Insurance Bad Faith Law in Arizona

A Brief History of Arizona Bad Faith Insurance from a Scottsdale Attorney

The following is for general informational purposes only. Case decisions are often subject to further review by other courts and thus may be affirmed, overturned, or modified in later proceedings. Rather than seeing these case results as definitive, exercise caution in the reading and interpretation of these cases as the current status of case law and/or statutory law may have changed by the time you read this. Please consult with a licensed attorney in the proper jurisdiction before you take any action based on what you read on this or any other website.

The number of cases that have influenced Arizona insurance law are too numerous to list here. However, as the result of handling insurance bad faith matters in Arizona since 1995, the Law Offices of Shane L. Harward has compiled this brief, summary list of a few significant cases in Arizona’s history.

1969: Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997. An insurer has a reasonable obligation to defend their policy holders from lawsuits by a third-party. Prior to this decision, insurance companies might have refused to defend policy holders for fear of admitting they were responsible for the injuries or damages at issue. By not defending their claim holders they often sought to bolster their case that the issue in the lawsuit was not covered by the insured’s policy. This is an extremely important case in situations in which there is a failure to defend. This case also allows a defendant to shield their personal assets from an excessive verdict.

1981: Noble v. National American Life Insurance Company, 128 Ariz. 188, 624 P.2d 866. This case demonstrated that an insurance company could be held accountable if they denied policy benefits or cancelled a policy without a reasonable basis. The court ruled that there is implied good faith in all insurance policies and the claimant has the right to sue an insurance company like National American Life for damages above the amount covered in their insurance policy contract.

1982: Sparks v. Republic National Life Ins. Co., 132 Ariz. 529, 647 P.2d 1127, cert. denied, 459 U.S. 1070. In this case, Republic National Life Insurance Company basically denied coverage to a severely injured person because of an insurance policy ambiguity. The Court determined that insurance policies should be construed in a manner according to their plain and ordinary meaning and argument was defeated.  Ambiguous insurance policy language should be examined from the viewpoint of one not trained in law or in the insurance business. Insurance companies like Republic National Life, Allstate, Farmers or others cannot unreasonably delay or deny claims regardless of alleged insurance industry standards or customs. The insurance company has an obligation to conduct on investigation in a timely manner and to determine if a claim is legitimate only after such an investigation. This investigation and its findings must be conducted in good faith.

1987: Hawkins v. Allstate Ins., Co., 152 Ariz. 490, 733 P.2d 1073. This case determined that all these practices could be considered in assessing punitive damages in a lawsuit against an insurance company like Allstate: the length of time that the insurer practiced misconduct, awareness of harm that resulted from misconduct, and any concealment of that harm. Punitive damages can be awarded if the insurance company engaged in conduct that would lead to harm or contributed to an environment where risk of injury or damages was nearly unavoidable.

2000: Zilisch v. State Farm Mutual Auto Ins. Co., 196 Ariz. 234, 995 P.2d 276.  Zilisch produced evidence that State Farm engaged in a deliberate practice of underpaying claims nationwide.  The evidence suggested State Farm set arbitrary claim payment goals for its claims personnel in order to reach the company goal of having the most profitable claims service in the industry.  Promotions and salary increases for State Farm claims personnel were based on reaching these goals.  Zilisch re-emphasized basic rules:  (1) The tort of bad faith arises when the insurance company intentionally denies, fails to process or pay a claim without a reasonable basis; (2) While an insurer may challenge claims which are fairly debatable (and may not challenge claims that are not fairly debatable), the insurance company’s belief in fair debatability is a question of fact to be determined by the jury; (3) An insurance contract is not an ordinary commercial bargain; implicit in the contract and the relationship is the insurer’s obligation to play fairly with its insured; (4) The insurer has some duties of a fiduciary nature including equal consideration, fairness, and honesty; (5) An insurer may be held liable in a first-party case when it seeks to gain unfair financial advantage of its insured through conduct that invades the insured’s right to honest and fair treatment; and (5) The insurance company’s eventual performance of the express covenant — by paying the insurance claim — does not release the insurance company from liability for bad faith. If an insurer acts unreasonably in the manner which it processes a claim, it will be held liable for bad faith without regard to the ultimate merits of the underlying claim.