PHOENIX (Legal Newsline) – On Feb. 8, the Supreme Court of Arizona answered certified questions from the U.S. Court of Appeals for the Ninth Circuit to clarify questions in a dispute among a car rental company, an insurance company and individuals injured in an accident.

Payless Car Rentals appealed a district court decision that Payless was liable for the almost $1 million settlement paid to an injured couple by KnightBrook Insurance, relying on the indemnity clause of the First Restatement of Restitution.

Justice John R. Lopez IV concluded in the court opinion that Section 78 of the First Restatement of Law was not incorporated into Arizona law because it “conflicts with Arizona’s general indemnity principles” and declined to answer the second question “as moot.”

Lopez noted that the Supreme Court did not agree with the district court interpretation in this case, stating, “We are unwilling to impose liability based on the 'justifiable belief' that a duty exists, and we are troubled that §78 could preclude an indemnitor from raising viable defenses to the underlying claim, as Payless contends happened here.”

Section 78 of the First Restatement was relied on in the district court’s decision to hold Payless liable for the amount KnightBrook had paid to the couple that sued it.

Chief Justice Scott Bales, Vice Chief Justice John Pelander and justices Robert M. Brutinel, Ann A. Scott Timmer, Clint Bolick, and Andrew Gould concurred with Lopez.

According to the court's opinion, Michael Bovre had an accident in his Payless rental car with Robert and Stacy McGill, causing serious injuries to the McGills. 

Bovre had declined supplemental liability insurance (SLI) offered by Payless and provided by KnightBrook Insurance on his rental, but claimed he was owed the policy because the Payless employee didn’t have him initial the place on the contract that he declined coverage.

The couple sued Bovre after the accident. Bovre ultimately settled, paying the McGills using his own insurance along with the state-mandated insurance, and assigned his claims of negligence, insurance bad faith, and breach of contract against both companies to the McGills as part of their settlement. 

Bovre also agreed to an $8 million adverse judgment against Payless and KnightBrook to the McGills on the condition that they would not be able to go after his personal assets. The settlement included the SLI amount, which KnightBrook denied to Bovre.

Attempting recover the $8 million, the McGills sued KnightBrook and Payless, and settled with KnightBrook for $970,000. The amount resolved the bad faith claims but did not settle any claim with Payless. 

KnightBrook then sued Payless for the almost $1 million payment it made to the McGills to cover the SLI claim and alleged that Payless was responsible because their desk rental employee did not have Bovre initial to decline the SLI or make any notation on the contract signed.

Relying on section 78 of the First Restatement, the district court found that KnightBrook was entitled to “equitable indemnification from Payless for the $970,000 SLI policy limits it paid to settle the McGills’ claims.”

Payless appealed the decision to the Ninth Circuit, which then certified questions to the Supreme Court, asking, “whether Arizona equitable indemnity law incorporates the Restatement (First) of Restitution § 78… (hereinafter 'First Restatement') and, if so, (2) whether § 78 requires that the indemnity plaintiff and indemnity defendant’s liability be coextensive as to the underlying plaintiff.

Lopez said that the district ruling “entitles KnightBrook to indemnification with the mere 'justifiable belief' that it faced a 'supposed obligation' for which Payless bore the greater responsibility.”

Lopez stated that rule 78 of the First Restatement is to be used to “to provide equitable indemnity" in “situations [where] the performance is not a benefit to the primary obligor and hence there can be no recovery by the payor because of unjust enrichment.”

“Section 78 does not require an actual legal obligation or a discharge of the indemnity defendant’s liability. Rather, it creates a new cause of action based on the relationship between the indemnitor and the indemnitee, expanding equitable indemnity to cover 'supposed obligation[s]' that may be based on the payor’s 'justifiable belief' that he owed a duty to the third party," Lopez wrote.

Supreme Court of the State of Arizona case number CV-17-0156-CQ

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