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Vol. 3, Iss. 16
December 3, 2014

Quihuis v. State Farm Mutual Auto Ins. Co., 334 P.3d 719 (Ariz. 2014)

Insurer Can Litigate Facts Determinative Of Both Liability And Coverage Following A Consent Judgment


The Arizona Supreme Court’s decision in Quihuis v. State Farm answered the following Certified Question from the Ninth Circuit: “Whether a default judgment against insured-defendants that was entered pursuant to a Damron agreement that stipulated facts determinative of both liability and coverage has (1) collateral estoppel effect and precludes litigation of that issue in a subsequent coverage action against the insurer, as held in Associated Aviation Underwriters v. Wood, 98 P.3d 572 (Ariz. Ct. App. 2004), or (2) no preclusive or binding effect, as suggested in United Services Automobile Association v. Morris, 741 P.2d 246 (Ariz.1987).”

Damon, Wood and Morris are unquestionably important coverage decisions concerning Arizona law. In Quihuis the Arizona high court addressed an issue concerning these decisions, especially Damron v. Sledge, 460 P.2d 997 (Ariz. 1969). On its face, Quihuis appears to be the kind of case that I discussed in the top ten selection process as one that does not get selected. It looks like one of those cases that, despite its importance to its home state, is too state-specific to be called upon by other states at a later time. In other words, surely a decision where a Certified Question specifically lists three Arizona cases by name is not a good candidate for having the potential ability to influence other courts nationally. But an examination of Quihuis v. State Farm suggests otherwise. The issue before the court was an important one, is not overflowing with guidance nationally and the court’s rationale for its decision was not all Arizona-specific. For these reasons the significance of Quihuis may not be limited to those who practice in the sweltering desert heat -- but which is, thankfully, dry.

The underlying facts go like this. Norma Bojorquez and Carol Cox were coworkers. Norma purchased Carol’s Jeep, requiring Norma to make eight monthly installments totaling $3,000. Norma gave the keys to her daughter, Iliana. Carol did not transfer the Jeep’s title certificate to Norma as she believed that this would give her collateral until Norma paid off the Jeep.

Carol Cox maintained insurance coverage on the Jeep with State Farm. Iliana got into an accident with Yolanda Quihuis. Quihuis and her husband sued Iliana for negligence and the Coxes for negligent entrustment, based on the Coxes’ still-alleged ownership of the Jeep at the time of the accident. But State Farm refused to defend the Coxes because the Jeep’s ownership had transferred to Norma before the accident.

The Coxes, the Bojorquezes and the Quihuises entered into a “Damron agreement.” “They stipulated that the Coxes owned the Jeep at the time of the accident, that Iliana was incompetent to drive a motor vehicle and her negligence caused the accident, and that the Coxes should have known that Iliana was incompetent to drive and therefore should not have entrusted the Jeep to her. The Coxes and Bojorquezes agreed to damages in the amount of $275,000. The Coxes assigned their rights under the Policy to the Quihuises, who agreed not to execute upon a judgment against the Coxes or the Bojorquezes. The parties also agreed to request a default judgment to terminate the case. On December 31, 2009, the state court entered default judgment in the amount of $350,000—$325,000 for Yolanda's injuries and $25,000 for Robert Quihuis’ loss of consortium.”

To understand Quihuis first requires a quick lesson on Damron and the basis for the so-named agreement that the parties entered into. The Quihuis court conveniently described Damron in the following succinct fashion: “When a liability insurer refuses to defend its insured against a third party’s tort claims . . . the insured and the claimant may enter into a Damron agreement under which the insured stipulates to a judgment, assigns his rights against the insurer to the claimant, and receives in return a covenant from the claimant not to execute against the insured. . . . After obtaining a judgment pursuant to a Damron . . . agreement, the claimant then seeks payment of the judgment by the insurer based on the latter’s indemnity obligation under the policy. The insurer, in turn, generally may contest any duty to indemnify by asserting that its policy did not cover the accident or claim.”

