SUPREME COURT OF ARIZONA
En Banc
SAFEWAY INSURANCE COMPANY, INC., ) Arizona Supreme Court
a foreign corporation, ) No. CV-04-0146-PR
)
Plaintiff-Appellant, ) Court of Appeals
) Division One
v. ) No. 1 CA-CV 02-0661
)
PETER A. GUERRERO, individually, ) Maricopa County
PETER A. GUERRERO, P.C., an ) Superior Court
Arizona professional ) No. CV 02-004495
corporation; CHARLES D. ROUSH, )
individually, CHARLES D. ROUSH, ) O P I N I O N
P.C., an Arizona professional )
corporation; and ROUSH, )
MCCRACKEN, GUERRERO & MILLER, )
ATTORNEYS AT LAW, a partnership )
of professional corporations, )
)
Defendants-Appellees. )
)
__________________________________)
Appeal from the Superior Court in Maricopa County
The Honorable Margaret H. Downie, Judge
AFFIRMED
Opinion of the Court of Appeals, Division One
207 Ariz. 82, 83 P.3d 560 (App. 2004)
VACATED
Parrillo, Weiss & O’Halloran Tempe
By: Ronald E. Huser
Attorneys for Plaintiff-Appellant
Turley, Swan & Childers, P.C. Phoenix
By: Kent E. Turley
and
Haralson, Miller, Pitt, Feldman & McAnally, P.L.C. Tucson
By: Stanley G. Feldman
Attorneys for Defendants-Appellees
Law Office of JoJene Mills, P.C. Tucson
By: JoJene E. Mills
and
Plattner Verderame, P.C. Phoenix
By: Richard S. Plattner
Attorneys for Amicus Curiae
Arizona Trial Lawyers Association
Law Offices of John L. Tully, P.C. Tucson
By: John L. Tully
and
Law Offices of James D’Antonio Tucson
By: James J. D’Antonio
Attorneys for Amicus Curiae
United Policyholders
H U R W I T Z, Justice
¶1 This case requires us once again to consider issues
arising out of a Morris agreement.1 The question presented is
1
The term “Morris agreement” is generally used to describe a
settlement agreement in which an insured defendant admits to
liability and assigns to a plaintiff his or her rights against
the liability insurer, including any cause of action for bad
faith, in exchange for a promise by the plaintiff not to execute
the judgment against the insured. See United Servs. Auto. Ass’n
v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987). Such an
agreement can be prompted by a number of circumstances. See,
e.g., id. at 115, 741 P.2d at 248 (involving an agreement
entered into after reservation of rights by insurer); Ariz.
Prop. & Cas. Ins. Guar. Fund v. Helme, 153 Ariz. 129, 735 P.2d
451 (1987) (involving an agreement entered into after alleged
anticipatory breach of insurer’s duty to indemnify); Miel v.
State Farm Mut. Aut. Ins. Co., 185 Ariz. 104, 912 P.2d 1333
(App. 1995) (involving an agreement entered into after alleged
bad faith failure to settle by insurer). An agreement with
these same characteristics entered in response to an insurer’s
refusal to defend the insured is generally referred to as a
Damron agreement. See Damron v. Sledge, 105 Ariz. 151, 460 P.2d
2
whether attorneys who negotiate a Morris agreement on behalf of
a plaintiff in a personal injury action can be subjected to
liability to the defendant’s insurer for intentional
interference with contractual relations. We conclude that such
a claim does not lie in this case.
I.
¶2 This case arises out of an automobile accident in
which Holly Castano suffered catastrophic injuries.2 Castano’s
mother, Patricia Himes, was appointed as her conservator and
retained Peter A. Guerrero of the firm of Roush, McCracken &
Guerrero (collectively “Guerrero”), to handle Castano’s personal
injury claims. Steven Botma drove the car that caused the
accident. Safeway Insurance Company (“Safeway”) insured the
vehicle that Botma was driving. The insurance policy provided
coverage limits of $15,000 per person and $30,000 per accident.
997 (1969). We recognize that the cases sometimes use the terms
“Morris agreement” and “Damron agreement” interchangeably. See
Himes v. Safeway, 205 Ariz. 31, 34 n.2 ¶ 1, 66 P.3d 74, 77 (App.
2003). We refer to the agreement at issue in this case as a
“Morris agreement” because it does not involve a refusal to
defend.
2
As the court of appeals acknowledged, “Holly Castano’s
injuries were extremely severe.” Safeway Ins. Co. v. Guerrero,
207 Ariz. 82, 84 ¶ 6, 83 P.3d 560, 562 (App. 2004). She
“suffered a diffuse axonal injury to her brain which resulted in
spastic quadreparesis,” has “no use of her left arm or leg” and
only limited use of her right arm and leg, and suffers from long
term and short term memory problems. Id. The cost of her past
and projected medical care has been estimated at $7 million.
