An appellate court in Arizona has ruled that insureds under a title insurance policy could not assign their rights against their title insurer as part of a settlement agreement that was not arm's-length.
Background
In Arizona, under a typical Morris agreement under United Services Automobile Ass'n v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987), an insured agrees to allow judgment to be entered against it in exchange for a covenant not to execute, and assigns its rights under the policy to the claimant, who then pursues the insurer.
To protect the insurer, Morris announced several limitations on an insured's right to enter into such an agreement. The insured must:
(1) “provide notice to the insurer,”
(2) “demonstrate that the settlement was free from fraud and collusion,” and
(3) “prove that the settlement amount is reasonable.”
The Case
This case involved a putative Morris agreement that was not between the insureds and third-party mechanics' lien claimants, but, rather that was between the insureds and an entity they controlled that had purchased the mechanics' lien claims.
The Court's Decision
The court ruled that the settlement agreement between the insured and the entity that purchased the mechanics' lien claims fell “outside the permitted parameters of Morris.”
It reasoned that, rather than representing an arm's-length settlement between lien claimants and insureds, “the purported Morris agreement in this case was between the insureds and an entity they controlled.”
The court noted that the lien claimants – the parties whose claims created the insureds' potential liability – were not parties to the agreement and that the interests of the parties to the settlement agreement “were aligned, not divergent.”
The case is Fidelity National Title Ins. Co. v. Centerpoint Mechanic Lien Claims, LLC, Nos. 1 CA-CV 12–0721 and 1 CA-CV12–0726 (Consolidated) (Ariz. Ct.App. Dec. 30, 2016). Attorneys involved include: Jones Skelton & Hochuli, PLC, Phoenix, By Lori L. Voepel, Robert R. Berk, Jennifer B. Anderson, Counsel for Fidelity National Title Insurance Company and Commonwealth Land Title Insurance Company; Perkins Coie, LLP, Phoenix, By Richard M. Lorenzen, Philip R. Higdon, Rusty D. Crandell, Counsel for Centerpoint Mechanic Lien Claims, LLC; Moyes Sellers & Hendricks, Phoenix, By Keith L. Hendricks, Joshua T. Greer, Counsel for ML Manager, LLC, et al.; Tiffany & Bosco, PA, Phoenix, By J. Lawrence McCormley, Counsel for Universal–SCP 1 LP and VRCP Funding, LP; Haralson Miller Pitt Feldman & McAnally, PLC, Tucson, By Stanley G. Feldman; Noel Fidel Attorney at Law, Phoenix, By Noel Fidel, Co-counsel for Amicus Curiae American Land Title Association.
Steven A. Meyerowitz
Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. He may be contacted at [email protected].