agree with Southern Pacific's contention that Mason was at all times fully protected prior to the execution of the Morris agreement. Hartford's defense did not protect Mason from a verdict in excess of Hartford's policy limits since it is undisputed that by the fall of 2001 it was clear to all that Mason was responsible for damages to the plaintiff that far exceeded the combined limits of both Hartford's policy and Southern United's policy. It is also undisputed that Southern United did not accept Hartford's tender of Mason's defense after Hartford settled with the plaintiff and that Southern United failed to participate in the arbitration that resulted in the plaintiff be awarded $1.5 million in damages from Mason, Mason's entry into the Morris agreement was not violative of Arizona public policy because Mason was clearly going to be harmed by Southern United's failure to timely settle with the plaintiff for its policy limits because there was simply no scenario factually possible after the fall of 2001 that could have resulted in a rational verdict for less than the limits of Southern United's policy. Third, to the extent that the defendants are arguing that they are not automatically liable for the $1.5 million in damages awarded in the stipulated judgment given the circumstances of this case, they are correct since Arizona law makes it clear that no presumption of reasonableness applies to a settlement amount reflected in a Damron/Morris agreement. Himes v. Safeway Insurance Co., 205 Ariz. 31, 37, 66 P.3d 74, 80 (2003). That legal principle, however, does not entitle the defendants to a summary judgment in their favor on the bad faith claim at this time as a matter of law.

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B. Appropriate Defendants The defendants also argue that only State and County Mutual Fire Insurance Co. and Southern United are proper defendants in this action. While the defendants may be found at trial to be correct as to this issue, given that Arizona law recognizes that a subsidiary is generally a distinct and separate entity from a parent corporation, the Court cannot conclude as a matter of law at this time based upon the limited factual record before it that Southern United General Agency of Texas, Inc., Southern United Holdings, Inc., and Kingsway America, Inc. are not proper defendants in this action. As the moving parties without the ultimate burden of persuasion at trial, the defendants have both an initial burden of production and the ultimate burden of persuading the Court that there is no genuine issue of material fact regarding their contention as to which defendants are proper defendants. See Nissan Fire & Marine Ins. Co., Ltd. v. Fritz Companies, Inc.. 210 F.3d 1099, 1102 (9th Cir. 2000). Summary judgment is not appropriate as to this issue because the Court does not believe that the defendants have met that their initial burden of production. C. Punitive Damages The defendants further argue that they are entitled to summary judgment on the plaintiff's demand for punitive damages because the plaintiff has failed to produce clear and convincing evidence of the factors required for the imposition of such damages. The Court declines to resolve this issue at this time as it is the Court's policy to resolve the issue of the propriety of punitive damages at trial through either the settling of jury instructions or through ruling on a motion for a judgment as a matter of law pursuant to Fed.R.Civ.P. 50. Therefore, IT IS ORDERED that Defendants' Motion for Summary Judgment (doc. #37) is denied. IT IS FURTHER ORDERED that the parties shall file their Joint Pretrial

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Statement and all motions in limine no later than January 30, 2006.5 IT IS FURTHER ORDERED that the Pretrial Conference shall be held on Monday, February 27, 2006 at 3:00 p.m. in Courtroom 601.6 DATED this 5th day of December, 2005.

5

The parties are directed to review paragraphs 6 and 7 of the Scheduling Order (doc. #15. The Court hereby vacates the requirement of paragraph 5 of the Scheduling Order relating to the submission of a joint settlement status letter.
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The parties are directed to review paragraph 8 and 9 of the Scheduling Order.

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