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Lozier v. Auto Owners Insurance Co.

filed: January 24, 1992.


Appeal from the United States District Court for the District of Arizona. D.C. No. CV-88-01059-PGR. Paul G. Rosenblatt, District Judge, Presiding. Original Opinion Reported at,.

Before: Richard H. Chambers, Thomas Tang and Stephen S. Trott, Circuit Judges. Opinion by Judge Trott.

Author: Trott

TROTT, Circuit Judge:

Rosemary Lozier and Wilbur McDonald were involved in a car accident, and Lozier was severely injured. McDonald's insurer, Auto Owners Insurance Company ("Auto Owners"), mishandled the claim. Pursuant to Arizona law, McDonald assigned to Lozier his bad-faith and contract claims against Auto Owners. Lozier sued Auto Owners on those claims. Sitting without a jury, the district court entered judgment of $3.5 million for Lozier. Auto Owners appeals. We have jurisdiction under 28 U.S.C. § 1291 (1988), and we affirm.


McDonald and Lozier had what Lozier described as a "seven months commonlaw" [sic] marriage, with a history of violence. On January 19, 1986, McDonald and Lozier had an argument, and Lozier moved out of their home. That night, they saw each other in the parking lot of a restaurant, and had a noisy dispute. Each had been drinking. They drove away in separate cars.

Later that evening, they were involved in a two-car accident, McDonald driving one car and Lozier the other. As a result of the accident, Lozier suffered a broken back and a severed spinal column. She is now a quadriplegic. McDonald was not seriously hurt. His blood-alcohol level was later tested at .18%.

At the time of the accident, McDonald was insured by Auto Owners, with a policy limit of $100,000 per person injured. The policy was valid and the premiums were paid up. The policy contained the following provision: "Exclusions. Liability Coverage does not apply: 1. To any person who intentionally causes bodily injury or property damage."

McDonald told the police that Lozier had caused the accident by ramming his car from behind. In contrast, Lozier told the police that McDonald had rammed her. There were no other witnesses to the accident.

Auto Owners hired Ken Fisher to investigate the accident,*fn1 and he soon learned of Lozier's injuries. On February 13, 1986, McDonald told Fisher that Lozier had caused the accident. Although Lozier offered herself for an interview, Auto Owners never accepted the offer, and did not depose her until more than a year after the accident. Fisher knew Arizona was a comparative negligence state, in which a third party's negligence would not preclude recovery against Auto Owners' insured. See generally Ariz. Rev. Stat. Ann. § 12-2505 (Supp. 1991). On February 19, 1986, Fisher sent McDonald a reservation-of-rights letter based on the intentional-acts exclusion in McDonald's policy.

The initial police report of January 19, 1986, offered the tentative explanation that Lozier had hit McDonald from behind. On March 12, 1986, Auto Owners received a copy of that report. A supplement to the first police report, written six days later, included an interview with Lozier in which she accused McDonald of having hit her from behind.

The final police report was written on March 26, 1986, by Deputy Graham of the Yavapai County (Arizona) Sheriff's Department. Deputy Graham, who was not an accident reconstructionist, stated: "it is my opinion that Mrs. LOZIER['s] . . . vehicle was struck at least three (3) times by Mr. MCDONALD'S vehicle . . . . This . . . clearly constitutes a willful act on the part of . . . MCDONALD." Auto Owners did not hire an accident reconstructionist to investigate the accident until the bad-faith trial with Lozier.

On February 19, 1986, Lozier asked Auto Owners to tell her McDonald's policy limits, and informed Auto Owners that she would sue if they refused to disclose the limits. The policy limits were discoverable information under the Arizona Rules of Civil Procedure. See Ariz. R. Civ. P. 26(b)(2). Without consulting McDonald, Auto Owners refused to disclose the limits. Lozier sued McDonald in Arizona state court on March 19, 1986. Auto Owners hired an experienced attorney, Daniel Stoops, to represent McDonald. On April 10, Auto Owners informed Stoops it was reserving its rights under McDonald's insurance policy.

On July 17, 1986, Lozier offered to settle the case against McDonald if Auto Owners would pay $100,000, the policy limits, within ten days. The district court found Lozier's time-limited offer reasonable under the circumstances. Auto Owners requested and obtained from Lozier a ten-day extension, but did not request any further extension. Time expired on the offer without a response from Auto Owners.

The day the settlement offer expired, Auto Owners hired outside counsel. On September 8, 1986, it filed a declaratory judgment to determine whether or not McDonald was insured based on the intentional-acts exclusion in his policy. Tom Froman, the in-house attorney responsible for the decision-making in the McDonald-Lozier file, stated that the declaratory judgment was brought because the "facts were confusing." Auto Owners' branch claims adjuster, Steve Castor, estimated as of August 4, 1986, that Auto Owners had a "50/50 shot" of obtaining a favorable declaratory judgment.

On March 24, 1987, Auto Owners' outside counsel wrote a letter stating that Auto Owners could lose the declaratory judgment action, and be subject to liability over the $100,000 policy limit for the tort of bad faith in handling the claim. On or about April 2, 1987, Auto Owners attempted to settle the case by offering to Lozier the policy limit of $100,000. Lozier rejected the offer.

On August 25, 1987, Lozier and McDonald entered into a Damron agreement.*fn2 That agreement provided for: (1) a stipulated judgment against McDonald of $3.5 million with 10 percent interest per year from the date of judgment; (2) a promise from Lozier not to execute that judgment; (3) an assignment to Lozier of McDonald's bad-faith and contract claims ...

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