Requirements to Show Bad Faith by an Insurance Company

The Arizona Supreme Court recognizes an implied duty in all insurance contracts that the insurer must act in good faith when handling the claims of the insured. Noble v. National Am. Life Ins. Co.,128 Ariz. 188, 624 P.2d 866 (1981). Even though the claim for bad faith is a breach of contract claim, many jurisdictions have found bad faith claims against insurers give the insured the opportunity to recover tort damages.  This means damages can be recovered beyond what is typically available during a breach of contract claim, including punitive damages.

Showing Bad Faith by the Insurer

In Noble, the court held that bad faith by the insurance company can be shown when there is a lack of a reasonable basis for denying benefits under the insurance policy, and the insurance company knew or should have known that there was no reasonable basis for denying the claim. However, an insurer that fails to pay a “fairly debatable” claim after an adequate investigation usually will not be acting in bad faith.

Fair debility is not always sufficient to defeat a claim of bad faith. An insurance company cannot simply offer an amount on the fringes of reasonable and be protected from a bad faith claim. Rather, the insurance company must act reasonably during the investigation, evaluation, and processing of the claim. Zilisch v. State Farm Mut. Auto. Ins. Co., 196 Ariz. 234, 995 P.2d 276, (2000). Insurance companies must go beyond showing that the amount offered was “fairly debatable”. They must act reasonably and in good faith through the claims process, and if there is a dispute they have a safe harbor if they can show the circumstances were fairly debatable.

Paying a claim alone is not enough to satisfy the duty of good faith and fair dealing. If an insurance company delays a claim, fails to conduct an adequate investigation, or forces the insured to go through needless hoops to collect under the policy, then a claim for bad faith may be present, even if the amount of benefits eventually offered could be considered reasonable.

Attorney’s fees, damages for emotional distress, and punitive damages may be awarded in a bad faith claim. Punitive damages are typically only awarded when the insurer’s conduct is quite severe.

Chernoff Law handles insurance bad faith claims throughout Arizona. Contact us by calling 480-719-7307 to discuss your insurance coverage case.