Opinion
1 CA-SA 12-0298
02-26-2013
MT. HAWLEY INSURANCE COMPANY, a foreign corporation; MT. HAWLEY INSURANCE COMPANY, a foreign corporation, as the Assignee of the CITY OF FLAGSTAFF, ARIZONA, a political subdivision of the State of Arizona; MT. HAWLEY INSURANCE COMPANY, a foreign corporation, as the Assignee of BUILDING & ENGINEERING CONTRACTORS, SOUTHWEST, INC., Petitioners, v. THE HONORABLE DAN SLAYTON, Judge of the SUPERIOR COURT OF THE STATE OF ARIZONA, in and for the County of COCONINO, Respondent Judge, AUZA CONSTRUCTION, INC., a domestic corporation; FINANCIAL PACIFIC INSURANCE COMPANY, a foreign corporation, Real Parties in Interest.
Kunz Plitt Hyland & Demlong by Steven Plitt Joshua D. Rogers John K. Wittwer Attorneys for Petitioners Gordon & Rees LLP by David L. O'Daniel Arthur Schwartz Attorneys for Real Party in Interest Financial Pacific Insurance Company Elardo, Bragg, Appel & Rossi, P.C. by John A. Elardo Venessa J. Bragg Attorneys for Real Party in Interest Auza Construction, Inc.
NOTICE: THIS DECISION DOES NOT CREATE LEGAL PRECEDENT AND MAY NOT BE CITED
EXCEPT AS AUTHORIZED BY APPLICABLE RULES.
See Ariz. R. Supreme Court 111(c); ARCAP 28(c);
Ariz. R. Crim. P. 31.24
MEMORANDUM DECISION
(Not for Publication - Rule 28, Arizona Rules of Civil Appellate Procedure)
Petition for Special Action
from the Superior Court in Coconino County
Cause No. CV 2010-00727
The Honorable Dan R. Slayton, Judge
JURISDICTION ACCEPTED; RELIEF GRANTED
Kunz Plitt Hyland & Demlong
by Steven Plitt
Joshua D. Rogers
John K. Wittwer
Attorneys for Petitioners
Phoenix Gordon & Rees LLP
by David L. O'Daniel
Arthur Schwartz
Attorneys for Real Party in Interest
Financial Pacific Insurance Company
Phoenix Elardo, Bragg, Appel & Rossi, P.C.
by John A. Elardo
Venessa J. Bragg
Attorneys for Real Party in Interest
Auza Construction, Inc.
Phoenix PORTLEY, Judge ¶1 In this special action Mt. Hawley Insurance Company ("Mt. Hawley") challenges the order compelling the depositions of its claims manager and an attorney. Because we find that Mt. Hawley did not waive its attorney-client privilege by filing this lawsuit, we accept special action jurisdiction and grant the requested relief by vacating the order.
FACTUAL AND PROCEDURAL BACKGROUND
I. Underlying Lawsuit ¶2 The lawsuit giving rise to this indemnity and contribution lawsuit was filed by Carol Sullivan after she fell off her bicycle and was injured while attempting to cross an open construction ditch in June 2007. She and her husband sued the City of Flagstaff ("Flagstaff"), the general contractor, Building & Engineering Contractors, Inc. ("BEC"), and its subcontractor, Auza Construction ("Auza"). ¶3 The litigation proceeded. Mt. Hawley, BEC's carrier, provided a defense for its insured and Flagstaff. Although Auza was insured by Financial Pacific Insurance Company ("FPIC"), BEC was not listed as an additional insured under the policy despite that requirement in the construction contract. Moreover, Auza refused the tenders of defense from BEC and Flagstaff despite the construction contract provision that required Auza to indemnify BEC and hold it and Flagstaff harmless from all claims, losses, costs and damages. ¶4 Auza settled its liability the day before trial for $160,000. The trial proceeded, and the jury awarded the Sullivans damages against both BEC and Flagstaff. After the court awarded the Sullivans sanctions under Arizona Rule of Civil Procedure 68 and related costs against both BEC and Flagstaff, the total judgment was $458,537.56. ¶5 Mt. Hawley subsequently settled the judgment for $152,619.93, and secured a release for BEC, Flagstaff and Mt. Hawley.
