United States District Court, D. Arizona
ORDER
HONORABLE ROSLYN O. SILVER, SENIOR UNITED STATES DISTRICT
JUDGE
In May
2012, Lisa Ackert was involved in an automobile accident that
resulted in serious injuries to two of her children. At the
time, she was insured by Country Mutual Insurance Company.
After the accident, the children's father sued Lisa to
recover for the children's injuries. Country Mutual
defended Lisa but, in Lisa's view, that defense was
“woefully inadequate.” (Doc. 42 at 3). Believing
Country Mutual's actions freed her from her obligations
under the insurance policy, Lisa agreed to a judgment being
entered against her and assigned her claims against Country
Mutual to the children's father. That assignment prompted
Country Mutual to file the present declaratory judgment
action against the children and their father, seeking a
determination that “Lisa breached implied and express
terms of the [insurance] Policy [and] forfeited coverage
under the Policy.”[1](Doc. 10 at 13). The parties each seek
summary judgment. For the following reasons, Country
Mutual's motion will be granted.
FACTUAL
BACKGROUND
Unless
otherwise noted, the following facts are undisputed. On March
27, 2012, Lisa was driving on Ironwood Drive in Pinal County.
Two of Lisa's children, A.A and B.A, were in the car with
her. A.A. was in the front passenger's seat and B.A. was
in a rear seat. (Doc. 68 at 162). A.A. was not wearing a
seatbelt. Lisa was going approximately seventy mph, twenty
mph above the speed limit, and was traveling behind another
vehicle going approximately the same speed. (Doc. 68 at 162).
The vehicle Lisa was following changed lanes to avoid a truck
towing a horse trailer that had slowed to make a left turn
across the median. After the other vehicle changed lanes,
Lisa took her foot off the accelerator but did not apply the
brakes or steer away from the horse trailer. (Doc. 68 at
173). Lisa's vehicle hit the horse trailer and, as a
result of that collision, A.A. was rendered a
ventilator-dependent quadriplegic. B.A. was also injured but
not as severely.
At the
time of the accident, Lisa was covered by an automobile
insurance policy issued by Country Mutual. That policy had
liability limits of $15, 000 per person, $30, 000 per
occurrence. The policy also had uninsured/underinsured limits
of $15, 000 per person, $30, 000 per occurrence. Shortly
after the accident, a Country Mutual adjuster had some
contact with Lisa and her family members but the record is
not clear regarding what was discussed.
A few
months after the accident, Brandon Ackert, the father of A.A.
and B.A and Lisa's ex-husband, retained counsel to
represent his children regarding the accident. (Doc. 68 at
153). On June 6, 2012, that counsel wrote to Country Mutual.
The letter stated the accident “resulted from
[Lisa's] negligence” and it asked for a variety of
information regarding Lisa's policy. The letter also
stated it was “not an attempt to settle this case and
no settlement offer [was] on the table.” On June 8,
2012, an adjuster for Country Mutual responded to the letter.
(Doc. 68 at 156). That letter provided some of the requested
information and stated Country Mutual's
“investigation shows [Lisa] is at fault for this
collision.” The letter closed with a vague paragraph
regarding payment of the policy limits:
It does appear that the [sic] each child's claim will
exceed our available coverage. The child in the vehicle that
was hit also has a bill for a check up that she had as a
result of the collision that will need to be considered when
the division of the money is addressed. Court approval will
be needed and the liens will need to be addressed as well.
(Doc. 68 at 157). According to the adjuster, that paragraph
was meant to be read as an offer of the policy limits. (Doc.
70-32 at 37). During her deposition the adjuster explained
she did not make a straightforward offer of the policy limits
because the circumstances meant the policy limits could not
be paid immediately. That is, in the adjuster's view the
fact that A.A. and B.A. were minors meant a conservator would
have to be appointed before any payments could be made. (Doc.
70-32 at 32). Brandon's attorney admits he did not make a
settlement demand to Country Mutual in 2012. In fact, the
attorney would not make a settlement demand until 2015. (Doc.
68 at 269, 271).
