Arizona Property & Casualty Insurance Guaranty Fund v. Martin , 210 Ariz. 478 ( 2005 )

FILED BY CLERK
JUN 17 2005
IN THE COURT OF APPEALS COURT OF APPEALS
STATE OF ARIZONA DIVISION TWO
DIVISION TWO
ARIZONA PROPERTY AND ) 2 CA-CV 2004-0199
CASUALTY INSURANCE GUARANTY ) DEPARTMENT B
FUND, )
) OPINION
Plaintiff/Appellee, )
)
v. )
)
BUNNY MARTIN and ROY MARTIN, )
wife and husband, )
)
Defendants/Appellants. )
)
APPEAL FROM THE SUPERIOR COURT OF PIMA COUNTY
Cause No. CV2003-0983
Honorable Michael Alfred, Judge
AFFIRMED
Jones, Skelton & Hochuli, P.L.C.
By Michael A. Ludwig and Randall H. Warner Phoenix
Attorneys for Plaintiff/Appellee
Block Grynkewich, P.C.
By Gary S. Grynkewich
Tucson
Attorneys for Defendants/Appellants
P E L A N D E R, Chief Judge.
¶1 In this declaratory relief action (DRA) that involves a Morris1 agreement,
appellants Bunny Martin and her husband appeal from the trial court’s grant of summary
judgment in favor of appellee Arizona Property and Casualty Insurance Fund (Fund).
Martin contends the trial court erred in allowing the Fund to litigate alleged liability issues
in the coverage phase of this case. Finding no error, we affirm the trial court’s decision.
BACKGROUND
¶2 On appeal from a summary judgment, we view the facts “in the light most
favorable to the party against whom judgment was entered.” Bothell v. Two Point Acres,
Inc., 192 Ariz. 313, ¶ 2, 965 P.2d 47, 49 (App. 1998). Here, the parties agree the material
facts are undisputed. Martin was an employee of First Chiropractic, where Robin O’Neal
and Paul Ries worked as chiropractic doctors. As one of the benefits of her employment,
Martin received chiropractic “adjustments” free of charge. No records were kept for the
twenty-five to forty treatments Martin received during the course of her employment with
First Chiropractic. Martin filed a tort action against First Chiropractic, O’Neal, and Ries
(First defendants), claiming two chiropractic adjustments they performed had caused
permanent injury to her neck.
¶3 The First defendants were insured under a professional liability insurance
policy issued by Reliance National Indemnity Company. Reliance assumed the defense of
the tort action but reserved its rights to contest coverage. In their answer in that underlying
1
United Servs. Auto. Ass’n v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987).
2
case, the First defendants alleged as an affirmative defense that Martin’s “claims may be
barred by the worker’s compensation laws of the state of Arizona.” After Reliance became
insolvent in 2001, the Fund took over the defense of the tort action pursuant to A.R.S. §§
20-661 and 20-667.
¶4 In February 2003, the Fund filed this DRA, requesting a ruling that insurance
coverage was excluded under the Reliance policy because Martin’s alleged injuries had
occurred in the course of her employment and because the chiropractors had violated their
professional code of conduct. The Fund also requested a declaration that Martin’s injuries
constituted one incident under the policy. In March, O’Neal and First Chiropractic entered
into a Morris agreement with Martin and, pursuant to their stipulation, the trial court
entered a default against O’Neal and First Chiropractic in the underlying action.2
¶5 The Fund moved for summary judgment in this DRA on the issue of coverage
and Martin, standing in the shoes of O’Neal and First Chiropractic pursuant to the Morris
agreement’s assignment provision, cross-moved for summary judgment. The trial court
granted the Fund’s motion and denied Martin’s. This appeal followed the trial court’s entry
of judgment pursuant to Rules 54(b) and 56, Ariz. R. Civ. P., 16 A.R.S., Pt. 2.
2
For reasons not clear in the record, Ries, the other defendant in the underlying
action, was not a party to either the Morris agreement or the stipulation for entry of default.
At oral argument in this court, Martin’s counsel stated that a default judgment was never
actually entered against O’Neal and First Chiropractic.