II. Current Lawsuit ¶6 Mt. Hawley sued Auza and FPIC to recover the settlement and its costs of $124,341 to defend the Sullivan litigation. Auza and FPIC answered the complaint. They contend that Mt. Hawley failed to exercise due diligence and reasonable prudence in the underlying lawsuit, failed to mitigate its damages by settling before trial, and that BEC and Flagstaff failed to call certain expert witnesses at trial. ¶7 Auza subsequently moved to compel the deposition of Kerry Griggs, the trial attorney for BEC in the Sullivan litigation, and Jack Lewis, Mt. Hawley's claims manager. Auza claimed it needed to conduct the depositions to prove its defenses to the litigation; specifically, the discussions between Griggs and Lewis about settling, going to trial and using certain listed experts. It also argued that Mt. Hawley impliedly put the communications between Griggs and Lewis at issue by filing the lawsuit. Despite Mt. Hawley's objection, the court found a partial waiver of the attorney-client privilege and granted the motion to compel.
The third amended complaint alleges seven causes of action, including breach of contract, contractual indemnity, common law indemnity, and equitable contribution.
DISCUSSION
I. Special Action Jurisdiction ¶8 Special action jurisdiction is appropriate when a petitioner does not have an "equally plain, speedy, or adequate remedy by appeal." Ariz. R.P. Spec. Act. 1(a). A discovery order is an interlocutory, non-appealable order, Green v. Nygaard, 213 Ariz. 460, 462, ¶ 6, 143 P.3d 393, 395 (App. 2006), making "appellate review . . . available only by special action." Haas v. Colosi, 202 Ariz. 56, 57, ¶ 2, 40 P.3d 1249, 1250 (App. 2002); see also P.M. v. Gould, 212 Ariz. 541, 544, ¶ 12, 136 P.3d 223, 226 (App. 2006) ("When a party asserts a privilege against a discovery order, special action jurisdiction lies because the party has 'no equally plain, speedy, or adequate remedy by appeal.'") (quoting Ariz. R.P. Spec. Act. 1(a)). Consequently, we exercise discretion and accept special action jurisdiction.
Our decision to accept special action jurisdiction does not extend to the question of whether Auza and FPIC may assert a mitigation of damages defense — a question about which we express no opinion.
II. Order Compelling Depositions ¶9 We review the order compelling the depositions of Griggs and Lewis for an abuse of discretion. State Farm Mut. Auto. Ins. Co. v. Lee, 199 Ariz. 52, 57, ¶ 12, 13 P.3d 1169, 1174 (2000). We, however, review whether Mt. Hawley waived the attorney-client privilege de novo. Twin City Fire Ins. Co. v. Burke, 204 Ariz. 251, 253-54, ¶ 10, 63 P.3d 282, 284-85 (2003). ¶10 Because the trial court found a partial waiver of the attorney-client privilege, we assume without deciding that Griggs, who was hired by Mt. Hawley to represent BEC and Flagstaff in the Sullivan litigation, had an attorney-client relationship with Mt. Hawley. We do so because "[c]mmunications between the nonclient insurer and the lawyer would generally be entitled to the same degree of confidentiality — as long as the general requirements for privilege are met — as those between the insured client and the lawyer." Paradigm Ins. Co., 200 Ariz. at 152 n.3, ¶ 20, 24 P.3d at 599 n.3. The communications would be privileged if "made to or by the lawyer," in confidence, "for the purpose of securing or giving legal advice," and treated as confidential. Samaritan Found. v. Goodfarb, 176 Ariz. 497, 501, 862 P.2d 870, 874 (1993). Because Auza and FPIC want to depose Lewis and Griggs about their discussions surrounding whether to settle, go to trial, and call experts to testify at trial, those communications meet the general requirements for the privilege, for they were "for the purpose of securing or giving legal advice." Id. Therefore, the communications between the two are protected by the attorney-client privilege. ¶11 We next turn to whether Mt. Hawley impliedly waived the privilege by filing this lawsuit. The concept of an implied waiver of the privilege was discussed by our supreme court in State Farm Mutual Automobile Insurance Co. v. Lee. State Farm was sued by policyholders for bad faith denial of underinsured and uninsured claims. 