Navigators v. First Mercury ( 2020 )

NOTICE: NOT FOR OFFICIAL PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.
IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
NAVIGATORS INSURANCE COMPANY,
Plaintiff/Appellee,
v.
FIRST MERCURY INSURANCE COMPANY,
Defendant/Appellant.
No. 1 CA-CV 19-0744
FILED 10-6-2020
Appeal from the Superior Court in Maricopa County
No. CV2015-008833
The Honorable Teresa A. Sanders, Judge
AFFIRMED
COUNSEL
Raymond, Greer & McCarthy, P.C., Scottsdale
By Michael J. Raymond, Daniel W. McCarthy
Counsel for Plaintiff/Appellee
The Cavanagh Law Firm, P.A., Phoenix
By Timothy R. Hyland, Jordan R. Plitt
Counsel for Defendant/Appellant
NAVIGATORS v. FIRST MERCURY
Decision of the Court
MEMORANDUM DECISION
Presiding Judge Samuel A. Thumma delivered the decision of the Court,
in which Judge D. Steven Williams and Judge David D. Weinzweig joined.
T H U M M A, Judge:
¶1 This appeal concerns an excess insurer’s claim against a
primary insurer for breaching its duty of good faith in failing to settle an
underlying claim. A jury found defendant First Mercury Insurance
Company liable and awarded plaintiff Navigators Insurance Company $1
million in damages. First Mercury challenges the sufficiency of the evidence
supporting that verdict, as well as the superior court’s rejection of its
proposed jury instructions, failure to grant First Mercury judgment as a
matter of law, and award of attorneys’ fees to Navigators. Because First
Mercury has shown no error, the judgment is affirmed.
FACTS AND PROCEDURAL HISTORY
I. The Personal Injury Case.
¶2 This case arises out of a personal injury case filed by Michael
Wiley, which resulted in a $3.95 million jury verdict against an insured
gym. Wiley was seriously injured and permanently impaired when one of
the gym’s stair climbers malfunctioned. As the gym’s primary insurer, First
Mercury was obligated to pay the first $2 million of any verdict or
settlement above the gym’s $250,000 self-insured retention amount (akin to
a deductible). As the gym’s excess insurer, Navigators would pay damages
above $2 million.
¶3 Wiley sued the gym for premises liability and negligence,
claiming the injury prevented his return to work as a probation officer.
Wiley sought $175,000 in medical expenses, about $3 million in lost
earnings, pain and suffering, and disability. Wiley and his wife also sued
for loss of consortium damages.
¶4 When the gym realized the Wileys’ claims could not be
resolved within its self-insured retention amount, it tendered the defense
to First Mercury, which First Mercury accepted. Given the gym’s apparent
liability, discovery largely focused on damages. First Mercury weighed
settlement options at various points based on estimated jury verdicts
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provided by its counsel and claims adjuster. Worst-case figures increased
as discovery proceeded — from $900,000 18 months before trial to $4.2
million a month before trial. But First Mercury believed a verdict not
exceeding $1.3 million was the most likely outcome.
¶5 Settlement negotiations continued through trial. The Wileys
reduced their demand from $2 million to $1.5 million, while First Mercury
increased its offer from $800,000 to $1.1 million. Both the gym and
Navigators urged First Mercury to settle the case before a verdict, but First
Mercury would go no higher — even though it had previously approved a
settlement of up to $1.25 million.
¶6 As First Mercury had anticipated, evidence at trial established
the gym’s liability. Defense witnesses conceded the gym had not
maintained the stair climber according to the manufacturer’s guidelines.
The court rejected First Mercury’s argument that Wiley had assumed the
risk of injury and gave a spoliation instruction because the gym had lost
important evidence. Accordingly, the defense focused on disproving
damages — especially Wiley’s claim for $2.8 million in lost future earnings.
First Mercury called vocational rehabilitation and economics experts to
opine that Wiley’s earning capacity was unaffected by the accident.
¶7 Ultimately, however, the jury returned a unanimous verdict
awarding the Wileys $3.95 million, consistent with First Mercury’s pretrial
worst-case scenarios. Because this amount exceeded First Mercury’s policy
limits, Navigators assumed control and settled the case for $3 million.
