Centerpoint v. Commonwealth

IN THE

SUPREME COURT OF THE STATE OF ARIZONA

CENTERPOINT MECHANIC LIEN CLAIMS, LLC,
Plaintiff/Appellant/Appellee,
v.

COMMONWEALTH LAND TITLE INSURANCE COMPANY,
Defendant/Appellee/Appellant.

No. CV-23-0164-PR
Filed June 10, 2025

Appeal from the Superior Court in Maricopa County
The Honorable Christopher Whitten, Judge
No. CV2011-008600
REMANDED WITH INSTRUCTIONS

Opinion of the Court of Appeals, Division One
255 Ariz. 261 (App. 2023)
AFFIRMED IN PART, VACATED IN PART

COUNSEL:

Richard M. Lorenzen (argued), RMLaw/PC, Phoenix, Attorney for
Centerpoint Mechanic Lien Claims, LLC

Robert R. Berk (argued), Eileen Dennis GilBride, Charles M. Callahan,
Jones, Skelton & Hochuli P.L.C., Phoenix; and David M. Satnick, Loeb &
Loeb LLP, New York, New York, Attorneys for Commonwealth Land Title
Insurance Company

Matthew G. Kleiner, Gordon Rees Scully Mansukhani, LLP, Phoenix,
Attorneys for Amicus Curiae American Land Title Association

_______________
 CENTERPOINT V. COMMONWEALTH
Opinion of the Court

JUSTICE BOLICK authored the Opinion of the Court, in which CHIEF
JUSTICE TIMMER, VICE CHIEF JUSTICE LOPEZ, and JUSTICES BEENE,
MONTGOMERY, BRUTINEL (Ret.), and BERCH (Ret.) 1 joined.
_______________

JUSTICE BOLICK, Opinion of the Court:

¶1 This case is the latest chapter in the lengthy litigation saga
attributable to the collapse of construction financer Mortgages Ltd. (“ML”);
the multitude of mechanics’ liens placed on unfinished construction
projects that ML was funding; title insurance to protect investors who
loaned money to ML to keep the construction projects afloat; and the title
insurance claims made because the mechanics’ liens had priority over the
investors’ deeds of trust.

¶2 Although the case is fact-intensive, some general legal
principles govern. We hold that (1) under the terms of the title insurance
policy issued to the lenders in this case, only losses attributable to a failure
to repay the loans are covered, so that where (as here) the loans were fully
repaid, the insurer is not liable; (2) where the only damages sought for an
insurer’s bad faith are from loss of lien value, full repayment of the loans
forecloses recovery, because the liens themselves have no intrinsic value;
and (3) the collateral source rule does not apply to exclude evidence of loan
repayments by third parties where those repayments are central to the
questions of insurance coverage and liability.

BACKGROUND

¶3 In 2007 and 2008, ML loaned about $165 million to Tempe
Land Company, LLC (“TLC”) to construct a residential condominium
project (“Centerpoint”). ML secured its loan with a deed of trust on the
Centerpoint property and purchased a lender’s title insurance policy from
Fidelity National Title Insurance Company (“Fidelity”) to insure lien
priority of the deed of trust.

1 Although Justice Robert M. Brutinel (Ret.) retired before issuance of this
opinion, he participated in oral argument and throughout preparation of
this opinion. Justice King is recused from this matter. Pursuant to article 6,
section 3 of the Arizona Constitution, Justice Rebecca White Berch (Ret.) of
the Arizona Supreme Court was designated to sit in this matter.
2
 CENTERPOINT V. COMMONWEALTH
Opinion of the Court

¶4 Starting in April 2008, various contractors and subcontractors
began recording mechanics’ liens against the Centerpoint property (the
“Mechanics’ Liens”). This led to the consolidated litigation of claims in
which the claimants sought both a determination that the Mechanics’ Liens
had priority over ML’s security interest in the Centerpoint property and
foreclosure on the Centerpoint property.

¶5 In June 2008, ML entered involuntary bankruptcy
proceedings. Pursuant to a court-ordered bankruptcy reorganization plan,
numerous limited liability companies were created to hold assets securing
ML’s fifty outstanding loans, including the TLC loan. These holding
companies were managed by ML Manager, LLC (“ML Manager”). The
LLCs that held ML’s Centerpoint-related assets were Centerpoint I Loan,
LLC (“CPI”) and Centerpoint II Loan, LLC (“CPII”), which we refer to
collectively as the “Loan LLCs.” The Loan LLCs were assigned a large
percentage of the interest in the ML deed of trust for Centerpoint.
Remaining interests in the loans and ML deed of trust were held by eight
fractional interest holders (the “Pass-Through Investors”). We refer to ML
Manager, the Loan LLCs, and the Pass-Through Investors as the “ML
Investors.”

