                                                                      FILED BY CLERK
                              IN THE COURT OF APPEALS                      FEB 14 2007
                                  STATE OF ARIZONA                        COURT OF APPEALS
                                    DIVISION TWO                            DIVISION TWO


RICHARD ACOSTA,                                )
                                               )
                        Plaintiff/Appellant,   )        2 CA-CV 2006-0116
                                               )        DEPARTMENT A
                   v.                          )
                                               )        OPINION
PHOENIX INDEMNITY INSURANCE                    )
COMPANY,                                       )
                                               )
                     Defendant/Appellee.       )
                                               )


            APPEAL FROM THE SUPERIOR COURT OF PIMA COUNTY

                                  Cause No. C20050642

                              Honorable John E. Davis, Judge

                             REVERSED AND REMANDED


Law Offices of John L. Tully, P.C.
 By John L. Tully                                                                 Tucson
                                                         Attorney for Plaintiff/Appellant

Allen & Lewis, PLC
 By Lynn M. Allen and Robert K. Lewis                                       Scottsdale
                                                      Attorneys for Defendant/Appellee


V Á S Q U E Z, Judge.
¶1            Appellant Richard Acosta appeals from the trial court’s grant of summary

judgment in favor of appellee Phoenix Indemnity Insurance Company on his third-party bad

faith claim. For the following reasons, we reverse the judgment and remand this matter for

proceedings consistent with this decision.

                                   Standard of Review

¶2            We review a trial court’s grant of summary judgment de novo. Andrews v.

Blake, 205 Ariz. 236, ¶ 12, 69 P.3d 7, 11 (2003). We will affirm a summary judgment only

if there are no genuine issues of material fact and the moving party is entitled to judgment

as a matter of law. Id. ¶ 13. And we view the facts in the light most favorable to the party

against whom summary judgment was entered. Ariz. Prop. & Cas. Ins. Guar. Fund v.

Martin, 210 Ariz. 478, ¶ 2, 113 P.3d 701, 701-02 (App. 2005).

                             Facts and Procedural History

A. Personal injury action

¶3            The following facts are undisputed. In January 2001, Acosta was a passenger

in a car being driven by Alonzo Carranza when Carranza lost control of the vehicle and

crashed it. Acosta was severely injured. Carranza’s aunt, Guadalupe Lara, owned the

vehicle, and Carranza admitted that he had lacked her permission to drive the car. Acosta’s

girlfriend reported the accident to Phoenix Indemnity, Lara’s automobile insurance

company, approximately one week after the accident. In April 2001, Acosta filed a

negligence lawsuit against Carranza and Lara. Phoenix Indemnity retained an attorney to


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defend Lara under a reservation of rights. However, the attorney filed an answer on behalf

of both Lara and Carranza.1

¶4             On June 12, 2001, Carranza filed a petition for bankruptcy in federal court.

Several days later, on June 20, Acosta’s attorney sent a letter to the attorney representing

Carranza, giving Phoenix Indemnity ten days to pay Acosta Lara’s policy limit of $15,000,

presumably in exchange for his dismissing his lawsuit. The attorney responded with a letter

declining to accept the settlement offer. In October 2001, Carranza’s debts were discharged

by the bankruptcy court.

¶5             Within days of the bankruptcy discharge, Phoenix Indemnity offered to settle

Acosta’s claim against Lara for the policy limit of $15,000, but confirmed its denial of

coverage for Carranza. In January 2002, Phoenix Indemnity conceded its policy covered

Carranza and again offered to pay the policy limit. Acosta rejected these offers.

¶6             In December 2004, Acosta, Carranza and his wife, and Phoenix Indemnity

entered into a settlement agreement in the negligence action in which the parties agreed that

Acosta would file an action against Phoenix Indemnity for bad faith “as though [Acosta] had

obtained a judgment against [Carranza] at a trial on the merits . . . and . . . after the judgment

became final . . . , [Carranza] assigned [his] claims for bad faith against Phoenix Indemnity

to [Acosta].” The parties further agreed that Acosta’s maximum recovery against Phoenix




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        Lara was apparently eventually dismissed from the lawsuit.

                                                3
Indemnity in the bad faith action would be $400,000 and that Acosta would receive nothing

if he did not prevail in the bad faith action.

