Court of Appeals Protects Insurance Company Right to Intervene

Insurance--Insurer with Subrogation Rights, Right to Intervene

Monterey Homes Arizona, Inc. v. Federated Mutual Ins. Co.. 549 Ariz. Adv. Rep. 14 (App., Div. II, February 10, 2009) (Justice Norris)

INSURER WITH SUBROGATION RIGHTS HAS RIGHT TO INTERVENE AT REASONABLENSS HEARING AFTER MORRIS AGREEMENT BUT MAY ONLY CHALLENGE REASONABLENESS OF SETTLEMENT

Third party construction defect case defended under a reservation of rights, gets settled via a Morris agreement and the insurer is prohibited from intervening at the reasonableness hearing. The Court of Appeals ruled that where an insurance company defends its insured but reserves the right to later deny coverage exists, the insured is free to negotiate a settlement with the injured third party. The reservation however does not constitute a waiver of the insured to subrogation rights against the third party.

This being said, the court however pointed out that these subrogation rights could not be used to interfere with the insured's right to protect itself and enter into a settlement agreement whereby an amount is set for damages and the insured assigns its rights against the insurance carrier for payment of that settlement to the injured party in exchange for a promise from the injured party not to execute on the judgment against the insured.

"We hold, the insurer's subrogation rights will not limit the insured from entering into a settlement that releases those rights when, as here, the insured is being defended under a reservation of rights. . . . When an insurer defends under a reservation of rights, the insured steps into the insurer's shoes for purposes of settlement negotiations.' . . .this transfer of control allows the insured to compromise or release the subrogation rights of the insurer even if the insured's opponent knows of these rights before it settles with he insured."

The equity afforded the insurer under this situation is the right not to have the agreement the result of fraud or collusion and fair notice of the intent to stipulate or hold a reasonableness hearing and the right to participate in that proceeding to assure the amount is reasonable. If this is established the agreement will be upheld even to the extent it extinguishes the subrogation rights.