In
February 2013, Brandon filed a lawsuit in the Pinal County
Superior Court.[2](Doc. 68 at 269). That suit was
“against Pinal County for the negligent design,
construction and maintenance of Ironwood Drive.” (Doc.
70-1 at 2). The suit was brought by Brandon on his own behalf
as well as on behalf of his two injured children. For the
sake of simplicity, the Court will refer to the claims simply
as belonging to Brandon. After responding to the complaint,
Pinal County identified as non-parties at fault the
engineering firm involved in the design of Ironwood Drive,
the construction firm that did the work, the driver of the
truck towing the horse trailer, and Lisa. (Doc. 70-1 at 2).
Brandon then decided to amend his complaint to name those
non-parties as parties.
After
Lisa was named as a party, Country Mutual agreed to defend
her without any reservation of rights. Country Mutual
retained attorney Tom Burke to defend Lisa. At that time,
Burke had more than 30 years of litigation experience and had
defended Country Mutual's insureds for almost twenty-five
years. (Doc. 68 at 2). In defending Lisa, Burke concluded the
allegations against Lisa were not the focus of the case.
(Doc. 68 at 101). Rather, Burke believed Brandon's
strategy would be to shift all fault to the other parties
(i.e., the construction firm, engineering firm,
Pinal County, and the driver of the truck towing the horse
trailer). Burke's understanding allegedly stemmed from
conversations he had with Rob Lewis, Brandon's counsel.
The content of those conversations is now disputed. (Doc. 68
at 100).
In
pursuing his claims, Brandon hired and disclosed at least
five experts. Those experts were to provide opinions on the
overall circumstances of the accident, the “design and
engineering standard of care, ” the “construction
standard of care, ” the seatbelt warning system, and
the fact that A.A. would have suffered the same injury even
if he had been wearing a seatbelt. (Doc. 68 at 193). The
expert on the overall circumstances of the accident was
Richard M. Ziernicki, Ph.D. (Doc. 68 at 160). Country Mutual
now claims Ziernicki's report was especially helpful in
establishing Brandon did not believe Lisa was at fault.
According
to Ziernicki's report, the purpose of his investigation
was to address the circumstances of the accident, including
the actions taken by the driver of the truck towing the horse
trailer, the design of the road at the accident site and,
most crucially for present purposes, “[t]he ability for
[Lisa] to avoid the accident.” (Doc. 68 at 161).
Ziernicki concluded the driver of the truck “created an
unsafe situation and an unnecessary hazard that resulted in
this accident.” (Doc. 68 at 179). Ziernicki also
concluded the road had not been constructed according to the
plans. That meant the construction firm “created [a]
significant hazard on the roadway” by not following the
plans, the engineering firm “allowed a significant
hazard to be created on the road” by not
“verify[ing] compliance of the road construction with
the design drawings, ” and Pinal County “allowed
a significant hazard to be created on the road” by
either approving the deviation from the plans or not
inspecting the road to identify the deviation and requiring
it be corrected. (Doc. 68 at 181). As for Lisa, Ziernicki
concluded the “published literature” established
it takes 2.5 second or longer “to respond to an
unexpected hazard on the road.” (Doc. 68 at 177). And
Ziernicki believed Lisa “did not have enough time to
apply the brakes or steer after recognizing the slow moving
trailer.” Thus, Lisa's “reactions at the time
of the accident [were] within the reasonable range of
driver's responses. [Lisa] did not have enough time to
avoid the accident.”[3] (Doc. 68 at 186).
Upon
receiving Brandon's expert disclosures, Burke decided not
to retain separate experts. Burke based that decision on his
review of the expert disclosures and, according to Burke,
conversations he had with Lewis. In Burke's view, the
expert disclosures “were wonderful” for Lisa
because they shifted all of the blame to the other
defendants. (Doc. 68 at 101). Burke allegedly informed Lewis
that Lisa's strategy would be to not “get in your
way by hiring experts who might create issues for you in the
development of the case.” (Doc. 68 at 100). In other
words, Burke did not want to disclose experts that might
conflict with Brandon's litigation strategy. On April 8,
2015, Burke submitted a supplemental disclosure statement
regarding experts. That document stated Lisa “has not
retained any expert witnesses” but she
“reserve[d] the right to elicit opinions from the
following witnesses identified by [Brandon].” (Doc. 68
at 191). The disclosure statement then listed Brandon's
experts, including Ziernicki, and their expected testimony.
