356 F. Supp. 3d 856
D. Ariz.2018Background
- In Feb 2010 Payless rented a car to Bovre and offered $1 million Supplemental Liability Insurance (SLI) under a policy issued by KnightBrook; Bovre did not pay for SLI and received state-minimum coverage instead.
- In March 2010 Bovre (driving the rental) collided with the McGills, who sued and sought payment up to available limits from Travelers ($500,000), Great American ($30,000), and the SLI ($1,000,000).
- Bovre executed a Damron settlement assigning his claims to the McGills and they stipulated to an $8 million judgment against Bovre; Travelers and Great American paid $530,000 which the McGills declined as full satisfaction.
- KnightBrook paid the McGills $970,000 to settle (reflecting the SLI limits less $30,000) and obtained an assignment of claims against Payless; KnightBrook then sued Payless asserting equitable indemnification among other claims.
- The district court originally awarded KnightBrook equitable indemnification for the $970,000; on appeal the Arizona Supreme Court rejected Restatement §78 and required an "actual obligation" standard, and the Ninth Circuit remanded for application of Arizona law.
- On remand the district court found KnightBrook’s settlement discharged more than the SLI obligation (including the assigned bad‑faith exposure), the settlement was not apportioned, and KnightBrook therefore failed to prove the portion that discharged a common/coextensive duty owed by Payless; judgment for Payless.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether KnightBrook is entitled to equitable indemnity from Payless for the $970,000 settlement | KnightBrook: paid only SLI policy limits to resolve the McGills' claim; payment discharged the common SLI obligation and so is recoverable from Payless | Payless: KnightBrook’s payment also resolved KnightBrook’s distinct exposure (assigned bad‑faith claim and $8M Damron judgment); liabilities were not coextensive | Held: No indemnity — KnightBrook failed to show the payment was made solely to discharge the same obligation owed by Payless |
| Whether Arizona law incorporates Restatement §78 or requires an "actual obligation" discharge | KnightBrook urged broader Restatement approach (as earlier applied by district court) | Payless relied on Arizona Supreme Court’s rejection of §78 and demand for an actual, common obligation | Held: Arizona Supreme Court controls — equitable indemnity requires discharging an actual obligation owed by both parties (coextensive/common duty) |
| Whether settlement documents and extrinsic communications show payment was only for SLI limits | KnightBrook: March 2013 demand and counsel emails show settlement focused on SLI limits; bad‑faith claim was not paid for | Payless: Settlement agreement releases all claims against KnightBrook without apportionment; emails/demand do not alter integrated agreement | Held: Settlement expressly released bad‑faith and other claims and contained an integration clause; extrinsic evidence inadmissible because contract not reasonably susceptible to KnightBrook’s narrower interpretation |
| Whether apportionment is required when payment covers both common and non‑common obligations | KnightBrook: seeks full recovery of $970,000 | Payless: if payment includes non‑common obligations KnightBrook must identify and subtract those amounts | Held: KnightBrook must prove the portion of its payment that discharged the common obligation; because it failed to apportion, indemnity denied |
Key Cases Cited
- KnightBrook Ins. Co. v. Payless Car Rental Sys., Inc., 855 F.3d 1072 (9th Cir. 2017) (Ninth Circuit certified questions to Arizona Supreme Court and discussed coextensive liability issue)
- KnightBrook Ins. Co. v. Payless Car Rental Sys., Inc., 731 Fed.Appx. 632 (9th Cir. 2018) (Ninth Circuit remanded to apply Arizona Supreme Court’s actual‑obligation standard)
- KnightBrook v. Payless, 243 Ariz. 422, 409 P.3d 293 (Ariz. 2018) (Arizona Supreme Court rejected Restatement §78 and required discharge of an actual common obligation)
- MT Builders, LLC v. Fisher Roofing, Inc., 219 Ariz. 297, 197 P.3d 758 (Ariz. Ct. App. 2008) (articulates the three‑part test for equitable indemnity referenced by Arizona Supreme Court)
- Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (Ariz. 1969) (explains assignment via Damron settlement and stipulated judgment mechanism)
- Crab Orchard Improvement Co. v. Chesapeake & O. Ry. Co., 115 F.2d 277 (4th Cir. 1940) (equitable indemnity requires discharge of a duty coextensive with the defendant’s)
- City of St. Joseph v. Kaw Valley Tunneling, Inc., 660 S.W.2d 26 (Mo. Ct. App. 1983) (apportionment principle: plaintiff must prove amount paid that discharged defendant’s share of common liability)
- Glob. Petromarine v. G.T. Sales & Mfg., Inc., 577 F.3d 839 (8th Cir. 2009) (coextensive liability survives additional warranty variation where core obligation remains common)