B. Bad faith action

¶7            Acosta filed his bad faith complaint in February 2005, asserting that Phoenix

Indemnity had breached the implied covenant of good faith and fair dealing in Lara’s

automobile liability insurance policy by failing to settle his personal injury claim against

Carranza and paying Acosta the policy limit of $15,000. Acosta later filed a motion for

partial summary judgment on two affirmative defenses Phoenix Indemnity had raised in its

answer. Phoenix Indemnity filed a cross-motion for summary judgment, asserting that it

could not have accepted Acosta’s June 20, 2001, offer to settle his claim because Carranza

had filed a bankruptcy petition. Phoenix Indemnity asserted that Carranza’s filing of the

bankruptcy petition had stayed any pending actions in which he was involved. Phoenix

Indemnity also argued that the settlement offer was not valid because the bankruptcy trustee

was not a party to it. Thus, Phoenix Indemnity argued, because “it was a legal impossibility

for [it] to settle the matter,” it could not have acted in bad faith as a matter of law.

¶8            In response, Acosta argued Carranza’s pending bankruptcy proceeding did not

affect whether Phoenix Indemnity could have accepted his June 20, 2001, offer to settle his

action because the insurance proceeds were not a part of Carranza’s bankruptcy estate.

Alternatively, Acosta argued that, even if bankruptcy court approval was required, the




                                                 4
settlement offer was nonetheless valid because Phoenix Indemnity could have conditionally

accepted his offer pending that approval.

¶9            Acosta further argued that summary judgment in favor of Phoenix Indemnity

was precluded because the “factual basis” of the motion—that the June 20, 2001, offer had

been the only settlement offer—was incorrect and that Phoenix Indemnity could have settled

the personal injury action before Carranza had filed his bankruptcy petition on June 12,

2001. Acosta further asserted that Phoenix Indemnity had borne an affirmative duty “under

the circumstances of this case to initiate and pursue settlement negotiations designed to settle

the claim within the policy limit even in the absence of an offer from the claimant.”

¶10           In response to the final two related arguments, Phoenix Indemnity contended

that, before June 12, 2001, “there was no good reason” for it to accept or solicit a settlement

offer because its position at the time had been that Carranza was not covered by the

insurance policy. Accordingly, Phoenix Indemnity argued that, because “[t]here is no

evidence in the record that a reasonable claims professional would have paid this claim,”

there was, as a matter of law, no bad faith on its part for failing to settle the negligence

action.

¶11           After a hearing, the trial court denied Acosta’s motion and granted Phoenix

Indemnity’s cross-motion. The court found that Phoenix Indemnity had had no duty to

solicit a settlement before Carranza filed his petition for bankruptcy because it had “initially

questioned whether there was coverage in this case” and because neither Carranza nor Lara,


                                               5
the owner of the policy, had sought coverage of the claim from Phoenix Indemnity. The

court further found that the bankruptcy filing had impeded Phoenix Indemnity’s ability to

settle Acosta’s lawsuit. The trial court concluded that, as a matter of law, Phoenix

Indemnity had not acted in bad faith in failing to settle Acosta’s lawsuit. This appeal

followed.

                                          Discussion

A. Principles of bad faith law

¶12           “[A]n insurance company owes its insured a duty of good faith in deciding

whether to accept or reject settlement offers.” Hartford Accident & Indem. Co. v. Aetna

Cas. & Sur. Co., 164 Ariz. 286, 289, 792 P.2d 749, 752 (1990). This duty stems from the

implied covenant of good faith and fair dealing that arises from the underlying contractual

relationship. See id. at 291, 792 P.2d at 754; Taylor v. State Farm Mut. Auto. Ins. Co., 185

Ariz. 174, 176, 913 P.2d 1092, 1094 (1996).

¶13           The tort of bad faith has two elements: first, “that the insurer acted

unreasonably toward its insured” and, second, “that the insurer acted knowing that it was

acting unreasonably or acted with such reckless disregard that such knowledge may be

imputed to it.” Miel v. State Farm Mut. Auto. Ins. Co., 185 Ariz. 104, 110, 912 P.2d 1333,

1339 (App. 1995). When an insurer allegedly acts in bad faith in its duty to indemnify or

protect its insured against liability to third parties, the action is classified as a third-party

claim. Clearwater v. State Farm Mut. Auto. Ins. Co., 164 Ariz. 256, 258, 792 P.2d 719,


                                               6
721 (1990). Such a claim can be brought either by the insured or the insured’s assignee, id.,

as is the case here. And, in the third-party context, the duty of good faith requires an

insurance company to give “equal consideration to the protection of the insured’s as well

as its own interests.” Hartford, 164 Ariz. at 289, 792 P.2d at 752; see also Clearwater, 164

Ariz. at 260, 792 P.2d at 723.

