Fidelity Nat'l Title Ins. Co. v. Centerpoint Mechanic Lien Claims, LLC, 720 Ariz. Adv. Rep. 8 (App. Div. I, August 27, 2015) (J. Cattani)

MORRIS AGREEMENT INVALID WHEN MADE BETWEEN INSURED AND ENTITY IT CONTROLLED FOR AN AMOUNT GREATER THAN WHAT WAS PAID TO PURCHASE LIEN AND WHERE INSURED HAD NO PERSONAL EXPOSURE         

The builder of an apartment complex in Tempe got behind, was not making loan payments or paying subs which created a “cluster schtup” among lienholders and brought mechanics liens into play. Ultimately the insured, who was being defended under a reservation of rights by its title insurer settled the mechanics liens extinguishing all liability under those liens and then entered into an agreement with another entity it owned which had purchased the liens purporting to sell a claim for indemnity against the title insurer in an amount substantially greater than the amount paid to settle the liens. The trial court found this to be a valid, reasonable and enforceable Morris agreement. The Arizona Court of Appeals reversed.

In United Services Automobile Ass'n v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987) the Arizona Supreme Court held that where an insured is being defended by his liability insurer under a reservation of rights, he may enter into a settlement/judgment with the injured claimant and assign a right to recover the amount of the settlement against the insurer if the insurer was given an opportunity to settle the case first and declined, was thereafter on notice of the proposed settlement agreement and the amount of the settlement agreement was reasonable. If ultimately the coverage issue supporting the reservation of rights is determined in the insured's favor the amount of the settlement agreement may be collected against the insurer. The rationale for allowing such an agreement to be enforced is that the insured is subjected to potential personal liability to pay the injured party if the insurer refuses either because there may ultimately be a determination he has no coverage or the amount of a judgment against him may exceed available coverage.

Here the court found the Morris agreement was invalid because the insured had extinguished all risk of personal liability to those holding the mechanics lien, the amount of the Morris agreement was facially unreasonable since it greatly exceeded the actual amount paid to extinguish the liens and the agreement was not an “arms-length” agreement between the insured and a third party claimant. Because the court found the agreement in question not to be enforceable the court did not address whether or not it's even permissible to enter into a Morris agreement under a first party title insurance claim.