In Arizona, the starting point for most third-party bad faith cases is a Damron or Morris agreement. Such agreements go by various names in various states. They involve the defendant’s stipulation or acquiescence to a judgment, a covenant not to execute against the defendant individually, and the defendant’s assignment to the plaintiff of any claim she has against her liability insurance company. In this way, the plaintiff gets what he wants -- an opportunity to sue the defendant’s insurance company directly, usually for bad faith -- and the defendant gets a guarantee of no personal liability.
How much is the stipulated judgment? Since that amount is agreed to between a plaintiff who wants a big judgment and a defendant who couldn’t care less (since she is getting a covenant not to execute), the sky is the limit. It is no surprise, therefore, that insurance companies often intervene after the insured enters into such an agreement for purposes of challenging the stipulated judgment. In the recent case of Himes v. Safeway, 66 P.3d 74 (App. 2003), the Arizona Court of Appeals clarified the role of the trial court in reviewing such agreements.
The plaintiff in Himes was severely injured, with damages far exceeding the defendant’s $15,000 of insurance. After alleging that the defendant’s insurer committed bad faith by not settling the case for policy limits, the plaintiff entered into a Damron/Morris agreement with the defendant. Under the agreement, the defendant stipulated to a $12 million judgment and assigned to the plaintiff any bad faith claim he had against his insurer. In exchange, the plaintiff gave him a covenant not to execute.
The insurer intervened and challenged the $12 million judgment as not representing a “reasonable” settlement. The trial court disagreed, finding $12 million to be within the range of reasonable settlements for injuries such as the plaintiff’s and ruling that it had no authority to second guess a settlement reached by the plaintiff and defendant.
The Court of Appeals reversed, holding that the trial court improperly deferred to the number picked by the plaintiff and defendant. It noted that defendants have no incentive to negotiate the amount of the stipulated judgment, and would be willing to agree to almost anything in exchange for being relieved of personal liability. For that reason, the trial court must independently review a stipulated judgment entered pursuant to a Damron/Morris agreement. It must make its own determination of what a reasonable settlement would be. Furthermore, the plaintiff bears the burden of proving the stipulated judgment is reasonable.
What constitutes a reasonable settlement? The court clarified this as well. A reasonable settlement is one that a reasonable defendant would reach on the merits, assuming he was negotiating with his own money and had the ability to pay. It encompasses considerations of both liability and damages. The amount of a Damron/Morris agreement -- which effectively liquidates a personal injury claim into judgment -- must represent the settlement the plaintiff and defendant would reach if they were negotiating at arm’s length.
On another issue, the court held that a stipulated judgment pursuant to a Damron/Morris agreement may not be entered unless and until the trial court determines that it is reasonable. This is important because entry of the judgment is usually what precipitates the plaintiff’s third-party bad faith suit against the insurer.
Finally, the court clarified that an alleged breach of the duty of equal consideration does not bar the insurer from challenging the reasonableness of a Damron/Morris agreement. By contrast, an insurer who abandons the insured by not providing a defense may not challenge the settlement amount.
Himes is an important case for any plaintiff or defense lawyer who enters into Damron/Morris agreements. It has implications not only for how you litigate the agreement after it is entered into, but for how you structure the agreement in the first place.
