Free Order - District Court of Arizona - Arizona

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WO

IN THE UNITED S TATES DIS TRICT COURT FOR THE DIS TRICT OF ARIZONA

) ) Plaintiff, ) ) v. ) ) G olden Eagle Insurance Corporation;) Does 1-100; XYZ Corporations 1-100;) Black and White Business Entities 1-100,) ) Defendants. ) ) SWA Painting, Inc.,

CV-03-2364-PHX-DGC

ORDER

The Court held an evidentiary hearing on October 26, 2005. were presented by both sides. A. RULINGS AT HEARING.

Witnesses and exhibits

At the end of the hearing, and for t he reasons stated on the record, the Court ruled as follows: 1. A Damron agreement was entered into between SWA Painting, Inc. and CM S in the Spring of 2002. 2. CM S's tender of a defense t o Golden Eagle in the Fall of 2002 did not repudiate, rescind, or modify the Damron agreement. 3. Golden Eagle did not establish by clear and convincing evidence that the Damron agreement was the result of fraud or collusion. 4. Because a valid and binding Damron agreement has been entered into in t his case, Golden Eagle is not entitled to a hearing on the reasonableness of the

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$500,000 stipulated judgment obtained by SWA . v. Tenney, 83 P.3d 19, ¶ 15 n.3 (Ariz. 2004).

See Parking Concepts, Inc.

After hearing G olden Eagle's proffer of evidence that would be presented to the Court on the question of "understandable mistake," see Dunmore v. United States, 358 F.3d 1107, 1112 (9th Cir. 2004), the Court concluded that the bankruptcy trustee's ratificat ion of SWA's action in this case resolves potential standing problems rais ed by Defendant. See Fed. R. Civ. P. 17(a).

GOLDEN EAGLE'S COVERAGE ARGUMENT. On M arch 18, 2005, the Court held a hearing on the parties' cross-motions for

summary judgment.

For reasons stated in detail on the record at the hearing, the Court p rovided coverage for SWA's claim.

found that Golden Eagle's insurance policy

Specifically , the Court held that SWA had established the existence of "property damage" within the meaning of Golden Eagle's p olicy . T he Court was unable, on the then-existing

record, to determine what portions of SWA's claim were covered and w het her inquiry into such coverage issues was even appropriate. The parties have now briefed t he coverage issue extensively. considered the briefing as well as the evidence p res ent ed at The Court has the hearing on

October 26, 2005. Damron agreement.

A s not ed above, SWA and CM S entered into a valid and binding This agreement was made at a time when Golden Eagle had declined

to indemnify and defend CM S with respect t o claims made by SWA. "[I]n cases where the insurer has refused to defend and the parties enter int o a Damron agreement, the insurer has no right to contest the stipulated damages on the basis of reasonableness, but rather may contest the settlement only for fraud or collusion." Tenney, 83 F.3d at ¶ 15 n.3; s ee also Himes v. Safeway Ins. Co., 66 P.3d 74, ¶ 1 n.2 (Ariz. Ct. App. 2003). Golden Eagle argues that it may parse the $500,000 stipulated judgment in this case, showing which portions are covered and which portions are not, and even arguing as to t he s ufficiency of the evidence to establish damages where portions are covered. But such a procedure would be tantamount to a hearing on the reasonableness of the stip ulat ed
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judgment.

Because such an inquiry is not permitted for this Damron agreement, and

because the Court has already concluded t hat t he Golden Eagle policy provided coverage for this claim, the Court concludes that further inquiry into t he coverage issue is not appropriate. Even if the Court were to conduct s uch an inquiry, however, it likely would conclude that the entire $500,000 judgment is covered. The Golden Eagle policy specifically states: " We w ill pay those sums that the insured becomes legally obligated to pay as damages because of . . . `property damage' t o which this insurance applies." Insurance Contract at I(A)(1)(a). Golden Eagle

SWA presented evidence at the hearing on October 26,

2005, that the $500,000 judgment was intended to reflect both out-of-p ocket expenses incurred in correcting the property damage to houses painted with faulty CM S paint, and profit s los t to SWA as a result of the resources diverted to repainting the houses and the substantial loss of rep ut at ion resulting from the faulty paint jobs. SWA principal Stephen Anderson testified credibly that his lost profits resulted directly from the faulty CM S paint applied to the cus t om houses ­ that is, directly from the "property damage" the Court found to exist at t he hearing on M arch 18, 2005. Thus, the lost profits constituted sums that CM S was legally obligated to pay SWA as "damages because of . . . `property damage'" caused by CM S's faulty product, and therefore are covered by the insurance policy Golden Eagle issued to CM S. See Policy § I(A)(1)(a). Golden Eagle argues that the evidence presented by SWA in support of the lost profits amount is defective becaus e it reflects lost gross revenues, not lost profits. The

ques tion to be considered at this point in the litigation, however, is not whether SWA sufficiently proved lost profits, but whether lost profits are covered by the Golden Eagle insurance policy. Once the Court concludes that coverage exists, Golden Eagle is not be

permitted to quibble with the amount of those profit s or t he p roof that established them. A Damron agreement eliminates the insurer's ability to contest matters that might have been challenged had the insurer assumed the defense of it s insured in the underlying litigation. Absent fraud and collusion, t he insurer cannot challenge the reasonableness
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of covered damages s t ip ulated to in a Damron agreement. And as explained on the record at the end of the October 26, 2005 hearing, t he Court found sufficient evidence of lost profits to overcome any suggestion by Golden Eagle that the $500,000 stipulated judgment resulted from fraud or collusion. C. REMAINING LITIGATION S CHEDULE. The Court will hold a hearing at 4:30 p.m. on November 22, 2005 t o s chedule a trial in this matter. The parties are directed to meet and confer about the possibility of settling this case before a jury trial. DATED this 31st day of October, 2005.

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