The Holding 

In Knightbrook Insurance Company v. Payless Car Rental System Incorporated, 2018 WL 769295 (Ariz. February 8, 2018), an insurance bad faith and equitable indemnification case arising from an auto claim, the Arizona Supreme Court answered a Certified Question from the Ninth Circuit Court of Appeals and held that Arizona's equitable indemnity law does not incorporate the First Restatement of Restitution § 78 because it conflicts with Arizona's general equitable indemnity principles.  In Arizona, an insurer must actually owe—rather than have a "justifiable belief" that it owes—the discharged duty to recover from a third party.

The Takeaway

Arizona insurers should be wary of employing a "pay and chase" strategy because an insurer's "justifiable belief" that it discharged an owed duty is insufficient to entitle the insurer to equitable indemnification. Rather, in Arizona, an insurer must actually owe the discharged duty to recover from a third party under equitable indemnification.

The Rationale

First: under Arizona common law, an indemnity plaintiff must show:

1. it discharged a legal obligation owed to a third party,
2. for which the indemnity defendant was also liable, and
3. the obligation should have been discharged by the indemnity defendant.

Second: "there is no duty of indemnity unless the payment discharges the primary obligor from an existing duty."  Arizona courts citing the First Restatement of Restitution have repeatedly applied § 76 (requiring an "actually owed" duty) rather than § 78 (requiring a "justifiable belief" in a duty) to equitable indemnity cases.

Third: Third, the Arizona Supreme Court rejected the Insurer's request that Arizona's equitable indemnity law incorporate § 78 because:

• § 78 is not a refinement of § 76;
• § 78 expands the scope of equitable indemnity in a manner inconsistent with § 76 and Arizona's equitable indemnity common law;
• § 78 creates a new cause of action based on the relationship between the indemnitor and the indemnitee, thereby expanding equitable indemnity to cover "supposed obligations" that may be based on the payor's "justifiable belief" that it owed a duty to the third party; and
•  § 78 would entitle an insurer/indemnitee to indemnification with the "mere justifiable belief that it faced a 'supposed obligation' for which [the indemnitor] bore the greater responsibility" but "[w]ould preclude [the indemnitor] from raising viable defenses to the underlying claim."