Id.
3
¶3 Guerrero made a settlement offer that included a
demand of the $15,000 policy limits. Guerrero later withdrew
the offer, and then sued Botma and General Motors, the
manufacturer of the car in which Castano was injured. Safeway
appointed counsel for Botma, who filed a counterclaim alleging
that Safeway had accepted the settlement offer before it was
withdrawn. That issue was tried to a jury, which found that no
settlement had been reached. The court of appeals affirmed in a
memorandum decision.
¶4 Shortly before the scheduled trial of the personal
injury lawsuit, Himes and Botma entered into a Morris agreement
under which Botma admitted liability in the amount of $12
million and assigned to Himes any claims that he had against his
original counsel3 and Safeway. Safeway intervened in superior
court to contest the amount of the settlement. The superior
court found the $12 million settlement reasonable.4
3
Himes later brought a malpractice suit against the first
counsel Safeway assigned to Botma’s case. The superior court
dismissed the complaint, holding that a legal malpractice claim
cannot be assigned, and the court of appeals affirmed. Botma v.
Huser, 202 Ariz. 14, 39 P.3d 538 (App. 2002).
4
Safeway appealed the reasonableness determination, and the
court of appeals reversed and remanded for further proceedings.
Himes v. Safeway Ins. Co., 205 Ariz. 31, 66 P.3d 74 (App. 2003).
On remand, the superior court once again found the settlement
reasonable. Safeway again appealed, and the court of appeals
affirmed that judgment in a memorandum decision.
4
¶5 After the Morris settlement, Safeway filed two
lawsuits. The first, filed in federal court, sought a
declaratory judgment that Botma had breached the cooperation
clause of the insurance contract by entering into the Morris
agreement.5 Himes and Botma counterclaimed, alleging that
Safeway had acted in bad faith by failing to accept the policy
limits settlement offer. The district court granted summary
judgment to Safeway, finding that the insurer had not acted in
bad faith and that Botma therefore breached the cooperation
clause of his insurance contract by signing the Morris
agreement. Safeway Ins. Co. v. Botma, No. CIV-00-553-PHX-RCB
(D. Ariz. Mar. 7, 2003) (order granting partial summary
judgment). An appeal of that judgment is pending in the Ninth
Circuit.
¶6 In the second suit, filed in superior court, Safeway
sued Guerrero for intentional interference with contractual
relations. The complaint alleged that Guerrero “devised a
scheme” to induce Botma to admit liability and assign his bad
faith claim against Safeway, in order to allow Guerrero to
“receive a much larger fee.” Safeway alleged that Guerrero
induced Botma’s breach of the cooperation clause by threatening
Botma with a multi-million dollar judgment, manufacturing a bad
5
The clause provided: “A person claiming any coverage of
this policy must . . . [c]ooperate with us and assist us in any
matter concerning a claim or suit.”
5
faith claim against Safeway through aborted settlement
negotiations, and misrepresenting to Botma what had occurred
during those negotiations.
¶7 Guerrero filed a motion for summary judgment. The
superior court granted the motion, holding that “on the
undisputed facts, plaintiff’s complaint fails as a matter of
law.”6 The court of appeals reversed, finding a genuine issue of
material fact as to whether Guerrero engaged in improper conduct
that could give rise to the intentional interference claim.
Safeway Ins. Co. v. Guerrero, 207 Ariz. 82, 95 ¶¶ 55-56, 83 P.3d
560, 573 (App. 2004) (“Safeway”).
¶8 We granted Guerrero’s petition for review because the
case presents an issue of statewide importance and first
impression. We have jurisdiction under Article 6, Section 5(3)
of the Arizona Constitution, and Arizona Revised Statutes
(“A.R.S.”) § 12-120.24 (2003).
6
Guerrero styled the motion as a “Motion to Dismiss, or in
the Alternative, Motion for Summary Judgment.” Safeway argues
here, as it did in the court of appeals, that the superior court
erred in treating the motion as one for summary judgment. See
Safeway Ins. Co. v. Guerrero, 207 Ariz. 82, 85 n.5 ¶ 11, 83 P.3d
560, 563 (App. 2004). The court of appeals found it unnecessary
to consider this procedural claim. Id. In light of Safeway’s
claim, we have considered in this opinion only the facts alleged
in Safeway’s complaint, facts established in the federal
litigation (which both Safeway and Guerrero requested be the
subject of judicial notice in the court of appeals), see id. at
83 ¶ 3, 83 P.3d at 561, and facts conceded by Safeway at oral
argument.
6
II.
A.
