Primary Insurers Beware: Arizona Appellate Court Protects Excess Insurer at Primary Insurer’s Expense

In Colorado Casualty Ins. Co. v. Safety Control Co., Inc., 1 CA-CV 10-0871 (Jan. 5, 2012), the Arizona Court of Appeals confirmed that a Damron Agreement is permissible in certain situations where the insured is not exposed to personal liability. When an insurer fails to defend its insured, the insured may consent to a judgment and agree to assign to the claimant the insured's claims against its insurer, in exchange for the claimant's covenant not to execute on the stipulated judgment. The Colorado Casualty decision provides guidance in several categories:

(1) A primary insurer cannot avoid responsibility when the excess insurer provides a defense.

The underlying settlement agreement to impose liability on the primary insurer was permissible because liability should have been imposed on the primary insurer in the first place. The settlement agreement did not fraudulently or collusively shift liability because the primary insurer was liable for up to its policy limit, which exceeded the stipulated judgment. "[A]n insurer that refuses to defend a claim must know that a judgment may be entered against the insured and that it will be held liable if the claim is within its policy." A primary insurer cannot escape liability simply because the excess insurer made a different coverage decision.

(2) A stipulated judgment does not create coverage if the insured did not otherwise have coverage under its policy.

An insurer's duty to indemnify is not contingent on the facts alleged; instead, it is contingent on the facts proven, stipulated or otherwise established. An insurer is "bound for purposes of coverage by any issues determined by the stipulated judgment." The issue for courts to decide is whether the stipulated judgment contains facts that create indemnification liability within the policy coverage.

(3) Policy term "ongoing operations" has been defined.

The primary insurer argued that its additional insured coverage was limited to accidents arising out of the subcontractor's "ongoing operations," and that no coverage existed for the underlying accident because subcontractor personnel were not actively working at the site. The Court adopted the definition that liability arising out of "ongoing operations" means "liability that arises while the work is still in progress." Because the accident occurred while the subcontractor's work under the contract was "still in progress," the Court held that the collision giving rise to the stipulated judgment did occur during "ongoing operations."

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