Overview

Every contract has an implied covenant of good faith and fair dealing. The implied covenant of good faith and fair dealing exists with particular force in an insurance contract. This means that the insurance company will treat your first party claim honestly, fairly, and with at least equal consideration to its own financial interests.

Our social structure is in many ways dependant on the insurance industries. Insurance is the safety net that protects our lives and undertaking from loss from an unexpected casualty. We purchase homeowners insurance to protect our homes from burglary, fire, theft and natural disasters or acts of God. We purchase health and disability insurance to assist with medical expenses and loss of income following unexpected disease, illness or injury. Long term care insurance is purchased to provide reasonable assistance with the necessities of old age or debilitating disease for ourselves or loved ones. Life insurance protects those left behind in the event of death. Some coverages, such as, automobile liability and worker’s compensation, are required by law. These are only a few of the insurance coverages our society has come to rely upon.

Claims are paid for largely by the premiums paid for the purchase of insurance policies. These premiums are pooled to pay the claims of the statistical few who unfortunately experience the insured risk.

When a claim occurs, the loss by itself is often frustrating.  However, the advance purchase of insurance for that loss, gives the peace of mind of knowing that your loss will be recuperated and made up promptly, and fairly, from the pool of insurance funds you have paid into. This in itself is a large benefit.

However, when the insurance company that is supposed to help you through your loss, unreasonably attempts to minimize, lowball, or delay payment for your loss, that peace of mind can be lost entirely. A whole new level of distress and loss of time can occur.

Eventually the law came to recognize that a judgment ordering an insurance company to pay what it owed, following lengthy litigation delays, often was woefully inadequate to pay for the suffering that occurred as a result of the wrongful denial of benefits. The law then recognized the extra contractual claim of bad faith, for wrongful delay or denial of insurance benefits.

Basics of Bad Faith

The two principal elements of a bad faith claim are (1) an unreasonable claim decision by the insurance company, and (2) the insurance representative’s knowledge that the decision was unreasonable, or demonstration that the insurance company failed to conduct an investigation adequate to determine whether its decision was reasonable or not.

An insurance contract is not an ordinary commercial bargain. The heart of an insurance policy is the peace of mind knowing that prompt and fair assistance will be there when you are vulnerable. The law implies into every insurance policy an obligation that the insurance carrier will play fairly with the insured, including equal consideration, and honesty. An insurer may be held liable in a first party case when it seeks to gain unfair financial advantage of the insured through conduct that uses your vulnerability and need as leverage to coerce unfair settlement during delay. If bad faith has been committed, the carrier’s eventual payment of the claim does not release it from liability for bad faith.

Upon presentation of the claim, an insurance carrier has an obligation to immediately conduct an adequate investigation, to act reasonably in evaluating the claim, and act promptly in paying a legitimate claim. It should do nothing that jeopardizes the insured’s security under the policy. It should not force an insured to go through needless adversarial hoops to achieve its rights under the policies. It cannot lowball claims or delay claims hoping that an insured will settle for less. Equal consideration requires more than that.

The benefits recoverable under the policy are part of a breach of contract action. However, a bad faith claim allows additional recovery for the unpaid benefits and policy monetary loss or damage to credit reputation experiences or reasonably probable to be experienced in the future; and emotional distress, humiliation, inconvenience, and anxiety  experienced, and reasonably probable to be experienced in the future.

Third Party Bad Faith

Arizona does recognize limited claims for a third party bad faith. A third party bad faith claim arises when your insurance company fails to reasonably defend you from a claim brought by a third party against you. For example, if you are sued and your insurance company wrongfully denies coverage under your liability policy, you may well experience damages for attorney fees, as well as the anxiety and financial loss of having a judgment against you. Another example is if you cause damage to a third party in excess of the monetary limits of your insurance coverage, the injured party may offer to release you in exchange for payment of your insurance policy’s limits of damages. If your insurance company unreasonably refuses that offer, exposing you to damages in excess of your coverage, the insurance company may be guilty of third party bad faith. Damages recoverable for third party bad faith would normally include the exposure above policy limits, as well as other monetary loss or damage to credit reputation, emotional distress, humiliation, inconvenience and anxiety experienced or reasonably probable to be experienced in the future.

Robert J. Hommel, PC

9304 East Raintree Drive, Suite 100

Scottsdale, AZ 85260

Office: (480) 778-0123

Toll Free: (800) 571-0015

Fax: (480) 951-5033

The law office of Robert J. Hommel, PC serves clients throughout Arizona, including Apache Junction, Avondale, Casa Grande, Casas Adobes, Catalina Foothills, Chandler, Flagstaff, Fountain Hills, Gilbert, Glendale, Goodyear, Kingman, Mesa, Paradise Valley, Peoria, Prescott, Pinetop-Lakeside, Scottsdale, Sedona, Sun City, Surprise, Tempe, Tucson, Yuma, Coconino County, Maricopa County, Mohave County, Navajo County, Pima County, Pinal County, Yavapai County, and Yuma County.