¶9 Morris agreements are designed to reconcile the
“conflicting interests” of an insured and a liability insurer in
certain difficult situations. Parking Concepts v. Tenney, 207
Ariz. 19, 22 ¶ 12, 83 P.3d 19, 22 (2004) (quoting United Servs.
Auto. Ass’n v. Morris, 154 Ariz. 113, 117, 741 P.2d 246, 250
(1987)). One such situation occurs when an insurer defends an
insured against a claim by a third party but reserves the right
to dispute whether the claim is covered under the policy. While
an insurer with a good faith policy defense has a right to
dispute coverage, the insured is thereby placed in a “precarious
position.” Id. (quoting Morris, 154 Ariz. at 118, 741 P.2d at
251). Even though the insurer is providing a defense to the
claim, the insured faces the possibility that any judgment, even
one within policy limits, may not be covered by the policy. Id.
¶10 In order to allow insureds to protect themselves from
“the sharp thrust of personal liability,” Morris, 154 Ariz. at
118, 741 P.2d at 251, we held that the cooperation clause of the
insurance contract is not violated by a Morris agreement when
the insurer defends under a reservation of rights. Id. at 119,
741 P.2d at 252. To protect the insurer, we place the burden on
the insureds (or their assignees) to show that any Morris
agreement is free of “fraud or collusion,” Parking Concepts, 207
7
Ariz. at 22 ¶ 13, 83 P.3d at 22, and reasonable in amount, id.
at ¶ 15. If the insurer eventually succeeds in establishing
that the claim is not covered by the policy, the insurer is not
liable for any part of the settlement. Morris, 154 Ariz. at
121, 741 P.2d at 254.
¶11 A similar situation arises when an insured is
confronted with a claim that exceeds the limits of the insurance
policy, and the insurer fails to accept an offer to settle
within those limits. The insurer owes the insured an implied
contractual “duty to treat settlement proposals with equal
consideration” to its interests and those of an insured. Ariz.
Prop. & Cas. Ins. Guar. Fund v. Helme, 153 Ariz. 129, 137, 735
P.2d 451, 459 (1987). Failure to give such “equal
consideration” is a breach of contract by the insurer that frees
the insured from the contractual prohibition on settlement
without the insurer’s approval. Id. But when an insurer fails
to settle a claim, the insured may be forced to proceed to trial
on the claim before a final determination can be made as to
whether the insurer acted in bad faith. Use of a Morris
agreement under such circumstances allows insureds to protect
themselves against personal liability, while reserving to the
insurer the ability to prove that its actions were not in bad
faith. If bad faith is not established, the Morris agreement
will be a breach of the cooperation clause and the insurer will
8
be excused from any duty to pay the stipulated judgment, no
matter how reasonable the amount. See State Farm Mut. Auto.
Ins. Co. v. Peaton, 168 Ariz. 184, 192-93, 812 P.2d 1002, 1010-
11 (App. 1990).
B.
¶12 This case involves a Morris agreement premised on
Safeway’s alleged bad faith failure to settle. However, the
federal district court has held that Safeway did not act in bad
faith in handling the Castano claim against Botma. Unless that
holding is overturned by the federal courts, it follows that
Botma breached his duty to cooperate with the insurer by
entering into the Morris agreement.
¶13 We have “long recognized” that a person who
intentionally interferes with contractual relationships between
other parties can be held liable under certain circumstances to
a party injured by the interference. Wells Fargo Bank v. Ariz.
Laborers, Teamsters & Cement Masons Local No. 395 Pension Trust,
201 Ariz. 474, 493 ¶ 74, 38 P.3d 12, 31 (2002). Safeway’s
complaint alleges that Guerrero intentionally interfered with
Safeway’s contractual relationship with Botma by inducing Botma
to enter into the Morris agreement.
¶14 The tort of intentional interference with contractual
relations requires a plaintiff to prove:
9
(1) existence of a valid contractual relationship, (2)
knowledge of the relationship on the part of the
interferor, (3) intentional interference inducing or
causing a breach, (4) resultant damage to the party
whose relationship has been disrupted, and (5) that
the defendant acted improperly.
Id. The opinion below focused solely on the fifth element,
whether Guerrero “acted improperly.” Safeway, 207 Ariz. at 92 ¶
41, 83 P.3d at 570. Because it found a genuine issue of
material fact as to this element, the court of appeals reversed
the superior court’s summary judgment and remanded for trial.
Id. at 95 ¶¶ 55-56, 83 P.3d at 573.
III.
A.
¶15 Guerrero argues that lawyers acting on behalf of their
clients hold a qualified privilege from liability for tortious
interference with contractual relations. In tortious
interference cases, however, this Court long ago rejected the
“formalistic privilege concept in favor of a requirement that an
interference be ‘improper’ for liability to attach.”