3
DISCUSSION
¶6 Martin contends “[t]he trial court erred in granting summary judgment in favor
of the Fund in that its ruling was based on an issue completely subsumed under the terms
of . . . [the] Morris agreement.” “On appeal from a summary judgment, we must determine
de novo whether there are any genuine issues of material fact and whether the trial court
erred in applying the law.” Bothell, 192 Ariz. 313, ¶ 8, 965 P.2d at 50. “We will affirm if
the trial court’s ruling is correct on any ground.” Rowland v. Great States Ins. Co., 199
Ariz. 577, ¶ 6, 20 P.3d 1158, 1162 (App. 2001).
¶7 The Reliance policy contained various exclusions to coverage, including the
following language:
This policy does not apply to any claim or suit arising directly
or indirectly from:
1. bodily injury to you in the course of your employment.
....
3. any obligation for which you or any carrier acting as insurer
may be held liable under any workers’ compensation . . .
law or under any similar law.
....
15. injury or damage to:
• your employee . . . arising out of the course of his or her
work;
....
4
This exclusion applies:
• whether you may be liable as an employer or in any
other capacity, and
• to any obligation to share loss with or repay someone
else who must pay because of the injury.
¶8 In its ruling, the trial court found that “Bunny Martin was, at the time of her
injury, an employee of Defendant First Chiropractic and Defendant Robin O’Neal.” The
trial court also stated that “Martin’s injury arose out of and occurred within the course and
scope of her employment with Defendant First Chiropractic” and that “A.R.S. [§] 23-
1022(A) provides that Worker’s Compensation is the exclusive remedy for employees who
are injured in the course of their employment.” Presumably on all of those bases, but
without referring to the policy exclusions or otherwise specifying the particular grounds on
which it relied, the trial court granted summary judgment in favor of the Fund.3
¶9 Focusing on the trial court’s reference to the exclusivity provision of § 23-
1022(A), Martin maintains the trial court “based [its] decision” on “[w]hat this Court
prohibited” in Associated Aviation Underwriters v. Wood, 209 Ariz. 137, 98 P.3d 572
(App. 2004) (AAU). In that case, decided by this court after the trial court had ruled, we
3
The trial court made several other findings relating to the chiropractors’ “violat[ion
of] the code of professional conduct applicable to the chiropractic profession” and the
number of policy limits that would apply. In view of our holding on the coverage issue,
however, we do not address Martin’s arguments on those other rulings.
5
applied the principles set forth in United Services Automobile Association v. Morris, 154
Ariz. 113, 741 P.2d 246 (1987), and stated:
when an insured who is being defended under a reservation of
rights enters into a Morris agreement and stipulates to an
adverse judgment, the insurer may not litigate in the coverage
phase of a DRA “the same legal and factual issues” that
underlie the judgment. . . . Morris does not authorize, but
rather essentially prohibits, an insurer’s attempt in that context
to litigate tort liability and damage issues in the guise of a
coverage defense.
AAU, 209 Ariz. 137, ¶ 37, 98 P.3d at 585.
¶10 According to Martin, the Fund violated AAU’s principles by litigating liability
issues in this action on coverage. If the workers’ compensation defense that the Fund
presented here had been successfully urged in the underlying tort action, she argues, it
would have “defeated Martin’s claim of liability.” Thus, Martin reasons, the trial court erred
because its ruling “hinged on facts and law bearing directly on [O’Neal’s and First
Chiropractic’s] liability in the underlying action.” We do not agree with Martin’s reading
or application of our decision in AAU.
¶11 The insurer in AAU argued it was “entitled to a declaration of ‘no coverage’
under its policies” if the plaintiffs in the underlying case did not prove “actionable fault” on
the insureds’ part. Id. Relying primarily on “the basic insuring provision of its policies,” id.
¶ 32, the insurer contended no coverage existed because those plaintiffs had “failed to
establish an ‘insured event’” absent proof of liability, causation, and damages in the DRA.
