                                                                     FILED BY CLERK
                                                                         JUN 17 2005
                            IN THE COURT OF APPEALS                      COURT OF APPEALS
                                STATE OF ARIZONA                           DIVISION TWO
                                  DIVISION TWO


ARIZONA PROPERTY AND                         )       2 CA-CV 2004-0199
CASUALTY INSURANCE GUARANTY                  )       DEPARTMENT B
FUND,                                        )
                                             )       OPINION
                       Plaintiff/Appellee,   )
                                             )
                  v.                         )
                                             )
BUNNY MARTIN and ROY MARTIN,                 )
wife and husband,                            )
                                             )
                 Defendants/Appellants.      )
                                             )


           APPEAL FROM THE SUPERIOR COURT OF PIMA COUNTY

                                Cause No. CV2003-0983

                           Honorable Michael Alfred, Judge

                                      AFFIRMED


Jones, Skelton & Hochuli, P.L.C.
 By Michael A. Ludwig and Randall H. Warner                                      Phoenix
                                                        Attorneys for Plaintiff/Appellee


Block Grynkewich, P.C.
 By Gary S. Grynkewich
                                                                            Tucson
                                                 Attorneys for Defendants/Appellants


P E L A N D E R, Chief Judge.
¶1            In this declaratory relief action (DRA) that involves a Morris1 agreement,

appellants Bunny Martin and her husband appeal from the trial court’s grant of summary

judgment in favor of appellee Arizona Property and Casualty Insurance Fund (Fund).

Martin contends the trial court erred in allowing the Fund to litigate alleged liability issues

in the coverage phase of this case. Finding no error, we affirm the trial court’s decision.

                                     BACKGROUND

¶2            On appeal from a summary judgment, we view the facts “in the light most

favorable to the party against whom judgment was entered.” Bothell v. Two Point Acres,

Inc., 192 Ariz. 313, ¶ 2, 965 P.2d 47, 49 (App. 1998). Here, the parties agree the material

facts are undisputed. Martin was an employee of First Chiropractic, where Robin O’Neal

and Paul Ries worked as chiropractic doctors. As one of the benefits of her employment,

Martin received chiropractic “adjustments” free of charge. No records were kept for the

twenty-five to forty treatments Martin received during the course of her employment with

First Chiropractic. Martin filed a tort action against First Chiropractic, O’Neal, and Ries

(First defendants), claiming two chiropractic adjustments they performed had caused

permanent injury to her neck.

¶3            The First defendants were insured under a professional liability insurance

policy issued by Reliance National Indemnity Company. Reliance assumed the defense of

the tort action but reserved its rights to contest coverage. In their answer in that underlying


       1
        United Servs. Auto. Ass’n v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987).

                                              2
case, the First defendants alleged as an affirmative defense that Martin’s “claims may be

barred by the worker’s compensation laws of the state of Arizona.” After Reliance became

insolvent in 2001, the Fund took over the defense of the tort action pursuant to A.R.S. §§

20-661 and 20-667.

¶4            In February 2003, the Fund filed this DRA, requesting a ruling that insurance

coverage was excluded under the Reliance policy because Martin’s alleged injuries had

occurred in the course of her employment and because the chiropractors had violated their

professional code of conduct. The Fund also requested a declaration that Martin’s injuries

constituted one incident under the policy. In March, O’Neal and First Chiropractic entered

into a Morris agreement with Martin and, pursuant to their stipulation, the trial court

entered a default against O’Neal and First Chiropractic in the underlying action.2

¶5            The Fund moved for summary judgment in this DRA on the issue of coverage

and Martin, standing in the shoes of O’Neal and First Chiropractic pursuant to the Morris

agreement’s assignment provision, cross-moved for summary judgment. The trial court

granted the Fund’s motion and denied Martin’s. This appeal followed the trial court’s entry

of judgment pursuant to Rules 54(b) and 56, Ariz. R. Civ. P., 16 A.R.S., Pt. 2.




       2
        For reasons not clear in the record, Ries, the other defendant in the underlying
action, was not a party to either the Morris agreement or the stipulation for entry of default.
At oral argument in this court, Martin’s counsel stated that a default judgment was never
actually entered against O’Neal and First Chiropractic.

