Knightbrook Ins. Co. v. Payless Car Rental, __Ariz. Adv. Rep.__ No. Cv-17-0156-CQ (February 8, 2018) (J. Lopez)

ARIZONA'S EQUITABLE INDEMNITY LAW DOES NOT ALLOW AN ACTION FOR RESTITUTION BASED UPON PAYMENT OF AN OBLIGATION THE PAYOR “JUSTIFIABLY BELIEVES” THE DEFENDANT IS PRIMARILY OBLIGATED TO PAY

Michael Bovre rented a car from Payless but neither paid for the supplemental liability insurance [SLI] nor initialed the box declining the coverage. He got in an accident and the  injured parties Robert and Lorraine McGill made a settlement demand that included payment of the SLI.  Plaintiff insurer KnightBrook Insurance Company denied coverage.

McGill then settled with Bovre for the combined policy limits of $530,000 from state mandated insurance and Bovre's personal policy.  Bovre and McGill then entered into a Damron agreement including an $8 million stipulated judgement in exchange for McGill's covenant not to execute the judgment against Bovre. Bovre also assigned McGill his claims against Knightbrook and Payless for their failure to provide and pay the SLI. Mc Gill then sued KnightBrook and Payless seeking payment of the $8 million judgment.

Thereafter the McGills and KnightBrook entered into a settlement in which the McGills' (previously Bovre's) claims against Payless were further assigned to KnightBrook, which paid the McGills the $970,000 SLI policy limit and promised them a percentage of any recovery from Payless. The settlement resolved the McGills' insurance bad faith and Damron claims against KnightBrook but did not extinguish all the claims against Payless. Payless was not notified of the final settlement agreement terms until after it had been executed.

KnightBrook subsequently filed an action in federal court against Payless, asserting its assigned claims, along with an equitable indemnification claim for the $970,000 it paid the McGills, arguing that the Payless employee at the rental counter was at fault for not memorializing Bovre's denial of SLI coverage. The district court dismissed the contract claims, holding that they were extinguished by accord and satisfaction when KnightBrook settled with the McGills. Relying on the First

Restatement § 78, the court also ruled that KnightBrook was entitled to equitable indemnification from Payless for the $970,000 SLI policy limits it paid to settle the McGills' claims.

Payless appealed and the Ninth Circuit determined the outcome rested upon the answer to two questions which it certified to the Arizona Supreme Court:

(1) whether Arizona equitable indemnity law incorporates the Restatement (First) of Restitution § 78 and, if so,

(2) whether § 78 requires that the indemnity plaintiff and indemnity defendant's liability be coextensive as to the underlying plaintiff?

Restatement § 78 differs from Arizona indemnity law in that it will allow restitution to a party who has paid an  obligation  “if he became subject to the obligation with the consent of or because of the fault of the other and, if in making payment, he acted .  .  . in the justifiable belief that such a duty existed.” Arizona indemnity law only allows restitution when the party seeking indemnity has made a  payment which discharges the primary obligor from an existing duty.  Restatement § 78 creates a new cause of action based on the relationship between the indemnitor and the indemnitee, expanding equitable indemnity to cover “supposed obligation[s]” that may be based on the payor's “justifiable belief” that he owed a duty to the third.

Finally, the court noted that while it generally follows the Restatement when there is not existing Arizona law, it is not obligated to always do so particularly when existing law supports a contrary result.  Here, Arizona law recognizes causes of action in contract and tort for compensation, such as KnightBrook's breach of fiduciary duty claim against Payless for its handling of Bovre's rental car counter transaction, that adequately address § 78's focus on scenarios where a person subject to a “supposed obligation” makes a payment to satisfy the perceived obligation, but the payment is not beneficial to the other ostensibly culpable party. Accordingly, the Arizona Supreme Court chooses not to create a new cause of action by adopting § 78.