¶6 Without funding from ML, the Centerpoint project stalled,
and in December 2008, TLC filed for bankruptcy protection. The Loan LLCs
were its largest creditors. In January 2010, the Loan LLCs and
Pass-Through Investors foreclosed on Centerpoint and ultimately
purchased the property at a trustee’s sale for $8 million, but the Mechanics’
Liens were not extinguished.

¶7 Universal-SCP 1 Limited Partnership (“Universal”) provided
a $20 million loan to ML Manager, the Loan LLCs, and the Pass-Through
Investors for bankruptcy exit costs. Universal secured its loan with deeds
of trust on Centerpoint and other assets owned by the Loan LLCs.
Universal obtained a $5 million title insurance policy from Commonwealth
Land Title Insurance Co. (“Commonwealth”). This policy insured the
priority of Universal’s deed of trust on Centerpoint only as against “any
other lien or encumbrance.”

¶8 During this time, the Loan LLCs purchased land adjacent to
Centerpoint, financed by a $5 million loan from VR CP Funding (“VRCP”).
VRCP was a single-purpose entity, formed solely to provide this loan,
3
 CENTERPOINT V. COMMONWEALTH
Opinion of the Court

which was secured with a deed of trust on the adjacent lot and Centerpoint.
Commonwealth insured VRCP’s deed of trust with a $5 million title
insurance policy. This policy insured priority of VRCP’s deed of trust in
second position behind Universal’s deed of trust. The Loan LLCs also
procured an owner’s title insurance policy from Fidelity for their purchase
of the adjacent lot.

¶9 Commonwealth’s title insurance policies insured that
Universal and VRCP’s mortgage liens had priority over other liens against
the Centerpoint project. But when Commonwealth issued the Universal
and VRCP policies, there were more than $30 million in Mechanics’ Liens
recorded against Centerpoint.

¶10 After the holders of the Mechanics’ Liens sued to enforce their
liens, ML Manager (acting for the Loan LLCs and the Pass-Through
Investors) tendered the defense of these lien claims to Fidelity. In
September 2009, Fidelity accepted the defense with a general reservation of
rights to later contest coverage, and Fidelity engaged counsel to represent
ML Manager. Centerpoint Mech. Lien Claims, LLC v. Commonwealth Land Title
Ins. Co. (“Centerpoint III”), 255 Ariz. 261, 266 ¶ 10 (App. 2023); Fid. Nat. Title
Ins. Co. v. Centerpoint Mech. Lien Claims, LLC (“Centerpoint I”), 238 Ariz. 135,
138 ¶ 9 (App. 2015).

¶11 In January 2010, ML moved for summary judgment on the
issue of lien priority, seeking a judgment that its mortgage loan, which was
secured by the ML deed of trust, was senior to the Mechanics’ Liens. In
September 2010, the trial court denied the motion, reasoning that a jury
could find that ML’s mortgage loan was not equitably entitled to priority
over the Mechanics’ Liens because ML did not fully fund its loan to TLC,
which prevented TLC from paying its subcontractors. Thereafter, Fidelity
reasserted its reservation of rights as to the ML policy (held by the Loan
LLCs).

¶12 Also in September, the Loan LLCs contracted to sell
Centerpoint. Centerpoint III, 255 Ariz. at 267 ¶ 16. However, that sale
“failed to close in October as planned, at least in part due to Fidelity’s
decision . . . not to provide a title policy to the buyer that would insure
priority over the [M]echanics’ [L]iens.” Centerpoint I, 238 Ariz. at 138–39
¶ 12.

4
 CENTERPOINT V. COMMONWEALTH
Opinion of the Court

¶13 Notwithstanding the failed October 2010 closing, the buyer
still wanted to purchase Centerpoint—it just needed title insurance, which
was difficult to obtain due to the recorded Mechanics’ Liens. See Centerpoint
III, 255 Ariz. at 267 ¶ 19. The parties extended the closing deadline to early
November. Id. Counsel for ML Investors, acting under authority from
Universal and VRCP, urged Fidelity National Title Group (“FNTG”)—the
parent corporation to both Fidelity and Commonwealth—to provide the
contemplated title insurance policy to the buyer. Id. ¶¶ 19–20. Fidelity,
however, refused, and the Centerpoint sale again failed to close. Id. ¶ 20.

¶14 The ML Investors, Universal, and VRCP feared losing their
entire $120 million investment and also feared the prospect that their title
insurers would decline coverage. The Mechanics’ Liens claimants would
only settle for cash and were uninterested in receiving an assignment of
claims against Fidelity. Thus, the Loan LLCs and Pass-Through Investors
found a buyer willing to pay $30 million for the Centerpoint property with
the sale contingent upon the buyer obtaining satisfactory title insurance.
But Fidelity refused to issue title insurance to the buyer, and the buyer
refused to purchase Centerpoint.