Navigators then sued First Mercury under the doctrine of equitable
subrogation for breaching its duty to negotiate in good faith. As damages,
Navigators claimed the $1 million settlement it had paid the Wileys plus
interest, attorneys’ fees and costs.
II. This Equitable Subrogation Case.
¶8 Navigators’ case against First Mercury is based on the
principle that, when the gym tendered its defense to First Mercury, First
Mercury had an obligation to negotiate in good faith on the gym’s behalf.
First Mercury’s refusal to settle a claim that should have been settled,
Navigators claims, was a breach of this duty of good faith and would have
exposed the gym to liability absent Navigators’ excess coverage. Because it
was this excess coverage that shifted the risk of loss from the gym to
Navigators, Navigators was subrogated to the rights of the gym and
therefore could sue First Mercury for failing to negotiate in good faith on
the gym’s behalf. See generally Hartford Accident & Indem. Co. v. Aetna Cas. &
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Sur. Co., 164 Ariz. 286, 289 (1990) (noting an excess insurer “should not have
to pay a[n excess] judgment if the primary insurer caused [it] by a bad faith
failure to settle within [policy] limits”).
¶9 At trial in this equitable subrogation case, Navigators relied
on First Mercury’s pretrial exposure analyses to show First Mercury
understood the substantial risk of a verdict in excess of $3 million and as
high as $4.2 million. Navigators argued in closing that a reasonable insurer
would have settled for $1.5 million, paying a few hundred thousand dollars
more than its internal estimates to avoid a loss of millions. That First
Mercury did not, Navigators concluded, was a breach of its duty of good
faith.
¶10 First Mercury countered its only duty was to the gym, its
insured, and not Navigators, the excess insurer. The pretrial verdict
analyses, according to First Mercury, proved it had thoroughly and
properly investigated the Wileys’ claims, thereby discharging its duty to the
gym. Because its insured suffered no harm, First Mercury argued,
Navigators had no claim.
¶11 The jury returned a unanimous $1 million verdict for
Navigators and against First Mercury. After entry of final judgment
awarding Navigators more than $266,000 in attorneys’ fees and taxable
costs, First Mercury timely appealed. This court has jurisdiction pursuant
to Article 6, Section 9 of the Arizona Constitution and Arizona Revised
Statutes (A.R.S.) sections 12-120.21(A)(1) and -2101(A)(1) (2020).1
DISCUSSION
¶12 First Mercury argues (1) Arizona law does not recognize
Navigators’ equitable subrogation claim, (2) the evidence did not support
the jury’s verdict, (3) the court erroneously rejected First Mercury’s
proposed jury instructions and (4) the court erroneously awarded
Navigators its attorneys’ fees.
1Absent material revisions after the relevant dates, statutes and rules cited
refer to the current version unless otherwise indicated.
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I. Arizona Law Recognizes Navigators’ Equitable Subrogation
Claim.
¶13 Judgment as a matter of law (JMOL) should be granted “if the
facts produced in support of the claim or defense have so little probative
value, given the quantum of evidence required, that reasonable people
could not agree with the conclusion advanced by the proponent of the claim
or defense.” Roberson v. Wal-Mart Stores, Inc., 202 Ariz. 286, 290 ¶ 14 (App.
2002) (quoting Orme Sch. v. Reeves, 166 Ariz. 301, 309 (1990)); accord Ariz. R.
Civ. P. 50. This court reviews the evidence and all reasonable inferences in
the light most favorable to Navigators, the nonmoving party. See Murcott v.
Best Western Int’l, Inc., 198 Ariz. 349, 356 ¶ 36 (App. 2000). Whether
equitable relief is available is a question of law reviewed de novo. Andrews
v. Blake, 205 Ariz. 236, 240 ¶ 12 (2003) (citing cases). This court likewise
reviews de novo the denial of a motion for JMOL. ABCDW LLC v. Banning,
241 Ariz. 427, 433 ¶ 16 (App. 2016).
¶14 First Mercury contends Navigators has no claim because the
gym had no exposure. By ruling otherwise, First Mercury argues the
superior court erroneously denied it JMOL. But to prevent an excess insurer
from pursuing damages from the primary insurer because the insured is
not personally liable would undercut the doctrine of equitable subrogation.