Wagenseller v. Scottsdale Mem’l Hosp., 147 Ariz. 370, 388, 710
P.2d 1025, 1043 (1985).7 This approach is consistent with the
general rule that lawyers have no special privilege against
7
Although Wagenseller rejected a “formalistic privilege”
approach, we subsequently noted that the requirement that the
defendant’s interference be improper “covers essentially the
same ground as ‘privilege.’” Snow v. W. Sav. & Loan Ass’n, 152
Ariz. 27, 34, 730 P.2d 204, 213 (1986).
10
civil suit. See Restatement (Third) of Law Governing Lawyers §
56 (2000) (stating that, with limited exceptions, “a lawyer is
subject to liability to a client or nonclient when a nonlawyer
would be in similar circumstances”).8 The court of appeals
therefore correctly focused on whether Guerrero “acted
improperly” and not on whether the lawyers were “privileged” to
interfere in the contractual relationship between Safeway and
Botma.
B.
¶16 In analyzing the “improper conduct” issue, the court
of appeals began from the premise that “[t]here is no such thing
as an unconditional, absolute right to a Damron/Morris
agreement.” Safeway, 207 Ariz. at 90 ¶ 34, 83 P.3d at 568.
Rather, it reasoned, “[b]efore such an agreement can be entered,
an insurer must have breached its duty to the insured.” Id.
If, as the district court found, Safeway did not breach any
contractual duty to Botma, then the Morris agreement in this
case was “outside the permitted parameters.” Id. at 91 ¶ 39, 83
8
Contrary to Guerrero’s assertions, recognition of such a
privilege is not necessary to promote unfettered advice from
counsel to client. Lawyers’ advice to their own clients to
breach a contract already lies outside the general scope of this
tort. See Restatement (Third) of Law Governing Lawyers § 57(3);
Am. Family Mut. Ins. Co. v. Zavala, 302 F. Supp. 2d 1108, 1121
(D. Ariz. 2003) (holding that attorney, as agent for a client,
generally cannot tortiously interfere with a contract to which
the client is a party).
11
P.3d at 569. The court of appeals concluded that counsel who
negotiate such agreements “do so at their peril.” Id.
¶17 To the extent that the opinion below suggests that the
“improper conduct” element of tortious interference can be
established simply by a finding that Safeway did not breach its
contractual duties to Botma, we disagree. A conclusion that
Safeway did not act in bad faith merely establishes that Botma
breached his contract with the insurer by entering into the
Morris agreement. This finding is quite relevant in proving the
third element of intentional interference – that the
interference induced or caused a breach of contract. It cannot,
however, also satisfy the fifth element – that the actor’s
conduct was improper.
¶18 Such a holding would largely negate the utility of
Morris agreements in cases of an alleged bad faith failure to
settle. If claimants’ counsel were exposed to tort liability
for intentional interference whenever the bad faith claim
against the insurer is ultimately unsuccessful, lawyers would be
unwilling to negotiate Morris agreements in failure-to-settle
cases any time there was a possibility that the bad faith claim
would fail. Insureds facing ruinous personal liability would
thus be deprived of this important means of protection.
¶19 The court of appeals also suggested that “improper
conduct” could be found from evidence that Guerrero negotiated
12
the Morris agreement knowing that the insurer had not breached
its duty to give equal consideration to Botma’s interests. See
id. at 94 ¶ 51, 83 P.3d at 572. But this is simply another way
of saying there was evidence that Guerrero knew that Botma would
breach his contract with Safeway by entering the Morris
agreement. Such a showing may be relevant to establishing that
Guerrero intended to induce the breach. See Snow v. W. Sav. &
Loan Ass’n, 152 Ariz. 27, 33, 730 P.2d 204, 211 (1986) (“The
tort is intentional in the sense that [the defendant] must have
intended to interfere with the [plaintiff’s] contract or have
known that this result was substantially certain to be produced
by its conduct.”) (citations omitted).9
¶20 However, proof that an actor intentionally induced a
breach of contract is not sufficient to establish that the
actor’s conduct was improper. Rather, “there is a requirement
that the interference be both intentional and improper.”
Restatement (Second) of Torts § 767 cmt. a (1979) (emphasis
9
Guerrero’s knowledge that Safeway had not acted in bad
faith might be relevant to a claim that a bad faith suit brought
against the insurer under a Morris assignment of claims was
wrongfully instituted. See Bradshaw v. State Farm Mut. Auto.
Ins. Co., 157 Ariz. 411, 417, 758 P.2d 1313, 1319 (1988)
(holding that inquiry into an individual’s subjective belief in
the merits of a claim is one of two prongs testing whether a
suit was brought “without probable cause” for purposes of a
claim of wrongful institution of civil proceedings); cf.