¶15 In November 2010, Universal and VRCP tendered formal
defense to Commonwealth pursuant to the Universal and VRCP policies.
Commonwealth acknowledged receipt of the claims, and, in December
2010, it ultimately accepted Universal and VRCP’s offer to defend under a
general reservation of rights. Id. ¶¶ 21–23. Around that time, Fidelity also
accepted the defense of the Loan LLCs with a reservation of rights.

¶16 Starting in October 2010, after the first failed closing, ML
Manager notified Fidelity that it would seek a Morris agreement with the
Mechanics’ Liens claimants for a payment of the Mechanic Liens, which
totaled about $30 million. See United Servs. Auto. Ass’n v. Morris, 154 Ariz.
113 (1987). In January 2011, Universal and VRCP sent a demand letter to
Commonwealth stating “that they had ‘entered into negotiations with and
intend[ed] to consummate agreements with the mechanic lien holders.’”
Centerpoint III, 255 Ariz. at 268 ¶ 24 (alteration in original). But the letter
“also stated [that Universal and VRCP] would not enter into any settlement
if Commonwealth withdrew its reservation of rights” while threatening to
enter a Morris agreement. Id.

5
 CENTERPOINT V. COMMONWEALTH
Opinion of the Court

¶17 In February 2011, ML Manager, the Loan LLCs, Universal,
VRCP, and the Mechanics’ Liens claimants entered into the Morris
agreement—which would become effective once the trial court accepted
it—and completed the sale of Centerpoint to ZarCalRes Tempe, LLC (the
“Buyer”) for $30 million. To ensure that the Buyer could purchase title
insurance, the Morris agreement established a way to guarantee that no
existing lienholder would foreclose on Centerpoint after the sale.

¶18 To execute the Morris agreement, a new entity, Centerpoint
Mechanic Lien Claims, LLC (“CMLC”), was created. The Morris agreement
required that CMLC use approximately $13.5 million of the sale’s proceeds
to purchase all of the Mechanics’ Liens claims. CMLC and the Buyer then
entered into a subordination agreement and a covenant not to sue or
execute, with CMLC promising not to execute on the Centerpoint property
against the Buyer or the Buyer’s assigns and successors. Importantly,
Universal and VRCP agreed to relinquish their respective rights to demand
payment of their $5 million loans from the sale’s proceeds. Instead,
Universal and VRCP subordinated their interests in the agreement to those
of the Buyer and the Buyer’s assigns and successors. Additionally,
Universal and VRCP promised not to execute on the Buyer or its assigns
and successors.

¶19 For Universal and VRCP’s part in the Morris agreement, they
were paid a little over $4 million and $5.8 million, respectively, from the
sale’s proceeds. Universal ultimately received payment in full for its loans
to the Loan LLCs and Pass-Through Investors, as Universal had secured its
loan with other properties that were subsequently sold. VRCP was not
directly repaid from the sale’s proceeds. Instead, VRCP’s members sold
their ownership interests to CPII (99%) and CMLC (1%) in amounts equal
to the principal and interest owed on the VRCP loan. Whether these
payments constituted “loan repayments” was disputed. Notably,
Universal and VRCP’s deeds of trust were not released.

¶20 After the Morris agreement, “CMLC substituted itself for the
[M]echanics’ [L]ien claimants in the ongoing litigation,” and Fidelity and
Commonwealth challenged the agreement. Centerpoint I, 238 Ariz. at 139
¶ 18. The trial court validated the agreement, finding it neither fraudulent
nor collusive, and decided that the settlement amount was reasonable. Id.
Fidelity, but not Commonwealth, appealed. Id. at 140 ¶ 19.

6
 CENTERPOINT V. COMMONWEALTH
Opinion of the Court

¶21 The court of appeals invalidated the Morris agreement,
finding that (1) the interests of Universal, VRCP, the Loan LLCs, and CMLC
“were aligned, not divergent,” (2) there was “no risk of excess liability for
the insureds” once the Mechanics’ Liens claims were unconditionally
settled for a fixed sum, and (3) the agreement exceeded “Fidelity’s
indemnity obligation.” Id. at 141 ¶¶ 29–30, 142 ¶¶ 35–36. But because
Commonwealth failed to appeal, the “Morris judgment remain[ed] in effect
as against Commonwealth.” Id. at 142 ¶ 39.

