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Knightbrook Insurance v. Payless (2/8/18)

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A certified question concerning the law of equitable subrogation.

A man rented a car from Payless. Payless offered him supplemental liability insurance from Knightbrook; he did not pay for it but Payless didn’t get his signature declining it. After he caused an accident he apparently took the position that he expected the insurance. Knighbrook denied the resulting claim against the policy. The driver settled with the claimants under a Damron and assigned them his claims against Knightbrook. Knightbrook settled their claim and sued Payless in federal court for equitable subrogation, alleging that its failure to get a written denial of coverage had exposed it.

The District Court ruled that Knightbrook was entitled to subrogation under §78 of the Restatement (First) of Restitution. Under that section it did not have to prove that it was actually liable under the policy but merely that it had a “justifiable belief” that it was. On appeal, the Ninth Circuit certified the question: Does §78 apply in Arizona?

The Supreme Court says “no.” “Arizona’s equitable indemnity law . . . [allows] recovery only when an indemnity plaintiff . . . discharges an actual obligation that a culpable indemnity defendant owed to a third party.” There is “no ‘duty of indemnity unless the payment discharges . . . an existing duty.” But §78 requires only a belief, not “an actual legal obligation or a discharge of the indemnity defendant’s liability.” So the rule could result in indemnity where there was in fact no original obligation: “We are troubled that §78 could preclude an indemnitor from raising viable defenses to the underlying claim” (Payless had apparently argued that, despite Knightbrook’s “justifiable belief,” it could disprove the existance of coverage.) “We . . . decline to adopt First Restatement §78 because it is contrary to Arizona’s equitable indemnity principles and does not, in our view, reflect a sound rule.”

Knightbrook argued that Arizona law follows the Restatement. The court points out that the Third Restatement, which superseded the First in 2011, deleted §78-type liability. “We are not bound to the latest edition if we chose to follow the Restatement” but the change is relevant to this analysis.

Only one Arizona case had ever cited §78 (Hatch, App. 2016), citing as authority the District Court’s decision in this case.

(Opinion: Knightbrook Insurance v. Payless Car Rental)

 

Allstate v. Watts (CA1 2/6/18)

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This case discusses the power of an industry-wide arbitrator to change the terms of the agreement by which its members handle claims.

In this consolidated appeal two insurance companies had paid claims under homeowners’ policies for damage caused to their insureds’ homes by Defendant’s plumbing products. They filed subrogation cases against it. The parties were all signatories to the property subrogation agreement of Arbitration Forums, an outfit that arbitrates property claims. But after they signed it AF changed the agreement to exclude products-liability claims. Defendant moved to compel arbitration in both cases, lost both motions, and appeals.

The Court of Appeals reverses. The insurers relied on language in the agreement allowing AF to make rules and regulations covering arbitrations. But the court inteprets that, based on its reading of the structure of the agreement, as procedural. Exclusions of products actions was “a significant, substantive change,” not a mere procedural change. AF didn’t have the power to make a substantive change. The court rejects an Indiana case (also involving this defendant, which has been fighting this battle around the country for a few years now) that read the agreement differently.

The court also relies on 12-3006, making agreements to arbitrate future claims “enforceable and irrevocable,” which it says happens “upon the arising of the controversy, unless the parties agree otherwise.”

AF is an insurance-industry entity with insurance-industry attitudes, which explains why it figured to change a contract unilaterally by sending out a notice.  But these plaintiffs have that same attitude and as far as we know never objected to the change; they continue to be among the most frequent users of the agreement’s arbitration procedures. It would be interesting to know what discussions, if any, they had with AF about the change at the time.

(Opinion: Allstate v. Watts)

Levine v. Haralson et al. (CA1 1/25/18)

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This was an attempt to use equity to enforce an unwritten agreement to split a contingent fee.

Plaintiff, a lawyer, was asked by another lawyer to work on a personal-injury case. They agreed to split the fee but put nothing in writing. Eventually the clients fired Plaintiff. They later fired the other attorney and hired Defendant, who settled their claim. Plaintiff demanded part of the fee; Defendant refused. Plaintiff sued in quantum meruit. (The opinion includes a footnote defining quantum meruit. We wonder what other obscure legal terms the court will from now on think it necessary to define — “statute” perhaps.) The trial court dismissed the Complaint.

The Court of Appeals affirms. The ERs require both contingent fees and fee splits to be in writing. The court explains why this is a good thing. Equity won’t enforce a contract that is against public policy. Plaintiff had a California case but “[n]either the interpretation and application of the Arizona Rules of Professional Conduct, nor this state’s public policy is subject to meaningful analysis by applying the law of other jurisdictions.” (This is of course throw-away rhetoric that our courts will ignore when foreign precedent supports their policy views.) Plaintiff also argued that prior Arizona cases had involved violation of statutes, not just ethical rules. But public policy has “the same force and effect” as a statute.

Plaintiff and the lawyer who brought him into the case were buddies who would have split the fee without a writing. Instead of being embarrassed by that Plaintiff insists on it. The moral is that friends don’t let friends act unethically.

(Opinion: Levine v. Haralson, Miller, Pitt et al.)