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Arizona First-Party Common Law Bad Faith | Property Insurance Law Team Blog



Our company is fighting State Auto in a commercial first-party insurance claim in Arizona. As a result, we have thoroughly researched the nuances of Arizona’s laws of bad faith before the upcoming trial. I thought we’d give an update on the basics of Arizona’s first party common law in bad faith.

Arizona recognizes that in every insurance policy and its performance, there is an implicit union of good faith and fair management.1 The breach of this obligation is recognized as damages.2 The Association for Good Faith and Fair Handling requires that an insurer “play fair with its insured.”3 The insurer owes the insured “certain obligations of a trust nature”

;, including “[e]qualified consideration, fairness and honesty. “4

When there is a coverage issue, an insurance company violates its duty of good faith and fair handling if it “intentionally denies, fails to process or pay a claim without reasonable cause.”5 Furthermore, the insurance company has an obligation to immediately carry out an adequate investigation, act reasonably in the evaluation of the claim and act promptly to pay a justified claim. It should not do anything that endangers the insured’s safety under the insurance. It should not force an insured to go through unnecessary adversaries in order to achieve their rights under the insurance. It can not be satisfied with claims or delay claims in the hope that the insured will be satisfied with less. Equal consideration for the insured requires more than that.6

Arizona believes that an insurer may be liable for bad faith if it intentionally refuses or fails to process or pay a claim without reasonable cause for such action. An insurer must not evade liability in bad faith by delegating its liability management responsibilities to an agent or adjuster.7 Insurers must at least, while acting in accordance with their obligations in good faith:

  1. Make an adequate investigation immediately.
  2. Act reasonably when evaluating the claim.
  3. Act immediately by paying the claim.

Insurers should not do anything that endangers the safety of the insured under the insurance. It should not force an insured to go through unnecessary adversaries in order to achieve their rights under the insurance. It can not be satisfied with claims or delay claims in the hope that the insured will be satisfied with less. Equal consideration for the insured requires more than that.8

The analysis is both objective and subjective, which requires a plaintiff to show the lack of a reasonable basis for denying benefits under the insurance, as well as the defendant’s knowledge or ruthless breach of the lack of a reasonable basis for refusing the claim.9 Whether a claim has been properly investigated, and whether the results of that investigation have been reviewed and evaluated in a reasonable manner, is relevant.10 It is also relevant if the insurances were written on a standard form for the industry and how the insurer, other insurers and other courts have interpreted the insurance language.11 However, mere negligence or unintentionality is not enough, as the insurer must have the intention of the act or omission and must formulate that intention without reasonable or rather debatable reasons.12 Consequently, an insurer may question claims that are quite debatable.13

Although it is a necessary condition to be quite debatable to avoid a claim of bad faith, it is not always enough. Whether the insurer knowingly acted unreasonably is a matter for a jury under Arizona law.14 Arizona has found that even if the trial court erroneously renders a summary judgment in favor of the insurer on a coverage defense, the insurer’s coverage position may still be found not to be quite debatable.15 Consequently, if the insurer submits a declaratory judgment to request a declaration of non-coverage, it can still be established that it has breached its obligations in good faith towards its insured.16

The bottom line is that Arizona has a very strong public policy to uphold an insurer’s obligation in good faith and fair handling. It recognizes the right of policyholders who have been injured in property insurance to seek redress and penalties from insurers who do not maintain their share of the good faith settlement.

Today’s thoughts

Baseball, it is said, is just a game. TRUE. And the Grand Canyon is just a hole in Arizona. Not all holes, or games, are created equal.
– George Will
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1 Lennar Corp. v. Transamerica Ins. Co., 256 P.3d 635 (Ariz. Ct. App. 2011)
2 Deese v. State Farm Mut. Car. Ins. Co., 172 Ariz .; 504, 506, 838 P.2d 1265, 1267 (1992).
3 Zilisch v. State Farm Mut. Car. Ins. Co., 196 Ariz. 234, 237, ¶ 20, 995 P.2d 276, 279 (2000) (citing Rawlings v. Apodaca, 151 Ariz. 149, 154, 726 P.2d 5615, 570) ().
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 (citing 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, quotes Zilisch, 995 P.2d at 280.
9 Lennar, 256 P.3d at 641.
10 Lennar, 256 P.3d at 639 (additional evidentiary influence may be considered to determine 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 that it is acting unreasonably or acts with such ruthless ignorance that such knowledge can be attributed to it … ”); Brown v. Fid. & Guar. Co., 194 Ariz. 85, 977 P.2d 807, 815 (Ariz. App. 1998); see also James River Ins. Co. v. Hebert Schenk, PC, 523 F.3d 915, 923 (9th Cir. 2008) (an insurer may be liable for bad faith if it intentionally treats, evaluates or pays a claim in an unreasonable manner ).
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 but incorrect or invalid policy interpretation does not in itself constitute bad faith).
14 Lennar, 256 P.3d at 642, quotes Zilisch, 995 P.2d at 279.
15 Lennar, 256 P.3d at 640.
16 Lennar, 256 P.3d at 642.


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