Fid. Nat'l Title Ins. Co. V. Osborn III Partners LLC (Arizona)

• Published date: 19 August 2021
• Subject Matter: Insurance, Insurance Laws and Products
• Law Firm: Lewis Brisbois Bisgaard & Smith LLP
• Author: Mr Andrew Bell

(August 2021) - Arizona courts continue to address the interplay between the parties' competing duties, such as an insurer's duty to defend, the insurer's duty to indemnify, and the insured's duty to cooperate. Where an insurer seeks a reservation of rights, Arizona courts reason that these duties paint an insured into a corner where they should be able to settle third-party claims.

In United Services Automobile Ass'n v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987), the Arizona Supreme Court held that, in the context of liability insurance, when an insurer agrees to defend its insured against a third-party claim but reserves the right to challenge coverage, the insured may independently settle with the third-party claimant without violating the insured's duty of cooperation under the insurance contract. Over the years, the principles underpinning Morris have been applied in a variety of contexts beyond liability insurance. In Fid. Nat'l Title Ins. Co. v. Osborn III Partners LLC, 483 P.3d 237 (App. 2021), the Arizona Court of Appeals just added one more to the list - title insurance.

Osborn starts with a detailed review of Morris. According to the Court of Appeals, the principles underlying Morris begin with the obligations at play in the insurer-insured relationship. Id. at 241. The insurer agrees to defend its insured against any potentially covered claim and to indemnify its insured against anything actually covered by the policy. Id. The insured, in turn, is bound to cooperate with the insurer and aid in the defense, which is subject to the insurer's exclusive control. Id. Before Morris, an insured was released from its cooperation obligation (and thus could independently settle with a third-party claimant without breaching the insurance contract) only if the insurer first breached one of its contractual duties. Id.

Morris, however, recognized the conflict that arises between the interests of the insurer and the insured when the insurer accepts the defense, but does so under a reservation of rights. Id. at 242. Because of the difference in scope between the insurer's duty to defend and its duty to indemnify, the insurer can properly (absent bad faith) reserve its right to contest coverage without breaching its policy obligations. Id. But because the insurer has not accepted full responsibility for the insureds' potential liability, the insureds are left in a "precarious position." Id.

Under then-existing law, the insureds had no control over the...