5.1.5 Proper Parties

• Jurisdiction: Arizona

The tort of bad faith involves the conduct between the insurance company and its insured.^[74] The duty of good faith and fair dealing is owed to the insured, and a stranger to the insurance contract has no claim, absent assignment, for bad faith as it relates to the performance of the insured's contract.^[75]

The Arizona courts have rejected attempts by injured claimants to bring direct actions against the tortfeasor's insurance company for failure to settle within policy limits. In so doing, the courts have refused to elevate the status of injured claimants to third-party beneficiaries under the tortfeasor's insurance policy. Third-party beneficiary status is granted only in those situations where the benefit to the third person is intentional and direct.^[76] The duty to settle is intended to benefit the insured, not the injured claimant.^[77]

In Leal v. Allstate Insurance Co.,^[78] an injured claimant attempted to bring an action for bad faith against Allstate Insurance Company. The injured claimant was rear ended by Allstate's insured. On the day of the accident, an Allstate adjuster contacted the injured claimant and advised the claimant that he would not need an attorney because Allstate would treat him fairly and would work with him to settle his claim. Several days later, Allstate wrote the claimant, requesting claimant to authorize release of medical and employment records in order to process the claim. The letter sent to the claimant by Allstate also stated that Allstate considered "anyone who has been involved in an accident with one of our policyholders an Allstate 'customer,' who is entitled to quality customer service." Enclosed with the letter was Allstate's "Customer Service Pledge," with the company logo and statement "You're in good hands with Allstate" at the top. Thereafter, Allstate made a settlement offer that provided no compensation for future medical bills to the claimant. The claimant believed that the Allstate offer to settle was "unreasonably low." Thereafter, the claimant brought suit against Allstate alleging breach of an assumed or implied duty of good faith and fair dealing under Allstate's policy. The court of appeals held that Allstate did not owe a direct duty of good faith and fair dealing to the claimant. The court noted that the duty to act in good faith arises by virtue of a contractual relationship. Thus, a third-party claimant, a stranger to the contract, cannot sue the insurance company for tortious breach of the duty of good faith.^[79]

The holding in Leal v. Allstate Insurance Co. was expanded in Smith v. Allstate Insurance Co.^[80] In Smith, the insured brought a bad faith claim against her automobile insurer arising from its handling of her liability claim wherein she alleged the negligence of her husband who was a co-insured under the same policy. The insurance company removed the state court action to federal court. The federal court ruled that the bad faith claim was not a "direct action" within the federal statute destroying diversity jurisdiction between insureds and insurers and that the insurance company did not owe a duty of good faith to the insured when she assumed the status of a third-party claimant by bringing her claim for liability benefits under the policy based upon the negligence of co-insured.

The court in Smith acknowledged that an insurance company's...