A. Navigators’ Claim Is Supported by Arizona Precedent.
¶15 This case is much like Hartford v. Aetna, where the Arizona
Supreme Court first recognized an excess insurer’s action for breach of
good faith against a primary insurer whose settlement tactics led to an
excess judgment. 164 Ariz. at 291. The insured in Hartford, who caused a car
accident, had primary insurance through Aetna for $25,000 in damages and
excess coverage from Hartford. Id. at 288. Like First Mercury, Aetna quickly
determined its insured was at fault, leaving only the amount of damages to
be determined. See id.
¶16 Despite conceding its insured’s liability, Aetna, like First
Mercury, was confident any potential exposure was well below its policy
limits and therefore negotiated aggressively. See id. Several months into
discovery, Aetna was advised of the possibility of a verdict well above its
previous estimates, id., just as First Mercury was here. But Aetna, like First
Mercury, opted to proceed to trial rather than settle. Id. And as in this case,
the eventual verdict far exceeded Aetna’s policy limits, due largely to an
adverse finding on lost future earnings. Id. Hartford assumed control of the
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case following the verdict, settled it on appeal and sued Aetna for
negotiating in bad faith soon after. Id. at 288–89.
¶17 At the time, Arizona courts had not recognized equitable
subrogation in this context and the superior court granted summary
judgment for Aetna, which argued its duty of good faith did not extend to
Hartford. Id. at 289. On appeal, the Arizona Supreme Court reversed,
explicitly recognizing the applicability of equitable subrogation and
overruling contrary precedent. Id. at 291. Hartford reasoned that equitable
subrogation would protect the public and others from a primary insurer’s
disincentive to settle within policy limits where “an excess insurer is
available to cover any amount over the primary insurer’s liability limits.”
Id. at 290. This disincentive to settle, the court explained, would lead to
inflated insurance premiums, increased litigation costs and an unfair
distribution of losses among primary and excess insurers. Id. at 290–91.
¶18 Hartford held that an excess insurer who pays an excess
judgment caused by a primary insurer’s “bad faith failure to settle within
policy limits” of the primary insurer “is subrogated to the rights of the
insured.” Id. at 291. In that circumstance, Hartford found, the excess insurer
may sue the primary insurer for breach of good faith — just as an insured
without excess insurance could. See id.
¶19 This case is controlled by Hartford. As the gym’s excess
insurer, Navigators had the right to step into the gym’s shoes and hold First
Mercury accountable for failing to negotiate in good faith. First Mercury’s
argument seeks to depart from Hartford by relieving primary insurers of
their duty to settle cases that a reasonable insurer would settle, thereby
shifting the risk of loss to excess insurers. Hartford, however, forbids that
exact result. Accordingly, this court rejects First Mercury’s argument that
Navigators’ claim is not cognizable under Arizona law.
B. First Mercury’s Counterarguments Are Inconsistent With
Arizona Caselaw.
¶20 First Mercury argues it cannot be liable to Navigators for
negotiating in bad faith absent damages or financial risk to its insured. In
doing so, First Mercury asserts an excess insurer’s rights are no greater than
the rights of its insured and a primary insurer owes no direct duty to an
excess insurer. See Twin City Fire Ins. Co. v. Bolton, 164 Ariz. 295, 296 (1990).
But Bolton, decided the same day as Hartford, rejected a direct duty because
it recognized that equitable subrogation adequately protected the rights of
excess insurers. 164 Ariz. at 296 (“We have decided this day, in Hartford,
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that under the doctrine of equitable subrogation, a primary insurance carrier
owes an excess insurance carrier a duty of good faith and fair dealing in accepting
settlement offers within policy limits.”) (emphasis added).
¶21 While First Mercury is correct that an excess insurer has no
greater rights than its insured, it does not follow that an excess insurer
cannot assert a bad faith claim against the primary insurer if the insured
has no such claim. Nor does it follow that all defenses applicable against the
insured are likewise applicable against the excess insurer. Indeed, Bolton
suggests in dicta only that wrongful conduct on the part of the insured may
be asserted as a defense against its excess insurer. Id. at 296–97. This view
reflects Arizona’s general approach to subrogation, under which “‘payment
to the insured by the insurer is no defense to the subrogation claim for the
obvious reason that it is by the making of such payment that the insurer’s
right of subrogation arises.’” PPG Indus., Inc. v. Cont’l Heller Corp., 124 Ariz.
