What Is a Damron Agreement in Arizona Injury Cases—and When Is It Used?

Insurance policies, like for auto insurance, often include a provision under which the insurance company may reserve the right to deny coverage or refuse to defend the policyholder in a lawsuit. If this happens, then sometimes a policyholder will enter into an agreement with the plaintiff in a lawsuit to stipulate a judgment in the plaintiff’s favor and assign the policyholder’s rights against the insurance company to the plaintiff.

In return, the plaintiff agrees not to enforce the stipulated judgment against the policyholder. Instead, the defendant assigns to the plaintiff any claims the policyholder may have against the insurance company for its failure to defend against the claim. In Arizona this arrangement is known as a “Damron agreement.”

The primary purpose of a Damron Agreement is to shift the risk of a large verdict to an insurer that has failed to provide a defense. This ensures that the insured is not left vulnerable to personal liability because of the insurer’s inaction.

Damron agreements are enforceable where the insurer breaches its duty to defend and no fraud or collusion exists (coverage is determined in subsequent litigation).

In this blog post, we consider the purpose of a Damron agreement, distinguish it from another kind of agreement known as a “Morris agreement,” and examine how a Damron agreement can affect your legal rights as a plaintiff in a personal injury lawsuit in Arizona.

If after reading this post you have any questions about Arizona personal injury claims generally or if a Damron agreement is applicable to a personal injury claim you may have, then call Plattner Verderame Arizona Injury Lawyers today or contact us online to speak with one of our experienced personal injury lawyers.

Why is it called a “Damron agreement?”

Damron agreements are named after the 1969 Arizona Supreme Court case (Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (1969))  that considered what happens when a policyholder attempts before trial to transfer to a claimant the policyholder’s rights against the insurance company for its refusal to defend the policyholder.

In Damron, the driver of an automobile owned by someone else was involved in an injury-causing accident. The injured parties sued the driver. The driver’s insurance carrier and the insurer of the vehicle owners both refused to defend the case, arguing that the driver did not have permission to drive the car when the accident happened.

Before the trial began the driver’s attorney entered into an agreement with the plaintiffs’ attorney. The substance of the agreement was that the plaintiffs would not execute against the driver and pay $2,000 to cover the driver’s attorney fees in return for the driver assigning any claim he had against the insurance companies for bad faith in refusing to defend him. A default judgment was then entered against the driver.

The insurance companies claimed that this agreement was collusive and fraudulent.

The supreme court upheld the agreement between the plaintiffs and the driver, ruling that such a prejudgment assignment is not inherently collusive or fraudulent, especially if the insurer had breached its duty to defend. The court emphasized that the driver’s actions in this case were a reasonable, self-protective response to the refusal of the insurance companies to act in good faith.

How does a Damron agreement work?

Once the plaintiff and the policyholder defendant conclude a Damron agreement, the next step is for the plaintiff to obtain a judgment against the policyholder. This can be done through a stipulated judgment arranged between the parties to the lawsuit, or through a default judgment, or in some cases by going through a trial in which the policyholder does not contest liability or damages.

After the plaintiff obtains a judgment against the policyholder, then under the Damron agreement the plaintiff will attempt to collect the judgment award from the insurance company. The basis of the plaintiff’s claim is to assume what would otherwise be the policyholder’s claim: that the insurance company wrongfully denied coverage to the policyholder by refusing to defend the claim.

• If the plaintiff is successful in proving that the insurer wrongfully refused to defend the claim, then the plaintiff can collect damages the policyholder would have been entitled to, up to the limits of the policy coverage amount (unless bad-faith liability is established).
• If, however, the insurer previously received and rejected a policy limits demand and acted in bad faith in refusing to settle, then the insurer’s liability could exceed the policy limits.
• If the Damron agreement is based on a stipulated judgment of all claims that could have been litigated in the plaintiff’s claim, then if the insurer refuses to defend the policyholder the insurer is bound as to liability, subject to coverage and reasonableness challenges.
• If the Damron agreement involves a default judgment, the insurance company does not have the right to intervene in a damages hearing if it breached its duty to defend the policyholder (though it may later challenge coverage and reasonableness).

Are Damron agreements restricted to auto insurance claims?

Damron agreements are possible in several kinds of insurance policy coverage-related cases aside from wrongful refusal to defend auto insurance claims. For example, Damron agreements may exist between an insured contractor and a plaintiff, including in cases involving excess insurance.

