Arizona Court OfAppeals Division One Holds That (1) Claimant Who Contracts For The Rights Of The Insured Pursuant To A Morris Agreement May Assert The Insured’s Equitable Estoppel Claims And (2) Insurance Company Was Equitably Estopped From Denying Coverage Because It Waited Eighteen Months To Notify The Insured That It Was Reserving Its Rights To Deny Indemnity Coverage.

Pueblo filed suit against Palo Verde Plastering for defective stucco work.  Palo Verde was insured by CNA, which hired counsel for Palo Verde and directed the defense against Pueblo’s suit.  CNA delayed approximately eighteen months before notifying Palo Verde that it was reserving its rights to deny coverage for the majority of Puebla’s damages.  Pueblo and Palo Verde then entered into an agreement pursuant to United Service Automobile Association v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987), whereby Pueblo and Palo Verde agreed to a $1,100,000 judgment and Palo Verde assigned Pueblo “its rights under the insurance policy in exchange for [Pueblo’s] covenant not to execute the judgment against” Palo Verde.    The trial court found the $1,100,000 judgment plus attorneys’ fees reasonable.  The trial court also found that CNA was equitably estopped from denying coverage because it delayed in reserving its rights, which prejudiced Palo Verde. 

The ArizonaAppeals Court affirmed but modified the amounts awarded for prejudgment interest and attorneys’ fees.  First, the court held that the Morris agreement, which explicitly contemplated that pueblo might have to assert Palo Verde’s equitable estoppel defense, gavePueblo the right to assert equitable estoppel when CNA attempted to deny coverage.  Second, the court concluded that the trial court correctly applied the doctrine of equitable estoppel to CNA’s coverage denial.  Because CNA failed to notify Palo Verde promptly that it was reserving its rights to deny coverage for the majority of Puebla’s damages, Palo Verde relied on its assumption that any resulting damages would be covered.  Furthermore, Palo Verde was prejudiced by this reliance because it would have participated in the destructive testing onPueblo’s townhomes to determine the cause of the stucco problems.  By the time Palo Verde was notified of CNA’s reservation of rights, however, the court-ordered deadline for destructive testing had passed.  Third, the court held that prejudgment interest inPueblo’s favor was calculated using the wrong start date, namely, the date on which pueblo entered into the Morris agreement.  Because Morris agreements must be approved by the trial court as reasonable, the judgment amount was not liquidated for prejudgment interest purposes until the trial court’s subsequent approval.  Finally, in light of the reduced amount awarded for prejudgment interest, the court also modified the award of attorneys’ fees pursuant to A.R.S. § 12-341.01(B) because the fee award “may not exceed the amount paid or agreed to be paid.”  UnderPueblo’s contingent fee agreement with its counsel, the “maximum amount payable [to its attorneys] pursuant to that agreement is $469,831,” which was less than the trial court’s award of $536,500.

Judge Johnsen authored the opinion; Judges Barker and Irvine concurred.