B. Failure to settle before June 12, 2001

¶14           We first address Acosta’s argument that Phoenix Indemnity was not entitled

to summary judgment on the issue of whether it had acted in bad faith in failing to settle his

claim for the $15,000 insurance coverage limit when it had the opportunity to do so before

Carranza filed his bankruptcy petition. The trial court expressly found that Phoenix

Indemnity had not acted in bad faith when it did not offer to settle Acosta’s lawsuit before

the petition was filed because it was questionable whether Carranza was covered under the

insurance policy. The trial court implicitly also found that Phoenix Indemnity had not acted

in bad faith in refusing to accept Acosta’s settlement offer during the same period.

¶15           Acosta argues the evidence shows Phoenix Indemnity acted in bad faith.

Acosta asserts that he presented uncontroverted evidence, in the form of an affidavit by his

negligence action attorney, that his attorney had told Phoenix Indemnity Acosta was willing

to settle for the $15,000 limit before June 12, 2001. Because we view the facts in the light

most favorable to Acosta, see Martin, 210 Ariz. 478, ¶ 2, 113 P.3d at 701-02, we assume

Acosta’s assertion is true. Thus, we must determine whether, in refusing this prebankruptcy


                                              7
settlement offer from Acosta, Phoenix Indemnity failed to give equal consideration to its

insured’s interests as well as its own and, consequently, acted in bad faith. See Clearwater,

164 Ariz. at 260, 792 P.2d at 723.

¶16           An insurer must weigh a number of factors, including the strength of the third

party’s claim and the “financial risk to the insured in the event of a judgment in excess of the

policy limits.” Id. “‘In determining whether an insurer has given consideration to the

interests of the insured, the test is whether a prudent insurer without policy limits would

have accepted the settlement offer.’” Id., quoting Crisci v. Sec. Ins. Co., 426 P.2d 173

(Cal. 1967). The insurer must evaluate a claim objectively and “as though it alone would

be responsible for the payment of any judgment rendered.” Gen. Accident Fire & Life

Assurance Corp. v. Little, 103 Ariz. 435, 442, 443 P.2d 690, 697 (1968). Acosta argues

that, under this test, Phoenix Indemnity should have accepted his offer to settle within the

policy limit. He contends the evidence shows a high potential that he would have been

successful in his negligence action and a high probability he would have recovered damages

in excess of the policy limit.

¶17           The evidence upon which Acosta relies consists of notations in Phoenix

Indemnity’s claim file that his injuries were “extensive” and “horrific,” that it had been

notified of a hospital’s lien on any insurance proceeds in an amount greater than twice the

policy limit of $15,000, and that the company had obtained a copy of the police report of

the accident, which noted that Carranza had been driving at a speed “too fast for conditions”


                                               8
and “had been drinking.” This evidence bears on the issues of Acosta’s chances of

successfully proving Carranza’s negligence and his likelihood of recovering damages in

excess of the policy limit because of the severity of his injuries. We agree a trier of fact

could find that a prudent insurer evaluating this evidence as though it alone would have been

responsible for paying any judgment would have accepted Acosta’s $15,000 settlement offer.

Thus, a trier of fact also could find that Phoenix Indemnity did not give equal consideration

to its insured’s interests as well as its own in refusing Acosta’s settlement offer. See, e.g.,

id. at 443, 443 P.2d at 698 (finding insurer did not give equal consideration to insured

because evidence showed it believed it had high probability of losing lawsuit and recognized

likelihood of excess exposure).

¶18            Our inquiry does not end here, however. Phoenix Indemnity asserts that it did

not reject a reasonable settlement offer prior to Carranza’s bankruptcy filing, noting that

“there was a substantial coverage issue involving non-permissive use.” Indeed, Carranza

admitted soon after the accident occurred that he had not had permission to drive Lara’s

vehicle, and this admission was never contradicted by Carranza or anyone else. However,

Phoenix Indemnity later conceded its policy covered Carranza. Based on that fact, Acosta

argues that, if an insurer rejects a policy limit offer, “and it is later determined that the policy

does provide coverage, the [insurer]’s liability for bad faith failure to settle is not excused

by its earlier good faith belief in a lack of coverage.”