Wolfinger v. Cheche, 206 Ariz. 504, 509-10 ¶¶ 26-27, 80 P.3d
783, 788-89 (App. 2003) (applying modified Bradshaw test in
light of First Amendment concerns). Safeway, however, has not
raised such a claim.
13
added). “If the interferer is to be held liable for committing
a wrong, his liability must be based on more than the act of
interference alone. Thus, there is ordinarily no liability
absent a showing that defendant’s actions were improper as to
motive or means.” Wagenseller, 147 Ariz. at 388, 710 P.2d at
1043.
¶21 While the “intentional” element of tortious
interference focuses on the mental state of the actor, see Snow,
152 Ariz. at 33, 730 P.2d at 211, the “improper” element in
contrast “generally is determined by weighing the social
importance of the interest the defendant seeks to advance
against the interest invaded,” id. at 34, 730 P.2d at 212
(citations omitted). Our case law thus emphasizes that a
plaintiff must show more than the defendant’s knowledge that his
or her conduct would induce a breach to establish intentional
interference with contractual relations. See, e.g., id.
(stating that a defendant properly may interfere intentionally
with another’s contract by appropriate means to protect an
interest of the defendant) (citing Restatement (Second) of Torts
§ 773); Strojnik v. Gen. Ins. Co. of Am., 201 Ariz. 430, 437-38
¶¶ 28-30, 36 P.3d 1200, 1207-08 (App. 2001) (holding that
insurer did not improperly interfere with plaintiff’s
prospective contractual relationship with insured by entering a
defense and indemnification agreement to prevent insured from
14
entering a Morris agreement with plaintiff); cf. Middleton v.
Wallichs Music & Entm’t Co., 24 Ariz. App. 180, 183, 536 P.2d
1072, 1075 (1975) (stating that mere fact of prior knowledge by
new tenant of restrictive covenant in lessor’s lease with
existing tenant, which covenant was necessarily violated by
lessor’s lease with new tenant, did not make new tenant’s
signing of lease agreement with lessor an “improper inducement”
of lessor’s breach of contract with existing tenant).10
“Improper” conduct thus cannot be established in this case by
evidence that Guerrero knew Safeway had not acted in bad faith
in failing to reach a settlement.
C.
¶22 Our inquiry does not end here, however, because
Safeway also contends that Guerrero acted with an improper
10
Cases from other jurisdictions are in accord. See, e.g.,
Occusafe, Inc. v. EG&G Rocky Flats, Inc., 54 F.3d 618, 623 (10th
Cir. 1995) (finding that operator of nuclear weapons production
facility did not engage in “improper conduct” by intentionally
hiring away industrial hygienists from its subcontractor);
Conoco Inc. v. Inman Oil Co., 774 F.2d 895, 907 (8th Cir. 1985)
(rejecting tortious interference claim by distributor where
“[t]he interference was clearly intentional” but not improper;
interference resulted from oil supplier bidding low for the
conceded purpose of winning customer contract away from
distributor); Mason v. Wal-Mart Stores, Inc., 969 S.W.2d 160,
166 (Ark. 1998) (finding no “improper conduct” in retailer’s use
of economic pressure to persuade manufacturer to eliminate its
contract with independent representative and thus deal directly
with retailer); C.R. Bard, Inc. v. Wordtronics Corp., 561 A.2d
694, 697 (N.J. Super. Ct. Law Div. 1989) (“It is not improper to
give truthful information to a customer about someone else’s
product, and this is so even if the purpose is to interfere with
an existing or prospective contractual relationship.”).
15
motive and employed three types of improper means. The
purportedly improper motive was Guerrero’s desire to garner
increased attorneys’ fees. The allegedly improper means were
(1) offering to settle Himes’ claim and then withdrawing from
settlement negotiations to “manufacture[]” a bad faith claim
against Safeway, (2) threatening Botma with multi-million dollar
personal liability, and (3) misrepresenting facts to induce
Botma to sign the Morris agreement. To determine whether such
allegations constitute “improper conduct” for purposes of this
tort, we consider seven factors:
(a) the nature of the actor’s conduct, (b) the actor’s
motive, (c) the interests of the other with which the
actor’s conduct interferes, (d) the interest sought to
be advanced by the actor, (e) the social interests in
protecting the freedom of action of the actor and the
contractual interests of the other, (f) the proximity
or remoteness of the actor’s conduct to the
interference, and (g) the relations between the
parties.
Wells Fargo, 201 Ariz. at 494 ¶ 81, 38 P.3d at 32 (quoting
Restatement (Second) of Torts § 767). We give the greatest
weight to the first two factors, the nature of the defendant’s
conduct and the defendant’s motive. Id.
1.
¶23 We start with Guerrero’s alleged improper motive.
