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Insurance—Damron Agreement Is Enforceable Even If Insurer Refuses to Defend

Colorado Casualty Ins. Co. v. Safety Control Co., Inc., 625 Ariz. Adv. Rep. 7 (App. Div. I, January 5, 2012) (J. Johnsen)

DAMRON AGREEMENT ENFORCEABLE EVEN WHEN INSURED IS DEFENDED AND INDEMNIFIED BY AN EXCESS CARRIER/JUDGMENT ENTERED AS PART OF DAMRON BINDS INSURER REFUSING TO DEFEND REGARDING FACTS SUPPORTING DUTY TO INDEMNIFY

DBA Construction contracted with Arizona to perform a road improvement project and hired Safety Control Co. as a sub contractor. Safety Control obtained liability insurance from Employers Mutual Casualty [EMC]and DBA obtained excess coverage from Colorado Casualty. A motorist involved in a collision at the construction site sued the state and DBA. Colorado Casualty tendered the defense of DBA to Safety Control and EMC. The tender was rejected. Colorado Casualty paid the injured motorist $75,000 and the state paid $20,000. DBA and the state entered a stipulated judgment for $750K with the motorist who agreed not to execute on the judgment [a Damron agreement]. DBA and the state assigned the motorist their rights against the subcontractors and their insurers. Ultimately the trial court ruled that EMC breached its duty to defend and was liable to pay the stipulated judgment and attorneys' fees. The Arizona Court of Appeals affirmed in part and reversed and remanded in part.

The court of appeals rejected EMC's argument that the Damron agreement was collusive or fraudulent based upon the fact the insured was not left without a defense and subject to personal liability when EMC refused the tender because Colorado Casualty stood to defend and indemnify. The court noted that if EMC was primarily responsible to defend and indemnify it would be precluded from escaping the consequence of a judgment entered when it turned its back.

Here the question of EMC's responsibility to indemnify turned upon whether or not the judgment constituted a liability that “arises out of” the subcontractor Safety Control's work. If the judgment in fact resolved that question than EMC having elected not to defend would be bound by such a determination. However, the court found that the stipulated judgment did not specify how the collision occurred or how any of the parties were negligent. In fact the stipulated judgment incorporated by reference a settlement agreement where the parties expressly denied any liability. While the duty to defend is determined by the allegations in the complaint and the facts known at the time of the tender, the duty to indemnify is determined by the facts actually proven and established. Because it was not determined in this action whether or not the damages and consequent stipulated judgment arose out of work by Safety Control the court remanded the matter for such a determination by the trial court.

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