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Damron/Morris Agreements May Apply to Non-Insurance Contracts to Indemnify

Indemnity Agreements-Settlement Agreement-Damron/Morris Agreements

A Tumbling-T Rances v. Flood Control District of Maricopa County, 544 Ariz. Adv. Rpt. 23 (Ariz. CA 1, 11/28/08)(Justice Barker) DAMRON/MORRIS AGREEMENT APPROPRIATE BASED UPON INDEMNITY AND HOLD HARMLESS AGREEMENT CONTAINED WITHIN A PROPERTY EASEMENT/COVENANT NOT TO EXECUTE IS NOT THE SAME AS A LIABLITY RELEASE.

The Gillespie Dam between Buckeye and Gila Bend failed on January 9, 1993. A number of downstream farmers were damaged by the subsequent flooding. They filed suit and ultimately entered into a Damron/Morris Agreement with the dam owners.

When the dam was built the Flood Control District of Maricopa County was given an easement to establish a channel in portions of the Gila River upstream from the dam. The easement contained an indemnity and hold harmless agreement whereby the District agreed to indemnity and hold harmless the Dam Owners from certain liabilities.

After the flooding the farmers sued the dam owners alleging primarily negligence in the maintenance of the dam. The farmers also sued the district alleging the upstream clearing and piloted channel project had contributed to the dam failure. This was followed by an indemnity action brought by the dam owners against the district.

The dam owners tendered the defense of the action to the district based upon the indemnity and hold harmless agreement but the district refused to accept the tender. Consequently the farmers entered into a settlement agreement with the dam owners. The agreement included a stipulated judgment in favor of the farmers and against the dam owners in the amount of $14.75 million. The dam owners agreed to pay $3.3 million up front to the farmers in return for a covenant not to execute against the dam owners on the remainder of the judgment. The judgment further provided that the farmers were not releasing the dam owners for liability although they did agree that no steps would be taken against the dam owners to collect on the judgment.

Over the district’s objection the farmers requested a reasonableness hearing and the trial court ruled the $14.75 million was a reasonable settlement and was not the result of bad faith, fraud or collusion.

The district first took the position that this “Damron/Morris” agreement was improper and unenforceable because the indemnity and hold harmless agreement was not an insurance policy but rather a commercial transaction and the right to enter into Damron/Morris agreements are limited to insurance contract disputes. The court disagreed. The court found a Damron/Morris agreement is based upon general principles of indemnity law. Turning to Restatement (2d) of Judgment §57 the court found that where the indemnitor is given reasonable notice of the action and an opportunity to assume or participate in its defense it is estopped from disputing the existence and extent of the indemnities’ liability to the injured person that follows. When the indemnitee defends the action with diligence and reasonable care, the indemnitor is precluded from re-litigating issues determined in the action against the indemnitee. Accordingly, the Court of Appeals found that the trial court did not abuse its discretion in holding a reasonableness hearing and finding the settlement to be reasonable. “Thus, we reject the contention that there was no ability to enter into a Damron/Morris Agreement in a context other than an insurance case.” The court however made it clear that this decision did not control the question of whether or not an obligation to indemnify actually exists under the facts of this case. Just as in Morris where the question of whether or not insurance coverage existed and therefore an obligation to indemnify, here the question of the district’s obligations under the indemnity agreement need to be determined.

Secondly, the district argued that there was no obligation to pay the judgment because the covenant not to execute extinguished any obligation to do such. Once again the court of appeals disagreed pointing out that a covenant not to execute is not a release from liability because it does not extinguish the Plaintiff’s cause of action. Arizona case law establishes that covenants not to execute are contracts and not releases.

Third, the district alleged that the Damron/Morris agreement was the result of fraud and collusion. Once again the court of appeals disagreed finding that the case of Damron v. Sledge, 105 Ariz. 150, 51, 460 P2d. 997 (1969) specifically addressed this question and said it cannot be held that as a matter of law collusion exists simply because a defendant chooses not to defend when he can escape all liability by way of a Damron/Morris agreement. On the other hand, if “it appears that the defendant instead of defaulting agrees to perjure himself and testify falsely to statements that are untrue, and that Plaintiff is a party to the agreement, or if some other definite evidence of collusion is induced by the proper testimony” then fraud and collusion may exist.

Finally, the court found that the parties to an indemnity and hold harmless agreement certainly could specify in the written agreement that the obligation to indemnify will not apply to Damron/Morris agreements if this was the intent of the parties when executing the contract.

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Damron/Morris Agreements May Apply to Non-Insurance Contracts to Indemnify