## Facts

- Clyde and Eileen Damron were injured in an automobile collision and sued Ples Sledge (driver) and Perel Polk (vehicle owner) for negligence.
- The complaint alleged Sledge drove Polk’s vehicle with her permission, raising potential coverage under Polk’s automobile liability policy.
- A coverage dispute arose: if Sledge lacked Polk’s permission, both insurers contended there was no duty to defend Sledge.
- Counsel initially provided to Sledge withdrew; Sledge retained personal counsel, who faced unpaid fees and costs and was denied payment by Polk’s insurer.
- On the trial date, Sledge and the Damrons entered an arrangement: (1) the Damrons gave Sledge a covenant not to execute on any judgment; (2) the Damrons provided a $2,000 promissory note to fund Sledge’s defense fees; and (3) Sledge assigned to the Damrons any claim he had against the insurers for bad-faith failure to defend.
- Polk (through her insurer) argued the arrangement was collusive and against public policy.

## Issues

1. Whether, after an insurer refuses to defend, an insured may lawfully protect himself by settling with the claimant via a covenant not to execute and assigning to the claimant the insured’s bad-faith failure-to-defend claim.
2. Whether the existence of that arrangement justified dismissing the plaintiffs’ claims against the non-settling defendant (the vehicle owner) as collusive or contrary to public policy.

## Decision

- The Arizona Supreme Court reversed the trial court’s order dismissing the complaint against Polk and remanded.
- The court held that an insured abandoned by an insurer may enter a settlement that includes a covenant not to execute and an assignment of the insured’s claim for bad-faith failure to defend.
- The court rejected a per se rule that such agreements are collusive or void as against public policy.
- The trial court erred by treating the arrangement itself as sufficient grounds to dismiss the claims against Polk.

## Legal Principles

- When an insurer refuses to defend, the insured may take reasonable steps to avoid personal exposure, including settling the underlying tort claim.
- An insurer that breaches the duty to defend relinquishes control over the defense and settlement; the insured may act independently to protect personal interests.
- Collusion is not established as a matter of law merely because the insured aligns with the plaintiff after the insurer declines to defend or the insured chooses not to contest liability.
- An insured’s claim against an insurer for bad-faith failure to defend may be assigned to the injured claimant in connection with a protective settlement.
- Covenants not to execute are not invalid per se; alleged sham or collusive conduct must be shown with more than the agreement’s structure.

## Conclusion

The court held that a defendant left without a defense by an insurer may lawfully settle through a covenant not to execute and assign potential bad-faith claims against the insurer, and that such an arrangement does not automatically constitute collusion or justify dismissal of related claims against other defendants.


Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (Ariz. 1969)