¶22 The present action stems from Commonwealth’s conclusion
that Universal and VRCP were not covered by the title policy for their
purported losses as set forth in the Morris agreement. CMLC
counterclaimed, alleging that Commonwealth breached the $5 million
policies with Universal and VRCP and had done so in bad faith.
Specifically, CMLC alleged that Commonwealth breached the Universal
and VRCP policies by failing to provide full insurance coverage as required
by the title policy when it failed to settle the Mechanics’ Liens or defend
against them. Similarly, CMLC alleged that Commonwealth engaged in
bad faith by refusing to indemnify Universal and VRCP against the
Mechanics’ Liens, refusing to withdraw its reservations of rights without a
reasonable basis, engaging in dilatory claims handling practices, refusing
to participate in settlement negotiations, misrepresenting its insureds’
rights under the insureds’ policies, and forcing its insureds to engage in
litigation to obtain benefits due under the policies. CMLC sought both
compensatory and punitive damages.

¶23 In 2015, the trial court granted Commonwealth’s motion for
summary judgment on CMLC’s breach of contract claim because two
conditions of the policy, conditions 8(a)(ii) and 10(b), precluded coverage if
the insured loans had been fully repaid. The trial court reasoned that the
VRCP loan was fully repaid, despite being termed “a ‘payment for partners’
interests,’” because (1) the purported purchase price was the exact amount
of the loan, and (2) the payment “was initially described as a ‘payoff’” but
was “later changed to ‘payment for partners’ interests.’” The court
concluded that the depiction of the transaction as a purchase of VRCP
rather than a loan payoff was a mere “artful pretense.”

¶24 Eventually, the case proceeded to trial on one remaining
claim: CMLC’s bad faith claim against Commonwealth on the Universal
and VRCP policies. Before trial, however, the court denied CMLC’s motion
in limine to exclude evidence of the loan repayments made to Universal and
7
 CENTERPOINT V. COMMONWEALTH
Opinion of the Court

VRCP. The court reasoned that the loan repayments were not paid by a
collateral third party but were “part of the benefit bargained for by the
parties,” and thus the collateral source rule was inapplicable. The court
similarly denied Commonwealth’s motion to exclude evidence of CMLC’s
damages, notwithstanding the fact that Universal and VRCP were fully
repaid their loans, because Universal and VRCP asserted that they
nonetheless suffered pecuniary damages. This permitted CMLC to present
evidence of the diminution in value of the Centerpoint property caused by
the Mechanics’ Liens and to argue that this diminution resulted in
pecuniary losses, which were needed to sustain the bad faith claim.

¶25 During trial, CMLC argued that Universal and VRCP suffered
$19.5 million of damages due to Commonwealth’s bad faith because the $38
million Mechanics’ Liens had priority over their loans, rendering the deeds
of trust securing the loans valueless. Despite the trial court’s ruling on
Commonwealth’s motion for summary judgment that VRCP had been fully
repaid for its loan, CMLC repeatedly argued that the loan was not repaid.
CMLC also argued that because the October 2010 sale did not go through,
Universal and VRCP suffered a loss.

¶26 The jury returned a $5 million verdict in favor of CMLC for
damages suffered due to Commonwealth’s bad faith. Commonwealth
submitted a motion for renewed judgment as a matter of law, arguing that
neither Universal nor VRCP presented evidence that they suffered a loss
due to its alleged bad faith. CMLC moved for a new trial on the issue of
damages, arguing that the collateral source rule should have barred
evidence of Universal and VRCP’s loan repayments and that the jury
should have been instructed on punitive damages. The trial court denied
both motions and awarded CMLC attorney fees as the successful party
pursuant to A.R.S. § 12-341.01. Centerpoint III, 255 Ariz. at 269 ¶ 38. Both
parties appealed. Id. ¶ 39.

¶27 The court of appeals vacated the trial court’s entry of partial
summary judgment in favor of Commonwealth on the breach of contract
claims and remanded to the court with instructions to enter summary
judgment in favor of CMLC for $10 million. Id. at 272 ¶ 52. The court
reasoned that conditions 8(a)(ii) and 10(b) of the insurance contracts “do
not provide or define coverage defenses, but instead operate as defenses to
payment liability.” Id. at 271 ¶ 48; see also id. ¶ 49 (providing that the
exclusive coverage defenses pursuant to the policies were listed in the
“exclusions from coverage” and “exceptions from coverage” sections of the
8
 CENTERPOINT V. COMMONWEALTH
Opinion of the Court

policies). Thus, because the court-approved Morris agreement “is final and
binding against Commonwealth as to both the fact and amount of” liability,
and because none of the coverage exclusions in the policy exempted
Commonwealth’s coverage of the Mechanics’ Liens, the court held that
Commonwealth had breached the insurance contracts. Id. at 271–72
¶¶ 48–52.

