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KnightBrook Insurance Co. v. Payless Car Rental System Inc.

Supreme Court of Arizona

February 8, 2018

KnightBrook Insurance Company; Knight Management Insurance Services LLC, Plaintiffs/Counter-Defendants/Appellees,
v.
Payless Car Rental System Incorporated, Defendant/Appellant, PCR Venture of Phoenix LLC, Defendant/Counter-Claimant/Appellant.

         United States District Court for the District of Arizona No. 2:12-cv-01671-DGC

         Certified Question from the United States Court of Appeals for the Ninth Circuit KnightBrook Ins. Co. v. Payless Car Rental Sys. Inc.; PCR Venture of Phoenix, LLC, 855 F.3d 1072 (9th Cir. 2017)

          Alison R. Christian, Gena L. Sluga (argued), Douglas L. Christian, Stephen M. Dichter, Christian Dichter & Sluga, PC, Phoenix, Attorneys for KnightBrook Insurance Company and Knight Management Insurance Services LLC.

          William J. Maledon, Thomas L. Hudson, Osborn Maledon, P.A., Phoenix; William F. Greaney (argued), Philip J. Levitz, Covington & Burling LLP, Washington, D.C.; and Arron Nesbitt, Wilson Elser, Denver, CO, Attorneys for Payless Car Rental System Incorporated and PCR Venture of Phoenix, LLC.

          JUSTICE LOPEZ authored the opinion of the Court, in which CHIEF JUSTICE BALES, VICE CHIEF JUSTICE PELANDER, and JUSTICES BRUTINEL, TIMMER, BOLICK, and GOULD joined.

          OPINION

          LOPEZ JUSTICE.

         ¶1 The United States Court of Appeals for the Ninth Circuit certified the following questions for our review: (1) whether Arizona equitable indemnity law incorporates the Restatement (First) of Restitution § 78 (Am. Law Inst. 1937) (hereinafter "First Restatement") and, if so, (2) whether § 78 requires that the indemnity plaintiff and indemnity defendant's liability be coextensive as to the underlying plaintiff. We hold that § 78 is not incorporated in Arizona law. Consequently, we decline to answer the second certified question as moot.

         BACKGROUND

         ¶2 Michael Bovre rented a vehicle from Payless Car Rental System Inc. ("Payless"). At the rental counter, Payless offered Bovre supplemental liability insurance ("SLI") under a master policy provided by KnightBrook Insurance Co. ("KnightBrook"). Bovre did not pay the $13.95 daily premium for such coverage, but he contends that he is entitled to coverage because he did not initial the space provided in the rental contract to decline SLI coverage.

         ¶3 While driving the rented vehicle, Bovre caused an accident that injured Robert and Lorraine McGill. The McGills sued Bovre and made a settlement offer, which included an amount representing SLI coverage. KnightBrook denied Bovre's demand for SLI coverage because he did not purchase it.

         ¶4 Bovre ultimately entered into a settlement agreement with the McGills, under which they were paid the combined policy limits of $530, 000 from the state-mandated insurance and Bovre's own Travelers policy. Bovre also executed a Damron agreement, in which he assigned to the McGills his claims against KnightBrook and Payless for their alleged failure to provide SLI insurance (breach of contract, negligence, and insurance bad faith), and agreed to an $8 million adverse judgment in exchange for the McGills' covenant not to execute on the judgment against his personal assets. See Damron v. Sledge, 105 Ariz. 151 (1969) (recognizing the validity of an agreement in which an insured stipulates to a judgment, assigns his claims against the insurer to the claimant, and, in turn, the claimant agrees not to execute the judgment against the insured personally).

         ¶5 The McGills then sued Payless and KnightBrook, seeking to recover the $8 million judgment. The McGills and KnightBrook entered into a settlement in which the McGills' (previously Bovre's) claims against Payless were further assigned to KnightBrook, which paid the McGills the $970, 000 SLI policy limit and promised them a percentage of any recovery from Payless. The settlement resolved the McGills' insurance bad faith and Damron claims against KnightBrook but did not extinguish all the claims against Payless. Payless was not notified of the final settlement agreement terms until after it had been executed.

         ¶6 KnightBrook subsequently filed an action in federal court against Payless, asserting its assigned claims, along with an equitable indemnification claim for the $970, 000 it paid the McGills, arguing that the Payless employee at the rental counter was at fault for not memorializing Bovre's denial of SLI coverage. The district court dismissed the contract claims, holding that they were extinguished by accord and satisfaction when KnightBrook settled with the McGills. Relying on the First Restatement § 78, the court also ruled that KnightBrook was entitled to equitable indemnification from Payless for the $970, 000 SLI policy limits it paid to settle the McGills' claims.

         ¶7 Payless appealed to the Ninth Circuit, which concluded that the outcome of the case rests on answers to the two questions certified to this Court. We ...


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