In Arizona, insurance contracts include an implied covenant of good faith and fair dealing requiring the insurer to refrain from any conduct that would impair the benefits or rights expected from the insurance contract.1
Interestingly, unlike many other jurisdictions, the insured is not required to prevail on the breach of contract action to recover bad faith damages.
We hold that a plaintiff may simultaneously bring an action both for breach of contract and for bad faith, and need not prevail on the contract claim in order to prevail on the bad faith claim, provided plaintiff provides a breach of the implied covenant of good faith and fair dealing.2
Arizona courts have described the insurer’s duty of good faith as:
The carrier has an obligation to immediately conduct an adequate investigation, act reasonably in evaluating the claim, and act promptly in paying a legitimate claim. It should do nothing that jeopardizes the insured’s security under the policy. It should not force an insured to go through needless adversarial hoops to achieve its rights under the policy. It cannot lowball claims or delay claims hoping that the insured will settle for less.3
The policyholder’s burden in proving bad faith has been described by the Arizona courts as two-fold: The first inquiry involves an objective analysis of whether the insurer acted unreasonably; the second inquiry involves a subjective analysis regarding “whether the insurer knew that its conduct was unreasonable or acted with such reckless disregard that such knowledge could be imputed to it.”4
Further, just because the insurance company ultimately lives up to its contractual duty and pays the policyholder what is owed – for example, ultimately paying an appraisal award over two years after the loss – does not release the insurer from bad faith liability.
[T]he insurer’s eventual performance of the express covenant—by paying the claim—does not release it from liability for ‘bad faith’5
[I]f an insurer acts unreasonably in the manner in which it processes a claim, it will be held liable for bad faith ‘without regard to its ultimate merits.’6
While I don’t address the details of punitive damages here, it should be noted that courts consider claims for punitive damages to punish and deter the insurer from future misconduct in relation to bad faith actions in Arizona.
This is meant as a brief introduction to Arizona first-party bad faith law. Further in depth discussions of the case law will be addressed in future blogs.
1 See Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565, 570 (Ariz. 1986).
2 Deese v. State Farm Mut. Auto. Ins. Co., 172 Ariz. 504, 508, 838 P.2d 1265,1269 (Ariz. 1992).
3 Zilisch v. State Farm Mut. Auto. Ins. Co., 196 Ariz. 234, 238, 995. P.2d 276, 280 (Ariz. 2000).
4 Deese v. State Farm Mut. Auto. Ins. Co., 172 Ariz. 504, 838 P.2d 1265 (Ariz. 1992).
5 Rawlings v. Apodaca, 151 Ariz. 149, 154, 726 P.2d 565, 570 (1986).
6 Zilisch, 196 Ariz. at 237-38, 995 P.2d at 279-80 (citing Deese, 172 Ariz. at 508, 838 P.2d at 1269).