¶28 The court of appeals affirmed the trial court’s denial of
Commonwealth’s motion for judgment as a matter of law on the bad faith
claim. Id. at 277 ¶ 75. Commonwealth argued that CMLC suffered no
damage, as a matter of law, because “the evidence unequivocally
establishes” that Universal and VRCP were repaid. Id. at 276 ¶ 71. In
response, the court of appeals concluded that “trial evidence and the
parties’ briefs make clear that” there was a disputed issue of material fact
as to whether VRCP’s loan was repaid. See id. ¶¶ 71, 73–74 (noting that
Universal “was fully repaid from other security” but that VRCP’s payment
could be characterized as a payment of partnership interest and to purchase
claims against Commonwealth). The court of appeals reasoned that the
conflicting evidence was resolved by the jury, and that the jury’s $5 million
award to CMLC for Commonwealth’s bad faith claim was therefore
supported by the evidence. Id. ¶ 75.

¶29 The court of appeals also upheld the trial court’s admission of
evidence that Universal and VRCP had been repaid their loans and,
confusingly, stated that “Universal and VRCP received full repayment of
their loans.” Id. at 273 ¶¶ 56, 58. The court concluded that the collateral
source rule was inapplicable because the “loan repayments were not the
result of the intrusion of a stranger,” i.e., a collateral source, but rather
resulted from the debtors’ (the Loan LLCs’ and CMLC’s) repayment of the
loans covered by the insurance policy. Id. ¶¶ 56–58. The court reasoned
that because CMLC’s payments to Universal and VRCP were not wholly
independent from the transaction for which Universal and VRCP could
claim an injury, CMLC was not a collateral source, and the collateral source
rule was therefore inapplicable. Id.

¶30 Lastly, the court of appeals vacated the trial court’s award of
attorney fees to CMLC until after that court resolved the remaining issues
on remand. Id. at 277 ¶¶ 77–78.

9
 CENTERPOINT V. COMMONWEALTH
Opinion of the Court

DISCUSSION

¶31 We granted the petition and cross-petition for review
presenting the following questions of statewide importance. (1) May the
insurer contest coverage for the insured lenders’ title insurance claims
based on policy provisions stating (a) that the insurer’s liability for loss or
damage shall not exceed the indebtedness owed to the insured and (b) that
there is no coverage for title defects or liens resulting in no loss to the
insured? (2) Where loans secured by a deed of trust are repaid, can an
alleged diminution in value of the insured deed of trust constitute actual
pecuniary damage to the insured lender to support a bad faith claim?
(3) Does the collateral source rule preclude evidence of the sources of loan
repayment in these circumstances?

¶32 As this matter was resolved on motions for summary
judgment and judgment as a matter of law, our review of the decisions
below is de novo, “viewing the evidence in the light most favorable to the
party against whom summary judgment was entered,” Bridges v. Nationstar
Mortg. L.L.C., 253 Ariz. 532, 534 ¶ 7 (2022) (motion for summary judgment),
and “viewing the evidence in the light most favorable to Plaintiffs,” Torres
v. JAI Dining Servs. (Phx.) Inc., 252 Ariz. 28, 30 ¶ 9 (2021) (motion for
judgment as a matter of law).

I. COVERAGE WHERE LOANS WERE REPAID

¶33 Title insurance differs from other types of insurance in that it
insures against harms that exist at the time the policy is issued, that is,
indemnifying against loss from title defects and encumbrances. See First
Am. Title Ins. Co. v. Johnson Bank, 239 Ariz. 348, 354–55 ¶¶ 31–33 (2016).
Central to the resolution of the dispute here is the recognition that not all
title insurance policies are the same. Courts have frequently distinguished
between owner and lender policies. “Defining and measuring actual loss
under a title insurance policy is not the same for the owner who has title to
property, and a mortgagee who holds only a security interest in the
borrower’s title.” Blackhawk Prod. Credit Ass’n v. Chi. Title Ins. Co., 423
N.W.2d 521, 525 (Wis. 1988). While “an owner-insured is entitled to the full
market value of the property, a value that is immediately diminished by the
presence of title defects,” a “mortgagee-insured’s loss cannot be determined
unless the note is not repaid and the security for the mortgage proves
inadequate.” Falmouth Nat’l Bank v. Ticor Title Ins. Co., 920 F.2d 1058, 1063
(1st Cir. 1990) (citing Blackhawk, 423 N.W.2d at 525).
10
 CENTERPOINT V. COMMONWEALTH
Opinion of the Court

¶34 The policy here illustrates this distinction. The parties agree
that the policy does not guarantee the loan, but only the priority of the deed
of trust over encumbrances existing at the time the policy was issued, such
as the Mechanics’ Liens here. The policy specifically lists in section 3 as
“Exclusions From Coverage,” any “[d]efects, liens, encumbrances, adverse
claims, or other matters . . . (c) resulting in no loss or damage to the Insured
Claimant[.]” Under “Conditions,” section 8(a) provides: “The extent of
liability of the Company for loss or damage under this policy shall not
exceed the least of . . . (ii) the Indebtedness[.]” In turn, the policy sets forth
a definition of “indebtedness” in Conditions section 1(d), which provides
that “(ix) . . . the Indebtedness is reduced by all payments[.]”
Condition 10(b) provides that “[t]he voluntary satisfaction of the Insured
Mortgage shall terminate all liability of the company[.]” Thus, the policy
excludes coverage if the insured has suffered no loss or damage, and it
expressly limits coverage to any actual, unreimbursed indebtedness.