                                              3
                                     DISCUSSION

¶6           Martin contends “[t]he trial court erred in granting summary judgment in favor

of the Fund in that its ruling was based on an issue completely subsumed under the terms

of . . . [the] Morris agreement.” “On appeal from a summary judgment, we must determine

de novo whether there are any genuine issues of material fact and whether the trial court

erred in applying the law.” Bothell, 192 Ariz. 313, ¶ 8, 965 P.2d at 50. “We will affirm if

the trial court’s ruling is correct on any ground.” Rowland v. Great States Ins. Co., 199

Ariz. 577, ¶ 6, 20 P.3d 1158, 1162 (App. 2001).

¶7           The Reliance policy contained various exclusions to coverage, including the

following language:

             This policy does not apply to any claim or suit arising directly
             or indirectly from:

             1. bodily injury to you in the course of your employment.

                  ....

             3. any obligation for which you or any carrier acting as insurer
                may be held liable under any workers’ compensation . . .
                law or under any similar law.

                  ....

             15. injury or damage to:

                • your employee . . . arising out of the course of his or her
             work;

                  ....


                                            4
                  This exclusion applies:

                  • whether you may be liable as an employer or in any
              other capacity, and

                   • to any obligation to share loss with or repay someone
              else who must pay because of the injury.

¶8            In its ruling, the trial court found that “Bunny Martin was, at the time of her

injury, an employee of Defendant First Chiropractic and Defendant Robin O’Neal.” The

trial court also stated that “Martin’s injury arose out of and occurred within the course and

scope of her employment with Defendant First Chiropractic” and that “A.R.S. [§] 23-

1022(A) provides that Worker’s Compensation is the exclusive remedy for employees who

are injured in the course of their employment.” Presumably on all of those bases, but

without referring to the policy exclusions or otherwise specifying the particular grounds on

which it relied, the trial court granted summary judgment in favor of the Fund.3

¶9            Focusing on the trial court’s reference to the exclusivity provision of § 23-

1022(A), Martin maintains the trial court “based [its] decision” on “[w]hat this Court

prohibited” in Associated Aviation Underwriters v. Wood, 209 Ariz. 137, 98 P.3d 572

(App. 2004) (AAU). In that case, decided by this court after the trial court had ruled, we




       3
        The trial court made several other findings relating to the chiropractors’ “violat[ion
of] the code of professional conduct applicable to the chiropractic profession” and the
number of policy limits that would apply. In view of our holding on the coverage issue,
however, we do not address Martin’s arguments on those other rulings.

                                              5
applied the principles set forth in United Services Automobile Association v. Morris, 154

Ariz. 113, 741 P.2d 246 (1987), and stated:

              when an insured who is being defended under a reservation of
              rights enters into a Morris agreement and stipulates to an
              adverse judgment, the insurer may not litigate in the coverage
              phase of a DRA “the same legal and factual issues” that
              underlie the judgment. . . . Morris does not authorize, but
              rather essentially prohibits, an insurer’s attempt in that context
              to litigate tort liability and damage issues in the guise of a
              coverage defense.

AAU, 209 Ariz. 137, ¶ 37, 98 P.3d at 585.

¶10           According to Martin, the Fund violated AAU’s principles by litigating liability

issues in this action on coverage. If the workers’ compensation defense that the Fund

presented here had been successfully urged in the underlying tort action, she argues, it

would have “defeated Martin’s claim of liability.” Thus, Martin reasons, the trial court erred

because its ruling “hinged on facts and law bearing directly on [O’Neal’s and First

Chiropractic’s] liability in the underlying action.” We do not agree with Martin’s reading

or application of our decision in AAU.

¶11           The insurer in AAU argued it was “entitled to a declaration of ‘no coverage’

under its policies” if the plaintiffs in the underlying case did not prove “actionable fault” on

the insureds’ part. Id. Relying primarily on “the basic insuring provision of its policies,” id.

¶ 32, the insurer contended no coverage existed because those plaintiffs had “failed to

establish an ‘insured event’” absent proof of liability, causation, and damages in the DRA.

