Quihuis v. State Farm Mut. Auto. Ins. Co. – 10/1/2014

October 28, 2014

Arizona Supreme Court Holds That Default Judgment Entered Pursuant to a Damron Agreement Binds Insurer in a Coverage Action as to Liability but Does Not Preclude Litigation of Coverage Issues.

The Ninth Circuit Court of Appeals certified a question to the Arizona Supreme Court regarding the collateral estoppel effect in a subsequent coverage action of a default judgment entered pursuant to a Damron agreement.  The Arizona Supreme Court analyzed the issue under the Restatement (Second) of Judgment § 58 (“Restatement”), which sets forth an issue-preclusion rule that concerns indemnitors (or insurers). 

Specifically, Restatement § 58 provides for issue preclusion when an indemnitor has an obligation to indemnify and duty to defend, an action is brought against the indemnitee (or insured) involving such a claim, the indemnitor receives notice of the claim and an opportunity to defend, and a judgment is entered in favor of the injured person.  Restatement § 58(1)(a) precludes the insurer from subsequently disputing the “existence and extent” of the insured’s liability to the injured person.  This section, however, does not preclude litigation of coverage issues.  This limitation has been recognized in other Arizona case law.  Restatement § 58(1)(b) precludes the insurer from “relitigating” any issues that were “determined in the action.”  The phrase “determined in the action,” the Court held, “refers to a judicial determination of issues actually litigated.”  Thus, a default judgment has no preclusive effect under this particular section.  

The Court, in sum, held that when a default judgment is entered pursuant to a Damron agreement, that judgment will bind the insurer in a coverage action as to the “existence and extent” of liability but will not preclude litigation of coverage issues, including the facts essential to establishing coverage.

The Court overruled Dairyland Insurance Co. v. Richards, 108 Ariz. 89, 492 P.2d 1196 (1972), noting that the result would likely differ if the case were decided today under more recent case law and Restatement § 58.

Vice Chief Justice Pelander authored the opinion for a unanimous Court.