¶35 As the Loan LLCs and Pass-Through Investors were
attempting to sell the Centerpoint property and discharge the Mechanics’
Liens, the insureds filed a claim under the policy. Commonwealth opted to
defend the insureds in the existing declaratory judgment action to establish
lien priority, but only under a reservation of rights. As a consequence, the
insureds proceeded to resolve the liability issues—i.e., priority of the deeds
of trust and related issues—through the Morris agreement.

¶36 Morris agreements typically come into play in liability actions
when an insurer defends an insured under a reservation of rights. See
Safeway Ins. Co., Inc. v. Guerrero, 210 Ariz. 5, 9 ¶ 9 (2005). Such agreements
recognize that an insurer’s reservation of rights places the interests of the
insurer and insured in a potential conflict, because if the insured is found
to be liable, the insurer can then contest coverage, and the insured will have
no recourse. See Parking Concepts, Inc. v. Tenney, 207 Ariz. 19, 22 ¶ 12 (2004).
This Court has ruled that such a situation gives “the insurer a double bite
at escaping liability.” Morris, 154 Ariz. at 118.

¶37 Under those circumstances, upon notice to the insurer and
subject to court approval, the insured may settle the questions of liability
and damages with a third-party plaintiff. Quihuis v. State Farm Mut. Auto.
Ins. Co., 235 Ariz. 536, 539 ¶ 4 (2014); Morris, 154 Ariz. at 119. So long as the
agreement is reasonable and not collusive—which the insurer may contest

11
 CENTERPOINT V. COMMONWEALTH
Opinion of the Court

during the Morris proceedings—the agreement will bind the insurer as to
liability and the damages amount. Once the Morris agreement is approved
by the court, the insurer may not litigate the fact and amount of the
insured’s liability, but it may contest coverage under the policy, because
otherwise the insurer may be required to provide coverage the insured did
not purchase. Quihuis, 235 Ariz. at 541 ¶ 12; Morris, 154 Ariz. at 119–20.
That question—whether the insurer is contesting liability or coverage—is
central to the dispute here.

¶38 The agreement here is different from a typical Morris
agreement because it does not resolve a third-party claim asserting a
damages claim against the insured, but instead arises from a first-party
agreement. However, Arizona courts have held that parties in similar
circumstances may make such agreements and Morris principles will apply.
See, e.g., Apollo Educ. Grp., Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 250
Ariz. 408, 414 ¶¶ 26–27 (2021) (acknowledging that the operative question
is whether the insurer had a duty to defend but also reserved the right to
deny coverage—not whether a first- or third-party claim is at issue). No
party contends that the Morris agreement here is inappropriate and
unenforceable, and therefore we do not address whether Morris agreements
are generally appropriate in the first-party context.

¶39 However, the difference between a third-party and a
first-party Morris agreement can give rise to confusion because the concept
of liability differs in those two circumstances. In a third-party agreement,
the liability is to the third-party claimant, and the resolution of that liability
within the Morris agreement is binding on the insurer and cannot
subsequently be challenged. With a first-party Morris agreement, the
“liability” is to the insured under the policy, so that the concepts of liability
and coverage necessarily overlap. That is what happened here and, in our
view, led to an erroneous legal conclusion by the court of appeals.

¶40 In Quihuis, this Court recognized that Morris “does not
preclude litigation of whether coverage exists under the policy,” but “an
insurer in a coverage action may not, in the guise of a coverage defense,
litigate what are essentially and solely liability issues” resolved by the Morris
agreement. 235 Ariz. at 538 ¶¶ 1–2 (emphasis added) (citing Associated
Aviation Underwriters v. Wood, 209 Ariz. 137, 150 ¶ 37 (App. 2004)). The
Court observed that Morris “does not preclude litigation of pure coverage

12
 CENTERPOINT V. COMMONWEALTH
Opinion of the Court

issues,” including factual issues that affect liability or independently
control coverage. Id. at 541 ¶ 15.