Id. ¶ 25. In other words, the insurer in AAU “essentially argue[d] it may fully litigate all

                                               6
liability and damage issues in the coverage phase of [the] DRA, irrespective of what occurred

in the [underlying tort] cases.” Id. ¶ 32. We rejected that argument because the purported

coverage issue the insurer sought to litigate—the existence of actionable fault—was

“completely subsumed in the consent judgment” that had been entered in the underlying tort

actions pursuant to the Morris agreement. Id. ¶ 35.

¶12           In contrast, Morris involved defendants in the underlying case who had

stipulated that their acts “were either negligent or intentional.” 154 Ariz. at 120, 741 P.2d

at 253. Our supreme court found “the coverage issue [was] clearly unresolved,” because the

defendants would be liable under either theory, but the insurance policy at issue excluded

intentional acts from coverage. Id. The court further explained that the insurer could not

“relitigate all aspects of the liability case,” id., because that would destroy the purpose of

the Morris agreement—allowing insureds “to act reasonably to protect themselves from ‘the

sharp thrust of personal liability.’” Id. at 118, 741 P.2d at 251, quoting Ariz. Prop. & Cas.

Ins. Guar. Fund v. Helme, 153 Ariz. 129, 137, 735 P.2d 451, 459 (1987). But, the court

also cautioned that “[a]n insured’s settlement agreement should not be used to obtain

coverage that the insured did not purchase.” Morris, 154 Ariz. at 120, 741 P.2d at 253; see

also Parking Concepts, Inc. v. Tenney, 207 Ariz. 19, ¶ 25, 83 P.3d 19, 24 (2004) (“Morris

neither imposes new contractual duties on the insurer nor otherwise expands the rights of

the insured under the contract of insurance.”).




                                              7
¶13           The parties agreed below that at all pertinent times Martin was O’Neal’s and

First Chiropractic’s employee and that her “injuries occurred during the course and scope

of her employment.” According to Martin, that conceded fact would relieve O’Neal and

First Chiropractic of liability because workers’ compensation is generally an exclusive

remedy for on-the-job injuries. Therefore, she maintains, her employee status cannot be

litigated, or raised as a defense to coverage, in this DRA because it is a liability question

subsumed in the underlying tort action. But, as noted earlier, the Reliance insurance

contract specifically excluded, inter alia, “[i]njury or damage to . . . your employee . . .

arising out of the course of his or her work.”4

¶14           With respect to that exclusion, as the Fund points out, “[t]here are

circumstances in which the [workers’ compensation] defense would not apply but the

exclusion nonetheless would.” For example, if the insured employer failed to post proper



       4
        Although Martin does not directly challenge the validity or applicability of that
exclusion, we note that courts have upheld and enforced similar exclusions to preclude
coverage for injury claims by employees of the insured. See, e.g., Stearns-Roger Corp. v.
Hartford Accident & Indem. Co., 117 Ariz. 162, 571 P.2d 659 (1977) (summary judgment
affirmed based on policy provision excluding coverage for injury to insured’s employees
arising out of and in course of such employment, when plaintiffs in underlying tort case
against additional insured had been injured in course of their employment with named
insured); Tucson Pub. Sch. Dist. No. One v. Home Ins. Co., 9 Ariz. App. 233, 451 P.2d 46
(1969) (summary judgment affirmed based in part on similar exclusion in policy);
Westchester Fire Ins. Co. v. Am. Gen. Fire & Cas. Co., 790 S.W.2d 816, 818 (Tex. App.
1990) (policy provision excluding coverage for injury to employees of insured arising out
of and in course of employment “was plainly intended to exclude any obligation on
[insurer’s] part to pay any liability incurred by [insured] by reason of bodily injury
sustained by an employee, whether that liability was direct . . . or indirect . . . .”).

                                              8
notice of workers’ compensation rights, the employee could sue the employer directly under

A.R.S. § 23-906, but the policy exclusion might still apply. Similarly, as the Fund also

observes, an employee “can elect to sue if the [on-the-job] injury resulted from willful

misconduct, though the exclusion would still apply.” See A.R.S. § 23-1022(A). Thus, any

liability issues relating to workers’ compensation law are not necessarily coextensive with

the insurance policy exclusions. And that is so even though, as Martin points out, she did

not allege, nor did the parties present evidence on, willful misconduct by the First

defendants or any “failure to post” issues in the underlying case or in this DRA.