There is no dispute that Guerrero negotiated the Morris
agreement with Botma as part of an effort to pursue a larger
monetary award for Himes, and that such an award would in turn
16
result in a larger contingent fee to Guerrero. However, we
cannot conclude that lawyers have an improper motive simply
because they seek to increase their fees by maximizing an award
for a client. See Restatement (Third) of Law Governing Lawyers
§ 57 cmt. g (“So long as the lawyer acts or advises with the
purpose of promoting the client’s welfare, it is immaterial that
the lawyer hopes that the action will increase the lawyer’s fees
. . . .”); cf. Los Angeles Airways, Inc. v. Davis, 687 F.2d 321,
328 (9th Cir. 1982) (holding that attorney’s mixed motive to
benefit both his client and himself does not make attorney’s
intent “improper”). Otherwise, every lawyer working under a
contingency fee agreement would have an improper motive when
negotiating a Morris agreement. There is no allegation in this
case that Guerrero was motivated by a desire to injure Safeway
or vent “ill will” against the insurer. See Restatement
(Second) of Torts § 767 cmt. d. The lawyers’ profit motive
therefore cannot establish that their actions were “improper.”
2.
¶24 We turn next to Safeway’s allegation that Guerrero
acted improperly by withdrawing the settlement offer before the
insurer had rejected it, thus “manufacturing” a bad faith claim.
This argument necessarily rests on the premise that, once having
made the $15,000 settlement offer, Himes was obligated to settle
her multi-million dollar claim against Botma for this sum, and
17
that Guerrero’s subsequent decision to withdraw the offer was
thus somehow wrongful. But this position is simply untenable.
A jury has determined that Safeway did not accept the offer, and
in the absence of such an acceptance, Guerrero was free to
withdraw the offer for any reason, or for no reason at all.
3.
¶25 Nor did Guerrero act improperly by threatening Botma
with multi-million dollar liability in the personal injury
lawsuit. Given the serious injuries suffered by Castano and the
unchallenged evidence of Botma’s liability, Guerrero was
entitled to bring the case to trial, even if the suit would have
imposed ruinous financial liability on the defendant. The
threat of an adverse verdict and personal liability was
undoubtedly a critical factor motivating Botma to enter into the
Morris agreement. But Himes and her attorneys were perfectly
entitled to pursue that course of action, and the “threat” to do
so cannot be improper conduct.
¶26 As the Restatement explains, bringing a civil suit is
an improper inducement to breach a contract only when the suit
itself is brought in bad faith:
The use of these weapons of inducement (civil suits)
is ordinarily wrongful if the actor has no belief in
the merit of the litigation or if, though having some
belief in its merit, he nevertheless institutes or
threatens to institute the litigation in bad faith,
intending only to harass the third parties and not to
bring his claim to definitive adjudication.
18
Restatement (Second) of Torts § 767 cmt. c. Safeway does not
allege that Guerrero lacked belief in the merit of Himes’ claim
against Botma or that the lawyers sued Botma for any purpose
other than to bring the claim to definitive adjudication.
4.
¶27 Finally, Safeway alleges that Guerrero acted
improperly by misrepresenting to Botma facts regarding the
settlement negotiations with Safeway.11 Phrased differently,
Safeway alleges that Guerrero misled Botma into believing that
Safeway acted in bad faith in its failure to reach a settlement
to protect Botma from personal liability.12
11
Safeway’s complaint alleged that Guerrero falsely
represented to Botma that no settlement was reached between
Safeway and Himes and that Safeway had made “no reasonable
attempt” to settle Castano’s claim. While we assume the truth
of these allegations for purposes of this appeal, it is worth
noting that a superior court jury found that no settlement was
reached between Safeway and Himes, a judgment that was affirmed
on appeal. Moreover, the alleged statement that Safeway’s
settlement efforts were not “reasonable” is largely a legal
conclusion, as opposed to a pure statement of fact. Safeway also
alleged that Guerrero secreted documents from Botma concerning
the settlement negotiations. This allegation is analytically no
different than Safeway’s allegation that Guerrero made factual
misrepresentations to Botma’s counsel regarding Safeway’s
efforts to settle.
12
It may seriously be questioned whether any such acts caused
Botma to enter the Morris agreement. After Safeway failed to
settle the claim and refused to indemnify Botma for any judgment
in excess of the policy limits, he faced the likely potential of
personal liability for a multi-million dollar judgment. It is
difficult to believe that any statement by Guerrero about
Safeway’s willingness to settle would have had any effect on
19
¶28 Fraudulent misrepresentation or concealment can, under
certain circumstances, constitute “improper conduct” for
purposes of the intentional interference tort. See Restatement
(Second) of Torts § 767 cmt. c. But, as the Restatement
teaches, the propriety of the means employed by the interferer
is determined in light of the particular circumstances of the
case. Id. Even such means as “physical violence, fraudulent
misrepresentation and threats of illegal conduct” may not
constitute “improper conduct” for purposes of the intentional
interference tort in light of the particular “relation between
the actor and the person induced.” Id.
