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Insured’s Options

If the insurer has refused to defend/indemnify and the insured resolves the claims on his own, the insured can (1) directly sue the insurer for a declaratory judgment, breach of contract and/or bad faith, or (2) assign his claims against the insurer to the third-party claimant.

In an action for declaratory judgment, the insured sues the insurance company in advance of any resolution of the claims brought against the insured by the third-party asking the court to declare the insurance company’s obligations under the policy. In a direct action for breach of contract, the insured simply sues the insurance company to reimburse the insured any out-of-pocket damages incurred by the insured that otherwise should have been paid by the company, as well as for attorneys’ fees and costs.

Fortunately, there is another option. The insured can enter an agreement with the third-party claimant whereby the insured allows judgment to be taken against him and assigns to the third-party any rights that the insured has against the insurance company, in exchange for an agreement that the third-party will not seek payment from the insured. This is generally called a “Damron” or “Morris” agreement, depending on whether the insurance company has completely denied coverage or has reserved its rights to later deny coverage.

Most insurance policies include a cooperation clause requiring the insured to cooperate with the insurer in connection with claims. Among other things, the insured’s duty of cooperation “forbids the insured only from settling those claims for which the insurer unconditionally assumes liability.” United Services Auto. Ass’n. v. Morris, 154 Ariz. 113, 119,117, 741 P.2d 246, 250, 252 (1987). If the insured breaches the cooperation clause, the insurer is relieved from any of its coverage obligations.

But, when an insurance company denies coverage, the insured is freed from the cooperation clause and may settle or take other action to protect himself. When an insurer reserves its rights as to coverage of a claim, the insured is partially freed from his duty of cooperation with respect to that claim, and may stipulate to have judgment taken against him on that claim. Specifically, when an insurer refuses to defend an insured against a third-party claim, or defends the insured under a reservation of rights, the insured is no longer obligated to allow the insurer to exclusively control the defense and may enter into a settlement agreement without the insurer’s consent without breaching the duty to cooperate.

A Morris or Damron agreement usually contains three essential provisions: (1) a stipulated judgment against the insured; (2) a covenant that the claimant will not execute the judgment against the insured; and (3) the insured’s assignment of his rights and claims against the insurer to the claimant.