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Country Mutual Insurance Co. v. Martinez

United States District Court, D. Arizona

April 23, 2019

Country Mutual Insurance Company, Plaintiff,
Mario Martinez, et al., Defendants.



         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.


         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.


         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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