¶29 It is uncontested in this case that the negotiations
concerning the Morris agreement took place entirely between
Guerrero and Botma’s counsel. See id. (stating that the “manner
of presenting an inducement” may be a significant consideration
in determining whether conduct was wrongful).13 Botma was
represented at all times by lawyers appointed by Safeway. We
Botma’s desire to enter into an agreement protecting him against
personal liability to Himes. However, we assume arguendo, given
the procedural posture of this case, that Guerrero’s alleged
misrepresentations did induce Botma to sign the agreement.
13
“The question of who was the moving party in the
inducement” is also relevant. Restatement (Second) of Torts §
767 cmt. c. Although there is some dispute in this case about
who first raised the possibility of a Morris agreement, it is
not contested here that Botma’s lawyer made the ultimate
approach to Guerrero that resulted in the negotiation of the
Morris settlement.
20
have emphasized that “a special relationship exists between the
insurer and the counsel it assigns to represent its insured.”
Paradigm Ins. Co. v. Langerman Law Offices, P.A., 200 Ariz. 146,
154 ¶ 28, 24 P.3d 593, 601 (2001).
¶30 Given this “special relationship,” we cannot conclude
that an insurer may base a claim for tortious interference with
contract on misstatements of fact made by a claimant’s lawyer to
an insurer-appointed adverse counsel regarding actions of the
insurer itself during settlement negotiations.14 Guerrero’s
alleged misrepresentations were made to a lawyer who had been
hired by and presumably had regular contact with Safeway, and
who thus had ample ability and opportunity to inquire of the
insurer as to precisely what happened during the settlement
discussions. Indeed, an insurer must be given advance notice of
a proposed Morris agreement, Morris, 154 Ariz. at 119, 741 P.2d
at 252, and Safeway does not contest that it received
14
We have no occasion to consider today whether defense
counsel in this case owed a duty of care to Safeway. See
Paradigm Ins. Co., 200 Ariz. at 150 ¶ 16, 24 P.3d at 597
(recognizing that when conflict exists between client and the
insurer, counsel’s duty “is exclusively owed to the insured”).
We hold only that the relationship between the insurer and
defense counsel here was such that Guerrero’s alleged
misrepresentations to counsel about what occurred during
settlement negotiations between Guerrero and the insurer cannot
give rise to a claim for tortious interference with contract.
21
appropriate notice here.15 If Safeway wanted to dispel any false
impression by Botma that the insurer had acted in bad faith, it
had full opportunity to provide Botma and his counsel with
whatever facts or documents were necessary to do so.
¶31 A party to a lawsuit generally may not premise a fraud
claim on alleged misrepresentations by adverse counsel. See
Linder v. Brown & Herrick, 189 Ariz. 398, 405, 943 P.2d 758, 765
(App. 1997) (“[A]s a matter of law and common sense, they had no
right to rely on statements made by the attorneys opposing
them.”). It would make no sense to hold that the alleged
representations here nonetheless can subject Guerrero to
liability to an insurer who employed the lawyer to whom the
representations were made. Like Botma, Safeway could not have
reasonably relied on Guerrero to provide defense counsel with a
thorough or objective assessment of the reasonableness of
Safeway’s efforts to settle on behalf of its insured.
Therefore, any alleged misstatements by Guerrero in that context
15
Nearly three months before Botma signed the Morris
agreement, Botma’s Safeway-appointed attorney notified Safeway
that Botma would enter a Morris agreement if the insurer would
not promise to indemnify him for any judgment in excess of the
policy limits. Safeway refused. According to the defense
counsel’s deposition, a Safeway claims manager instead suggested
that Botma declare bankruptcy if a judgment were entered against
him.
22
are not the sort of improper conduct that can give rise to
liability for intentional interference with contract.16
D.