In
litigating Brandon's claims, Lewis became frustrated with
Burke's allegedly insignificant efforts at defending
Lisa. That frustration is only understandable if
Brandon's claims were not primarily aimed at Lisa. After
all, Brandon was suing Lisa, alleging she was at fault for
the accident. If the goal was to prevail against Lisa, Lewis
should have been pleased that Burke was not pursuing a
vigorous defense of Lisa. But the reality that Lisa was not
the true aim of Brandon's claims is illustrated by
Lewis's deposition testimony.
During
his deposition, Lewis explained how he repeatedly tried to
convince Burke to “file a motion for summary judgment
on the seat belt issue.” (Doc. 70-18 at 3). That motion
would have “limit[ed] the allocation of fault based
upon the seat belt.” (Doc. 70- 18 at 3). In other
words, Lisa was potentially at fault for A.A. not wearing a
seatbelt and Lewis wanted Burke to take steps to lessen the
fault which might be allocated to Lisa. Lewis also
“beg[ged]” Burke to join in a motion for summary
judgment regarding the fault of the driver of the horse
trailer. (Doc. 70-18 at 9). Again, doing so would have
lessened Lisa's liability. If Brandon had been completely
invested in prevailing against Lisa, Lewis's repeated
attempts at lessening Lisa's liability would have made
little sense.
It
appears Brandon and all the defendants except for Lisa
engaged in serious litigation for several years. Eventually,
a mediation was scheduled for August 20, 2015. On August 17,
2015, Burke emailed Lewis to explain he had “multiple
calendar conflicts” with the mediation. Burke then
stated “[c]oupling [the calendar conflicts] with the
fact that Lisa's liability insurer remains willing to pay
the available policy limits to settle claims against her,
” meant Burke would not be attending the mediation.
Burke then wished Lewis well “in trying to get a
settlement with the other defendants.” Lewis sent a
lengthy response.
Lewis's
response began by stating he needed “to correct a
misunderstanding.” In his view, Country Mutual had
“never offered to settle.” Next, Lewis alleged
Country Mutual had done “nothing to resolve the case,
and worse yet, [done] nothing to defend Lisa.” Instead,
Country Mutual had “unilaterally declared that they are
going to freeload off of our experts.” (Doc. 70-8 at
3). In fact, Country Mutual allegedly had “not lifted a
finger or spent a dime to protect its policyholder either by
settlement or defense.” Lewis explained they were
“hoping to explore a partial resolution at the
mediation” but Country Mutual would have to show up for
that take place. Burke then responded:
We should talk, again. We talked long ago about experts,
among other discussions. I bring that particular talk up in
response to your “freeload” comments. You're
saying things here that really catch me off guard for lots of
reasons. . . . [N]either I nor Country was important to the
real goal [at the mediation] for your clients . . . I again
wish you the best on Thursday, and I hope soon thereafter we
can clear the air on what you have said.
(Doc. 70-8 at 3).
The
next day-August 19, 2015-Lewis sent Burke a letter. The
letter began as follows:
We write this letter because we are concerned that [Country
Mutual] has breached its obligations under the policy to
Lisa. We have a solution though. We received your disclosures
stating you planned on sharing our experts. You are not going
to do that because you did not pay for them. [Country Mutual]
should have done more to defend Lisa by pursuing more of an
allocation of fault to [engineering and construction firms]
and the County. Furthermore, [Country Mutual] has done
nothing to try and resolve this case. It has never even
offered the limits of coverage. . . . It is surprising that
[Country Mutual] has never even offered the money.
