Duty of Good Faith Fair Dealing
It is now well-established that a duty of good faith and fair dealing is implied in every insurance policy. The duty generally prohibits the insurer from taking any action that impairs the rights and benefits its insured reasonably expects under the insurance policy. The implied duty of good faith and fair dealing has been described differently by different courts depending upon the circumstances of the insurance claim and conduct of the insurer. Generally stated, an insurer commits bad faith when it acts unreasonably.
There is no definitive list of the ways in which an insurer can commit bad faith, but it is helpful to distinguish bad faith that may occur in the first-party claim context and third-party context. First party insurance coverage is the coverage directly sought by the insured for a loss to the insured. There are many types of first party coverage, including disability insurance, health insurance, and property insurance. On the other hand, third-party coverage is that coverage applicable when a claim is asserted against the insured by a third-party (i.e., liability coverage).
First Party Bad Faith
When the tort was first recognized by our courts, it was in the context of an insurer’s denial of a claim without a reasonable basis. Now it is well-established that an insurer can commit bad faith even if there is no coverage, in other words, even if the claim for benefits was not covered by the insurance policy. Among other things, the insurance company has to deal honestly and fairly with the insured, has to act promptly, must keep the insured reasonably informed concerning the status of the claim and investigation, and must conduct a reasonable investigation before making a decision regarding the claim. Thus, an insurer is guilty of bad faith when it “‘denies, fails to process or pay a claim without a reasonable basis’” and when the insurer “‘seeks to gain unfair financial advantage of its insured through conduct that invades the insured’s right to honest and fair treatment.’” Zilisch v. State Farm Mut. Auto Ins. Co., 196 Ariz. 234, 237-38, 996 P.2d 276, 279-80 (2000) (quoting Noble v. Nat’l Amer. Life Ins. Co., 128 Ariz. 188, 190, 624 P.2d 866, 868 (1981).
Third-Party Bad Faith
In the context of liability (i.e., third-party) insurance, the implied duty of good faith and fair dealing requires the insurer to give equal consideration to the interests of its insured in determining whether to settle a claim within policy limits. The insurer must evaluate all settlement demands on its insured within policy limits as if coverage was established and as if there is no policy limit. The duty to give equal consideration does not only arise when a settlement demand is made on the insured. Rather, whether there is the potential for a judgment in excess of applicable policy limits, the insurer likely has a duty to initiate settlement negotiations. In determining whether the insurer has given its insured equal consideration, courts often consider some or all of the following factors as the case dictates:
the strength of the injured claimant’s case on the issues of liability and damages; attempts by the insurer to induce the insured to contribute to a settlement; failure of the insurer to properly investigate the circumstances so as to ascertain the evidence against the insured; the insurer’s rejection of advice of its own attorney or agent; failure of the insurer to inform the insured of a compromise offer; The amount of financial risk to which each party is exposed in the event of a refusal to settle; the fault of the insured in inducing the insurer’s rejection of the compromise offer by misleading it as to the facts; and any other factors tending to establish or negate bad faith on the part of the insurer.
General Acc. Fire & Life Assur. Corp. v. Little, 103 Ariz. 435, 439, 443 P.2d 690, 694 (1968).