                                                 9
¶19           Acosta cites State Farm Automobile Insurance Co. v. Civil Service

Employees Insurance Co., 19 Ariz. App. 594, 509 P.2d 725 (1973), and further argues that,

“[w]hen an insurer refuses to consider settlement opportunities because the company does

not believe that the policy provides coverage for the claim, it acts at its peril even if the

company has an ‘honest though erroneous’ belief that the policy does not provide coverage.”

This is a correct statement of the law. See Parsons v. Cont’l Nat’l Am. Group, 113 Ariz.

223, 229, 550 P.2d 94, 100 (1976). However, in State Farm, Division One of this court

found that, although the insurer was liable to the extent of the policy limit, it was

nevertheless not liable for any amounts beyond the policy limit because it had justifiably

relied on its insured’s factual and legal position in failing to consider a settlement offer. 19

Ariz. App. at 603-04, 509 P.2d at 734-35.

¶20           The insureds in State Farm had initially maintained a legal and factual

position in a personal injury action that led State Farm to erroneously deny coverage for the

claim. Id. at 597, 603, 509 P.2d at 728, 734. After the insureds assigned their claim to the

injured party, who filed a third-party bad faith action against State Farm, the insureds

changed their statements in a manner consistent with there being coverage for the claim. Id.

at 598-99, 509 P.2d at 729-30. State Farm argued that the assignee should be estopped

from benefiting from the insureds’ change in position. Id. at 599, 509 P.2d at 730. Division

One stated the elements of equitable estoppel as: 1) one party acts inconsistently with a

position it later relies upon, 2) another party relies upon the initial actions, and 3) injury


                                              10
would result if the first party were allowed to repudiate its prior conduct. Id. at 603, 509

P.2d at 734. The court first determined that estoppel did not apply to State Farm’s liability

to the extent of its policy limit. Id. at 600, 509 P.2d at 731. The court concluded that State

Farm was obligated to pay the amounts within the policy limit because of its “contractual

policy undertaking” and not as a result of State Farm’s reliance on statements made by the

insureds. Id. at 601, 509 P.2d at 732.

¶21           But the court found the elements of estoppel had been met in determining

State Farm’s liability beyond the policy limit. The insureds would not have been permitted

to change their legal position after State Farm had relied on their earlier statements. Id. at

603-04, 509 P.2d at 734-35. And, because their assignee “ha[d] no greater rights” than the

insureds had, he was likewise estopped from asserting a legal position inconsistent with the

one the insureds had originally made. Id. at 604, 509 P.2d at 735. Thus, the court held

State Farm was not liable for damages in excess of the policy limit.

¶22           It appears from the trial court record that Lara and Carranza never contradicted

Carranza’s statement that he had not been given permission to use the vehicle. This would

seem to support Phoenix Indemnity’s implicit assertion that it reasonably relied on that

position in denying coverage and rejecting Acosta’s settlement offer. However, Phoenix

Indemnity does not dispute that, at some point, it conceded coverage for both Lara and

Carranza and offered to settle Acosta’s claim for the policy limit. One of the critical factors

the court in State Farm considered when deciding the issue of liability beyond the policy


                                              11
limits was the insureds’ statements, and the insurer’s reasonable reliance on those

statements, in denying coverage and refusing to settle. We agree with that analysis.

¶23           Turning to this case, at oral argument in this court, counsel for Phoenix

Indemnity acknowledged that no evidence had been presented in the trial court on exactly

when Phoenix Indemnity had changed its position or, just as importantly, why it had

changed its position on coverage. On the record before us, we have no way of deciding the

estoppel issue. We therefore remand this case to the trial court to make that determination.

If the evidence shows Phoenix Indemnity changed its position and conceded coverage

because it relied on new information from its insureds or as a result of further investigation

of the facts about Carranza’s use of the vehicle, then equitable estoppel may apply. If, on

the other hand, Phoenix Indemnity did not rely on new information or additional facts, but

instead, simply changed its position for business or other considerations, then equitable

estoppel will not apply.2

C. Failure to accept June 20, 2001, settlement offer

¶24           Phoenix Indemnity further contends it was legally impossible for it to settle

Acosta’s claim while the automatic bankruptcy stay was in effect without approval of the

bankruptcy court and the bankruptcy trustee’s involvement in the settlement offer. The

argument may be rendered moot by the trial court’s determination of the estoppel issue. But


       2
        Because we are remanding the case for a determination of the equitable estoppel
issue, we do not address Acosta’s due process argument that the trial court improperly
allowed Phoenix Indemnity to raise a new argument at the summary judgment hearing.

