Knightbrook Ins. Co. v. Payless Car Rental Sys. Inc.

409 P.3d 293

KNIGHTBROOK INSURANCE COMPANY; Knight Management Insurance Services LLC, Plaintiffs/Counter–Defendants/Appellees,

v.PAYLESS CAR RENTAL SYSTEM INCORPORATED, Defendant/Appellant,PCR Venture of Phoenix LLC, Defendant/Counter–Claimant/Appellant.

No. CV-17-0156-CQ

Supreme Court of Arizona.

Filed February 8, 2018

Alison R. Christian, Gena L. Sluga (argued), Douglas L. Christian, Stephen M. Dichter, Christian Dichter & Sluga, PC, Phoenix, Attorneys for KnightBrook Insurance Company and Knight Management Insurance Services LLC

William J. Maledon, Thomas L. Hudson, Osborn Maledon, P.A., Phoenix; William F. Greaney (argued), Philip J. Levitz, Covington & Burling LLP, Washington, D.C.; and Arron Nesbitt, Wilson Elser, Denver, CO, Attorneys for Payless Car Rental System Incorporated and PCR Venture of Phoenix, LLC

JUSTICE LOPEZ authored the opinion of the Court, in which CHIEF JUSTICE BALES, VICE CHIEF JUSTICE PELANDER, and JUSTICES BRUTINEL, TIMMER, BOLICK, and GOULD joined.

JUSTICE LOPEZ, opinion of the Court:

¶ 1 The United States Court of Appeals for the Ninth Circuit certified the following questions for our review: (1) whether Arizona equitable indemnity law incorporates the Restatement (First) of Restitution § 78 (Am. Law Inst. 1937) (hereinafter "First Restatement") and, if so, (2) whether § 78 requires that the indemnity plaintiff and indemnity defendant's liability be coextensive as to the underlying plaintiff. We hold that § 78 is not incorporated in Arizona law. Consequently, we decline to answer the second certified question as moot.

BACKGROUND

¶ 2 Michael Bovre rented a vehicle from Payless Car Rental System Inc. ("Payless"). At the rental counter, Payless offered Bovre supplemental liability insurance ("SLI") under a master policy provided by KnightBrook Insurance Co. ("KnightBrook"). Bovre did not pay the $13.95 daily premium for such coverage, but he contends that he is entitled to coverage because he did not initial the space provided in the rental contract to decline SLI coverage.

¶ 3 While driving the rented vehicle, Bovre caused an accident that injured Robert and Lorraine McGill. The McGills sued Bovre and made a settlement offer, which included an amount representing SLI coverage. KnightBrook denied Bovre's demand for SLI coverage because he did not purchase it.

¶ 4 Bovre ultimately entered into a settlement agreement with the McGills, under which they were paid the combined policy limits of $530,000 from the state-mandated insurance and Bovre's own Travelers policy. Bovre also executed a Damron agreement, in which he assigned to the McGills his claims against KnightBrook and Payless for their alleged failure to provide SLI insurance (breach of contract, negligence, and insurance bad faith), and agreed to an $8 million adverse judgment in exchange for the McGills' covenant not to execute on the judgment against his personal assets. See Damron v. Sledge , 105 Ariz. 151, 460 P.2d 997 (1969) (recognizing the validity of an agreement in which an insured stipulates to a judgment, assigns his claims against the insurer to the claimant, and, in turn, the claimant agrees not to execute the judgment against the insured personally).

¶ 5 The McGills then sued Payless and KnightBrook, seeking to recover the $8 million judgment. The McGills and KnightBrook entered into a settlement in which the McGills' (previously Bovre's) claims against Payless were further assigned to KnightBrook, which paid the McGills the $970,000 SLI policy limit and promised them a percentage of any recovery from Payless. The settlement resolved the McGills' insurance bad faith and Damron claims against KnightBrook but did not extinguish all the claims against Payless. Payless was not notified of the final settlement agreement terms until after it had been executed.

¶ 6 KnightBrook subsequently filed an action in federal court against Payless, asserting its assigned claims, along with an equitable indemnification claim for the $970,000 it paid the McGills, arguing that the Payless employee at the rental counter was at fault for not memorializing Bovre's denial of SLI coverage. The district court dismissed the contract claims, holding that they were extinguished by accord and satisfaction when KnightBrook settled with the McGills. Relying on the First Restatement § 78, the court also ruled that KnightBrook was entitled to equitable indemnification from Payless for the $970,000 SLI policy limits it paid to settle the McGills' claims.

¶ 7 Payless appealed to the Ninth Circuit, which concluded that the outcome of the case rests on answers to the two questions certified to this Court. We accepted jurisdiction pursuant to A.R.S. § 12–1861.

DISCUSSION

¶ 8 Section 78 of the First Restatement provides, in relevant part:

A person who with another became subject to an obligation or supposed obligation upon which, as between the two, the other had a prior duty of performance, and who has made payment thereon although the other had a defense thereto,

(a) is not entitled to restitution if he became subject to the obligation without the consent or fault of the other;

(b) is entitled to restitution if he became subject to the obligation with the consent of or because of the fault of the other and, if in making payment, he acted

...

