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

Citation: 356 F. Supp. 3d 856Docket: No. CV-12-01671-PHX-DGC

Court: District Court, D. Arizona; December 18, 2018; Federal District Court

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David G. Campbell, Senior United States District Judge, addressed the equitable indemnification claim by KnightBrook Insurance Company and Knight Management Insurance Services, LLC against Payless Car Rental System, Inc. and PCR Venture of Phoenix, LLC following a Ninth Circuit remand. The Court reviewed the case based on prior evidence and oral arguments held on November 30, 2018, ultimately concluding that KnightBrook did not establish a right to indemnification from Payless.

Background details indicate that in February 2010, Payless rented a car to Michael Bovre, who was informed by a Payless agent that liability coverage was included but did not decline the offered Supplemental Liability Insurance (SLI) of $1 million. Payless provided the minimum required liability coverage of $15,000 and $30,000 as mandated by Arizona law. On March 1, 2010, Bovre was involved in an accident with Robert and Lorraine McGill, leading to significant injuries. Bovre sought coverage under the SLI policy, which KnightBrook denied due to non-payment for the SLI.

The McGills subsequently sued Bovre and made a settlement demand in February 2011, seeking the total liability limits from Bovre's personal insurance and the state-mandated coverage. Although Travelers and Great American offered $530,000 to settle, the McGills refused the offer. To safeguard his interests, Bovre entered a Damron settlement agreement, paid the $530,000, and assigned his claims against KnightBrook and Payless to the McGills. The McGills then filed suit in June 2012, alleging breach of contract, negligence, and bad faith against both KnightBrook and Payless.

In March 2013, the McGills demanded $1 million to settle the claims, later reducing it to $970,000 to reflect the state-mandated coverage received. KnightBrook proposed a shared payment with Payless, but upon Payless's refusal, KnightBrook settled with the McGills for $970,000, acquiring an assignment of their claims against Payless.

On June 14, 2013, KnightBrook filed a complaint against Payless for breach of contract and negligence, alongside claims for equitable indemnification and breach of fiduciary duty. Payless counterclaimed for insurance bad faith. The Court ruled that KnightBrook's breach of contract claims were extinguished by an accord and satisfaction following a $970,000 payment to the McGills. After a bench trial, the Court determined that the negligence and breach of fiduciary duty claims were time-barred, Payless did not prove its bad faith counterclaim, and KnightBrook was entitled to equitable indemnification for the $970,000 settlement. The Court relied on § 78 of Restatement (First) of Restitution, asserting that KnightBrook had a "supposed obligation" to the McGills, which Payless was more responsible for discharging.

Payless appealed these rulings, leading the Ninth Circuit to certify two questions to the Arizona Supreme Court regarding the applicability of Restatement § 78 in Arizona's equitable indemnity law. The Arizona Supreme Court rejected the first question and deemed the second moot. The Ninth Circuit remanded the equitable indemnification claim to determine if KnightBrook's payment discharged a common liability between KnightBrook and Payless. The Ninth Circuit affirmed the judgment against Payless on its bad faith counterclaim. 

Upon further review, the Court concluded that KnightBrook did not make the $970,000 payment solely to discharge a common obligation and could not specify what portion of the payment was for that purpose. Consequently, KnightBrook failed to demonstrate entitlement to equitable indemnification under Arizona law. The Arizona Supreme Court clarified that equitable indemnity in Arizona requires the indemnity plaintiff to discharge an actual obligation owed by the culpable indemnity defendant to a third party, following a three-part test that includes discharging a legal obligation, shared liability, and the expectation that the obligation should have been discharged by the indemnity defendant.

Arizona's equitable indemnity principles align with the Restatement (First) and (Third) of Restitution and Unjust Enrichment, emphasizing that equitable indemnity necessitates "coextensive liability." Payless contends that its $1 million claim under the SLI policy differs from KnightBrook's broader liabilities, which include a separate insurance bad faith claim and an $8 million judgment, arguing that KnightBrook's settlement did not relieve a coextensive liability. Conversely, KnightBrook asserts that their liabilities regarding the SLI policy claim were indeed coextensive, having settled for $970,000, and cites that the Restatement does not require identical liabilities among parties. The court concludes that for equitable indemnity in Arizona, the obligation discharged by the indemnity plaintiff must match that faced by the indemnity defendant, emphasizing the concept of derivative or imputed liability. The court reiterates that equitable indemnification is only available when the indemnity plaintiff assumes the defendant's liability to a third party, as established by the MT Builders test, which serves as the exclusive basis for equitable indemnity in Arizona. Ultimately, the obligation must be the same, and both parties must share a common liability for indemnity to apply.