Id. ¶ 25. In other words, the insurer in AAU “essentially argue[d] it may fully litigate all
6
liability and damage issues in the coverage phase of [the] DRA, irrespective of what occurred
in the [underlying tort] cases.” Id. ¶ 32. We rejected that argument because the purported
coverage issue the insurer sought to litigate—the existence of actionable fault—was
“completely subsumed in the consent judgment” that had been entered in the underlying tort
actions pursuant to the Morris agreement. Id. ¶ 35.
¶12 In contrast, Morris involved defendants in the underlying case who had
stipulated that their acts “were either negligent or intentional.” 154 Ariz. at 120, 741 P.2d
at 253. Our supreme court found “the coverage issue [was] clearly unresolved,” because the
defendants would be liable under either theory, but the insurance policy at issue excluded
intentional acts from coverage. Id. The court further explained that the insurer could not
“relitigate all aspects of the liability case,” id., because that would destroy the purpose of
the Morris agreement—allowing insureds “to act reasonably to protect themselves from ‘the
sharp thrust of personal liability.’” Id. at 118, 741 P.2d at 251, quoting Ariz. Prop. & Cas.
Ins. Guar. Fund v. Helme, 153 Ariz. 129, 137, 735 P.2d 451, 459 (1987). But, the court
also cautioned that “[a]n insured’s settlement agreement should not be used to obtain
coverage that the insured did not purchase.” Morris, 154 Ariz. at 120, 741 P.2d at 253; see
also Parking Concepts, Inc. v. Tenney, 207 Ariz. 19, ¶ 25, 83 P.3d 19, 24 (2004) (“Morris
neither imposes new contractual duties on the insurer nor otherwise expands the rights of
the insured under the contract of insurance.”).
7
¶13 The parties agreed below that at all pertinent times Martin was O’Neal’s and
First Chiropractic’s employee and that her “injuries occurred during the course and scope
of her employment.” According to Martin, that conceded fact would relieve O’Neal and
First Chiropractic of liability because workers’ compensation is generally an exclusive
remedy for on-the-job injuries. Therefore, she maintains, her employee status cannot be
litigated, or raised as a defense to coverage, in this DRA because it is a liability question
subsumed in the underlying tort action. But, as noted earlier, the Reliance insurance
contract specifically excluded, inter alia, “[i]njury or damage to . . . your employee . . .
arising out of the course of his or her work.”4
¶14 With respect to that exclusion, as the Fund points out, “[t]here are
circumstances in which the [workers’ compensation] defense would not apply but the
exclusion nonetheless would.” For example, if the insured employer failed to post proper
4
Although Martin does not directly challenge the validity or applicability of that
exclusion, we note that courts have upheld and enforced similar exclusions to preclude
coverage for injury claims by employees of the insured. See, e.g., Stearns-Roger Corp. v.
Hartford Accident & Indem. Co., 117 Ariz. 162, 571 P.2d 659 (1977) (summary judgment
affirmed based on policy provision excluding coverage for injury to insured’s employees
arising out of and in course of such employment, when plaintiffs in underlying tort case
against additional insured had been injured in course of their employment with named
insured); Tucson Pub. Sch. Dist. No. One v. Home Ins. Co., 9 Ariz. App. 233, 451 P.2d 46
(1969) (summary judgment affirmed based in part on similar exclusion in policy);
Westchester Fire Ins. Co. v. Am. Gen. Fire & Cas. Co., 790 S.W.2d 816, 818 (Tex. App.
1990) (policy provision excluding coverage for injury to employees of insured arising out
of and in course of employment “was plainly intended to exclude any obligation on
[insurer’s] part to pay any liability incurred by [insured] by reason of bodily injury
sustained by an employee, whether that liability was direct . . . or indirect . . . .”).
8
notice of workers’ compensation rights, the employee could sue the employer directly under
A.R.S. § 23-906, but the policy exclusion might still apply. Similarly, as the Fund also
observes, an employee “can elect to sue if the [on-the-job] injury resulted from willful
misconduct, though the exclusion would still apply.” See A.R.S. § 23-1022(A). Thus, any
liability issues relating to workers’ compensation law are not necessarily coextensive with
the insurance policy exclusions. And that is so even though, as Martin points out, she did
not allege, nor did the parties present evidence on, willful misconduct by the First
defendants or any “failure to post” issues in the underlying case or in this DRA.
