Quihuis v. State Farm Mutual Automobile Insurance
334 P.3d 719
Ariz.2014Background
- Quihuises sued for indemnification after Jeep accident; State Farm refused to defend Coxes due to alleged lack of ownership.
- Damron/Morris-style agreement ('Morris agreement') settled damages and assigned rights to Quihuises; default judgment entered.
- Quihuises sued State Farm in Arizona DJA seeking indemnification and defense; action removed to federal court.
- District court held Restatement §58 applies and that ownership question could be litigated in the DJA.
- Ninth Circuit certified whether default judgment under Damron/Morris precludes ownership/coverage issues; Arizona Supreme Court resolved.
- Court clarifies interplay of Restatement §58 with Morris/Wood and overrules Dairyland on these facts.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a default judgment under a Damron/Morris agreement bars ownership issues in a DJA. | Quihuises argue the default judgment estops ownership dispute. | State Farm argues ownership is precluded by collateral estoppel as to liability. | Not precluded; ownership may be litigated in the DJA. |
| Whether Restatement §58 precludes insurer from litigating existence and extent of liability. | Quihuises rely on §58(1)(a) to block State Farm from disputing liability. | State Farm should be barred from disputing liability determined in the default. | §58(1)(a) precludes disputing existence/extent of liability; but §58(1)(b) does not preclude ownership issue not determined in action. |
| Whether Restatement §58(1)(b) bars relitigation of issues determined in the action. | Quihuises contend issues essential to liability are binding in DJA. | State Farm argues those issues are binding if determined in the underlying action. | Ownership not “determined in the action”; §58(1)(b) does not preclude litigating ownership in the DJA. |
| Whether a breach of the duty to defend mandates collateral estoppel against coverage disputes. | Quihuises claim breach to defend should preclude coverage defense. | Breach to defend does not automatically preclude coverage defense; duties are separate. | Breach to defend does not automatically estop insurance defense in a coverage action. |
| Whether Dairyland remains controlling authority after Restatement §58 adoption. | Quihuises rely on Dairyland to bar ownership defense. | Dairyland overruled; modern Restatement §58 governs." | Dairyland overruled; §58 governs, allowing ownership defense in this context. |
Key Cases Cited
- Morris v. State Farm Mut. Auto. Ins. Co., 154 Ariz. 115 (1987) (insurer may contest coverage; cannot relitigate all liability when Damron/Morris agreement exists)
- Wood v. State Farm Mut. Auto. Ins. Co., 209 Ariz. 137 (2004) (insurer barred from litigating liability in coverage action when issues determined against insured)
- Dairyland Ins. Co. v. Richards, 108 Ariz. 89 (1972) (default judgment preclusion for ownership questioned; overruled by later Restatement §58 cases)
- Vagnozzi v. Farmers Ins. Co., 138 Ariz. 443 (1983) (adopts Restatement §58; discusses conflict of interest)
- Kepner v. Western Fire Ins. Co., 109 Ariz. 329 (1973) (no absolute duty to defend; facts outside policy may negate coverage)
- Parking Concepts, Inc. v. Tenney, 207 Ariz. 19 (2004) (Damron/Morris framework; insurer may defend under reservation of rights)
- Acosta v. Phoenix Indemnity Ins. Co., 214 Ariz. 380 (2007) (bad faith/indemnity claims; assignee may sue insurer)