199 Ariz. at 54, ¶ 1, 13 P.3d at 1172. Despite State Farm's attorney-client privilege objections, the policyholders sought documents that demonstrated that State Farm's agents had received legal advice to pay or reject claims. Id. at 55, ¶ 5, 13 P.3d at 1172. After finding that State Farm was alleging that its agents subjectively believed they had acted in good faith when denying the claims in part because of advice of counsel, the divided court stated that State Farm "affirmatively injected the legal knowledge of its claims managers into the litigation and put the extent, and thus the sources, of this legal knowledge at issue." Id. at 57-58, 64-65, ¶¶ 14-15, 31, 34, 13 P.3d at 1174-75, 1181-82. Accordingly, the court found that State Farm had impliedly waived the privilege, and allowed the discovery. Id. at 67, ¶ 40, 13 P.3d at 1184. ¶12 Although the court did not address whether the implied waiver would apply to a plaintiff insurance company, it addressed the issue three years later in Twin City Fire Insurance Co. v. Burke. There, Twin City, the excess liability carrier, sued General Star, the primary liability carrier, for bad faith. 204 Ariz. at 254, ¶ 1, 63 P.2d at 283. In an attempt to prove that it acted in good faith, General Star sought to compel "disclosure of communications between Twin City and its counsel about a matter for which Twin City sought legal advice." Id. at ¶ 11. The court rejected the argument that Twin City impliedly waived the privilege and stated that Twin City did not "affirmatively put [its] counsel's views in issue when it filed" the lawsuit because the "subjective views and evaluations of Twin City's claims agents do not shed light on the question of General Star's good faith." Id. at 256, ¶¶ 19-20, 63 P.3d at 287. Consequently, General Star could not breach the privilege. Id. at 257, ¶ 23, 63 P.2d at 288. ¶13 Here, Mt. Hawley filed the lawsuit to recover its defense costs and the post-trial settlement. The mere act of filing the lawsuit did not put the discussions between the insured's trial lawyer and Mt. Hawley's claims manager at issue. Although Mt. Hawley may have to prove that it acted reasonably in handling the Sullivan litigation, see MT Builders, L.L.C. v. Fisher Roofing, Inc. , 219 Ariz. 297, 304, ¶ 16, 197 P.3d 758, 765 (App. 2008); United Servs. Auto. Ass'n v. Morris, 154 Ariz. 113, 120, 741 P.2d 246, 253 (1987) ("[T]he indemnitor will be liable to the indemnitee to the extent that the indemnitee establishes that the settlement was reasonable and prudent under all the circumstances."), nothing in the record before us suggests that it is relying on discussions between Griggs and Lewis to establish that it acted reasonably. ¶14 Mt. Hawley has not yet injected any subjective analysis into the lawsuit that would require a partial waiver of the attorney-client privilege. Moreover, Auza and FPIC can use objective evidence to attempt to demonstrate that Mt. Hawley did not act reasonably in the underlying lawsuit. See, e.g., Morris, 154 Ariz. at 121, 741 P.2d at 254 (stating that "[t]he test as to whether the settlement was reasonable and prudent is what a reasonably prudent person in the [indemnitee]s' position would have settled for on the merits of the . . . case"). They can also hire one or more experts to attempt to demonstrate that Mt. Hawley did not act reasonably under the circumstances. Consequently, Auza and FPIC have reasonable alternatives other than deposing Griggs and Lewis about any privileged communications in an attempt to demonstrate that Mt. Hawley did not act reasonably in the underlying litigation.
We note that "[b]ecause a lawyer is expressly assigned to represent the insured, the lawyer's primary obligation is to the insured, and the lawyer must exercise independent professional judgment on behalf of the insured." Paradigm Ins. Co. v. Langerman Law Offices, P.A., 200 Ariz. 146, 150, ¶ 16, 24 P.3d 593, 597 (2001).
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ATTORNEYS' FEES
¶15 Mt. Hawley, Auza and FPIC request attorneys' fees and costs pursuant to Ariz. R.P. Spec. Act 4(g). Mt. Hawley and FPIC also seek fees pursuant to Arizona Revised Statutes section 12-341.01 (West 2013). Because Mt. Hawley has prevailed in this action that involves a contractual indemnity provision, we will grant Mt. Hawley its reasonable attorneys' fees and costs upon compliance with ARCAP 21.
CONCLUSION
¶16 Based on the foregoing, we accept special action jurisdiction, grant Mt. Hawley relief and vacate the order finding an implied waiver of the attorney-client privilege and compelling Griggs and Lewis to discuss their conversations during the Sullivan litigation.
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MAURICE PORTLEY, Judge
CONCURRING: ________________
MARGARET H. DOWNIE, Presiding Judge
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PHILIP HALL, Judge