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Insureds Obligations to Insurer upon Entering into a Morris Agreement

By Debora L. Verdier
Sanders & Parks, P.C.

We know that an insured desiring to enter into a Morris agreement must first provide notice to the insurer. But what must an insured do to satisfy its obligation? For example, how much time must the insured afford the insurer to evaluate its options before the insured enters into the agreement? Other than the stipulated judgment amount, what other information must the insured provide the insurer? If the insured is contributing financially to the settlement, is the insurer entitled to know that and, if so, the amount of the contribution? Must the insured provide the insurer with a copy of the Morris agreement? Arizona case law offers no bright-line answers to these specific questions. Instead, opinions speak generally of the “reasonableness” of insured’s conduct.

Certain breaches by the insurer can relieve the insured of its obligations under the cooperation clause. Ariz. Prop. & Cas. Ins. Guar. Fund v. Helme, 153 Ariz. 129, 138, 735 P.2d 451, 460 (1987). The breach by the insurer, however, does not “eliminate” the insured’s obligations to cooperate with the insurer and does not mean that the insured can enter into any type of agreement or take any type of action. Id. “The insurer’s breach narrows the insured’s obligations . . . and permits [the insured] to take reasonable steps to save himself.” Id.

Upon the qualifying breach by the insurer, “insureds . . . need to act reasonably to protect themselves from ‘the sharp thrust of liability.’” USAA v. Morris, 154 Ariz. 113, 118, 741 P.2d 246, 251 (1987). Such agreements “must be made fairly, with notice to the insurer, and without fraud or collusion on the insurer.” Id. at 119, 741 P.2d at 252. “[N]either the fact nor amount of liability to claimant is binding on the insurer unless the insured or claimant can show that the settlement was reasonable.” Id. at 120, 741 P.2d at 252.

In Morris the Arizona Supreme Court stated, “The test as to whether the settlement was reasonable and prudent is what a reasonably prudent person in the insureds’ position would have settled for on the merits of the claimant’s case.” Id. at 121, 741 P.2d at 254. “This involves evaluating the facts bearing on the liability and damage aspects of the claimant’s case, as well as the risks of going to trial.” Id.

Most opinions following Morris discuss factors for determining the reasonableness of the stipulated judgment amount, not the parameters of the notice requirement. For example, the decisions do not specifically require the insured provide the insurer with a copy of the Morris agreement as part of the notice. Nor do they expressly require the insured inform the insurer that he is contributing to the settlement.

Although courts have focused on the reasonableness of the insured’s conduct in reaching the agreement, some decisions have also required the insured’s conduct in providing notice to the carrier to be reasonable and appropriate. The Arizona Supreme Court in Parking Concepts, Inc. v. Tennery stated, “To protect the insurer, we held that a Morris agreement must be preceded by appropriate notice to the insurer . . . [and] such agreements must be free of ‘fraud or collusion.’” 207 Ariz. 19, 22, 83 P.3d 19, 22 (2004) (emphasis added). In Safeway Ins. Co. v. Guerrero, the Court also stated that “an insurer must be given advance notice of a proposed Morris agreement . . . .” 210 Ariz. 5, 14, 106 P.3d 1020, 1029 (2005) (emphasis added). A more recent opinion of the Court of Appeals suggests that the “notice” must be “reasonable” and provide the insurer “an opportunity to assume or participate in [the] defense.” A Tumbling-T Ranches v. Flood Control Dist., 2008 Ariz. App. LEXIS 181, *8-14 (November 28, 2008) (applying the Restatement (Second) of Judgments Section 57(1) to the Damron/Morris-type agreement) (emphasis added).

Arizona case law supports the notion that insureds must provide “reasonable” and “appropriate” notice to the insurer such that the insurer is afforded a reasonable opportunity to evaluate whether to assume or participate in the defense. Beyond that general pronouncement, Arizona case law provides little guidance as to what constitutes “reasonable” and “appropriate” notice, which will likely turn on case-specific factors.