216, 221 (App. 1979) (quoting Highlands Ins. Co. v. Fischer, 122 Ariz. 394, 396
(App. 1979)). Bolton does not hold that the absence of an insured’s claim may
be asserted as a defense against its excess insurer, as First Mercury suggests.
¶22 First Mercury also argues — without citation to authority —
that “Arizona law does not allow an excess carrier to sit on the sidelines and
then assert an unexpected jury verdict renders the primary insurance
carrier liable for bad faith.” Not so. Navigators had no duty “to evaluate
[the] settlement offer, to participate in the defense, or to act at all” until First
Mercury offered its policy limits, which never occurred. See Twin City Fire
Ins. Co. v. Burke, 204 Ariz. 251, 256 ¶ 18 (2003) (emphasis added).
¶23 As Hartford directs, First Mercury had a good faith duty to
give equal consideration to the interests of its insured, 164 Ariz. at 289, and,
by proxy, Navigators, see id. at 291. “Equal consideration” turns on whether
First Mercury would have settled for $1.5 million if it was responsible for
losses beyond its $2 million policy limit. See Gen. Accident Fire & Life
Assurance Corp. v. Little, 103 Ariz. 435, 442 (1968) (a primary insurer must
evaluate a claim “as though it alone would be responsible for the payment
of any judgment rendered”). The excess judgment in the personal injury
case allowed Navigators, through equitable subrogation, to assert the bad
faith claim that the insured (the gym) could have asserted had Navigators
not covered the excess verdict. First Mercury’s argument to the contrary
would nullify the doctrines, recognized by the Arizona Supreme Court,
under which it has been found liable. Accordingly, the superior court did
not err in denying First Mercury’s motion for JMOL.
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II. The Evidence Was Sufficient to Support the Jury’s Verdict.
¶24 First Mercury argues the evidence did not support the jury’s
verdict, meaning the court should have granted its motion for JMOL on this
independent ground. In considering whether sufficient proof supports the
jury’s verdict, this court views the evidence “in the light most favorable to
upholding” the verdict. Powers v. Taser Int’l, Inc., 217 Ariz. 398, 399 ¶ 4 n.1
(App. 2007) (citing Larsen v. Nissan Motor Corp., 194 Ariz. 142, 144 ¶ 2 (App.
1998)).
¶25 It was not unreasonable for the jury to conclude First Mercury
failed to act as a prudent insurer by refusing multiple opportunities to
settle, for amounts well within policy limits, given its awareness of the risk
of a verdict well above its policy limits. In Arizona, a primary insurer is
liable for breaching its duty to settle in good faith if the finder of fact can
determine that (1) “a prudent insurer without policy limits would have
accepted the settlement offer” (the Clearwater test) and (2) “either knew or
was conscious of the fact that its conduct was unreasonable” (the Burke test).
Clearwater v. State Farm Mut. Auto. Ins. Co., 164 Ariz. 256, 260 (1990) (citation
omitted); Burke, 204 Ariz. at 255 ¶ 17 (citation omitted); accord Hartford, 164
Ariz. at 291, 294; Bolton, 164 Ariz. at 296. This “conscious negligence”
standard turns on the consideration of eight non-exclusive factors (the
Clearwater factors). Clearwater, 164 Ariz. at 260; accord id. at 259. The
Clearwater factors provide that a jury should “measure” — among other
things — “the extent of the insurer’s consideration of . . . the strength of the
third party’s claim” and “the amount of financial risk to which each party
is exposed in the event of a refusal to settle.” Id. at 259, 260.2 If this fact-
intensive inquiry leads the jury to conclude that the defendant knew it
should have settled the case, then a verdict for the plaintiff is proper. Accord
Clearwater, 164 Ariz. at 260; Burke, 204 Ariz. at 255 ¶ 17.
¶26 Here, the evidence presented at trial was sufficient to sustain
the jury’s verdict that First Mercury strayed from its duty to negotiate as a
prudent insurer would by rejecting the Wileys’ $1.5 million demand. Joyce
Poff, First Mercury’s claims adjuster in the personal injury case, testified
about her liability concerns given the gym had not followed the
2 First Mercury argues an insurer who has undervalued a claim because of
an honest mistake necessarily cannot be liable for breaching its duty to
settle in good faith. See Glendale v. Farmers Ins. Exch., 126 Ariz. 118, 120–21
(1980); Rawlings v. Apodaca, 151 Ariz. 149, 157 (1986). But the jury’s verdict
contradicts the thought that First Mercury’s conduct was no more than an
honest mistake.