¶41 Applying those principles, the court of appeals held that
“conditions 8(a)(ii) and 10(b) do not provide or define coverage defenses,
but instead operate as defenses to payment liability.” Centerpoint III, 255
Ariz. at 270 ¶ 41, 271 ¶ 48. Thus, the court concluded that “for purposes of
this case, the fact and amount of Commonwealth’s liability . . . may not be
relitigated, since it is bound by the Morris Judgment.” Id.

¶42 The court of appeals misreads Quihuis, which holds that a
Morris agreement is binding on the insurer as to “the existence and extent
of the insured’s liability.” 235 Ariz at 541 ¶ 13 (emphasis added). Here, the
Morris agreement did not resolve claims as to third parties. In other words,
the insured had no liability to anyone. In this first-party agreement, the
only liability is Commonwealth’s if it breached the policy terms by failing
to defend the insureds. Thus, coverage and liability here are coextensive.

¶43 Indeed, the policy essentially uses the terms “coverage” and
“liability” interchangeably. Exclusion 3(c) is listed under the caption
“Exclusions From Coverage,” and excludes liens and encumbrances
“resulting in no loss or damage to the Insured Claimant.” Thus,
Commonwealth’s assertion that the insureds sustained no loss is an
argument against coverage, because if there is no loss, there is no coverage.
See A.R.S. § 20-1562(8) (loss is a coverage, not a liability issue). Similarly,
the other pertinent policy provisions are conditions of coverage, even
though those provisions sometimes use the term “liability.” See, e.g.,
Condition 10(b) (“The voluntary satisfaction or release of the Insured
Mortgage shall terminate all liability of the Company[.]”); Condition 8(a)
(the insurer is obligated to pay the “least” among multiple values, including
indebtedness).

¶44 The policy expressly limits coverage to damages sustained
because of subordination of the mortgage to other liens and encumbrances,
and only to the extent that the mortgage remains unpaid. The nature of the
insurance policy—lender title insurance—in turn defines the scope of a
possible Morris agreement, which is limited to the fact and amount of the
insured’s liability, and not to whether the loss is covered by the insurance
policy. The only “liability” that was resolved by the Morris agreement
pertained to lien priorities, which Commonwealth does not contest here.

13
 CENTERPOINT V. COMMONWEALTH
Opinion of the Court

¶45 That leaves the question of whether the mortgage was not
fully repaid, which is the only damage alleged by the insureds. 2 Because
the court of appeals held that Commonwealth was precluded as a matter of
law from contesting the question of insurer liability to the insureds, it did
not reach this question and instead directed the trial court on remand to
enter summary judgment in favor of CMLC for breach of contract. See
Centerpoint III, 255 Ariz. at 270 ¶ 41, 272 ¶ 52. But because we conclude that
Commonwealth properly challenged coverage, that coverage hinges upon
whether the insureds sustained damage through the unpaid mortgage.

¶46 The trial court considered this question, however, and found
that the mortgage was repaid in full from the “purchase” of VRCP, which,
based on the evidence, it concluded was actually a loan payoff. Indeed, it
was initially characterized in the draft closing documents as a “payoff,” but
later changed to “payment for partners’ interests” in VRCP. The
payment—$5.88 million—exactly matched the amount of the debt. The trial
court deemed calling the payoff of the lien payment for partners’ interests
an “artful pretense,” noting that “[a]llowing a lender to manipulate and
extend mortgage insurance by agreeing to term the repayment of its loan”
in that manner would have “dangerous and far-reaching consequences,”
derailing an insurer’s ability to project its costs and accurately price its
insurance, and extending coverage beyond the scope agreed to by the
parties. As a result, VRCP “owed nothing on the loan, as the full debt had
been paid. Condition 8(a)(ii) and Condition 10(b) both preclude coverage
in such a case.”

¶47 We conclude that uncontroverted evidence supports the trial
court’s conclusion that the “purchase” of VRCP was actually a loan
repayment, and that the insureds therefore suffered no damages covered
under the policy.

¶48 We therefore vacate the court of appeals opinion on this
question and affirm the trial court’s grant of summary judgment to
Commonwealth on the breach of contract claim.

2We do not separately analyze Universal’s claims in this regard because it
was fully repaid from proceeds from the sale of property. Supra ¶ 19.
14
 CENTERPOINT V. COMMONWEALTH
Opinion of the Court

II. DIMINUTION IN LIEN VALUE AS ACTUAL PECUNIARY
LOSS

¶49 CMLC also asserts bad faith on the part of Commonwealth
because of the insurer’s decision to defend only under a reservation of
rights. “To show a claim for bad faith, a plaintiff must show the absence of
a reasonable basis for denying benefits of the policy and the defendant’s
knowledge or reckless disregard of the lack of a reasonable basis for
denying the claim.” Noble v. Nat’l Am. Life Ins. Co., 128 Ariz. 188, 190 (1981)
(internal quotation marks omitted) (quoting Anderson v. Cont’l Ins. Co., 271
N.W.2d 368, 376 (Wis. 1978)).

