Arizona Court Restricts Use of Morris Agreements
Under Arizona law, an insured that is defended by an insurance company under a "reservation of rights," may enter into a confessed judgment with the claimant and potentially not violate the insurance policy's cooperation clause. Such agreements, referred to as Morris agreements, include (in addition to a confessed judgment) the insured assigning its policy rights to the claimant in exchange for a covenant to not execute the judgment against the insured's personal assets. Arizona Courts have recognized the right of an insured to enter into such agreements when a carrier states that it may not indemnify the insured for all or a part of the eventual judgment. United Services Automobile Ass'n v. Morris,154 Ariz. 113, 741 P.2d 246 (1987).
In Leflet v. Redwood Fire & Casualty Ins. Co., ___P.3d___, 2011 WL 204402 (Ariz.App. Div.1, January 20, 2011), the Arizona Court of Appeals held that Morris did not extend to agreements that included one insurance company "setting up" other carriers who are allegedly not participating in a mutual insured's defense or indemnity. Leflet was a construction defect case. The putative insured, Hancock Communities, was defended by its own carrier, and sought additional insured coverage from several other carriers. A dispute arose over defense and indemnity allocations between Hancock's own primary carrier, and the additional insurers, referred to in the agreement as the "Non-Participating Insurers." To resolve the case, Hancock's carrier paid a fraction of its policy limit, and entered into an $8.4 million Morris agreement along with its insured and the claimant.
While the court reaffirmed the rule that a carrier must first have notice of a Morris agreement to be bound by its terms, the court clarified that notice means actual and meaningful notice, and not just constructive notice that the parties are contemplating a Morris agreement. Further, notice of the Morris agreement must include terms sufficient to cause the agreement, if entered into, to be binding and enforceable. Notice of a potential Morris agreement which fails to include terms necessary to make it binding upon the parties, is not proper notice of a Morris agreement.
More important, however, was the court's holding that a Morris agreement which benefits one carrier against another is not a Morris agreement at all. The rationale behind the Morris case was not to allow one carrier to avoid paying less than its limits and subject another carrier to a confessed judgment. The policy behind Morris was to remove the insured from the potentially crushing exposure of personal liability, and transfer the risk of coverage and collection of the judgment upon the claimant. As the court noted "an insurer that reserves its rights may not employ Morris to reduce its liability below policy limits, and an insured that facilitates such an effort breaches its duty to cooperate with its other insurers." This is a significant case in that it restricts the application of Morris to only those circumstances contemplated by the court when the Morris case was decided.
Kurt M. Zitzer and John C. Hendricks represented Transportation Insurance Company and Transcontinental Insurance Company at the trial court and were successful in winning summary judgment. Thomas H. Crouch successfully represented the same clients on appeal, and argued the case on behalf of the insurers.
If you would like more information about this case, or related issues, please contact Kurt Zitzer, Tom Crouch, or John Hendricks.