¶15           More importantly, as the Fund explains, it “is not arguing that there is no

coverage because there is no liability. It is arguing that there is no coverage because specific

policy exclusions apply.” The Fund likewise points out it “does not seek to relitigate

liability,” but rather, “only seeks to enforce policy exclusions, the applicability of which are

uncontested.” We agree, and that makes this situation similar to Morris and different from

AAU. In AAU, we prohibited an insurer from relitigating liability issues under the guise of

litigating coverage; but we did not prohibit insurers from litigating legitimate coverage issues

in a DRA based on specific policy exclusions. That is all the Fund did, and Martin does not

persuasively explain what other viable options the Fund might have had to pursue and

resolve those coverage issues under the circumstances presented here.

¶16           In Arizona, a liability insurer owes express duties to defend and, if coverage

and liability exist, to indemnify the insured. See Waddell v. Titan Ins. Co., 207 Ariz. 529,


                                               9
¶ 14, 88 P.3d 1141, 1145 (App. 2004). Martin apparently suggests that, having chosen to

defend the underlying case while reserving its rights to contest coverage, and having raised

as an affirmative defense in that case a potential bar under the workers’ compensation laws,

the insurer could avoid its duty to indemnify the insureds only by litigating and prevailing

on that defense as a “complete shield from liability” in the underlying case. But the insurer

clearly was entitled to reserve its rights on coverage while providing a defense in the

underlying action, “without thereby waiving its right to raise the question of liability under

the terms of the policy at a later date.” Damron v. Sledge, 105 Ariz. 151, 155, 460 P.2d

997, 1001 (1969); see also Morris, 154 Ariz. at 118, 741 P.2d at 251. And, when the

insurer did so, the insureds were equally free to protect themselves, as they did, by executing

a Morris agreement with Martin and stipulating to entry of default against them. Id. at 119,

741 P.2d at 252; see also Mora v. Phoenix Indem. Ins. Co., 196 Ariz. 315, ¶ 17, 996 P.2d

116, 120 (App. 1999). At that point, the Fund’s only appropriate and available avenue for

litigating and obtaining a ruling on the coverage issues was in this DRA. We find that

procedure neither unauthorized nor unusual and reject Martin’s suggestion to the contrary.5

¶17           As the Fund points out, neither Morris nor its progeny, including AAU,

intended to “eliminate policy exclusions with a Morris agreement.” To rule otherwise


       5
        We also reject Martin’s suggestion that, by merely “bringing” the DRA, the Fund
“sought haven from its obligation to defend.” Nothing in the record suggests Reliance or the
Fund breached its duty to defend. Rather, the record suggests defense counsel in the
underlying case simply chose to pursue a Morris agreement instead of litigating the merits
of either Martin’s claims or the affirmative defenses the First defendants raised.

                                              10
would allow Martin, by entering into a Morris agreement with O’Neal and First

Chiropractic, “to obtain coverage that [they] did not purchase”—coverage for injury to

employees. Morris, 154 Ariz. at 120, 741 P.2d at 253. This would upset the careful

balance between the interests of the insured and the insurer set forth in Morris and

explained in AAU. Accordingly, we find no error in the trial court’s ruling on the coverage

issue here.

                                     DISPOSITION

¶18           The judgment of the trial court is affirmed. In our discretion, we deny the

Fund’s request, made pursuant to A.R.S. § 12-341.01(A), for an award of attorney fees on

appeal. See Hale v. Amphitheater Sch. Dist. No. 10, 192 Ariz. 111, ¶ 20, 961 P.2d 1059,

1065 (App. 1998) (court has discretion on whether to award attorney fees on appeal).



                                             ____________________________________
                                             JOHN PELANDER, Chief Judge

CONCURRING:



____________________________________
M. JAN FLÓREZ, Presiding Judge



____________________________________
PHILIP G. ESPINOSA, Judge



                                            11