The
letter then proposed a settlement requiring Country Mutual do
the following: pay the policy limits (i.e., $30,
000), pay the costs associated with the probate proceedings
in state court, reimburse Brandon for all the experts Burke
planned to share (approximately $300, 000), pay “all
future expert fees, travel costs of experts, and litigation
costs through trial, take a more active role in defending the
allegations of fault by the other defendants, pay for focus
groups (no more than $50, 000), and pay for a jury
consultant.” The letter stressed that Brandon was
“only asking this insurance company not to free load
off of him and to pay what it should have been paying all
along.” (Doc. 70-7). Burke did not accept that
settlement.[4]
Brandon
and the other defendants attended the mediation on August 20.
Burke did not attend but he did send his law partner.
Burke's partner left before the mediation with the other
defendants ended. (Doc. 68 at 338). Towards the end of the
mediation, Lewis sent Burke an email. That email provided in
full (errors in original):
We are at the mediation and it is getting close to the end.
As I explained earlier today and on our recent telephone
call. Consistent with your discussions with [the mediator],
the opportunity to resolve the claim within the policy limits
giving Lisa covenant not to execute expires today at 6
o'clock.
I will send you the case saying that that is a reasonable
settlement opportunity during mediation after litigation has
been pending for a while.
(Doc. 70-8). According to Brandon, the intent behind that
email was to offer a settlement “just for the policy
limits” that would “not include the payment of
any costs.” (Doc. 70-1 at 4). That description is in
significant tension with other evidence in the record. In
particular, during his deposition Lewis stated the offer was
for more than the $30, 000 policy limits. It appears Burke
interpreted the offer as being equivalent to the offer in
Lewis's August 19 letter. (Doc. 70-4 at 18). It is
undisputed Burke did not respond to the email and the offer,
whatever it was, expired. The mediation eventually ended with
Brandon settling with the construction firm, engineering
firm, and the County. (Doc. 70-1 at 4).
Sometime
after the mediation, Brandon settled with the driver of the
truck. That settlement left Lisa as the sole defendant. On
October 27, 2015, Lewis made another settlement offer to
Burke. That offer, contained in an email to Burke, began by
stating counsel was “certain that [Country Mutual] has
breached it [sic] duties to [Lisa].” Again, Lewis
stressed that Burke's failure to disclose independent
experts meant he was trying to “free load[] off of
[A.A.] and his family.” Lewis believes “[A.A.]
does not owe [Country Mutual] a free ride.” Thus, Lewis
proposed a settlement consisting of the $30, 000 liability
limits, the $30, 000 underinsured motorist limits, one-half
of the expert fees ($84, 510.96), and one-half of the court
reporter fees ($6, 866.91). (Doc. 68 at 306). The email also
stated “[t]o this day you have never tendered the
policy limit.” On October 30, 2015, Burke made a
counter-offer.
Burke's
counter offer was for the “15/30 liability limits of
Lisa's policy, ” along with the “15/30
[underinsured motorist] coverage, ” and “$15, 000
for litigation expenses incurred.” (Doc. 68 at 310).
That offer was not accepted. On April 28, 2016, Lewis sent a
letter outlining another possible settlement offer. That
offer was structured around setting up a subsequent bad faith
claim against Country Mutual. The letter outlining the offer,
however, stated “I do not have authority to enter into
this agreement.” Thus, it was not a true settlement
offer that could have been accepted. The litigation
continued.
There
was another mediation on May 25, 2016. Prior to that
mediation, Country Mutual authorized payment of up to $100,
000 beyond the policy limits. (Doc. 76 at 18). Brandon made a
settlement demand during the mediation “for an amount
roughly equivalent to the costs incurred in the underlying
litigation.” (Doc. 68 at 339). Country Mutual did not
accept the offer. The parties have not explained how the
litigation progressed after that failed mediation. The next
date identified by the parties is April 3, 2017. On that date
Lisa executed a “Settlement Agreement and
Assignment.” (Doc. 68 at 336). That agreement provided
a judgment for $30 million dollars would be entered against
Lisa but there would be a covenant not to execute. (Doc. 68
at 342). Lisa assigned all her claims against Country Mutual
to an entity that had been appointed as guardian ad litem for
her injured sons. (Doc. 68 at 343).