Indemnity is applicable only when the duty fulfilled by one party is identical to the duty owed by another. Case law establishes that equitable indemnity requires the duties to be coextensive or common. Notable cases, such as Crab Orchard Improvement Co. v. Chesapeake & O. Ry. Co., emphasize that indemnity can only occur when the plaintiff discharges a duty that is the same as that of the defendant. This principle was upheld in several subsequent cases, including Md. Cas. Co. v. Paton, which found no basis for equitable indemnity due to differing duties. The analysis in Nat'l Fruit Prod. Co. v. Baltimore & Ohio R.R. Co. reinforced that a lack of common obligation prevents claims for implied indemnity. Denny's Inc. v. Avesta Enters. Ltd. reiterated that both parties must have identical duties for indemnity to be valid. 

In the current case, KnightBrook seeks indemnification for $970,000 paid to the McGills, asserting this payment was to fulfill a shared obligation with Payless under the SLI policy. The court notes that KnightBrook's right to indemnification hinges on whether this payment discharged the same obligation for which Payless was liable. If any part of the payment was for obligations not owed by Payless, such as a bad faith claim, and cannot be distinctly identified, KnightBrook cannot substantiate its claim for indemnification. KnightBrook claims it settled the McGill lawsuit by paying the SLI policy limits as demanded, indicating that the payment was necessary to address shared liability stemming from Payless's negligence in the rental transaction.

KnightBrook asserts that it paid the full amount of $970,000 solely to settle the SLI policy claim and not for other claims against it. However, the settlement agreement explicitly states that this payment is made as consideration for settling all claims against KnightBrook, including a bad faith claim. The McGills agreed to release KnightBrook from all potential claims in exchange for the settlement, which covers a range of claims including breach of contract and negligence. The settlement agreement does not divide the $970,000 among the various claims, making it impossible to determine how much was allocated specifically for the SLI claim.

KnightBrook argues that communications from the McGills' attorney indicate that it paid nothing for the bad faith claim, but the demand letter clearly states that KnightBrook faced exposure exceeding $8 million for the bad faith claim and that the settlement represented full resolution of all claims. The negotiations included adjustments to the demand amount—initially $1 million—accounting for other payments received by the McGills. 

Additionally, the court cannot consider the demand letter and emails for interpreting the settlement due to an integration clause in the agreement, which stipulates that it should be enforced according to its written terms without external expectations. KnightBrook's CEO testified that after reassessing the situation, KnightBrook recognized the potential for significant liability and felt compelled to settle to avoid litigation risks, especially given the favorable legal environment for plaintiffs in Arizona regarding bad faith claims.

KnightBrook's potential liability of over $8 million from a bad faith claim significantly influenced Jarvis's decision to settle for $970,000. The Ninth Circuit noted that this liability, alongside the Damron judgment, was a key factor in the settlement. KnightBrook's complaint against Payless indicates that part of the settlement was aimed at resolving the bad faith claim, emphasizing that KnightBrook had to defend against this lawsuit and is entitled to reimbursement for the settlement amount. The court determined that KnightBrook's payment was not solely for the SLI policy claim for which Payless was also liable, as it included obligations beyond those owed by Payless. Consequently, KnightBrook's claim for equitable indemnification fails because it did not demonstrate that the $970,000 was paid exclusively to cover a common obligation with Payless. Thus, the court ruled that KnightBrook is not entitled to recover the settlement amount from Payless, leading to a judgment in favor of Payless on the indemnification claim. The legal principles from the Restatement highlight that indemnity is warranted only when a party discharges a duty that should have been covered by another. The court's analysis also referenced case law to illustrate that joint obligations must be coextensive for indemnity claims to be valid.

The Court determines that it cannot use the demand letter and emails as parol evidence to interpret the settlement agreement under Arizona law. The judge assesses if the contract language is “reasonably susceptible” to the proposed interpretation; if so, the evidence can clarify the parties' intent. In this instance, the Court finds that the settlement agreement’s language is not susceptible to KnightBrook's interpretation, as it explicitly states that the $970,000 is paid to settle all claims against KnightBrook. Once the Plaintiffs receive this payment, they are required to dismiss all claims against the Insurer Defendants with prejudice. Additionally, at the time of the settlement, KnightBrook did not intend to discharge Payless’s SLI liability and instead took an assignment of the SLI claim to pursue against Payless. The discharge of liability only occurred because the Court later ruled that KnightBrook's payment constituted an accord and satisfaction.