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manufacturer’s maintenance guidelines and had lost a crucial piece of
evidence. First Mercury’s final pretrial report, which was admitted into
evidence, predicted the Wileys would submit evidence of damages that
greatly exceeded the primary policy limits. That report also estimated a 20%
chance of a $2–$3 million verdict and a worst-case verdict of $4.2 million.
Poff also testified that, despite its pretrial estimates and its $2 million in
coverage, First Mercury rejected multiple opportunities to settle for $1.5
million, secured $1.25 million in settlement authority and refused to offer
more than $1.1 million to settle. On these facts, a jury could conclude First
Mercury knew its settlement approach was contrary to the actions of a
prudent insurer without policy limits. See Clearwater, 164 Ariz. at 260.
¶27 First Mercury contends the evidence could not support the
verdict because Navigators only submitted evidence of two of the eight
Clearwater factors and, even then, there was insufficient evidence for an
adverse finding on either of those factors. The eight Clearwater factors,
however, are not elements to be shown in every case, but are non-exclusive
factors that guide a jury’s deliberations. See Clearwater, 164 Ariz. at 259
(suggesting jury may consider “any other factors tending to negate or
establish bad faith” besides the eight Clearwater factors) (emphasis added);
see also Little, 103 Ariz. at 443 (evidence attempting to rebut factors which a
plaintiff neither raised nor challenged is “irrelevant to the issue of bad
faith”). Moreover, the jury could have reasonably found First Mercury did
not adequately account for the strength of the Wileys’ case or the financial
risk to which it would expose Navigators if settlement was not reached, and
thus it knew it was not acting as a prudent insurer would.
¶28 First Mercury has not shown the jury could not have
reasonably returned the verdict it did on the evidence admitted at trial.
Stated differently, First Mercury has not shown the trial evidence — viewed
in the light most favorable to sustaining the verdict — could not establish
First Mercury’s bad faith. Accordingly, because the claim was properly
submitted to the jury and the verdict was supported by the trial evidence,
the court properly denied First Mercury’s motion for JMOL.
III. The Court Properly Rejected First Mercury’s Proposed Jury
Instructions.
¶29 First Mercury unsuccessfully proposed several jury
instructions it claims were necessary for the jury to understand the law.
First Mercury claims the superior court’s rejection of these instructions was
reversible error. Presuming the issues were properly preserved for appeal,
First Mercury has shown no reversible error.
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¶30 General objections do not preserve a matter for appeal. See
Czarnecki v. Volkswagen of Am., 172 Ariz. 408, 417 (App. 1991). An objection
on the ground that a proposed jury instruction states or does not state the
law is a general objection. Spillios v. Green, 137 Ariz. 443, 446–47 (App. 1983).
First Mercury raises general objections, insisting its proposed jury
instructions were “relevant,” and “correct reflection[s] of the State of
Arizona law” that “would be instructive for the jury” during its
deliberations. The record does not reflect any rationale for the proposed
instructions beyond First Mercury’s claim that each was a relevant and
correct statement of Arizona law. It is not enough for First Mercury to
maintain “the trial judge knew why [First Mercury] was requesting the
instructions and never inquired for more clarification.” Accord Spillios, 137
Ariz. at 446.
¶31 Presuming the objections were preserved for appeal, the
court’s refusal to give First Mercury’s requested instructions is reviewed for
abuse of discretion. See Dupray v. JAI Dining Servs. (Phx.), Inc., 245 Ariz. 578,
585 ¶ 22 (App. 2018). “[A]n abuse of discretion ‘is discretion manifestly
unreasonable, or exercised on untenable grounds, or for untenable
reasons.’” Lashonda M. v. Ariz. Dep’t of Econ. Sec., 210 Ariz. 77, 83 ¶ 19 (App.
2005) (quoting Quigley v. Tucson City Ct., 132 Ariz. 35, 37 (1982)).