In
August 2017, Country Mutual filed the complaint at issue in
the present case. That complaint named as defendants the
guardian ad litem, Brandon, and the children (collectively,
“Defendants”) (Doc. 1). The complaint sought
declaratory judgment that Lisa had breached the cooperation
clause by entering into the settlement agreement such that
the settlement agreement was “invalid, noncompliant,
nonbinding and/or unenforceable.” (Doc. 1 at 14).
Defendants filed their answer along with a counterclaim also
seeking declaratory judgment. According to Defendants, they
are entitled to a declaratory judgment that Country Mutual
“breached the insurance contract with
Lisa.”[5](Doc. 12 at 22).
On
November 30, 2018, the parties filed cross-motions for
summary judgment. Greatly simplified, Country Mutual seeks
summary judgment that Lisa breached the cooperation clause of
the insurance policy while Defendants seek summary judgment
that Country Mutual committed an anticipatory breach such
that Lisa was free to enter into the settlement agreement.
ANALYSIS
The
parties' cross-motions for summary judgment present a
wide variety of assertions and arguments about what is or is
not allowed under Arizona law. Based on the briefing,
however, it appears the case comes down to a single question:
did Country Mutual breach any of the obligations owed to Lisa
such that she could enter into the settlement agreement?
Viewed in the light most favorable to Defendants, Country
Mutual did not.[6]
I.
Country Mutual Did Not Breach Its Duties
Country
Mutual owed Lisa three duties: the duty to treat settlement
proposals with equal consideration, the duty to defend, and
the duty to indemnify. Arizona Prop. & Cas. Ins.
Guar. Fund v. Helme, 735 P.2d 451, 459 (Ariz. 1987). In
general, if Country Mutual breached any of these duties, Lisa
was free to enter into the settlement agreement. Id.
Here, Defendants argue Country Mutual “breached all
three duties.” (Doc. 69 at 5).
A.
Duty of Equal Consideration
“The
insurer owes the insured an implied contractual duty to treat
settlement proposals with equal consideration to its
interests and those of an insured.” Safeway Ins.
Co. v. Guerrero, 106 P.3d 1020, 1024 (2005). The test
for “determining whether an insurer has given
consideration to the interests of the insured . . . is
whether a prudent insurer without policy limits would have
accepted the settlement offer.” Clearwater v. State
Farm Mut. Auto. Ins. Co., 792 P.2d 719, 723 (Ariz.
1990). Crucially, Defendants concede this test is only
triggered when there are “offers to settle the claims
against the insured within coverage of the
policy.”[7] (Doc. 69 at 6-7) (emphasis added). In
other words, Country Mutual breached the duty of equal
consideration only if Defendants made a settlement offer
within the policy limits. Defendants never did so.
Defendants
point to three settlement offers which they argue were within
the policy limits. Those offers were on August 19, 2015,
August 20, 2015, and October 27, 2015. (Doc. 69 at 8-10). Two
of those offers-August 19 and October 27-obviously included
offers that Country Mutual pay part of Brandon's
litigation costs. Because the policy did not require Country
Mutual pay Brandon's litigation costs, those offers were
not within policy limits and their rejection did not breach
the duty of equal consideration. As for the August 20
settlement offer, Defendants now describe that offer as
not including any amounts beyond the policy limits.
But the underlying evidence establishes the August 20 offer
still included amounts beyond the policy limits.
i.
August 19 & October 27 Offers
The
August 19 and October 27 settlement offers both contemplated
Country Mutual pay substantial amounts beyond the policy
limits in the form of “litigation costs.” The
August 19 offer was for Country Mutual to pay the policy
limits plus some portion of Brandon's already-incurred
expert fees (approximately $300, 000), as well as “all
future expert fees, travel costs of experts, and litigation
costs through trial, . . . focus groups (no more than $50,
000), and . . . a jury consultant.” The October 27
offer was for the policy limits as well as half of the expert
fees ($84, 510.96) and one-half of the court reporter fees
($6, 866.91). Defendants now argue both of these settlement
offers should be viewed as simply demanding the “policy
limits.” Defendants' argument is hard to follow
and, to the extent the Court can understand it, the argument
conflicts with the plain language of the policy.