Distinguish a Damron agreement from a Morris agreement

In some cases, an insurance company may defend a policyholder in a lawsuit but do so under a “reservation of rights.” A reservation of rights is a formal notice the insurance company sends to the policyholder, stating that the insurer is investigating a claim but is keeping the right to deny coverage for all or part of it if the claim falls under a policy exclusion, or is not properly reported, or otherwise fails to meet policy terms.

A reservation of rights must be properly communicated to the insured, and in a timely manner. A reservation of rights letter must, in a straightforward manner:

• Fairly inform a reader of average intelligence of the fact that the insurer is providing a defense without waiving its rights to later contest coverage
• Inform the reader of the concerns the insurer has with coverage, and
• Be timely and provided before or promptly after the insurer assumes the defense.

If the insurance company elects to defend the policyholder under a reservation of its rights to deny policy coverage later, the policyholder has a duty to cooperate with the insurance company in defending the case. But what happens if the policyholder still enters into a Damron-style agreement with the plaintiff?

This is the question the Arizona Supreme Court faced in the 1987 Arizona Supreme Court case of United Services Automobile Association v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987). In that case, even though the insurance company agreed to defend under a reservation of rights, the plaintiff and the policyholder still agreed for the plaintiff not to execute on a judgment against the policyholder in return for the policyholder assigning to the plaintiff the policyholder’s rights against the insurance company.

The state supreme court held that such an agreement is not a violation of the policyholder’s duty to cooperate with the insurance company if the insurer:

• Is given notice of a proposed Morris agreement
• Is given the opportunity to defend unconditionally or withdraw from the defense
• The settlement is made fairly, and
• No fraud or collusion is involved.

If a Morris agreement is in place, then the stipulation of the policyholder to liability and damages is not binding on the insurer unless the insured (or its assignee) can show that the settlement was reasonable and prudent. The insurer retains the right to challenge the fairness and reasonableness of the settlement between the plaintiff and the policyholder.

Morris agreements are limited to admitting facts essential to determining the insured’s liability to the injured plaintiff in the underlying tort action. This means that the plaintiff and the insured cannot use a Morris agreement to establish facts necessary to obtain coverage.

When is a Damron agreement not permitted?

If the insurer unconditionally performs its obligation to defend the policyholder, then the cooperation clause remains in full force, and the policyholder cannot make a Damron or Morris settlement agreement with the plaintiff without breaching the insured’s obligations under the insurance policy.

Not every policyholder dispute with the insurance company is subject to a Damron agreement. A Damron agreement is appropriate only when the insurer breaches its express or implied obligation to defend under the policy.

• So, for example, if the insurer refuses to pay more than the policy coverage limit, this is not grounds for a Damron agreement.
• A legal malpractice claim cannot be assigned through a Damron agreement even when it is included with a bad faith claim against an insurance company.

Is a Damron agreement right for you in a personal injury claim?

Insurance companies may refuse to defend an insured policyholder for many reasons. Sometimes these reasons may be valid; other times they may not be. If the insurer is refusing to defend a personal injury claim for wrongful reasons, then a Damron agreement with the insured defendant becomes a real possibility.

The question of whether the insurance company’s refusal to defend its insured can be complex to answer. It requires careful investigation of the facts of the underlying personal injury claim against the reason or reasons the insurer provides to justify its refusal. This is one area where an experienced Arizona personal injury attorney, like you will find at Plattner Verderame, can help you to know if a Damron agreement is a practical option for you.

Our attorneys have extensive experience dealing with insurance bad faith actions, including claims against another person’s insurance policy. We can give you clear, understandable advice on whether negotiating a Damron agreement will serve your interests if you have a personal injury claim against an insured defendant.

If you are having difficulty collecting a third-party insurance claim, trust us to advocate on your behalf. With a free initial consultation, our skillful Arizona insurance claims lawyers learn about the details of your case, so you know what assistance we can provide upfront.

At Plattner Verderame Arizona Injury Lawyers, our personal injury attorneys work diligently to secure fair and appropriate compensation for your injuries. We proudly provide skilled representation to the residents of Phoenix and beyond.

You can reach us by phone or through our online contact form to discuss your legal options and schedule a free consultation with us.