United States: Knightbrook Insurance Company v. Payless Car Rental Systems

In KnightBrook Insurance Company v. Payless Car Rental Systems, 855 F.3d 1072 (May 5, 2017), the United States Court of Appeals for the Ninth Circuit certified the following questions to the Supreme Court of Arizona: "(1) whether Arizona equitable indemnity law incorporates § 78 of the Restatement [(First) of Restitution]; and, if so, (2) whether equitable indemnity under § 78 requires that the indemnity plaintiff's liability to the underlying plaintiff have been coextensive with the indemnity defendant's liability to the underlying plaintiff."

KnightBrook Insurance Company and Knight Management Insurance Services, LLC ("KnightBrook") sued PCR Venture of Phoenix, LLC, a franchisee of Payless Car Rental System, Inc. ("Payless") regarding a master policy KnightBrook issued to Payless that allowed Payless to sell supplemental liability insurance ("SLI") to individuals who rented cars from Payless. Michael Bovre rented a vehicle from Payless but did not purchase or pay for the available SLI coverage. However, Bovre later argued he was entitled to coverage for an accident he was involved in – a collision with two motorcycles wherein those drivers (the McGills) were seriously injured – "because the Payless desk agent: (1) failed to notice that Bovre did not initial the line on the contract that expressly declined SLI; and (2) told Bovre that 'liability coverage' was included in the rental contract." "Bovre's rental did include insurance coverage under a $30,000 state-mandated policy [and] Bovre received coverage under the $30,000 state-mandated policy and $500,000 of coverage from his personal liability policy from Travelers Insurance Company."

The injured drivers sued Bovre. "KnightBrook denied Bovre's request for SLI coverage, explaining in a letter that 'you did not purchase the optional Supplemental Liability Insurance (SLI) coverage at the time of the rental.' KnightBrook did not defend Bovre under a reservation of rights or file a declaratory judgment action over the coverage dispute."  

Bovre settled with the McGills, and the settlement included a Damron agreement (Damron v. Sledge, 105 Ariz. 151 (Ariz. 1969):

[T]he parties stipulated to an $8 million judgment in exchange for: (1) the McGills' covenant not to execute upon the judgment against Bovre's personal assets; and (2) Bovre's assignment to the McGills of Bovre's claims against KnightBrook. Bovre also paid the McGills $530,000, the combined limits of the state-mandated and Travelers policies.

The McGills then sued KnightBrook and Payless, pursuing the assigned claims as well as recovery of the $8 million stipulated judgment. The McGills made a $970,000 settlement demand. KnightBrook requested Payless contribute 50% to satisfy the demand; Payless declined. KnightBrook, alone, then settled with the McGills. Under the terms of the settlement:

(1) [T]he McGills would dismiss all of their claims against KnightBrook in exchange for $970,000; and (2) the McGills would assign to KnightBrook all of their claims against Payless in exchange for 15% of the first $250,000 and 10% of any amount in excess of $250,000 that KnightBrook recovered from Payless. Payless was not notified of the terms of the final settlement agreement until after it had been signed.

KnightBrook then took over as the plaintiff against Payless. Its amended complaint asserted the contract and negligence claims that Bovre had assigned to the McGills and that the McGills had in turn assigned to KnightBrook, as well as KnightBrook's own claims against Payless for equitable indemnification and breach of fiduciary duty. Payless filed a counterclaim against KnightBrook for insurance bad faith. The district court dismissed the contract claims on summary judgment, reasoning that they were extinguished through an accord and satisfaction when KnightBrook paid the McGills $970,000. The remaining claims proceeded to a bench trial. After the trial, the district court ruled: (1) that KnightBrook's negligence and breach of fiduciary duty claims were barred by the statute of limitations; (2) that KnightBrook was entitled to equitable indemnification for the entire settlement payment of $970,000; and (3) that Payless had failed to prove its insurance bad faith claim.

Payless filed this appeal challenging the district court's ruling in favor of KnightBrook on KnightBrook's equitable indemnification claim and Payless's insurance bad faith claim. The questions of law certified in this Order concern only the equitable indemnification claim.

The Court noted that the outcome of this appeal turns on resolution of the two certified questions: "(1) whether Arizona equitable indemnity law incorporates § 78 of the Restatement; and (2) whether equitable indemnity liability under § 78 requires that the indemnity plaintiff's liability to the underlying plaintiff have been coextensive with the indemnity defendant's liability to the underlying plaintiff."

Pertinent to this appeal, Section 78 provides:

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,

  1. is not entitled to restitution if he became subject to the obligation without the consent or fault of the other;
  2. 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

    . . .

    1. in the justifiable belief that such duty existed . . . .

The district court relied on this provision in reaching its determination:

The district court cited § 78 for the proposition that for purposes of its equitable indemnification claim against Payless, "it is sufficient if [KnightBrook] w[as] 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." The district court awarded equitable indemnification—without finding that either KnightBrook or Payless would have been found liable in the underlying lawsuit—on the ground that "[t]he requirements of § 78 of the Restatement are satisfied."

At the time the district court issued its opinion, § 78 had never been cited in a published decision of an Arizona court. After the district court issued its decision, however, the Arizona Court of Appeals applied § 78 in Hatch Development, LLC v. Solomon, 240 Ariz. 171, 377 P.3d 368 (Ariz. Ct. App. 2016), in holding that "a duty to indemnify may arise in at least two alternative circumstances: First, when the party seeking indemnity has 'extinguished an obligation owed by the party from whom it seeks indemnification,' or second, when the indemnity defendant is 'at fault.'" Id. at 372. The district court's decision is the only authority cited in Hatch for the proposition that Arizona equitable indemnity law incorporates § 78 of the Restatement.

The Court then addressed the next issue of coextensive liability:

The district court recognized that KnightBrook and Payless did not face coextensive obligations in the McGills' suit. KnightBrook paid the McGills $970,000 to settle a case in which the McGills "sought to recover [from KnightBrook] the $8 million established in the consent judgment against Bovre." The suit asserted negligence, breach of contract, and insurance bad faith claims. But only KnightBrook, and not Payless, was potentially liable for the insurance bad faith claim and the $8 million Damron judgment. [Citation.] Accordingly, as the district court correctly observed, although the McGills could have recovered $8 million from KnightBrook, they could have recovered from Payless only $1 million (the maximum available amount of SLI coverage) plus any compensable damages for Bovre's "emotional suffering, time, effort, and inconvenience." Because KnightBrook's settlement payment to the McGills enabled it to avoid substantial liability that Payless did not face, KnightBrook's and Payless's liability to the McGills was not coextensive.

Whether this matters under Arizona law is unclear. In Herstam v. Deloitte & Touche, LLP, 186 Ariz. 110, 919 P.2d 1381 (Ariz. Ct. App. 1996), the court observed that "indemnity allows one who has discharged a common liability to seek reimbursement in full from another," but it did not define "common liability" or otherwise address whether coextensive liability is a necessary prerequisite for equitable indemnity. Id. at 1388. Although other state courts have held that an indemnitee and indemnitor's respective obligations to the underlying plaintiff must be identical for equitable indemnity liability to attach [citations], no Arizona court has resolved this issue. [Citation.]

The evolution of Arizona's equitable indemnity doctrine is better entrusted to the Supreme Court of Arizona than to us. We therefore certify the foregoing questions of law to the Supreme Court of Arizona.

Due to the Court's certification of the two questions to the Supreme Court of Arizona, the Court determined "the submission of this appeal is withdrawn, and all further proceedings in this case before our court are stayed pending final action by the Supreme Court of Arizona, save for any petition for rehearing regarding this order." 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.