Our firm is battling State Auto in a commercial first-party property insurance claim in Arizona. As a result, we have been researching deeply into the nuances of Arizona bad faith law in preparation for the upcoming trial. I thought we should give an update on the basics of Arizona first-party common law bad faith.
Arizona recognizes there exists in every insurance contract and its performance, an implied covenant of good faith and fair dealing.1 The breach of that obligation is recognized as a tort.2 The covenant of good faith and fair dealing requires an insurer “to play fairly with its insured.”3 The insurer owes the insured “some duties of a fiduciary nature,” including “[e]qual consideration, fairness and honesty.”4
When there is a coverage question, an insurance company breaches its duty of good faith and fair dealing if it “intentionally denies, fails to process or pay a claim without a reasonable basis.”5 Further, the insurance company 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. Equal consideration of the insured requires more than that.6
Arizona holds that an insurer may be liable for the tort of bad faith if it intentionally denies or fails to process or pay a claim without a reasonable basis for such action. An insurer may not escape bad faith liability by delegating its claims handling responsibilities to an agent or adjuster.7 Insurers, at a minimum, while acting under their good faith obligation, must:
- Immediately conduct an adequate investigation.
- Act reasonably in evaluating the claim.
- Act promptly paying the claim.
Insurers 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. Equal consideration of the insured requires more than that.8
The analysis is both objective and subjective, requiring a plaintiff to show the absence of a reasonable basis for denying benefits under the policy, as well as the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.9 Whether a claim was properly investigated, and whether the results of that investigation were reasonably reviewed and evaluated, are relevant.10 Also relevant is whether the policies were written on a standard industry form and how the insurer, other insurers, and other courts have interpreted the policy language.11 However, mere negligence or inadvertence will not suffice, as the insurer must intend the act or omission and must form that intent without reasonable or fairly debatable grounds.12 Accordingly, an insurer may challenge claims that are fairly debatable.13
While being fairly debatable is a necessary condition to avoid a claim of bad faith, it is not always sufficient. Whether the insurer knowingly acted unreasonably is a question for a jury under Arizona law.14 Arizona has found that even if the trial court erroneously grants summary judgment in favor of the insurer on a coverage defense, the insurer’s coverage position may still be found not to be fairly debatable.15 Accordingly, if the insurer files a declaratory judgment action seeking a declaration of no coverage, it may still be found to have breached its obligations of good faith toward its insured.16
The bottom line is that Arizona has a very strong public policy of enforcing an insurer’s obligation of good faith and fair dealing. It recognizes the right of wronged property insurance policyholders to seek redress and punishment from insurers who fail to uphold their part of the good faith bargain.
Thought For The Day
Baseball, it is said, is only a game. True. And the Grand Canyon is only a hole in Arizona. Not all holes, or games, are created equal.
1 Lennar Corp. v. Transamerica Ins. Co., 256 P.3d 635 (Ariz. Ct. App. 2011).
2 Deese v. State Farm Mut. Auto. Ins. Co., 172 Ariz. 504, 506, 838 P.2d 1265, 1267 (1992).
3 Zilisch v. State Farm Mut. Auto. Ins. Co., 196 Ariz. 234, 237, ¶ 20, 995 P.2d 276, 279 (2000) (quoting Rawlings v. Apodaca, 151 Ariz. 149, 154, 726 P.2d 565, 570 (1986)).
4 Zilisch, 196 Ariz. at 237, ¶ 20, 995 P.2d at 279 (quoting Rawlings, 151 Ariz. at 155, 726 P.2d at 571).
5 Zilisch, 196 Ariz. at 237, ¶ 20, 995 P.2d at 279 (quoting Noble v. Nat’l Am. Life Ins. Co., 128 Ariz. 188, 190, 624 P.2d 866, 868 (1981)).
6 Zilisch, 196 Ariz. at 238, ¶ 21, 995 P.2d at 280.
7 Mendoza v. McDonald’s Corp., 222 Ariz. 139, 213 P.3d 288, 305 (Ariz. App. 2009).
8 Lennar, 256 P.3d at 639, quoting Zilisch, 995 P.2d at 280.
9 Lennar, 256 P.3d at 641.
10 Lennar, 256 P.3d at 639 (extraneous evidence influences may be considered in determining whether an insurer’s coverage position is reasonable); Nardelli v. Metro Grp. Prop. and Cas. Ins. Co., 277 P.3d 789, 794–95 (Ariz. App. 2012) (“An insurer acts in bad faith when it unreasonably investigates, evaluates, or processes a claim…, and either knows it is acting unreasonably or acts with such reckless disregard that such knowledge may be imputed to it…”); Brown v. U.S. Fid. & Guar. Co., 194 Ariz. 85, 977 P.2d 807, 815 (Ariz. App. 1998); see also James River Ins. Co. v. Hebert Schenk, P.C., 523 F.3d 915, 923 (9th Cir. 2008) (an insurer may be liable for bad faith if it intentionally processes, evaluates, or pays a claim in an unreasonable manner).
>sup>11 Lennar, 256 P.3d at 639.
12 Tang v. Shell Chem. Co., 317 F. App’x 660, 661 (9th Cir. 2009).
13 Desert Mt. Props. Ltd. P’ship v. Liberty Mut. Fire Ins. Co., 225 Ariz. 194, 236 P.3d 421, 442–43 (Ariz. App. 2010) (an insurer’s reasonable yet incorrect or invalid policy interpretation does not, by itself, constitute bad faith).
14 Lennar, 256 P.3d at 642, quoting Zilisch, 995 P.2d at 279.
15 Lennar, 256 P.3d at 640.
16 Lennar, 256 P.3d at 642.