                                             12
because we are remanding the case, and to avoid any potential confusion of issues below,

we address the merits of Phoenix Indemnity’s argument.

¶25            The relevant portion of the Bankruptcy Code, 11 U.S.C.A. § 362(a), provides

that, with certain exceptions not applicable here, the filing of a bankruptcy petition operates

as a stay of

               the commencement or continuation, including the issuance or
               employment of process, of a judicial, administrative, or other
               action or proceeding against the debtor that was or could have
               been commenced before the commencement of the case under
               this title, or to recover a claim against the debtor that arose
               before the commencement of the case under this title.

¶26            It appears that, under § 362(a), Acosta’s negligence action against Carranza

would have been automatically stayed. See, e.g., Stallings v. Spring Meadows Apartment

Complex Ltd., 185 Ariz. 156, 157, 913 P.2d 496, 497 (1996) (defendant’s bankruptcy

petition filing triggered automatic stay of pending personal injury action). Acosta had

offered to settle his negligence action against Carranza in exchange for payment of the

insurance coverage limit by Phoenix Indemnity. Thus, some involvement of the bankruptcy

court to lift the stay may have been required in order for the settlement to be effective.

¶27            Phoenix Indemnity further asserts that the settlement offer itself was invalid

because the bankruptcy court and trustee did not approve it, relying on Coe v. State Farm

Mutual Automobile Insurance Co., 136 Cal. Rptr. 331 (Ct. App. 1977). This reliance is

misplaced because Coe is inapposite. There, the court found that a settlement “offer” was

deficient as a matter of law because it did not provide for the participation and consent of

                                              13
the State Compensation Insurance Fund. Id. at 337. Involvement of the fund was required

by law because the fund was entitled to reimbursement for benefits it had paid the plaintiff

because he had been injured while on the job. Id. Coe is limited to its unique workers’

compensation context, however, and we find it unpersuasive here in the context of

bankruptcy law.

¶28            Rather, we find the Ninth Circuit case of Gibbs v. State Farm Mutual

Insurance Co., 544 F.2d 423 (9th Cir. 1976), upon which Acosta relies, persuasive and

helpful in this context. In that case, the court rejected the insurer’s argument that there had

not been a meaningful settlement opportunity because there had not been a court ruling

authorizing the compromise or release of the injured minor’s cause of action. Id. at 427.

The court stated: “This argument is naive. State Farm could have agreed to pay [the

minor’s] expenses to the limit of the policy and then have sought court approval before

making any payments. This would have allowed it to conform to the good faith requirement

of California case law.” Id. at 427-28; see also Allen v. Allstate Ins. Co., 656 F.2d 487,

490 (9th Cir. 1981) (“An insurer’s duty of good faith would be trifling if it did not require

an insurer to explore the details of a settlement offer that could prove extremely beneficial

to its insured.”).

¶29            A similar process could have been followed here. Even if bankruptcy court

approval and trustee involvement would ultimately be required for the settlement to become

effective, Phoenix Indemnity has failed to show that the June 20, 2001, offer did not afford


                                              14
it a meaningful opportunity to settle the case. The offer’s sufficiency under bankruptcy code

law is irrelevant. Thus, as Phoenix Indemnity has failed to demonstrate its entitlement to

judgment as a matter of law on this basis, summary judgment on this ground was

inappropriate. See Andrews v. Blake, 205 Ariz. 236, ¶ 13, 69 P.3d 7, 11 (2003) (summary

judgment appropriate only if no genuine issues of material fact exist and moving party

entitled to judgment as a matter of law).

¶30           The trial court’s grant of summary judgment in favor of Phoenix Indemnity is

reversed, and this matter is remanded for further proceedings consistent with this decision.



                                              ____________________________________
                                              GARYE L. VÁSQUEZ, Judge

CONCURRING:



____________________________________
JOHN PELANDER, Chief Judge



____________________________________
JOSEPH W. HOWARD, Presiding Judge




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