¶15 More importantly, as the Fund explains, it “is not arguing that there is no
coverage because there is no liability. It is arguing that there is no coverage because specific
policy exclusions apply.” The Fund likewise points out it “does not seek to relitigate
liability,” but rather, “only seeks to enforce policy exclusions, the applicability of which are
uncontested.” We agree, and that makes this situation similar to Morris and different from
AAU. In AAU, we prohibited an insurer from relitigating liability issues under the guise of
litigating coverage; but we did not prohibit insurers from litigating legitimate coverage issues
in a DRA based on specific policy exclusions. That is all the Fund did, and Martin does not
persuasively explain what other viable options the Fund might have had to pursue and
resolve those coverage issues under the circumstances presented here.
¶16 In Arizona, a liability insurer owes express duties to defend and, if coverage
and liability exist, to indemnify the insured. See Waddell v. Titan Ins. Co., 207 Ariz. 529,
9
¶ 14, 88 P.3d 1141, 1145 (App. 2004). Martin apparently suggests that, having chosen to
defend the underlying case while reserving its rights to contest coverage, and having raised
as an affirmative defense in that case a potential bar under the workers’ compensation laws,
the insurer could avoid its duty to indemnify the insureds only by litigating and prevailing
on that defense as a “complete shield from liability” in the underlying case. But the insurer
clearly was entitled to reserve its rights on coverage while providing a defense in the
underlying action, “without thereby waiving its right to raise the question of liability under
the terms of the policy at a later date.” Damron v. Sledge, 105 Ariz. 151, 155, 460 P.2d
997, 1001 (1969); see also Morris, 154 Ariz. at 118, 741 P.2d at 251. And, when the
insurer did so, the insureds were equally free to protect themselves, as they did, by executing
a Morris agreement with Martin and stipulating to entry of default against them. Id. at 119,
741 P.2d at 252; see also Mora v. Phoenix Indem. Ins. Co., 196 Ariz. 315, ¶ 17, 996 P.2d
116, 120 (App. 1999). At that point, the Fund’s only appropriate and available avenue for
litigating and obtaining a ruling on the coverage issues was in this DRA. We find that
procedure neither unauthorized nor unusual and reject Martin’s suggestion to the contrary.5
¶17 As the Fund points out, neither Morris nor its progeny, including AAU,
intended to “eliminate policy exclusions with a Morris agreement.” To rule otherwise
5
We also reject Martin’s suggestion that, by merely “bringing” the DRA, the Fund
“sought haven from its obligation to defend.” Nothing in the record suggests Reliance or the
Fund breached its duty to defend. Rather, the record suggests defense counsel in the
underlying case simply chose to pursue a Morris agreement instead of litigating the merits
of either Martin’s claims or the affirmative defenses the First defendants raised.
10
would allow Martin, by entering into a Morris agreement with O’Neal and First
Chiropractic, “to obtain coverage that [they] did not purchase”—coverage for injury to
employees. Morris, 154 Ariz. at 120, 741 P.2d at 253. This would upset the careful
balance between the interests of the insured and the insurer set forth in Morris and
explained in AAU. Accordingly, we find no error in the trial court’s ruling on the coverage
issue here.
DISPOSITION
¶18 The judgment of the trial court is affirmed. In our discretion, we deny the
Fund’s request, made pursuant to A.R.S. § 12-341.01(A), for an award of attorney fees on
appeal. See Hale v. Amphitheater Sch. Dist. No. 10, 192 Ariz. 111, ¶ 20, 961 P.2d 1059,
1065 (App. 1998) (court has discretion on whether to award attorney fees on appeal).
____________________________________
JOHN PELANDER, Chief Judge
CONCURRING:
____________________________________
M. JAN FLÓREZ, Presiding Judge
____________________________________
PHILIP G. ESPINOSA, Judge
11