The
Country Mutual policy included a provision that “[i]n
addition to the limits of liability stated on the
declarations page, we will pay . . . all expenses we incur
and all court costs assessed an insured as a result of a
lawsuit we defend.” This meant Country Mutual was
obligated to pay for two types of costs 1) “expenses we
incur” and 2) “all court costs assessed an
insured.” Defendants focus on the first type and argue
Country Mutual “incurred the costs” outlined in
the August 19 and October 27 offers “because the costs
were primarily for experts that Brandon retained to support
fault against the road design defendants and [the driver of
the truck].” (Doc. 69 at 8). Defendant do not provide a
clear explanation why the fact that Brandon's experts
were not aimed at imposing fault on Lisa meant the costs
qualified as “expenses [Country Mutual]
incur[red].” Country Mutual did not hire or pay for
Brandon's experts. And if those experts were not paid,
they could not turn to Lisa or Country Mutual for payment.
See Samsel v. Allstate Ins. Co., 59 P.3d 281, 284
(Ariz. 2002) (noting “‘[i]ncur' is generally
accepted to mean ‘to become liable for'”).
The litigation costs outlined in the August 19 and October 27
demands were not incurred by Country Mutual.
Beyond
claiming Country Mutual was obligated to pay the costs under
the language of the policy, Defendants also argue the costs
were within the policy limits because of an agreement between
Burke and Lewis. According to Defendants, “Lisa and
Brandon agreed to use and to share the costs of liability
experts” during an “August 1, 2013
meeting.” (Doc. 69 at 8). That is not established by
any evidence in the record. Defendants point to no evidence
in the record that Burke agreed to bear the costs of the
liability experts. In fact, the record is replete with
evidence that Burke did not agree to such an arrangement.
In
litigating Brandon's claims against Lisa, Lewis
repeatedly argued to Burke that Country Mutual was trying to
“free load” off Brandon. In August 2015-long
after the alleged agreement whereby Burke agreed to bear some
of the cost of the experts-Lewis stated Country Mutual had
“unilaterally declared that they are going to freeload
off of our experts.” (Doc. 70-8 at 3). Also in August
2015, Lewis claimed Brandon's demand for litigation costs
was “only asking [Country Mutual] not to free load off
of him and to pay what it should have been paying all
along.” (Doc. 70-7). Finally, in October 2015, Lewis
told Burke his designating the same experts as Brandon was
“free loading off of [A.A.] and his family. [A.A.] does
not owe [Country Mutual] a free ride.” These statements
are wishful thinking on Lewis' part and they are
unequivocal evidence that Burke did not agree to bear the
litigation costs in August 2013 as Defendants
claim.[8] If there had been an agreement as of
August 2013, Lewis's communications would have demanded
payment, not complained about freeloading. Thus, the
litigation costs included in the August 19 and October 27
offers were not expenses Country Mutual incurred as required
by the policy language.
Defendants'
fallback position is that Country Mutual admitted the costs
outlined in the August 19 and October 27 settlement offers
were covered by the policy language. Defendants cite to
statements by in-house counsel for Country Mutual allegedly
admitting the costs were covered by the policy. (Doc. 69 at
8). Those statements, however, do not indicate the costs in
the settlement offers were covered. Rather, they merely
indicate that some costs are covered by the policy,
such as expenses Country Mutual incurred or costs eventually
assessed against an insured. The alleged concession that the
policy covered some additional amounts beyond the
“policy limits” is obviously true but entirely
irrelevant to whether the particular costs Lewis was
demanding were covered. Those costs were not covered and the
settlement offers including such costs were not within the
policy limits.
Finally,
Defendants argue that Country Mutual “waived its right
to contest that costs are not covered when it extended
coverage, but did not assert a reservation of rights.”
(Doc. 69 at 9). As best as the Court can tell, Defendants
believe Country Mutual's settlement offer that included a
small additional amount to cover litigation costs somehow
permanently bound Country Mutual to the position that
all costs were covered by the policy. Defendants
have no legal support for this position and it is close to
frivolous.
Neither
the August 19 nor October 27 settlement offers were within
the policy limits. Thus, Country Mutual did not breach the
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