A “Morris agreement” between a title insured and mechanics lien claimants was unenforceable, because the agreement wasn’t an arms-length transaction, and the settlement left the insured without any risk of personal liability, the Arizona Court of Appeals ruled in Fidelity National Title Insurance Company v. Centerpoint Mechanic Lien Claims, LLC. In doing so, the court passed on the opportunity to decide whether title insurance policies can be subject to a “Morris agreement.”

In a “Morrisagreement” – a type of settlement that derives from the Supreme Court of Arizona’s 1987 decision in United Services Automobile Ass’n v. Morris – an insured independently settles with a third-party claimant, assigning to the claimant his rights against his insurer, who agreed to defend the insured while reserving its right to challenge coverage under the insured’s policy.

In Centerpoint, the agreement in question was between the insured title holder and a mechanics’ lien claimant that was actually controlled by the insured, and essentially removed all of the insured’s liability. In effect, the court noted, the agreement allowed the claimants to “seek reimbursement under the insurance contract, and if appropriate, to pursue a potential bad faith claim based on the [the insurer’s] allegedly improper reservation of rights. Given these circumstances, the settlement agreement…was not a compliant Morris agreement.”

Fidelity had also argued that, as a matter of law, a title insurance policy holder may not enter a Morris agreement. Fidelity andamicus curiaeAmerican Land Title Association asserted that, unlike the third-party insurance claim at issue in Morris, a title policy provides insurance for a first-party property loss, meaning a loss caused by alleged title defects that could lessen the value of the insureds’ property. Unfortunately, the court refused to address this argument because even assuming Morrisapplies to title insurance claims; the settlement agreement was not a compliant Morris agreement.