¶32 Here, the court properly instructed the jury on the Clearwater
test, the Clearwater factors, the nature of equitable subrogation, and
Navigators’ burdens of proof and persuasion. First Mercury proposed four
more instructions: (1) that the jury could not evaluate First Mercury’s
conduct with knowledge of the eventual verdict, (2) that a primary insurer
has no absolute duty to accept settlement offers within its policy limits, (3)
that a primary insurer cannot be held liable for a good faith mistake in
performance or judgment if “it acts honestly, on adequate information and
does not place greater importance on its own interests . . . .” and (4) that a
primary insurer owes no direct duty to an excess insurer.
¶33 The court did not err in rejecting each of these proposed
instructions. The first was unnecessary, as the court’s instructions on the
Clearwater test and factors directed the jury to consider only what a primary
insurer knew and how it acted before and during settlement negotiations,
not after the eventual verdict. Both the second and fourth were irrelevant,
as Navigators never argued First Mercury had an absolute duty to accept
the Wileys’ demands or that First Mercury owed Navigators a direct duty.
See Little, 103 Ariz. at 443. Finally, the third assumed the truth of the dispute
at the core of the case: that First Mercury’s settlement tactics were in fact
conducted in good faith.
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¶34 Because the jury instructions given, viewed in their entirety,
adequately set forth the applicable law and provided the jury with the
correct rules for reaching its decision, see State v. Rosas-Hernandez, 202 Ariz.
212, 220 ¶ 31 (App. 2002); Lifeflite Med. Air Transp., Inc. v. Native Am. Air
Servs., Inc., 198 Ariz. 149, 151 ¶ 8 (App. 2000), the court did not abuse its
discretion in rejecting First Mercury’s proposed instructions.
IV. The Court Properly Awarded Navigators Attorneys’ Fees.
¶35 First Mercury argues the superior court erred by misapplying
the factors it relied on to award Navigators more than $266,000 in attorneys’
fees. In an action arising out of contract, a superior court may award the
successful party reasonable attorneys’ fees, A.R.S. § 12-341.01(A), to
“mitigate the burden of the expense of litigation to establish a just claim or
a just defense,” A.R.S. § 12-341.01(B). A court has broad discretion in
making a fee award; if there is “any reasonable basis” for its decision, the
award will be affirmed. Associated Indem. Corp. v. Warner, 143 Ariz. 567, 570–
71 (1985).
¶36 There are several factors that may be useful in determining
whether to award attorneys’ fees: (1) whether the unsuccessful party
presented a meritorious claim or defense, (2) whether the litigation could
have been avoided or settled, and whether the successful party’s efforts
would have been superfluous if it had, (3) whether assessing fees against
the unsuccessful party would cause an extreme hardship, (4) whether the
successful party recovered all of the relief sought, (5) whether the legal
question presented was novel, (6) whether the claim or defense had
previously been adjudicated in Arizona, and (7) whether a fee award would
discourage other parties with tenable claims or defenses from litigating
legitimate contract issues. Warner, 143 Ariz. at 570.
¶37 Here, the court awarded Navigators its requested attorneys’
fees after determining each of these factors weighed in Navigators’ favor.
First Mercury challenges the court’s conclusions on factors 1 and 5, as well
as the award of fees Navigators incurred while settling the Wiley lawsuit.
But the court’s characterization of First Mercury’s defense as without merit
or novelty did not “exceed[] the bounds of reason.” Warner, 143 Ariz. at 571.
Nor was it unreasonable for the court to award Navigators the fees it
incurred for settling the Wiley lawsuit. Although First Mercury disagrees
with the fee award, it has not shown the award was error.
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V. Attorneys’ Fees and Costs on Appeal.
¶38 Both First Mercury and Navigators seek an award of
attorneys’ fees and taxable costs on appeal pursuant to A.R.S. § 12-341.01.
Because it is not the successful party on appeal, First Mercury’s request is
denied. Because it is the successful party on appeal, Navigators is awarded
its taxable costs on appeal and, in the court’s discretion, its reasonable
attorneys’ fees on appeal, contingent upon its compliance with Arizona
Rules of Civil Appellate Procedure 21.
CONCLUSION
¶39 The judgment is affirmed.
AMY M. WOOD • Clerk of the Court
FILED: AA
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