Damron v. Sledge
105 Ariz. 151, 460 P.2d 997 (1969)
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Rule of Law:
A prejudgment assignment by an insured of a bad faith claim against their insurer to an injured plaintiff, in exchange for a covenant not to execute, is not inherently collusive or contrary to public policy. A trial court may not dismiss an action on grounds of collusion without first holding an evidentiary hearing to find definitive proof of bad faith, such as an agreement to commit perjury.
Facts:
- Clyde and Eileen Damron sustained injuries in an automobile collision with a vehicle driven by Pies Sledge.
- The vehicle Sledge was driving was owned by Perel Polk.
- Both Sledge's and Polk's insurance companies concluded that Sledge was driving without Polk's permission and refused to defend him in the Damrons' lawsuit.
- Facing personal liability, Sledge entered into an agreement with the Damrons.
- In the agreement, the Damrons gave Sledge a covenant not to execute, promising not to collect any potential judgment from Sledge's personal assets.
- In exchange for the covenant, Sledge assigned to the Damrons any claim he might have against the insurance companies for bad faith refusal to defend him.
- As part of the arrangement, the Damrons also gave Sledge's attorney $2,000 to cover his legal fees.
Procedural Posture:
- Clyde and Eileen Damron sued Pies Sledge and Perel Polk in the Superior Court (trial court) to recover damages for personal injuries from a car collision.
- On the date set for trial, the Damrons moved to amend their complaint to dismiss their claim against Polk with prejudice.
- Polk's attorney objected to the dismissal, arguing that the Damrons' arrangement with Sledge was collusive and fraudulent.
- Sledge's attorney stated his intention to withdraw Sledge's answer and allow a default judgment to be entered against his client.
- The trial court judge, based on the arguments of the attorneys and without taking any sworn testimony, found the arrangement to be collusive and dismissed the Damrons' entire action against both defendants.
- The Damrons (plaintiffs-appellants) appealed the trial court's dismissal to the Arizona Supreme Court.
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Issue:
Does a prejudgment agreement, in which an insured defendant assigns their potential bad faith claim against their insurer to the plaintiff in exchange for a covenant not to execute, constitute per se collusion justifying the trial court's dismissal of the entire action without an evidentiary hearing?
Opinions:
Majority - McFarland, J.
No. A prejudgment assignment of an insured's claim against an insurer for failure to defend, coupled with a covenant not to execute, is not ipso facto collusive and does not justify dismissing the action without an evidentiary hearing. When an insurer breaches its duty to defend, it exposes its policyholder to significant personal liability. The policyholder is not required to 'indulge in financial masochism' and may take reasonable steps, such as this type of assignment, to shield themselves from the danger created by the insurer's actions. Citing 'Critz v. Farmers Insurance Group,' the court found that such an assignment does not violate public policy, as the assignee-plaintiff will only succeed on the bad faith claim if the insurer's refusal to defend was, in fact, wrongful. A finding of collusion requires more than the existence of such an agreement; it requires proof of bad faith, like an agreement to commit perjury, which can only be established through a formal evidentiary hearing with sworn testimony, not merely through the arguments of counsel.
Analysis:
This decision validates the use of what is now known in Arizona as a 'Damron agreement.' It establishes a critical mechanism for plaintiffs to pursue recovery directly from an insurer that has refused to defend its insured. The ruling shifts significant leverage in insurance disputes, as it allows the insured and the claimant to align their interests against an insurer who denies coverage. By requiring a full evidentiary hearing to prove collusion, the court sets a high bar for insurers seeking to invalidate these agreements, thereby forcing them to weigh the risks of denying a defense more carefully. This precedent has profoundly shaped insurance bad faith litigation by providing a procedural pathway to hold insurers accountable for their duty to defend.
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