The Quihuises, as the assignee of the Coxes’ policy, filed a declaratory judgment action against State Farm for indemnification and failure to defend. The District Court of Arizona held that the default judgment did not preclude State Farm from litigating the question of whether the Coxes owned the Jeep at the time of the accident. And, on that question, the court held that, as a matter of law, the Bojorquezes owned the Jeep at the time of the accident. So no coverage was owed under the Coxes policy. On appeal, the Ninth Circuit agreed with the District Court that the Coxes did not own the Jeep at the time of the accident. But that was putting the cart ahead of the horse. The Quihuises argued that, under Arizona law, “an insurer may not litigate an issue determinative of coverage if that issue is also determinative of liability and was stipulated to as part of a Damron agreement that resulted in entry of a default judgment.” Here, the ownership of the vehicle was an element of liability in the negligent entrustment tort claim and a requirement of coverage under the State Farm policy.

The case made its way to the Supreme Court of Arizona on the Certified Question set out above, and which now no doubt makes more sense in the context of the facts and explanation of Damron: whether a default judgment against insured-defendants, that was entered pursuant to a Damron agreement, that stipulated facts determinative of both liability and coverage, has collateral estoppel effect and precludes litigation of that issue in a subsequent coverage action against the insurer or no preclusive or binding effect.

The Arizona high court took a long and complex road to reach its decision. A full explanation is well beyond the scope here. In general, the court looked to the Restatement (Second) of Judgments Section 58, addressing issue preclusion, for its decision. Based on Section 58, and Arizona law, the court held as follows: “[W]e reject the Quihuises’ assertion that issue preclusion ‘arises from the entry of a judgment against insureds whether after trial or by default. Section 58(1)(b) does not preclude State Farm from litigating the ownership issue in the DJA. That issue was not ‘determined in the action’ because it was not actually litigated and decided by the trial court that entered the stipulated default judgment. This is not to say that the default judgment has no preclusive effect or is meaningless. It precludes State Farm from denying the ‘existence and extent’ of the Coxes’ liability—established by the default judgment—under § 58(1)(a), and it prevents State Farm from avoiding that result simply by crafting a coverage argument that, in essence, merely disputes the Coxes’ tort liability. The result does not change simply because the issue that determines coverage also happens to be an element of the liability claim against the Coxes.”

[Apologies to the lawyers in the case for skipping all the analysis. The objective here is simply to get to the conclusion and an explanation how the decision could be relevant on a wider scale.]

Despite having a moniker that makes it sound unique, the concept of a Damron agreement is not at all unusual across the country. Lots of states have a procedure where, after a liability insurer disclaims coverage for a tort claim, the insured-tortfeasor and claimant enter into a settlement agreement whereby the insured stipulates to a judgment, assigns his rights against his insurer to the claimant, and, in return, receives a covenant from the claimant not to execute against him. The claimant, as assignee, then seeks coverage for the judgment from the tortfeasor’s insurer.

When insurers disclaim coverage, and it is followed by an assignment and consent judgment, the stakes for them can be high. See Tidyman’s, supra. The agreed-to judgment may be excessive -- but not so much so that it won’t pass a reasonableness test. And, besides paying the judgment and defense costs, a variety of other damages can befell an insurer that has breached the duty to defend. It’s a state specific issue.

When examining whether an insurer has wrongly disclaimed coverage it is not unusual for there to be facts that are determinative of both the coverage question and underlying liability. Indeed, when policyholders are seeking independent counsel they often-times have no problem pointing out examples where the same facts are relevant to both. Quilhuis serves as support for an insurer’s argument – in this high-stakes situation -- that any facts agreed to between the claimant and insured, with or without a stipulated default judgment, are not determinative for purposes of resolving the insurer’s coverage obligation. While Quilhuis has a lot of Arizonaness to it, that the court looked so heavily to a Restatement provision may serve as a basis for other courts to overlook that -- and likewise conclude that the coverage facts remain an open question because they were not determined in the action and therefore were not actually litigated.

 
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