(ii) in the justifiable belief that such a duty existed[.]

¶ 9 In awarding KnightBrook equitable indemnification from Payless, the district court relied on § 78 as a "refinement" of the rule stated in First Restatement § 76 to hold that, although KnightBrook need not prove that it or Payless was actually liable to the McGills, "it is sufficient if [KnightBrook] were subject to a ‘supposed obligation’ which [Payless] had a greater responsibility to discharge, [KnightBrook] became subject to the obligation because of the fault of [Payless], and, in choosing to make the settlement payment, [KnightBrook] acted in the ‘justifiable belief’ that [it] would be liable in the McGills' lawsuit." KnightBrook Ins. Co. v. Payless Car Rental Sys., Inc. , 100 F.Supp.3d 817, 829 (D. Ariz. 2015).

¶ 10 We hold that Arizona's equitable indemnity law does not incorporate § 78 because it conflicts with Arizona's general equitable indemnity principles.

I. Equitable Indemnity in Arizona

¶ 11 Arizona's equitable indemnity law seeks to avoid unjust enrichment by allowing recovery only when an indemnity plaintiff subject to derivative or imputed liability discharges an actual obligation that a culpable indemnity defendant owed to a third party. See MT Builders, L.L.C. v. Fisher Roofing, Inc. , 219 Ariz. 297, 303 ¶ 13 n.2, 197 P.3d 758, 764 (App. 2008) (enumerating the elements of an Arizona common law indemnity claim). Arizona's equitable indemnity principles are consistent with § 76 of the First Restatement and § 23 of the Restatement (Third) of Restitution and Unjust Enrichment (Am. Law Inst. 2011) (hereinafter "Third Restatement").¹ See First Restatement ch. 3, topic 3, intro. note (noting that the right to indemnity under § 76 arises when an indemnity plaintiff's payment confers a benefit on an indemnity defendant); Third Restatement § 23 reporter's note a (stating that "[i]ndemnity, a form of restitution, is founded on equitable principles; it is allowed where one person has discharged an obligation that another should bear" (citation omitted) ).

¶ 12 In Arizona, the plaintiff in a common law indemnity action generally must show: (1) it "discharged a legal obligation owed to a third party"; (2) for which the "indemnity defendant was also liable"; and (3) as between the two, "the obligation should have been discharged by the [indemnity] defendant." MT Builders , 219 Ariz. at 303 ¶ 13 n.2, 197 P.3d at 764 (citing Am. & Foreign Ins. Co. v. Allstate Ins. Co. , 139 Ariz. 223, 225, 677 P.2d 1331, 1333 (App. 1983) (relying upon the First Restatement § 76 to note the elements of an Arizona common law indemnity claim)). Thus, there is no "duty of indemnity unless the payment discharges the primary obligor from an existing duty." Am. & Foreign Ins. Co. , 139 Ariz. at 225, 677 P.2d at 1333 (citing First Restatement § 76 cmt. b for the proposition that its principles apply "only where the payor becomes obligated to pay because of the consent or fault of the principal obligor" or, in the absence of consent or fault, where "the payment is beneficial [to the principal obligor]").

¶ 13 Payless correctly notes that Arizona courts citing the First Restatement have repeatedly applied the general rule of § 76 to equitable indemnity cases rather than § 78. See, e.g. , MT Builders , 219 Ariz. at 303 ¶ 13 n.2, 197 P.3d at 764 ; INA Ins. Co. of N. Am. v. Valley Forge Ins. Co. , 150 Ariz. 248, 252, 722 P.2d 975, 979 (App. 1986) ; Am. & Foreign Ins. Co. , 139 Ariz. at 225, 677 P.2d at 1333. Arizona's approach is not unique. In fact, our research reveals that § 78 boasts a mere twelve case citation references nationwide, most from the 1940s and 1950s, while § 76 has been cited in 291 cases, including fifteen in Arizona.

¶ 14 KnightBrook argues, citing language in several cases, that § 78 is congruent with Arizona's equitable indemnity common law. See, e.g. , Blakely Oil, Inc. v. Crowder , 80 Ariz. 72, 75, 292 P.2d 842 (1956) ("The right of indemnity ... insures [sic] to a person who, without active fault on his own part, has been compelled, by reason of some legal obligation, to pay damages occasioned by the initial negligence of another, and for which he himself is only secondarily liable." (quoting Builders Supply Co. v. McCabe , 366 Pa. 322, 325, 77 A.2d 368 (1951) )); INA Ins. Co. of N. Am. , 150 Ariz. at 252, 722 P.2d at 979 ("[A] party has a right to indemnity when there is an implied contract for indemnity or when justice demands there be the right."); Allison Steel Mfg. Co. v. Superior Court , 22 Ariz.App. 76, 79, 523 P.2d 803 (1974) ("In this jurisdiction, we are committed to the rule that a contract of indemnity will not be construed to cover losses to the indemnitee...