United Servs. Auto Ass'n v. Morris
In United Servs. Auto Ass'n v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987), an insured was defended by his insurer under a reservation of rights. 154 Ariz. at 116-17, 741 P.2d at 249-50.
Because of the financial uncertainty created by the reservation of rights, the supreme court upheld the right of the insured to enter into an agreement with the tort plaintiff that resulted in economic protection for the insured. Id. at 119, 741 P.2d at 252.
The agreement in Morris included a stipulated judgment against the insured for a specified amount of money (in contrast to the default scenario implemented in this case). Id. at 115, 741 P.2d at 248.
The court held that the judgment would be binding and enforceable against the insurer only to the extent that the insured or tort plaintiff could prove the settlement was reasonable:
Morris will have the burden of showing that the judgment was not fraudulent or collusive and was fair and reasonable under the circumstances. If Morris cannot show that the entire amount of the stipulated judgment was reasonable, he may recover only the portion that he proves was reasonable. If he is unable to prove the reasonableness of any portion of the judgment, USAA will not be bound by the settlement. Id. at 121, 741 P.2d at 254.
In United Servs. Auto. Ass'n v. Morris, there was a bright line drawn between the tort case and the coverage case. Id.
Equating the indemnity case here with the coverage case in Morris, the following principle from Morris applies: "Despite the insured's settlement stipulations, the coverage issue indemnity issue is clearly unresolved and the indemnitor may litigate it on remand." Id. at 120, 741 P.2d at 253.
Reading Morris with an eye to an indemnity clause, as contrasted with an insurance agreement, leads to the following result: "An insured's an indemnitee's settlement agreement should not be used to obtain coverage indemnification that the insured indemnitee did not purchase contract for." Id.
Further, "if the insurer indemnitor wins on the coverage indemnity issue, it is not liable for any part of the settlement." Id. at 121, 741 P.2d at 254.