Parsons v. Continental National American Group
In Parsons v. Continental National American Group, 113 Ariz. 223, 550 P.2d 94 (1976) the Arizona Supreme Court discussed the circumstances under which an insurance carrier may be estopped from denying coverage because of its unethical conduct.
In that case, the plaintiff, Parsons, obtained a judgment against the insured, Smithey, after he assaulted her and her daughters. Id. at 225-26, 550 P.2d at 96-97.
Smithey's insurer, CNA, denied coverage on the basis that Smithey had acted willfully and criminally, and his conduct was therefore excluded by the policy's intentional acts exclusion. Id.
CNA based its denial on information it learned from the attorney CNA had retained to defend Smithey and his parents against Parson's claims. Id.
Although CNA had determined through its previous investigation that Smithey was not in control of his senses at the time of the assault, the attorney hired by CNA had gained access to Smithey's confidential psychiatric treatment file, and informed CNA that Smithey was fully aware of his acts and their wrongful nature. Id. at 225, 550 P.2d at 96.
The Arizona Supreme Court ruled that because Smithey's attorney owed him an undivided duty of loyalty, he could not reveal any information or conclusions derived from his representation of Smithey to CNA if such information might be detrimental to Smithey in any subsequent action. Id. at 226, 550 P.2d at 97.
The court held:
When an attorney who is an insurance company's agent uses the confidential relationship between an attorney and a client to gather information so as to deny the insured coverage under the policy . . . we hold that such conduct constitutes a waiver of any policy defense, and is so contrary to public policy that the insurance company is estopped as a matter of law from disclaiming liability under an exclusionary clause in the policy. Id. at 228, 550 P.2d at 99.