¶50 The trial court found bad faith and allowed the jury to
determine damages. It awarded VRCP $5 million dollars. The court of
appeals concluded that there was sufficient evidence to support this award
and that the trial court did not err by refusing to enter a directed verdict.
Centerpoint III, 255 Ariz. at 265 ¶ 2.

¶51 Commonwealth contests the finding of actual damages.
CMLC claims that it is entitled to bad faith damages for Commonwealth’s
failure to repay the loans. However, our conclusion in Part I of this opinion
forecloses CMLC’s argument. The loans were fully repaid and, therefore,
VRCP and Universal suffered no covered loss.

¶52 CMLC also contends that the value of VRCP and Universal’s
liens was diminished. CMLC provided no authority for the proposition
that the liens have intrinsic value. The insurance coverage was for priority
of liens only, and because the liens were repaid, Commonwealth’s bad faith
resulted in no damages. See, e.g., Falmouth, 920 F.2d at 1063 (holding that
“a mortgagee-insured’s loss cannot be determined unless the note is not
repaid and the security for the mortgage proves inadequate”); Twin Cities
Metro-Certified Dev. Co. v. Stewart Title Guar. Co., 868 N.W.2d 713, 718 (Minn.
Ct. App. 2015) (to the same effect); Karl v. Commonwealth Land Title Ins. Co.,
24 Cal. Rptr. 2d 912, 917 (Cal. Ct. App. 1993) (to the same effect); Green v.
Evesham Corp., 430 A.2d 944, 946 (N.J. Super. Ct. App. Div. 1981) (to the
same effect).

¶53 Although Commonwealth engaged in bad faith for failing to
defend without reservation, CMLC proved no damages and therefore
cannot recover. For the foregoing reasons, we reverse the decisions of the
court of appeals and trial court on the bad faith damages award.
15
 CENTERPOINT V. COMMONWEALTH
Opinion of the Court

III. COLLATERAL SOURCE RULE

¶54 CMLC argues that the trial court should have applied the
collateral source rule to preclude evidence of loan repayment. The court of
appeals disagreed and affirmed the trial court’s admission of such
evidence. See Centerpoint III, 255 Ariz. at 273 ¶¶ 56–58.

¶55 The collateral source rule is usually applied in personal injury
cases and holds that although payments by a tortfeasor to the injured party
reduce the tortfeasor’s liability, payments from third parties—collateral
sources—do not, and evidence of such collateral sources should not be
considered. See Michael v. Cole, 122 Ariz. 450, 452 (1979); Restatement
(Second) of Torts § 920(A) (Am. L. Inst. 1979). However, to preclude
evidence of payments, those collateral sources must be “wholly
independent” of the wrongdoer. See Hall v. Olague, 119 Ariz. 73, 73 (App.
1978).

¶56 We agree with the court of appeals that “[t]he loan
repayments were not the result of the intrusion of a stranger into
Commonwealth’s and CMLC’s relationship,” but rather they were “an
intrinsic and integral part of the same transaction.” Centerpoint III, 255 Ariz.
at 273 ¶ 56. Thus, “CMLC seeks an inverted application of the rule,”
allowing investors’ payments to be shielded from consideration as to the
insurer’s liability. Id. ¶ 57.

¶57 Given that the loan repayments are central to the insurer’s
liability, and that CMLC sought damages for bad faith only to the extent of
economic loss from the liens, the collateral source rule does not apply. See,
e.g., FDIC v. United Pac. Ins. Co., 20 F.3d 1070, 1083 (10th Cir. 1994) (holding
that collateral source rule does not preclude evidence of a third-party
settlement pertaining to “common damages”); Leprino Foods Co. v. Factory
Mut. Ins. Co., 653 F.3d 1121, 1136 (10th Cir. 2011) (applying same rule
pertaining to settlement of the “same transaction”); Crowley v. Tr. Co. Bank
of Cent. Ga., 466 S.E.2d 24, 26 (Ga. Ct. App. 1995) (holding that the collateral
source rule does not exclude evidence of payments made as “security for
the same loan”). Applying the rule would unfairly deprive a jury of
relevant—indeed, here, dispositive—evidence.

¶58 We therefore affirm the trial court and court of appeals on this
issue.
16
 CENTERPOINT V. COMMONWEALTH
Opinion of the Court

ATTORNEY FEES

¶59 CMLC seeks attorney fees pursuant to A.R.S. § 12-341.01. We
deny the request as it is not the prevailing party.

CONCLUSION

¶60 We vacate the court of appeals opinion except for
paragraphs 53–58. We remand to the trial court to enter summary
judgment in favor of Commonwealth on the bad faith claim.

17