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Insurance background concept. Compass needle pointing a blue word, decorative image suitable for left bottom angle of a page.

Arizona law recognizes a duty in insurance contracts to act in good faith when assessing claims of insured parties. The violation of this duty may give rise to a cause of action in tort for first-party bad faith. Such an action may allow the insured to recover for all losses incurred as a result of the conduct of the insured, in addition to punitive damages.

The Standard for Bad Faith in Arizona

The Arizona Supreme Court in Noble v. National American Life Insurance Company, 128 Ariz. 188, 624 P.2d 866 (1981) set forth the standard for what constitutes bad faith in insurance claims. The Court, relying on a Wisconsin Supreme Court decision, held that a claim for bad faith requires the plaintiff to 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.   This objective standard requires asking whether a reasonable insurer under the circumstances would have denied or delayed payment of the claim.

Unreasonable Conduct by the Insurer

Certain actions by the insurer suggest unreasonableness in rejecting or delaying a claim, and can lead to a tort action for bad faith. These may include: (1) delaying payment to coerce the insured into a settlement; (2) withholding payment on a portion of a claim to encourage settlement on a different part of the claim; (3) failing to engage in an investigation sufficient to assess the claim; (4) delaying the processing of a claim for an unreasonably long time; (5) invoking an invalid provision of the policy; and (6) failing to inform the insured that certain forms are required for processing.

When Failure to Pay is Reasonable

The unreasonable failure to pay a claim constitutes bad faith toward the insured and may give rise to liability. However, if the validity of the claim is “fairly debatable,” the insurance company will not be found to have breached its duty to the insured. According to the Court in Noble, the insurance company is authorized to challenge or later deny claims that are considered fairly debatable. In order to establish that a claim qualifies as debatable, the insurance company is obligated to conduct a thorough investigation of the claim to understand the facts of the case. In addition, the insurer’s contention that the claim is fairly debatable cannot be based on ambiguous language in the policy written by the insurance company.

Chernoff Law handles business, real estate and insurance litigation matters throughout Arizona. Contact us by calling 480-719-7307 to discuss your legal matter.