2.3 Duty of Good Faith and Fair Dealing

JurisdictionArizona

Every contract formed in Arizona contains an implied covenant of good faith and fair dealing.[446] This implied-in-law covenant is part of all insurance policies issued in Arizona.[447] The supreme court described the duty of good faith and fair dealing in Rawlings v. Apodaca:[448]

The duty arises by virtue of a contractual relationship. The essence of that duty is that neither party will act to impair the right of the other to receive the benefits which flow from their agreement or contractual relationship. [Citations omitted.] Thus, firmly established law indicates that the insurance contract between plaintiffs and [the carrier] included a covenant of good faith and fair dealing, implied in law, whereby each of the parties was bound to refrain from any action which would impair the benefits which the other had the right to expect from the contract or the contractual relationship. . . . In delineating the benefits which flow from an insurance contract relationship we must recognize that in buying insurance an insured usually does not seek to realize a commercial advantage but, instead, seeks protection and security from economic catastrophe. [Citations omitted.] Thus, the insured's object in buying the company's express covenant to pay claims is security from financial loss which he may sustain from claims against him and protection against economic catastrophe in those situations in which he may be the victim. [Citations omitted.] In both cases, he seeks peace of mind from the fears that accompany such exposure.

Because of the disparity in bargaining power and the nature of the contract, the insurer receives both premium and control. [Citation omitted.] Thus, in...

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