¶32 Safeway argues in its brief that if it is not allowed
to sue for intentional interference with contractual relations
under the facts of this case, “all attorneys will believe that
they can behave improperly and suffer absolutely no consequences
from their actions.” But our decision today does not condone
any alleged misbehavior by Guerrero; we merely hold that the
alleged behavior is not the sort of improper conduct that gives
rise to a suit for tortious interference with contractual
relations. Our holding that the defendants here are not liable
for this intentional tort does not provide an incentive for
16
Guerrero argues that the absolute privilege for defamatory
statements made during judicial proceedings should protect the
lawyers from liability here. See Green Acres Trust v. London,
141 Ariz. 609, 613, 688 P.2d 617, 621 (1984) (outlining the
privilege); Restatement (Third) of Law Governing Lawyers § 57
cmt. c (“The privilege is also a defense to other claims where
publication or communication is an element of the claim
. . . .”). The court of appeals declined to hold that the
privilege applies only to defamation claims, but nonetheless
rejected Guerrero’s argument, reasoning that it was the lawyers’
conduct, not their statements, that gave rise to the intentional
interference claim. Safeway, 207 Ariz. at 88-89 ¶¶ 27-30, 83
P.3d at 566-67. Because we find nothing improper in the
lawyers’ non-speech conduct, such a privilege might be relevant
to determining whether the lawyers acted “improperly” by
allegedly misrepresenting to Botma’s lawyer Safeway’s attempts
to settle the case. See supra note 7. However, because we
conclude that the communications in this case do not constitute
“improper conduct” for purposes of the intentional interference
tort, we need not explore the boundaries of the litigation-
defamation privilege.
23
improper conduct. To the contrary, existing law already
provides ample deterrence to lawyer misbehavior.
¶33 Lawyers face severe jeopardy for deceit in litigation.
Rule 11 of the Arizona Rules of Civil Procedure subjects lawyers
making false statements in litigation to sanctions such as
payment of an adversary’s expenses and fees. Lawyers who make
misrepresentations also face professional discipline. See Ariz.
R. Sup. Ct. 42, ER 3.3(a) (prohibiting a lawyer from making a
false statement of fact to a tribunal); id. R. 53(a) (providing
that violations of a rule of professional conduct are grounds
for discipline); id. R. 60 (providing for sanctions ranging from
censure to disbarment for professional misconduct by an
attorney).
¶34 The case law governing Morris agreements also provides
ample deterrence against “manufactured” bad faith claims. As
noted above, if there has been no reservation of rights or bad
faith by the insurer, the execution of the Morris agreement will
constitute a breach of contract by the insured, and thus will
relieve the insurer of any liability to indemnify the insured.
Plaintiff’s counsel therefore have every incentive to avoid
creating what the court of appeals called “Damron/Morris
agreements outside the permitted parameters.” Safeway, 207
Ariz. at 91 ¶ 39, 83 P.3d at 569. If counsel negotiate such
agreements, the result will be that their clients can collect
24
neither from the defendant (who will have received a covenant
not to execute) nor from the insurer.
¶35 Moreover, the law already provides powerful
disincentives against bringing suit on improperly “manufactured”
bad faith claims. Lawyers who pursue frivolous bad faith claims
not only face sanctions under Rule 11, but also may be required
to pay the insurer’s attorneys’ fees and expenses under A.R.S. §
12-349.17 Even when the bad faith action is not groundless, the
losing party faces the potential of a fee award under A.R.S. §
12-341.01. See Sparks v. Republic Nat’l Life Ins. Co., 132
Ariz. 529, 544, 647 P.2d 1127, 1142 (1982) (concluding that an
action alleging insurance bad faith is one “arising out of
contract” within the meaning of § 12-341.01(A)).18 Counsel who
bring bad faith claims without just cause are also exposed to
liability for wrongful institution of civil proceedings. See,
e.g., Lane v. Terry H. Pillinger, P.C., 189 Ariz. 152, 939 P.2d
430 (App. 1997) (involving suit for wrongful institution of
civil proceedings brought by officer of insurer against lawyer
who sued insurer and officers for bad faith). Lawyers who bring
frivolous claims also may be subject to professional discipline.
17
The federal analogue to A.R.S. § 12-349 is 28 U.S.C. §
1927. The district court rejected Safeway’s claim that Guerrero
should pay fees and costs under that provision.
18
Indeed, such an award was made against Himes in the federal
litigation.
25
See Ariz. R. Sup. Ct. 42, ER 3.1 (“A lawyer shall not bring or
defend a proceeding, or assert or controvert an issue therein,
unless there is a good faith basis in law and fact for doing so
that is not frivolous . . . .”); id. R. 53(a) (providing that
violations of a rule of professional conduct are grounds for
discipline); id. R. 60 (providing for sanctions for misconduct).
IV.
¶36 For the reasons above, we vacate the opinion of the
court of appeals and affirm the judgment of the superior court
dismissing Safeway’s complaint.
Andrew D. Hurwitz, Justice
CONCURRING:
_
Charles E. Jones, Chief Justice
______
Rebecca White Berch, Justice
_
Michael D. Ryan, Justice
_
John Pelander, Judge*
*
The Honorable Ruth V. McGregor recused herself; pursuant to
Article 6, Section 3 of the Arizona Constitution, the Honorable
John Pelander, Chief Judge of the Arizona Court of Appeals,
Division Two, was designated to sit in her stead.
26